ITT Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • ITT delivered 12% organic revenue growth, expanded segment margins by 280 bps, drove 36% EPS growth and improved free cash flow by over $120 million since Q1.
  • Industrial Process posted 23% revenue growth and 15% organic order growth, with green project awards more than doubling year-to-date and securing major LNG and decarbonization contracts.
  • Motion Technologies grew 10% organically, outperformed friction OE by 500 bps, won content on 67 new electrified vehicle platforms (including Tesla, BYD, Porsche, BMW) and is developing Euro 7–compliant brake solutions.
  • Connect & Control achieved record orders: Aerospace Components surged 25%, while connector orders rose 2% year-over-year and 24% sequentially, driven by commercial aerospace and defense demand.
  • Execution remains strong as Industrial Process margins exceed 20%, Motion Technologies targets ~18% next year, and the company raised full-year EPS guidance midpoint by $0.25 to $5.05 with a path to $400 million of free cash flow.
AI Generated. May Contain Errors.
Earnings Conference Call
ITT Q2 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Like to begin as I always do by thanking our employees around the world, who work hard every day to ensure we deliver on our commitments to all our stakeholders and to our shareholders and customers for their ongoing support and investment in ITT. Last quarter, the ITT story was about growth and execution. And in Q2, the story is again growth and execution with a significant step up and record results on many fronts. Our order growth rate accelerated. We expanded our margin, especially in Industrial Process and Motion Technologies, and our teams generated significantly higher cash and we deployed it.

Operator

Let me share some of the highlights. 12% organic revenue growth, 280 basis points of segment margin expansion, 36% EPS growth, a more than $120,000,000 improvement in free cash flow since Q1. And on top of that, orders, up 13% organically and 6% sequentially. Now let's get into the details. On growth, Industrial Process delivered a 23% revenue increase and the 15% organic orders growth with another record quarter driven by projects and aftermarket.

Operator

On aftermarket, our daily order rates in part and service remain at historically high levels, and we are realizing through the pricing. On projects, orders grew 41% despite a tough prior year comparison. This includes a significant TAMPS award on an LNG project for one of the world's most prestigious engineering firms. Green project orders are up more than 100% in Q2 and year to date are already more than double the amount for all of 2022. Additionally, our Bonneman twin screw and multi face pump technologies are capturing share.

Operator

For example, Voneman was recently awarded content on one of the world's largest decarbonization projects in Australia that produces roughly 16,000,000 tons of LNG per year. When I was at our Bournemouth site in Germany, I saw first and how the team's outstanding project management capabilities are driving market share gains. IP is quickly developing best in class project management with strong leaders and rigor across the organization. With IP outperformance ramping, I'm pleased to announce that Fernando Roland has joined ITT as President of Industrial Process, succeeding Dave Steblen will retire early this year after 30 very successful years of service to Goosebumps and ITT. With more than 2 decades of senior leadership experience at large multinational companies.

Operator

Fernando has the expertise to help grow our premier flow business and enhance IT's differentiation. Fernando, welcome to ITT. Continuing with growth. Motion Technologies grew revenue 10% organically, driven by Friction OE outperformance, which in Q2 was nearly 500 basis points. This quarter, we won content on 60 7 new electrified vehicle platforms with premier auto OEMs, including Tesla, BYD, Porsche, for Leister and BMW.

Operator

Stepping back from the quarter for a moment, one of the unique aspects about friction is the team's ability to serve our customers by anticipating their challenges and developing solutions to meet their needs. With each market disruption, friction found ways to differentiate and accelerate our market share gains. It happened with copper free brake pads. It's happening with the EV transition and the next opportunity is the eventual rollout of Euro 7 initial regulations. The Frutarom team has been proactively developing Euro 7 compliant products in partnership with our customers ahead of the expected rollout.

Operator

As you might remember, in 2022, our ITT Ventures Fund invested in Wakador, a German company specializing in highly customized rotor coating technology. Today, together with Wacker, we are developing low emission breaking technology to help our customers achieve Euro 7 compliance 2 years before regulation are expected to be enacted. We expect this will drive further market share gains once again. Lastly, on growth. Connect and Control Technologies delivered record orders in the quarter, growing 7% organically versus prior year.

