Welcome to ITT’s 2022 First Quarter Conference Call. Today is Tuesday, May 3, 2022. Today’s call is being recorded and will be available for replay beginning 12:00 p.m. ET. [Operator Instructions] It’s now my pleasure to turn the floor over to Mark Macaluso, Vice President and Investor Relations. You may begin..

Thanks, Harry, and good morning. It’s my pleasure to welcome you to ITT’s First Quarter 2022 Earnings Conference Call. Joining me here this morning are Luca Savi, ITT’s Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer.

Today’s call will cover ITT’s financial results for the 3-month period ending April 2 announced this morning.

Today’s remarks may contain forward-looking statements that are subject to certain risks and uncertainties, including comments relating to company performance, strategic priorities, business mix, market conditions and the effects of COVID-19 in ITT.

These statements are not a guarantee of future performance or events and are based on management’s current expectations. Actual results may vary materially due to, among other items, the factors described in our 2021 annual report on Form 10-K and other recent SEC filings.

ITT is not under and expressly disclaims any obligation to update forward-looking statements, whether as a result of new information, future events or otherwise. Except for otherwise noted, the first quarter results we present this morning will be compared to the first quarter of 2021 and are based on non-GAAP financial measures.

These adjusted results exclude certain nonoperating and nonrecurring items, including, but not limited to, a charge related to the suspension of operations in Russia, restructuring, acquisition-related charges and certain tax items, and in 2021, asbestos-related charges.

All adjustments in the quarter are detailed, along with a reconciliation of such measures to the most comparable GAAP figures in our press release and presentation both of which are available on our website. It is now my pleasure to turn the call over to Luca, who will begin on Slide number 3..

Thank you, Mark, and good morning. I would like to again begin by thanking our shareholders, our customers and our ITTers for their continued support and the investment in ITT.

I’m pleased with ITT’s results this quarter, considering the ever-challenging environment that we’re operating in today, which further demonstrates ITT’s resilience and the strength of our businesses. I continue to be confident in ITT’s growth and outperformance over the long term.

Before we begin, I want to take a moment to acknowledge the more than 8 million refugees from Ukraine whose lives have been impacted by the war. We are deeply saddened by the tragic losses of life stemming from the invasion of Ukraine. We will continue to support our employees in the region who remain our top priority.

With this in mind, let us discuss the quarter. Demand for our products and services remains strong across many of our end markets, and we are outperforming in most businesses. We see this in the short-cycle chemical and industrial business in Industrial Process, in aerospace and defense, in Connect and Control and in our Friction business.

Our teams drove 14% organic orders growth this quarter, contributing to an ending backlog of nearly $1 billion, up over $170 million from this time last year. On the strength of this demand, we drove 7% organic revenue growth, of which approximately 3% came from pricing actions across all our businesses, but most prominently in Motion Technologies.

The MT team achieved over 80% of its first quarter pricing target and is stepping up incremental pricing actions given the continued rise in raw material and energy costs. On profitability, margin this quarter was severely impacted by rising raw material, labor and overhead costs, which continued to increase throughout the quarter.

Cost inflation amounted to an approximately 760 basis point headwind, which outpaced the 270 basis point positive impact from pricing. During the first quarter, I again experienced firsthand the challenges in the global supply chain and the inefficiencies it creates in our operations.

As an example, in one of the many threats that they made to Seneca Falls this quarter, we developed new actions to mitigate the impact of parts shortages, which are preventing production lines from operating at full capacity.

In our outlook, we initially expected to lap the headwinds from higher raw material costs by the second half of 2022 as costs would begin to normalize and our price actions would take effect. However, current prices for steel and tin are now above the escalated levels from 2021, which will put additional pressure on our full year margin and earnings.

Nevertheless, ITT delivered solid first quarter results, in line with our expectations, while continuing to invest in the future. We invested over 3% of revenues in research and development to fund key growth initiatives.

On CapEx, we invested in further Friction of [e-price capacity] including the addition of 2 production lines in our Silao, Mexico plant to support EV wins in North America. We are also funding product redesigns in IP and CCT, footprint optimization and closures and new product innovations as we continue to refresh the portfolio.

As an example, in Industrial Process, we are launching the third generation of our i-ALERT Condition Monitoring Solution that more quickly and accurately diagnoses status changes and warrants of issues prior to failures.

I’m particularly excited about another new disruptive technology in Industrial Process that will significantly reduce energy consumption and CO2 emissions. At our Investor Day in June, we will show this and other innovations to demonstrate how we differentiate from the competition.

In April, we closed our second ITT ventures investment in a technology start-up focused on the rotor coating market, with its groundbreaking WECODUR technology. The technology is an innovative hard coating application that allows rotors last longer, better resist corrosion and reduce fine dust emission.

These will be critical requirements for electric vehicles. We also signed a third larger venture investment, which we expect will close in Q2, pending regulatory approval.

Recently, we announced the acquisition of Habonim, an Israeli-based designer and manufacturer of valve and actuation technologies for the gas distribution, biotech and harsh application sectors.

As Emmanuel and I witnessed firsthand when we met the team in February, Habonim has an attractive offering in LNG and is well positioned for growth in the green hydrogen space through its ultrahigh pressure and cryogenic offerings. In addition to Israel and the Netherlands, the company has a presence in North America, which we will look to expand.