Operator

Aerospace Components grew 25% fueled by increased commercial aero and defense demand in North America. And despite the challenges in distribution, connectors orders grew 2% year over year and 24% sequentially with a strong performance with our North American OEM customers in commercial aero and defense. Well done, Art and the entire Connectors team. On execution, We grew IP margin more than 600 basis points driven by volume, pricing and shop floor productivity, eclipsing our long term target of 20% for the 4th straight quarter. And we delivered this margin performance while continuing to invest in the business.

Operator

Our team is increasing IP's manufacturing capabilities and advancing the lean transformation in Seneca Falls. And we now expect to have 5 1 piece flow lines running next month. We are also progressing with a foundry closure, which will provide additional cost benefits beginning in 2024. In MT, margin improved 150 basis points to 16% and 120 basis points sequentially as we anticipated. With the progress in 2023, we believe NTE will return to roughly 18% margin in 2024 as destocking in the auto aftermarket abates.

Operator

Moving to capital deployment. On M and A, we didn't waste any time getting to work with our recent acquisition. The connectors and MicroModes teams are working together to execute on the commercial synergies and grow the pipeline. The teams are sharing customer opportunities, exploring new ways to package our products and expand distribution. We believe Micromotor differentiated miniature and high frequency design capabilities will enhance ITT's product portfolio and customer base and provide further entry into attractive defense and space markets.

Operator

Feedback from our customers has been positive and this is leading to other commercial opportunities for Alconectors business. Beyond M and A, we also paid down over $60,000,000 of standing commercial paper and repurchased $60,000,000 of ICT shares year to date, including $30,000,000 in Q2. Next to our outlook. With the outperformance through the first half, our large profitable backlog and our order acceleration, today we're raising the midpoint of our full year EPS guidance by $0.25 with confidence in our ability to deliver over $5 of EPS or 14% growth for the year. Notably, the high end of our previous range now becomes the low end of the new guidance, thanks to the performance in MT and IP.

Operator

To cash generation ramp considerably since Q1, with plenty of room still to grow on a path to nearly $400,000,000 of free cash flow in 2023. With our exposure to growing end markets, including auto, to energy, air and defense and the backlog of more than $1,200,000,000 ITT is in a strong position entering Q3. I'm incredibly proud of the team's accomplishments this quarter and we are ready to conquer what lies ahead. Now I would like to share with you another growth opportunity for ITT. In June, I joined the Friction team for a groundbreaking ceremony at MT's facility in Tamale, Italy to announce a €50,000,000 investment that we position ITT to quickly gain share in the underserved and profitable high performance vehicle segment.

Operator

The investment comprises a new facility, upgraded production equipment and an expansion of our fast prototyping, testing and R and D capabilities. We're also installing solar panels that we expect will provide more than 20% of the entire thermal site electricity needs, demonstrating Friction's ongoing commitment to sustainability. This opportunity was largely driven by feedback from customers about their need for a responsive, high quality and high performing partner. We have earned their trust by understanding their needs, delivering highly customized solution and performing. And today they're trusting us again to deliver the same quality for their most prestigious platforms.

Operator

This is a win win. Our customers will benefit from having a trusted and known partner that they know will deliver and expected returns for ITT are attractive. Congratulations to Luca Martinotto, Friction and the entire Thermody team. You have earned this investment. Let me now turn the call over to Emmanuel to discuss our Q2 results and full year outlook in more detail.

Speaker 1

Thank you, Luca. Let's begin on slide 5. We continue to see strong top line growth in both industrial process and motion technologies. In IP, project grew over 100%, while baseline pumps and aftermarket grew mid teens. In NT, Friction's perfect on time delivery performance drove double digit revenue growth.

Speaker 1

As I indicated at a conference in June, Friction's outperformance ramped this quarter. We also saw strong volume and pricing growth in KONI and Axtone, thanks to share gains in rail. In CCT, the growth in our aero components business largely offset declines in industrial connectors associated with continued destocking in distribution, especially in Europe. The team is addressing the dynamics of strong demand coupled with a challenged supply chain in commercial aerospace by reducing our internal lead times. Moving to our margin performance.

Speaker 1

Our incremental margin this quarter was nearly 40% 50% in IP. This is driven by over 300 basis points from volume and price and over 200 basis points of productivity, which collectively outpaced cost inflation and unfavorable foreign currency impacts. Motion Technologies delivered a strong sequential and year over year improvement. This will continue as productivity ramps and commodity inflation eases further. Finally, this quarter, we divested a small product line in CCT and incurred acquisition expenses related to MicroMode, which drove a net $5,000,000 gain or $0.05 of EPS.

Speaker 1

This amounted to 50 basis points of margin improvement that will not repeat. On adjusted EPS, Q2 showed another big step up in performance. The 36% growth is largely the result of strong operational performance, pricing realization that is now outpacing cost inflation. Finally, on cash, another impressive performance both year over year and compared to Q1. Free cash flow margin was almost 15% this quarter.

Speaker 1

The $145,000,000 increase in free cash flow year to date came from a combination of higher operating income and improved inventory management. What's even more encouraging are the benefits that are still to come from further optimization of working capital. We also continued to repurchase ICT shares while reducing interest expense from Q1 given our strong cash generation. With this quarter's performance, we have line of sight to nearly to $400,000,000 of free cash flow for the year. Let's now turn to Slide 6 to look at the EPS drivers in Q2.

Speaker 1

We delivered high quality results in Q2. We're growing operating income through share gains, to pricing and productivity. In fact, the operating income growth rate was almost triple our revenue growth rate this quarter. Pricing is outpacing cost inflation. We overcame large unfavorable year over year foreign currency impacts and we are making strategic investments in new and emerging technologies to sustain our differentiation over the long term.

Speaker 1

All of this will help to deliver this high level of performance for many years to come. Let's turn to Slide 7 to discuss the full year outlook. The positive demand we saw through the 1st part of Q2 continued and even ramped at the end of the quarter. The result is a large and profitable backlog that provides greater visibility into the second half of twenty twenty three. In IP, our project margin in backlog expanded over 200 basis points year to date as we continue to drive project management excellence.

Speaker 1

In CCC, orders in North America are growing sequentially, thanks to OEM share gains of setting the fact that our distributors are continuing to work through elevated levels of inventory. With all this considered, We expect to be solidly at the midpoint of our current organic revenue guidance range of 6% to 8%. On margin, IP has far exceeded our expectations for several quarters. This and the improved performance in MT are driving our 4 year segment margin outlook to over 18% at the midpoint. We see signs of easing inflation and are progressing on our lean transformation.

Speaker 1

With a $0.25 increase to our EPS midpoint to $5.05 we now expect growth of 11% to 16%, firmly above our long term target. Looking ahead briefly to the Q3, we expect low to mid single digit organic growth led by industrial process. Segment margin should be roughly flat sequentially with continued improvement in Motion Technologies. Earnings should be up mid single digits year over year. Finally, our effective tax rate remain at approximately 21%.

Speaker 1

Let me turn the call back to Luca on Slide 8 to wrap up.

Operator

Thank you, Emmanuel. A few points to reiterate before our Q and A. First, growth. We are positioned in attractive and growing end markets and we are outperforming. 2nd, the team's execution in these end markets has been outstanding.

Operator

They are fighting still challenging supply chain conditions, removing bottlenecks and finding new ways to deploy lean processes. And before you ask, let me assure you, we will have new long term margin targets for industrial process in the not too distant future given its current performance. It has been 1 year since we established a long term segment margin target for ICT of 20% and at 18.7% in Q2, we are already well on our way to achieving our target. 3rd, we're not losing sight of the long term. We're investing today in innovation, product development and capacity to support growth in pump projects, in electrified vehicles, in the high performance vehicle market and in aero and defense.