I’m very happy to welcome Ilan and the Habonim team to ITT. Lastly, this quarter we repurchased nearly $190 million of ITT shares. Together with the increases in dividends and growth CapEx, we deployed over $235 million in Q1 and over $375 million year-to-date, including the Habonim acquisition. Moving to our outlook.

We anticipate that the supply chain challenges and the higher raw material inflation we saw in Q1 will persist throughout 2022. Demand remains strong, and we are working hour by hour to eliminate the bottlenecks that are impacting our top line growth. With these dynamics in mind, we are maintaining our full year adjusted EPS guidance range for 2022.

We are trending towards the higher end of the range for organic sales growth, given the strong demand and outperformance I cited earlier. However, given the headwinds I mentioned as well as the ongoing war in Ukraine and COVID-related lockdowns in China, we’re trending towards the lower end of our range for adjusted operating margin.

In summary, we are advancing the actions in ITT’s control, including share gains, pricing actions and capital deployment, while managing through market dynamics that are worse than we initially anticipated and then confident in ITT’s ability to deliver. Let me now discuss a few points I raised in the opening.

ITT’s products continue to win in the marketplace and gain share, we see that in our order rates and backlog today. Orders increased on a year-over-year and sequential basis, which drove a 24% increase in organic backlog year-over-year that will convert in 2022 and 2023.

We continue to see broad-based demand in Industrial Process’s short-cycle pump and service offerings, while the long-cycle pumps business continues to strengthen. Year-over-year, the project funnel increased over 30% with strength across the board in mining, chemical and oil and gas.

Our short-cycle run rates are well above what was an already high level of orders in prior year in all product categories, and we expect that the addition of Habonim will add to demand given their fast-growing VAAS portfolio and capabilities in LNG.

Orders in Connect and Control increased with the growth in commercial aerospace and new program awards in defense. The connectors business continues to grow in North America and Europe, driven by increased industrial activity and our ability to deliver on time. All in, this drove organic revenue growth of 23% in CCT for the quarter.

In Motion Technologies, we continue to position ITT as the brake pad supplier of choice to OEMs, especially with electric vehicle manufacturers around the world. We won content on 15 electric vehicle platforms in the first quarter with key wins in Europe and China.

We also gained share through awards on both the front and we are active on a major European premium OEM platform. We are maintaining the strong win rates and continue to outpace global auto production. Let’s turn to Slide 5 to review ITT’s capital deployment progress in Q1.

As I previously said, capital deployment continues to be 1 of ITT’s top priorities. We are starting to see the benefits of our heightened focus in this area as evidenced by the activity year-to-date. We invested in growth CapEx to support new electrified vehicle awards in Friction that will convert our EV share gains into revenue.

We also continue to improve ITT’s operations through our green CapEx initiative. In April, we announced a $2.5 million investment to install a solar Lake in Barge, Italy that will power nearly 30% of the innovation center’s energy needs.

We are well on our way to deploying the $10 million commitment in 2022 for green CapEx to create a more sustainable ITT. On repurchases, we now expect to reduce our full year share count by a minimum of 2.5%.

Given the strong historical cash generation and actions to eliminate our asbestos liability, we have a ton of firepower still to deploy and intend to maintain a disciplined approach to capital deployment. Our M&A pipeline remains very active, and we are cultivating a number of additional targets with our revamped M&A team now in place.

As you have heard already, in April, we announced the acquisition of Habonim. The acquisition is now part of our Industrial Process segment. We acquired the business for $140 million, which amounts to a multiple of less than 13x EBITDA.

Our goal is to build a much larger and profitable platform for growth with Habonim being the first step in our strategy. Let me share why I’m so excited about this business. First, Habonim is a manufacturer of bore valves for harsh applications with strong brand recognition.

The company has attractive positions in gas distribution, hydrogen, chemical and pharma market. Second, Habonim is in strong and defendable market position, maintains close relationships with its end users, has a relentless focus on product quality and like in ITT customer centricity is a core value.

Third is technology, both on the product and on the process. On the product, as an example, Habonim has developed a proprietary technology called Total HermetiX which is a fully sealed valve system, the guaranteed zero-fugitive emissions.

On the process, the company has designed standard core product components while allowing for late-stage customization. All of this simplifies considerably the supply chain and production processes.

Fourth, the Habonim team is comprised of highly skilled engineers and entrepreneurial leaders with expertise in applying Habonim’s technology to solve the customers’ most pressing needs.

And finally, Habonim has a strong track record of growth and profitability, with a sales CAGR of over 10% for the past 4 years and EBITDA margins that are accretive to IP and ITT. I look forward to showcasing Habonim’s and ITT’s technologies to everyone on June 16 at ITT’s Investor Day.

Let me now pass it over to Emmanuel to review the results in more detail..

Thank you, Luca. From a top line perspective, ITT drove 7% organic growth in the first quarter. CCT delivered 23% organic growth, driven by continued industrial connector strength and recovery in aerospace. In MT, Friction was up 5% organically, driven by the continued momentum in the aftermarket.

While OE was flat organically given the ongoing chip shortage, we still outperformed global auto production. And as Luca mentioned, the MT team has been relentless in driving price realization in partnership with our customers.