Operator

Our teams have been working throughout the summer on their long term strategic plans, and I'm sure that we will deliver on them as we have done so far. We've been improving our balance sheet for several years now, which enabled us to go on offense. We are deploying capital while cultivating a strong M and A pipeline and investing in our business organically. Lastly, we raised our full year guidance to over $5 of EPS at the midpoint. ITT is entering a new stepped up level of performance.

Operator

Thank you for your time today and your interest in ITT. Alan, please open the line for questions.

Speaker 2

Thank you. The floor is now open for questions. Our first question comes from Damian Karas at UBS. Damian, your line is now open. Please go ahead.

Speaker 3

Hi, good morning, everyone.

Speaker 1

Good morning, Damian.

Speaker 3

Congratulations on hey, congrats on the quarter. Luca, I was hoping maybe you could share some more Absolutely. Maybe you could share some more color on what you're seeing across IT. I know you guys had expected some short cycle pressures In the back half, what are you seeing on the short cycle side? And maybe if you could also just speak to the project funnel?

Operator

Sure. Thank you, Daniel. So when we're talking about the orders overall, the orders are very positive as you see 15% growth. And if you look at the full picture, We are in a kind of, I will call it, reinforcing cycle. The revenue is up 23%, but the orders are very healthy with a book to bill of 1.2.

Operator

So our backlog goes up to record level, but also the funnel is up sequentially year over year. So overall, a very good level of demand. Now let's go specifically on the short cycle. On the short cycle, the orders stay at elevated level. So the growth rate decelerated, but just to give you an example, parts were very strong.

Operator

Starts grew 14% in the quarter, 7% was price, but 7% was volume. And when you look at the July orders, the July orders are still solid and growing year over year. And as I said, project is still healthy across the board, across the different regions.

Speaker 3

Terrific. And then maybe switching to margins, So you've seen some really nice expansion year to date and you called out the 39% incrementals in the second quarter. It looks to me like the guidance suggests just a good bit lower incremental, if my math is correct, maybe like 15% to 20% in the back half. So if you could maybe just talk about your margin expectations from here, any factors that might be leading to a little bit less uplift? And I guess just more generally, like how should we be thinking about the incrementals for your business?

Speaker 1

Yes. Thanks, Damian. So we expect segment margin to be generally in line with Q2 for Q3 and Q4. And Here it's important to keep in mind that MT continues to improve sequentially, while IP will probably settle between 21% 22%. I think it's important also to remember that last year in the second half there were a few one off positives that impacted mostly IP and that will need to lap in the second half.

Speaker 1

So overall, I think it's fair a little bit of deterioration of incrementals in the second half, but still very, very healthy.

Speaker 3

Understood. Thank you very much. Best of luck.

Speaker 2

Thank you, Damian. Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Jack, your line is now open. Please proceed.

Speaker 4

Hi, good morning guys. Just wanted to really get an update on The destocking progress in industrial connectors in Europe Automotive, I think You pointed out some better orders in connectors and it looked like the orders were pretty good in MT as well. So I'm just wondering If those are those issues are starting to resolve themselves ahead of plan or still thinking it kind of runs through the year.

Operator

Thanks, Jeff. Good morning. Now when you look at the aftermarket in Motion Technologies, The aftermarket is still destocking. So the situation there is not has not changed. So the destocking probably will continue for all of 2023.

Operator

This is when it comes to automotive. When you look at the connectors, connectors had a very good quarter in terms orders and it was a record as a matter of fact. I think that we are still facing the stocking, particularly in Europe, like Emmanuel was sharing in the prepared remarks. What the team has been able to do is to perform incredibly well on the orders with OEM and also they work very hard in the distribution here in North America to enlarge the product portfolio that we put through distribution. And these has led also to a very good order intake in Distribution North America in Q2.

Speaker 4

Okay. And then The $0.05 gain, is that in CCT? And am I thinking about that the right way?

Speaker 1

Yes. This is in CCT. This is a small product line roughly $3,000,000 of sales annually that we decided to sell to focus really on the core business of CCT.

Speaker 4

Okay. So but if you take out that $5,000,000 gain The margins were pretty low there. So maybe just what's going on with the underlying margins in CCT?