For all of ITT, we estimate that the ongoing supply disruptions cost us approximately 600 basis points of top line growth in Q1, with the most pronounced impact in Industrial Process. Turning to operating income.

Our teams drove productivity in the quarter of roughly 350 basis points of margin through a combination of shop floor and sourcing actions, which partially offset 760 basis points of cost inflation. From an earnings perspective, adjusted EPS declined roughly 8% versus 2021 despite the 7% increase in organic revenue.

The difference is largely attributable to the significant cost inflation and impact of the war in Ukraine. And as a reminder, our first quarter results in 2021 were incredibly strong. We also absorbed unfavorable foreign currency, which was offset by the benefit of higher share repurchases and a lower effective tax rate.

Finally, working capital requirements, continue to weigh on our free cash flow generation. We are purposefully investing in inventory to ensure we are able to guarantee delivery to our customers in this difficult time. We were also impacted by the timing of accounts receivable collections, given the large volume of sales in December.

We expect that cash generation will improve beginning in Q2, notwithstanding the inventory requirements. Let’s now turn to Slide 8 to look further at the earnings performance. We’re driving strong volume growth and productivity through deployment of the MT operating model.

Included in the $0.29 of operational performance improvement is roughly $0.22 of productivity. Pricing actions contributed to $0.20 to earnings, while volume contributed $0.07, with particular strength in CCT. These improvements, however, are still lagging the pace of material, labor and overhead inflation.

As a result, we are enacting incremental pricing -- price increases through the portfolio to address the rising costs. In Q1, we suspended our operations in Russia given the war in Ukraine. We see direct impacts mainly in MT and IP as well as indirect impacts from OEM customers that sell and supply into this region.

This cost us approximately $0.04 in the first quarter. In 2022, we expect this will result in a revenue decline of approximately $60 million to $85 million as compared to our original plan, which is factored into our current revenue outlook. Additionally, we are actively investing in M&A.

These investments will help to fund future growth at ITT, and this quarter cost us roughly $0.02 of earnings. Finally, given the movement in foreign currency rates, we absorbed a $0.03 headwind in Q1 and expect this ongoing trend will drive at least a $0.09 headwind for the full year.

Offsetting this first quarter headwind is the benefit of our share repurchases and a slightly lower tax rate. Let’s now turn to Slide 9 to review the segment results. Let me begin with Motion Technologies.

Our Friction OE business maintained its outstanding on-time performance at over 99%, effectively managing the global supply chain disruptions and OEM production impacts created by the war in Ukraine. MT continues to be highly differentiated, thanks to its innovation and imperial quality and exceptional on-time delivery performance.

By now, you probably are aware of the outstanding quality of our Friction business that produces less than 1 defect per million parts. Amazingly in Q1, the Friction team has been further improving their quality performance and reduce the defect rates by double digits versus 2021.

I also want to highlight our KONI shock absorber business, which has improved its customer defect rate by an impressive 90% over the past 2 years, delivering an industry-leading quality performance. On profitability, MT’s segment margin declined 310 basis points.

This was mainly due to higher-than-expected material inflation, partially offset by pricing actions and productivity benefits. We’re driving necessary pricing actions with our OEM customers. Finally, we completed the closure of our Lünen facility in Germany and transferred all production to Poland in Q1.

For Industrial Process, organic revenue grew 2%, driven by short-cycle strength, partially offset by supply chain disruptions and labor constraints. IP shipments were impacted mainly in January by the rise of the COVID-19 Omicron variant at our U.S. and India sites.

However, when looking at April, IP’s performance continues to improve, especially compared to what we experienced at the beginning of Q1. On the demand side, we are encouraged by the order strength in our short-cycle and project business.

This was our fifth consecutive quarter of sequential order growth as short-cycle demand remains strong and project activity continues to strengthen. IP’s margin declined by 300 basis points. This was driven by unusually high cost for freight and materials as well as a slow start in January due to high COVID absenteeism.

As a result, IP is undertaking substantial pricing actions to mitigate cost inflation, including a second larger price increase in March of this year. In Q1, I spent considerable time with our IP team in Seneca Falls and was impressed by the positive momentum we have generated on the shop floor over the past 5 months.

We’re continuing to transform our operation by accelerating shop floor velocity and attacking waste in our processes. For example, we shortened the throughput of our small MT pump by over 50% by streamlining the product release process and reducing non-value-added activities in the assembly line.

With these improvements achieved, we’re now shifting our focus to our midrange pump line. Lastly, on Connect and Control, we had our largest order quarter since Q1 2019 despite the fact that aerospace orders are still more than 30% below pre-COVID levels. Orders grew 28% organically versus prior year, driven by 40% growth in aerospace and defense.

CCT’s margin expanded an impressive 550 basis points to 16.7%, driven by higher volume and shortfall productivity. Notably, CCT delivered 42% incremental margin in the face of these inflationary headwinds. This was without the benefit of significant pricing actions, which we will begin to realize in Q2.

We will also expect -- we also expect that the product redesigns and range extension we launched, coupled with the process automation we will implement will drive further margin expansion in the near term. Let’s now turn to Slide 10, where we’ll provide an updated end market outlook. Our message here has not changed.

Demand remains strong and we’re winning in the marketplace. However, the dynamics we noted around pricing, cost inflation and the war in Ukraine, will impact our results in the near term.

In auto, inventories remain at historically low levels in North America and Europe, which should drive further demand, but deliveries continue to be impacted by the chip shortage. Profitability is being hit by inflation, and we’re now managing through further disruptions, namely COVID in China and the war in Ukraine.

The war is also impacting our rail business. Demand remains generally strong in the industrial businesses. However, labor shortages and supply chain disruptions continue to weigh on our top line growth and margin expansion. Regarding aerospace, demand is improving, but we’re still well below sales levels from 2019.

We expect this market to continue to steadily accelerate in the second half coinciding with a further increase in global travel and reduction in aero OEM inventory. All of this informs our guidance update on Slide 11. As you can see, we are reaffirming our guidance ranges for revenue, adjusted segment margin and adjusted EPS.

We continue to expect organic sales growth of 9% to 11%. But given our first quarter performance, the strong demand we see in IP and CCT and the incremental pricing actions we are taking, we are trending towards the high end of our organic sales range for the full year.

From a segment margin standpoint, for the full year, given the significant cost inflation headwinds, we’re trending towards the lower end of our current range. CCT will drive the strongest margin expansion, while MT margin will likely decline close to 200 basis points.

Industrial Process margin will expand overcoming the ongoing supply chain disruptions, which will continue to constrain delivery in the first half. Additionally, the acquisition of Habonim will tamper margins in 2022, given M&A costs.

As a result, we now expect IP to deliver between 15% and 16% margin for the year with a significant improvement in Q2 compared to Q1. Adjusted EPS will be impacted by the lost sales in Russia as well as the impact of cost inflation.

We intend to offset this through a stronger-than-anticipated performance in CCT, lower share count and the addition of Habonim. The impact of these items suggest we may trend towards the lower end of our adjusted EPS guidance range.

Our ability to drive better performance will depend in part on the cost of key raw materials, the pace at which we are able to realize benefits from price increases and the impact, if any, of prolonged lockdowns in China.

Given our use of cash in Q1, free cash flow will likely be lower than anticipated in a new range of $250 million to $300 million, and free cash flow margin will approximately be 8% to 10%. Longer term, we still believe we can effectively improve our cash flow profile through reductions in working capital and earnings growth.

In the event supply chain disruptions do not improve and raw material inflation gets worse, we’re planning to take further actions, including pricing and additional structural cost actions as we have demonstrated before. In terms of the cadence for the rest of the year, adjusted EPS for Q2 will be roughly flat sequentially to Q1.

Organic sales growth in Q2 is expected to be in the mid-single-digit range, thanks to the growth in CCT and to a lesser degree in MT. We expect IP organic sales to increase in Q2 and then to improve sequentially in the third and fourth quarters.

ITT’s segment margin in Q2 will likely be flat to Q1 at approximately 16%, with margin expansion in IP and CCT offset by an approximate a 200 basis point decline in MT margin sequentially given the material inflation headwind. This is obviously not the type of performance we like to see from MT.

However, we expect MT’s margin will begin to improve sequentially in the third quarter as pricing actions are realized. With that, let me pass it back to Luca to wrap up..

Thanks, Emmanuel. Like others, ITT is managing through unprecedented market conditions. We are encouraged by the demand across the portfolio and by our team’s ability to outperform in all our businesses and deliver for our customers. Thanks to this performance, ITT built a robust backlog that will provide a long runway for growth.

We are delivering on our capital deployment plan while continuing to invest in the business. Our heightened and intense focus on M&A is starting to generate results, and we are ready to execute more deals in 2022. Our solid first quarter results are a testament to the resilience of ITT and its people.

I would like to again thank our ITTers, our suppliers and our customers for working together in this unprecedented macro environment and our shareholders for their investment in ITT. As ever, it has been my pleasure speaking with you all this morning, and we will happily take your questions now. Harry, please open the line for Q&A..

[Operator Instructions] And our first question is from Damian Karas of UBS..

I wanted to ask you about guidance here and your assumptions for price/cost. How do you see that playing out as we progress through the coming quarters? Are you expecting to kind of get price/cost neutral by year end or still exiting the year with that as a headwind? And it does sound like you’re expecting MT to get worse before it gets better.

Maybe if you could just kind of elaborate on what you’re seeing across the supply chain and your manufacturing footprint.

What gives you confidence, Luca and the ability to achieve that margin guide for the year?.

Okay. So let me talk about pricing and a little bit of supply chain and eventually, Emmanuel, you can deep dive later. When it comes to pricing, of course, we -- we’ve made progress, but there’s still much more to do on the IP and CCT front.

But this is where probably you don’t face the biggest difficulties because it’s easier just going through the distribution channel, et cetera. You pointed it out correctly, it’s more on MT and particularly on Friction. On pricing, I think our team and specifically the Friction team are making progress.

I can give you a couple of examples where the Friction team has closed the negotiation with a couple of Tier 1s and a couple of OEMs in a very fair and just agreement. The customers audited the extra cost, and we closed it in a very nice way.

But there are still some negotiations that are happening, and I’m positive that they will reach a fair and just solution with our value customers. This has increased and improved quarter-after-quarter. If you think that just in Q1, we were able to achieve the same amount in millions of dollars that we had for the full year in 2021.