Speaker 1

Yes, yes, you're right, Geoff. So CCT has had a little bit of an issue in Europe dealing with low levels of demand and adjustment of the cost base. So we're now we're happy to report that as of June really the 2nd part of June and also what we saw in July we're back on track and we're back to the previous levels of performance. So So we feel pretty confident that CCT is going to be higher than 17% in the back half of the year.

Speaker 4

Okay. Good color. Thanks guys.

Speaker 2

Thank you, Jeff. Our next question comes from Joe Ritchie from Goldman Sachs. Joe, your line is now open. Please go ahead with your question.

Speaker 3

Hey, guys. Good morning. So a couple of quick questions. First one, just on the organic growth that you guys saw this Quarter in MT, can you just make that could you break that down a little bit further for us? Like what did you see in friction versus the rail business?

Speaker 3

And then like any other geographic color would be helpful too.

Operator

Okay. So first of all, when you look at Friction and Automotive, I think that there was a positive performance when you look at the OE. So we outperformed the market by 500 basis points, especially performing with China, where we were almost twice the growth of the market. And we continue to win awards. I will give a little bit more color later.

Operator

The aftermarket is still destocking. So overall, the OES was positive, but independent aftermarket negative growth year over year. Rail had a very good order intake. So when you look at KONI, for example, KONI orders in the quarter were up 25% and we expect the orders to be up double digit for all of 2023. And also Axtone, you might remember Axtone, 25% of the Axtone Visa was actually in Russia and we got hit pretty hard last year.

Operator

Now the team has worked incredibly hard to offset those Russian orders with more passenger orders in Western Europe and other regions. So we expect the orders for 2023 to fully offset the business that we suspended in Russia. So overall positive across the board. So to Joe to round it all up in terms of revenue, Friction so strong growth in Friction mid teens. This is really driven by Friction OE plus 21%,

Speaker 1

which is a really strong number as Luca was mentioning based on the outperformance. Rail also was up 25% and this is both coming from Kony and Axtone. So not only we had strong revenue and we really the team really increased the output of our factories. But on top of that, we had really strong orders as Luca was mentioning.

Speaker 3

Awesome. That's great to hear guys. And then my quick follow on, I saw that price cost was a nice contributor to earnings on a year over year basis versus last quarter, I think you guys were flat. What's the expectation into the back half of the year, Emmanuel, for price cost and how that's expected to contribute on a year over year basis.

Speaker 1

Yes. So you're right, Joe. We had a nice contribution from pricecost clearly positive from a dollar basis and more than 100 basis points of margin expansion thanks to that. And let me just precise that when we talk about price cost here, we talk about price versus all our costs. So not only material, It includes also labor and overhead.

Speaker 1

And so in the second half of the year, I would say that we should still see a positive trend on price cost definitely positive from a dollar basis and then from a margin basis a little less than 100 basis points.

Speaker 3

Perfect. Thanks guys. Thank

Speaker 2

you, Joe. Thank you. Our next question comes from Vlad Kvaiszewski from Citigroup. Vlad, please go ahead. Your line is now open.

Speaker 1

Good morning, Vlad.

Speaker 2

Lars, please go ahead to your line, Jason.

Speaker 1

We can't hear you. Hey, good

Speaker 3

morning, guys. Sorry about that guys.

Speaker 1

Can you hear me now? Yes. Yes.

Speaker 3

Okay, great. So I just wanted to ask you guys about channel destock in CCT connectors and where you think that channel is in the destocking cycle and And what you're hearing in terms of actual end market dynamics there?

Speaker 1

Yes. So I think what we're seeing is The destocking that we're seeing is happening in Europe. We're not seeing destocking for the moment in North America. What we hear from our distributors partners is that their customers are destocking, but we're not seeing a clear destocking movement at our customers in North America. I would say from a demand standpoint, we feel pretty good.

Speaker 1

As Luca was mentioning, we have been able to expand our product lines with our distributors especially in North America and that has yielded a significant share gains. And we'll continue to really in TCT develop new products, especially including the ones that we acquired with MicroMode to really boost our presence with distributors.