That’s on the pricing. On the supply chain, I think that the challenges that we have seen are persisting. These are very true, particularly in IP that has been impacted in terms of the revenue. But we do not necessarily see that really improving substantially until probably the second half or maybe Q4 of this year..

And in terms of the impact quarter-after-quarter. So in Q1, we have -- we were, as Luca mentioned, we were not able to completely compensate the cost inflation we’ve been facing, mainly driven by delays in getting price at MT. So the impact on the margin was roughly a little less than 200 basis points for the quarter.

And then we expect that in Q2 and in the next quarters, that this will moderate as we are able to step up our pricing, our pricing performance, as well as increased productivity. So in Q2 will be better, and the margin impact will be a little less than 100 basis points.

And then roughly, for the full year, we’ll benefit from the improvement in terms of pricing in Q3 and Q4..

Okay. That’s helpful. And then in IP, you’re seeing a lot of activity on the project front.

Maybe if you could just give some addition color around the types of awards you’re seeing? And how should we think about conversion there? Is it -- at some point later this year, there’s going to be over the next few years as you kind of work through supply chain conditions..

So when you look at IP, IP orders have been an exceptional performance this quarter. Again, on the short-cycle, this was the best that we’ve ever seen and stronger than even Q4, which was exceptionally strong. And the projects definitely have returned.

So if you think about our project orders, [$59 million] in the quarter was an increase of 45% year-over-year. And on top of that, also the funnel is solid. When you look at the sectors, it’s across the board, it’s in oil and gas, it’s in chemicals, it’s in general industrial.

We see it across the regions, if it is Europe, North America, Asia Pacific and the middle -- and the Middle East. So definitely a strong orders performance in project and stronger funnel..

And just one last thing regarding IP and our ability to convert. So obviously, this quarter, we mentioned 600 basis points of impact on our sales growth and most of it due to IP. And I think when you think about the situation there, we have difficulties on a number of components, whether it’s casing, motors, seals as well.

And it’s difficult to get all those components on time. So we’re really driving the conversion. And this was an -- the example that we’ve given in terms of reduction in the throughput time is one of them, but it’s still very difficult..

Our next question is from Joe Ritchie of Goldman Sachs..

Guys, can you maybe just provide us -- I want to drill down a little bit further into pricing. So last quarter, I think you had set a target of roughly $100 million for the year. Luca, I think in your prepared comments, you said that MT got 80% of the 1Q number you were expecting.

But can you guys just maybe just parse out how much are you now expecting for price for the year? And how does that break out by segment on a dollar basis?.

Yes. So you’re right, Joe. We targeted $100 million. And even though we fell a little bit short in Q1, we also realized that it’s not sufficient. So we increased our target to -- by roughly $80 million. So we’re now targeting something between $160 million to $180 million. And this is mainly driven by MT.

MT is the value center that’s impacted the most by inflation on steel, tin and copper. And as a result, we need to be compensated for that by our customers. And this is why we have increased our pricing recovery target..

And Emmanuel, just how far along are you in locking in the new $160 million to $180 million target? And at what point do you expect those negotiations to conclude such that you feel confident that you’re able to achieve those numbers in the back half of the year? ..

So as Luca mentioned, we are stepping up, overall, the ITT price recovery target. And so some of it is going to come from CCT and IP also whereas Luca mentioned, it’s easier to get price. So it’s not -- it’s not really the majority of the price increase, but it’s still pretty substantial.

And then in terms of our pricing, I would say that we are making continuous progress. In Q2, we have specifically stepped up our actions with customers that have not been as cooperative as we would expect, and we expect to see significant improvements already in Q2 and in Q3..

At the end, Joe, I think that if you look at the performance of Friction in terms of on-time delivery of 99%, the performance on quality, these are all characteristics that the customers are valuing quite a lot. And in the challenging market environment that we have today, securing the supply is critical and strategic.

So we are confident that we will find the proper just and fair agreement with our customers..

That’s super helpful. And if I could maybe just follow up one more a quick one, just on China. I know that the guidance doesn’t include an impact from China staying in for a long lockdown.

Just maybe provide a little bit more color on what you’re seeing on the ground there and what your expectation is for the rest of the year?.

Sure. When it comes to China, we have 2 plants, Joe. One is the connector plant in Shenzhen and the Friction plant in Wuxi. So when you look at Q1, Q1 already had the impact of the lockdowns that we had in Shenzhen. When that happened, our plants kept operating because we have dormitory, we operated in a closed loop.

And actually, we shut down the factory only for 1 day. When it comes to friction, the impact of the lockdowns in Shanghai and automotive are not really into Q1 because that started towards the end. The way that we’re operating in Wuxi, where we don’t have the dormitory, we are still operating in closed loops.

We put our people in a close by hotel so that they have not have exposure outside the hotel and the shop floor and the plant. And we are securing the supply with an investment in inventory. So we step-up our inventory over there. So the supply and the way that we are operating the plant is secured. We never stopped. It’s more a question of the demand.

And you’re rightly in saying that the demand in Q2 will be impacted. I think that the worst month is -- has been April. April will be the worst one, with probably the highest reduction in terms of demand, particularly if you think about all the plants that are around Shanghai.

May will be a little bit better and recovery will start really in June, at the end of Q2..