Speaker 3

Okay. That's helpful. And then I just wanted to shift on the friction announcement that you mentioned. That's quite interesting. So I guess just any color you can give on when you're expecting that plant Come online and how you're thinking about visibility to demand for product offerings out of that facility.

Speaker 3

And is this sort of displacing incumbents or More focused on winning new content on new vehicles as they're introduced. Just how are you thinking about ramping that capacity you're bringing online?

Operator

Sure. Thank you. Thank you, Vlad. So the first part of the question is that the plant will be up. The building will be up by September next year.

Operator

The equipment will be installed in September next year and the line will be running in October 2024. So you're talking about 15 months from now 14, 15 months from now. That's the timing. When it comes to awards, we've already won some of the awards that we will be producing in those plants. So we got a very good visibility.

Operator

And also This is something that we have been working in the last 12 months together with the customers. So that is going to be a good start up with the line running from day 1. And Vlad, this is an underserved market.

Speaker 1

So we're lucky enough to be able to guarantee our customers the same performance we deliver to them on conventional vehicles on those high performance vehicles. And so given this the differentiation we have with the competition, we feel very confident that This is a high success we have a high success rate here. In fact, we already as Luca was mentioning got some awards. And it was a great combination because the awards that we got were for high performance vehicles, but also including low emission brake options, which are fully fitting the Euro 7 requirements that we'll have to face in 2 years. So it's also a great testing ground for this new technology.

Speaker 3

That's all great to hear. Appreciate it. I'll get back in a few. Thanks.

Operator

Thank you, Ed.

Speaker 2

Thank you, Vlad. Our next question comes from Matt Summerville from D. A. Davidson. Matt, your line is open.

Speaker 2

Please go ahead.

Speaker 1

Good morning, Matt.

Speaker 3

Good morning. Thank you. Good morning. Couple of questions. First, just on friction OEM, what sort of production outlook are you looking at for 2023?

Speaker 3

And maybe an early thought On how you're building your business plan around the 2024 production outlook, regional color would also be helpful. And Maybe touch on 500 basis points of outperformance. I guess I thought you guys had talked about that gap maybe starting to close, but indeed You're still holding on to a pretty wide margin relative to global vehicle output. So maybe touch on that a little bit.

Operator

Sure. Thank you, Matt. So Q1 and Q2 production have been a pleasant surprise when because they were better than the original forecast. So the first half is roughly plus 11% worldwide. So when you look at the forecast for the full year, Today is at mid single digit.

Operator

This is what IHS is saying, roughly 86,700,000 vehicles produced. We tend to be more conservative. So we are more on the low single digit worldwide, right, 84,000,000, 85,000,000 they could produce and we continuously expect to outperform that market growth. Then you asked about the region. We think that Europe is probably growing mid single digit.

Operator

Year to date, they grow 16 center for H1. We think China is going to be probably flattish whereas North America is probably growing mid single digit. This is when it comes to the market and the region. As I said, we still expect to outperform. We are quoting 500 basis points in outperformance in Q2.

Operator

I would say the outperformance was outstanding in China. China did extremely well. I will talk a little bit about that in a second. But we expect the outperformance to continue that because We keep on winning a very fair share of new platforms. To give you an idea, we have been awarded 100 percent of the front axle and 100 percent of the rear axle of a major EU premium OEM EV platform.

Operator

This is for Friction, the largest award ever. The launch will be in 2025 and OE will last for 10 years. OE will last for 20 years. So think about the visibility that you have on this platform. We won with BYD.

Operator

We won the front axle of the cyber truck with Tesla. So we continue to see that electrification is really a tailwind for our outperformance in the future.

Speaker 3

That's great. Appreciate all that color, Luca. And then just maybe comment on the M and A pipeline Actionability, what you're seeing from a multiple standpoint among the 3 business segments, maybe where you're seeing the most near term activity and Maybe what your expectations are for incremental deals to close?

Operator

M and A, you know we have built a strong M and A function. We continue to build the pipeline. We see some good interesting opportunities move through the pipeline and those range from the bolt ons to larger scale transaction. So, we stay focused on the strategic fit and the asset quality. And I would say the area that we are making progress on, particularly because the pipeline is richer and because it's also our focus are really inflow, which means pumps and valves and connectors.

Speaker 1

And from a multiple standpoint, I would say that we see still pretty high multiples. I think it's Difficult for sellers to give up on those high multiples that they had before. And so that's why we pay real attention to the business case that are presented to us with those opportunities. And I think that we've been pretty successful in rationalizing those business case and really discussing with sellers the logic of those and in some cases debunking also their because we want to make sure that We stay close to the returns we've been able to provide so far.

Speaker 3

Thank you, guys. Appreciate it.

Operator

Thanks, Matt.

Speaker 2

Thank you, Matt. Our next question comes from Mike Halloran from Baird. Mike, your line is now open. Please proceed with your question.

Speaker 4

Thank you. Good morning, everyone.

Speaker 3

So two questions here. First on the margins for Motion, certainly you heard Emmanuel's comments about Up as we move into 3Q. Maybe just talk about the timing of the recovery curve given all the moving pieces on the costs, volume, etcetera side of things?

Speaker 1

Yes, Mike. So we're very excited with the Motion Technologies performance at 16%. As we mentioned, this is 150 basis points over year over prior year and then 120 sequentially. And there's still more to go after. The growth engine in terms of margin expansion for Motion Tech is productivity and it will continue to be productivity.

Speaker 1

And we see many more opportunities especially as we grow rapidly our top line and expand into new types of products, new types of technology for our brake pads. That's productivity. And then if you look at our rail platform Kony and Axtone, we see many opportunities both from a pricing standpoint and also a productivity standpoint. So here in pricing, we have just scratched the surface. There's still seeing all the impacts of pricing yet in our P and L.

Speaker 1

So We're going to continue to drive this. And with further margin expansion from KONI, Axtone as well as from Friction, We expect really Motion Technologies to be in a position in 2020 or sometime in 2024 to be at this 18% market.

Speaker 3

That's helpful. Appreciate it. And then following You talked about a pretty robust funnel, just a little help on the composition of that funnel. And in any way you can delineate between underlying health of the underlying markets versus what's clearly some share gain going on in your efforts there?

Operator

So just a couple of stats. 38% year over year and is up 11% since January 1. Is across most of the region, is very strong in North America, is And also when you look at the market, we're talking about both up in the oil and gas and the funnel is also up on the chemicals. I think if you look at our booking in terms of projects as is very good. And today they represent roughly 33% of all the orders that we booked in projects.

Operator

And we have a good size of opportunities in funnel there as well.

Speaker 3

Great. Really appreciate it. Thanks.

Operator

Thanks, Mike.

Speaker 2

Thank you. Our next question comes from Nathan Jones from Stifel. Nathan, your line is now open. Please go ahead.

Speaker 3

Good morning. First one on the capacity addition for MK. Can you just give us a number for what Capacity this is adding and over what time period you expect that to be filled up?

Operator

Okay. And that's you're talking about that these are high performing vehicles. So these tend to be low volume, high mix and tend to be high value in terms of products. So you're talking about anything that could go from 5 to maybe 10 maximum 15,000,000 pads probably in the next, let's say, 7 to 10 years.

Speaker 1

And so in terms of capacity, you know how we operate. We only book incremental capacity when we have our orders by more than 70%. And so that's the infrastructure. And then we're going to fill it up with new prices as we receive orders. But we already started receiving some orders especially from Porsche and also from Daimler with the AMG segment.

Speaker 1

So I think it's fair to say that there will be lower unitary volumes per platform. The price is going to be much higher than what we're selling today. And I would say our expectations from a profitability standpoint is that it will be higher than our business with conventional brake pads.

Speaker 3

And while we're at it, I was going to ask for an update on the Smart Pad. I haven't heard an update on that for a while. Just any update you've got on the progress that you made there?