Our next question is from Mike Halloran of Baird..

On the -- so on the auto side of things, maybe just give a little context to how you’re thinking about end market demand for the remainder of the year. Obviously, a lot of puts and takes happening right now, which you just referenced China, Europe, supply chain challenges.

How do you think that cadence is out? And at what point in time do you think inventory can start catching up a little bit?.

Thanks, Mike. Obviously, the market for 2022 will not be as positive as originally forecasted by IHS. IHS was thinking 8.5%. It’s already down to 4.4% for 2022. We always approach it in a more conservative way. So we think that, actually, Europe will probably be up flat to up low single digit.

China will be down low single digit and North America will be up single digit. So -- but what we are --the way that we perform, we will be able to overcome the lack of growth in the market with our outperformance.

And if you think about the awards that we had in Q1, Q1 was a perfect quarter in the awards because we rewon everything that we were in and was up for renewal. And we added on top some platforms where we were not present, so that will keep on feeding our market share gains and our outperformance.

It’s tough to operate in this environment because the volatility is incredibly high, but the team has performed incredibly well with the 99% on-time delivery so far. Now going back to the inventory because that was your second part of your question. I mean the demand is there. The inventory are at record low for North America and Europe.

And because of the challenge on the supply chain, I don’t really see that changing in 2022..

Great. And then a follow-up, just on the capital deployment. Obviously, you got a lot going on both internally, with the capital you’re spending internally as well as externally. When you think about the external balance between the M&A and the buyback side of things.

Do you think you can keep this cadence up going forward? Obviously, you got a lot of bandwidth, the guidance implies some further share repurchase from here.

Maybe some context on how you balance that with -- what the pipeline might look like on the M&A side?.

Okay. The pipeline is a very good pipeline. It’s robust and it’s full of opportunities, some like Habonim. If you think Habonim was an exclusive deal, we cultivated this deal for quite a while, and we were able to bring it home without getting into process. So we have some of those -- and is rich. They’re at different stage in the funnel.

So I’m confident that we will do more deals in 2022. Now if things do not work out because different expectation or else, of course, we will go back to the share repurchases. But I would say, first priority is organic investment; second is M&A; and of course, then is share repurchases and dividend..

And our next question is from Jeff Hammond of KeyBanc..

So I just want to be clear.

So the organic growth at the high end, that’s despite this $60 million to $85 million headwind from Russia?.

Correct..

That’s correct, Jeff..

Okay. So you’d be 2 to 3 points above, if not for Russia.

Can you break out kind of where that -- because it seems like it touches a number of businesses, kind of how you think that $60 million to $85 million kind of falls across the segments?.

Sure. So obviously....

$60 million to $85 million the Russia impact..

The Russia impact. So in terms of the Russia impact, this is mainly coming from MT and IP. We have 2 kinds of impacts. We have direct impact, which is basically everything that we sell directly into Russia, and that’s around $60 million, and that is probably equally split between IP and MT.

And then we have the indirect impact, which is due to the lower production, either of our OEM customers in auto, which is either due to the lack of supply that were produced in Ukraine and Russia, and/or less sales into Russia from an indirect standpoint. And that accounts for the rest. So this is the impact on Russia..

Okay. Perfect. And then IP, it seems like the margins step up nicely, 1Q to 2Q.

And I’m just trying to understand what are the moving pieces there because you still seem pretty confident about the margin trajectory there?.

Sure. So obviously, we were disappointed in the Q1 performance. A lot of the revenue we were expecting in January didn’t come out. And then we tried really hard to catch up in February and March. But given the Omicron impact, it was very difficult. So when we look at Q2, the improvement in margin is going to be driven by, obviously, volume.

We’re going to have more volume. And April is already showing really nice -- really nice increase compared to what we’ve seen in January. And then we’re going to have a step-up in terms of pricing. We launched a pricing campaign in March. That’s going to yield results in Q2, as well as improved productivity.

So those are the main drivers for margin expansion sequentially in IP..

So Jeff, just to give you a sense in terms of [indiscernible] January and part of February we were impacted heavily by COVID. If you think about in 2021, our average number of new cases per month were roughly 50, 60 people new cases every month. In January, it was 800 people. In February, it was around 450 and a couple of hundred in March.

Most of that in the U.S. and the Seneca Falls was impacted heavily. So you think about the under absorption that you have in during the month of January and half of February. This is not the case right now..

Next question is coming from Vlad Bystricky of Citi..

I’m here. Sorry about that. So can you just talk maybe a little bit more specifically around the organic growth outlook? Because I mean, you’re absorbing meaningful headwinds for Russia, but now the outlook is unchanged and you’re talking about the top end of the range.

So can you talk more specifically about what’s getting better to offset the headwinds? Is it mainly the incremental pricing actions you’re putting in place? Or is there something else where you’re seeing better trends on the organic growth outlook?.

Sure, Vlad. So obviously, we are impacted positively by higher growth rates in terms of orders, specifically in IP and CCT. We’re seeing really good orders that we will convert in 2022 and 2023 from all different end markets.

And Luca mentioned, our growth is really across the board, chemical, oil and gas, mining and general industrial are all double digits. And so that will help us in converting into revenue into 2022. Pricing also will be a positive impact.