Operator

Sure. The SmartPath is part of the initiative that we have on the innovation. We have several projects going on in this map. We have a project on one sensor where we are working together with some, I would say unconventional customers in terms of some fleet management and look at that as a business opportunity different than the OEM side. And then we are working together with a couple of OEMs in Tier 1 on the 3 sensors.

Operator

And as you know, there are a lot of changes happening from a technology point of view on the break in with autonomous vehicle, etcetera, and those are progressing well as well, Nathan.

Speaker 3

Thanks. Just one final one on the CCT destocking, clearly in industrials we've seen a lot of destocking going on. People built too much inventory in 2022. Some places you're seeing end markets softening, lead times are coming down, supply chains are improving. So There's multiple inputs on why destocking is happening.

Speaker 3

Do you have any color on how much of this is being driven by the fact that Lead times are getting shorter. People maybe built too much inventory last year versus actual softening of Underlying demand, which pretty clearly is going on in parts of Europe.

Operator

So I think that when we look at the destocking through the connectors in distribution as Emmanuel said before, We are seeing that particularly on the European side, Nathan. North American distribution was incredibly strong in Q2. And the area where we were strong was aero, defense and also industrial in terms of orders. And this is also thanks to the great job that the team has done in terms of enlarging the product portfolio that we are offering through the North American distribution. So distribution in North America and distribution worldwide because exceptional performance in North America has been strong for ITT connectors in Q2.

Speaker 1

Great. Thanks very much for taking my questions.

Operator

Thanks, Nathan.

Speaker 2

Thank you. Our last question today comes from Joe Giordano from TD Cowen. Joe, your line is now open. Please proceed.

Speaker 1

Good morning, Joe.

Speaker 3

Hey, guys. Hey, morning. This is Zane Khan on for Joe Giordano. Congrats on the quarter guys. So my first question is on Motion Technologies, the 18% margin you guys mentioned.

Speaker 3

Just wanted to confirm how you guys view the sustainability of that margin? Like do you view that as a run rate margin? I know there are some pricing still being worked through, but long term how do you do that?

Speaker 1

So I think the 18% that we talked about It's just the first step to get to our 20% target. You may remember that last year we committed to those targets. And for Motion Technologies, they were 20% long term. So I would say, we feel pretty good about this 18% first step. We continue to drive productivity.

Speaker 1

We continue to drive pricing also as I mentioned especially in rail. And I think that as aftermarket recovers next year and we also have the platforms the new platforms with a better coverage in terms of cost inflation that are kicking into production next year and in 2025. We feel that structurally Motion Technologies will be at a higher level of profitability. So we have definitely good line of sight for that 18% in 2024. And then to build on that and get to our 20% long term target in the next 3 to 4 years.

Speaker 3

That's awesome. Thank you for that. And last question would be just on your backlog. So you guys have currently I think 1.2. Broadly speaking, how much visibility or coverage do you guys think that provides into 2024?

Speaker 1

So, yes, backlog has been a really strong data point for us, really strong performance from a commercial standpoint. Our backlog in IP is almost $700,000,000 It's up $50,000,000 in Q2 versus Q1. So think about that. We grew revenue by almost 23% in IP. And despite that, we were able to grow our backlog by 50,000,000 So year to date, we have 1.2 book to bill.

Speaker 1

So definitely, we expect that with this level of backlog, that we'll be able to grow in 2024 in IP. In CCT, we continue to also drive a lot of backlog accumulation. Backlog was up €25,000,000 versus Q1, 11% year over year And the book to bill is at 1.15. So also here really strong performance from a commercial aerospace standpoint. And so here in commercial aerospace and in defense, we accumulate long term backlog.

Speaker 1

So this bodes well for CCT's cities revenue in 2024. And then as I mentioned in MT, backlog is mostly centered around rail and defense. And here we're accumulating also some strong orders. So overall, I would say we have this definitely gives us really good line of sight for the second half and also because of some of the long cycle awards that we got into 2024.

Operator

And it's not just the size, but it's also the profitability of this backlog, which is better and higher than it was as an example 1 year ago.

Speaker 3

That's awesome. Thank you very much.

Operator

Thank you.

Speaker 2

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

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