As for CCT, we’re really seeing our orders taken off in aerospace, defense, but also general industrial for both components and connectors. And as we mentioned, we’ve launched also a pricing -- a new pricing campaign that will impact our Q2 revenue and then obviously, Q3 and Q4.

So those 2 main businesses are going to really drive incremental revenue, both from a volume and a pricing standpoint..

And if I can build on what Emmanuel said, if you think about CCT, the momentum that the commercial aerospace is having right now will be a tailwind for 2022. As a matter of fact, this quarter, Q1 2022 is the first quarter when our components business is actually growing year-over-year in revenue. This is after 8 quarters of decline.

So this is an important tailwind at a very good incremental margin..

Okay. That’s great to hear. And that’s encouraging on the aero side. So maybe just a follow-up on the momentum you’re seeing in the IP projects orders. Can you talk more -- I know you mentioned it’s broad-based and across regions and industries.

But can you talk about really what’s driving that? Is it deferred CapEx that’s coming back now? Are you seeing any greenfield activity? And then specifically in North America, are you seeing any signs of reshoring driven type activity?.

So I think that there are different components, Vlad, into this. If we think about the oil and gas, the fact that this sector didn’t receive the proper investment in the last few years, of course, we start seeing that across the board, which is also in the Middle East.

Of course, there will be -- we don’t see it right now, but there will be investment in Europe, if you think about the energy challenge that they will have to face in the next couple of years in becoming less dependent from the Russia gas. And then obviously, there is an expectation of more capital investment in North America because of the reshoring.

All of these are pieces of the puzzle that makes us think positive about projects for IP..

And our next question is from Andrew Obin of Bank of America..

Can we just dig into a little bit more IP because I think Flowserve had a similar narrative regarding their sort of pumps. This whole idea that COVID hit early in the quarter. What I’m just trying to understand because when everybody guided, everybody sort of just sort of guided in the industry in mid-February.

So was the surprise in ability to catch up in the second half of Q1? And I just want to get a better understanding of what specifically, what were the pinch points and sort of in the pump supply chain that limited ability sort of to ship and get margins up?.

Andrew, so if we think about IP, I think that some of the challenges, of course, the COVID absenteeism was a big challenge, was a big challenge in January, and that continued for the first half of February. And some of that, we were not able to recover. And that was practically because of the supply chain challenges that continue to persist. .

As Emmanuel said, if you think about it, in terms of revenue that we were not able to deliver in Q1 that we will deliver further later in the year was roughly $30 million for IP. This is because of seals, of motors, of casting.

And for that -- if you think about that recent $30 million of revenue, that would have been quite a nice contribution in terms of margin and would have delivered a margin which was more aligned to what was probably last year. So it was really the supply chain that didn’t improve towards that -- it didn’t allow us to recover in Q1..

Got you. And a follow-up question, just as you think about the organization, you have this unprecedented volatility in terms of supply chain, in terms of input prices, right, ability to actually source stuff.

Can you just talk about what kind of conversations are you having with your supply chain in order sort of to take out this volatility out? Because you guys have managed it remarkably well.

But just if you could share with us, if you can, do you have to extend contracts with your suppliers? Do you have to pay more versus the spot price? How do you ensure in this unprecedented environment, sort of availability of product and some sort of visibility as much as you can as to what kind of price you have to pay in the second half?.

It’s really a mix, Andrew. We do not have a silver bullet that we say it’s going to solve it. So let me give you a couple of examples, which may give you some color and to understand exactly how we’re operating. When it comes to Motion Technology, I was talking to [Silvano] in Shanghai.

And practically, how we were able to do that is we increased the inventory. Some of the warehouses were locked down in Shanghai. You couldn’t get access. So in that cases, you’re working with the government to get a special permission so that you have a special permission to get there and get the material that are critical for your production.

Or sometimes, you really have a special team that goes and pickup truck at the highway gates to guide them to campus. This is how the China team operated so far in China to guarantee the level of service.

Or when you’re looking at the Shanghai port, you stay ahead of the game and you’re shifting your shipment from the Shanghai port to other ports nearby or towards the North of China. But, there are challenges out there. Some of our suppliers also in terms of steel are not willing to commit to the full volume when it comes to Q4 of this year.

So you keep on staying on the ball, you keep on talking to them and you must guarantee the supply. This is the rule of the game today. It’s guaranteeing the supply for ourselves. And this is also some of the leverage that we have with our customers because we are able to deliver for them. I hope I....

And in terms of financial, obviously, this has a financial impact. It has a financial impact because we have to hold more inventory. And also in some cases, we had to prepay some suppliers in order to secure parts to be delivered to our facilities. So it has an impact on our cash performance as you have been able to see in the first quarter..

And our next question is from Nathan Jones of Stifel..

I wanted to go back to price/cost productivity. Correct me if any of these numbers are wrong. You talked about 760 basis points of headwind from cost, 370 of tailwind from price and 350 of tailwind from productivity.

I think the business would typically be negative on price/cost, mostly out of the MT segment that you typically make up with productivity, but it clearly wouldn’t have had that bigger spread.

Can you talk about that kind of dynamic historically, how far behind you typically are on price/cost that you make up every year with productivity primarily out of the MT business?.

So on price/cost, as we mentioned, we are -- we were behind in Q1, and this was both from a lower price recovery performance as well as increased cost inflation that we’re seeing mainly on raw materials. And so that impacted us negatively, and this impact is coming mostly from MT.

As we move forward, we’re really pushing on price recovery and productivity because cost inflation, as Luca mentioned, it is what it is. We’re not able to really impose any type of price with customers we’re battling to get supplies -- with the suppliers, we’re battling to get supplies.

And so we’re driving price with our customers and trying to really differentiate ourselves in making sure that we provide the value that others cannot provide. We are increasing our price recovery targets, as I mentioned earlier. And this is going to be a central piece of us being able to recover the cost inflation that we’re facing.

Productivity for sure is very important, but this is not going to make the difference. Price is going to make the difference in order to recover the cost inflation we’re facing..

So Nathan, if you look at Motion Technologies in -- go ahead. Go ahead..

Yes, go ahead..

No, if you look at Motion Technology in Q1, we had a gross productivity of more than 400 basis points, but then inflation is more than 1,000. Material is 800 basis points. You have overhead, which includes energy, which is roughly 200 basis points. So to Emmanuel point, gross productivity is not able to cover for that. You have to go for pricing..

And -- but where -- I guess my question is where would you have been historically? Because I know you have price downs in the Motion Tech business. I mean this is obviously where the price/cost spread is, historically negative. You have price downs in that business that you typically make up for in productivity.

What -- if I look at cost minus or price plus productivity minus cost, you were fairly close to neutral overall in the business.

Where is that historically been? Have you historically been able to use price and productivity to overcome cost inflation? And you’re back down to neutral here? Just trying to get a sense of where that would be historically for the business..

Yes. So historically, we would be able to drive the margin equation by really driving productivity. Because, as you rightly mentioned, price was a negative impact on margin, and we would be probably in Motion Tech between 1.5% and 2% price down every year, year-over-year.

And so we were able to continuously improve the margin because we would drive productivity. And at this point, the cost inflation will be retained. And so right now, what we’re seeing is that we’re able to continue to drive productivity and we’re able to get price increases.

The problem is that the cost inflation is outpacing our cost -- price recovery. And as a result, this is a negative equation for MT and for ITT..

And our next question is from Joe Giordano of Cowen..

This is Robert Jamieson in for Joe. I just wanted to ask a couple of questions about Europe. The first one, just with the war in Ukraine.

Can you give us a little bit of color on what you’re seeing on the changes to the energy landscape there? And are there potential opportunities where you could benefit?.

Okay. So the thing that we’ve seen is are still we don’t necessarily see yet in the pipeline, the necessary investment to reverse from the Russia dependency. But this is something that will happen just because of the geopolitical environment.

So that will be -- it could be the more LNG investment in terms of terminals for things coming from Qatar or from the U.S. We haven’t seen those yet in the pipeline, but we know that they are a work in progress. And that will be a positive sign -- a positive tailwind for IP, but we’re talking about medium term, not short term..

Great, that helps. And then just another one. How is this kind of -- has this had any impact on your M&A strategy in Europe and kind of the different assets you’re looking at there? I think you’re looking at some opportunities within rail. But yes, just like an update on that as well..

Sure. Now, of course, the situation in Europe is dramatic. But I would say when we look at our acquisition, the areas that the business that we are looking at being in the pumps and in the valves being on the connector side of the business or in rail, the opportunity is there, we are cultivating both in Europe and in North America.

This is where the geography, where our pipelines are. And it’s has not really changed. Of course, we are not looking at acquisitions in the eastern part of Europe at this moment in time..

And our final question for today is from Matt Summerville of D.A. Davidson..

This is Will Jellison on for Matt Summerville this morning. I want to ask 2 questions. The first regarding capital deployment. You put a lot of resources to work in the first quarter.

And I’m wondering, to what extent has your thinking about capital allocation being influenced by inflation and the fact that it has become more costly to hold net cash on the balance sheet.

I’m just wondering if your thinking has changed at all in response to that?.

Of course, the inflation is the challenge that we are facing today, that we’re facing for the quarters to come. So having said that, so the use of capital is something that was important before, and it’s even more important now. So I would say the strategy has not really changed. We planned it.

The capital deployment was a top priority at the beginning of the year, it’s a top priority now. And when you look at the deployment of the capital, it’s organic first, M&A and then share repurchases and dividends, third..

And well, I would say that, for us, the consequence is that when we look at targets, what’s really important for us is to understand their pricing power, and how they’re able in this environment to differentiate for the competition. And this is something that we saw with Habonim, for instance..

Understood. And then I want to pivot here and ask you about your Friction business.

I’m wondering if you can help me understand a little bit better, what’s driving the fact that you continue to win share in that business? Is it a function of the fact that you can continue to deliver on time 99% of the time, where others can’t? Or is it a function of the fact that ITT great solutions in that business happened to be higher quality than the other solutions that are out there?.

I think it’s a mix of things. Of course, the delivery is one component. Quality that Emmanuel was talking about is another, but then it’s also the speed in finding the solution, and the fact that our R&D and our performance in terms of material science is better and faster than the competition. And then there is a cost advantage as well.

We have a lower cost structure than most of our competitors. And therefore, this allows us to win in the market when sometimes they can’t. So it’s a combination definitely of things..

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