Welcome to ITT's 2021 Second Quarter Conference Call. Today is Friday, August 6, 2021. This call is being recorded and will be available for replay starting at 12:00 p.m. Eastern Time. Currently, all participants are in a listen-only mode, and we will open the floor for questions following the presentation. It is now my pleasure to hand it over to Mark Macaluso, Vice President of Investor Relations. You may begin.

Thank you, Christen, and good morning. It's my pleasure to welcome you to ITT's second quarter 2021 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 three-month period ending July 3, announced yesterday evening. Today's remarks may contain forward-looking statements including comments relating to company performance, strategic priorities, business mix, market conditions and the effects of COVID-19 on ITT, which are subject to certain risks and uncertainties. These statements are not guarantees 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 2020 Annual Report on Form 10-K and other recent SEC filings. ITT does not under any expressly disclaims any obligation to update forward-looking statements whether as a result of new information, future events or otherwise. Except where otherwise noted, the second quarter results we present this morning will be compared to the second quarter of prior year and based on non-GAAP financial measures. These adjusted results exclude certain non-operating and non-recurring items, including but not limited to asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items. All adjustments in the quarter and expected for the full year 2021 are detailed along with the reconciliation of such measures to the most comparable GAAP figures in our press release and presentation, both of which are available on our website. Before we begin, I'll provide a brief overview of our second quarter GAAP results. Revenue increased 34% to $692 million, segment operating income increased 206% to $114 million, which equates to segment operating margin of 16.5%. Reported earnings per share decreased 15% to $0.45, driven primarily by a $28 million after-tax loss on the divestiture of InTelCo Management LLC, formerly a wholly-owned subsidiary that holds legacy asbestos liabilities and related insurance assets, as well as prior year income tax benefits and increased corporate and environmental costs. With that, it's my pleasure to turn the call over to Luca who will begin on Slide #3.

Thank you, Mark. And good morning. I want to first thank you, our stakeholders for your continued support and investment in ITT. I also want to thank the nearly 10,000 employees at ITT that continue to demonstrate the resilience that makes ITT a trusted partner for our customers and the communities in which we operate. We are all focused on ensuring ITT delivers on its commitments, hour after hour while taking care of each other, our families, and our customers. This has been a pivotal quarter for ITT. On July 1, we divested the subsidiary that held all of our legacy asbestos liabilities to a portfolio company of Warburg Pincus. Importantly, ITT is indemnified from any further responsibility for all pending and future legacy asbestos claims. This transaction followed the successful transfer of a U.S. pension liability in October 2020 and will allow us to focus more on growing the core business organically and through acquisitions. We're now beginning the next chapter in ITT's history. On the operational front, over the past few months, I've had the privilege of meeting our teams in person at our sites in Italy, California, the Netherlands, and the Northeast. I continue to be encouraged by the progress we are making, by the opportunities that remain, and by the commitment and the passion I see from our workforce. Before reviewing our results, let me talk a little bit about ITT's sustainability efforts. In the coming weeks, we will be releasing our 2021 sustainability report supplement, which will show our commitment to environmental, social, and governance initiatives. It is clear that while we have made significant progress in 2020, despite the impact of the pandemic, there is still more that we can do. Our employees’ efforts during the pandemic to take care of each other and our customers transcend our resolve to continually improve our ESG practices. And this is what we will do. Some of our accomplishments, which you can soon read about in the supplement, include a 25% reduction in greenhouse gas emissions and a 25% reduction in workplace incidents. Further, we maintain an A rating for our ESG profile as measured by MSCI, a recognized leader in global ESG assessment. Now, let's review our results for the second quarter, beginning with sales. Friction continued to outperform global auto production growth. In fact, the outperformance we drove this quarter was significantly above our historical average. The auto business in Motion Technologies grew organic revenue nearly 80% and our revenue exceeded pre-COVID levels from 2019 once again this quarter. More importantly, we continue to win key awards in both conventional vehicles and our new electric vehicle platforms, which will fuel future outperformance. This quarter we were awarded content on 10 new electric vehicle platforms, seven of which were in China, and two on key strategic platforms in the growing North American market. We also continue to differentiate ourselves from the competition. In July, Friction’s ceramic brake pads sold in the aftermarket were ranked the highest among five competitors according to ADAC, Europe's largest motoring association based in Germany. Our brake pads have been acknowledged for their outstanding safety and durability and received best-in-class ratings for weather resistance and braking distance. This is a testament to the supplier excellence and innovation of the Friction team. Let's get back to the quarter. Building on the first quarter momentum, our connectors business in connecting control technologies grew sales by 17% organically after 8% organic growth in Q1. We saw continued strength in the North American distribution channel and sequentially, industrial connectors in Q2 grew 6% versus Q1 due to distribution strength worldwide. We also achieved 8% organic revenue growth in industrial process driven by strong pump project deliveries, which were up 52% organically in the quarter due to strength in the chemical and oil and gas markets. We achieved this by remaining focused on serving our customers and ensuring we commissioned their projects on time, despite significant supply chain disruptions. Turning to orders. I'm energized by the growth our commercial teams generated this quarter across all three segments. In total, we drove 47% organic orders growth across ITT with order levels surpassing 2019, positioning us well for the second half of the year and for 2022. First, Motion Technologies grew orders by 76% organically driven mainly by auto. And we also saw a strong performance in rail, which grew over 20% organically. Second, industrial process orders were up 18% organically and up 7% sequentially, driven by continued recovery in our short-cycle business, while orders grew 24% across service. Project orders were relatively flat year-over-year. However, we are increasingly confident that project activity in the funnel is strengthening. And we expect to successfully leverage this momentum in the second half. Finally, in Connecting Control Technologies, orders were up 47% organically driven largely by industrial connectors and aerospace components. As we mentioned last quarter, we saw some positive signs in commercial aerospace, which we expected would start to pick up in Q2. And we're seeing that momentum in orders today. From a profitability perspective, despite increased pressure from commodity costs and supply chain disruptions, we delivered nearly 400 basis points of adjusted segment margin expansion with triple-digit margin expansion in each segment. This was a result of the incredible growth in volumes I mentioned earlier and the team's ability to generate productivity net of inflation, while successfully navigating challenging market conditions. This was aided in part by the actions we took in 2020 to reduce our structural costs. As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $0.94, growing 65% and surpassing our pre-COVID adjusted EPS levels in Q2 2019. Given the strong first half performance and our confidence in ITT's ability to outperform, we are again raising our outlook for 2021. We now anticipate organic revenue growth will be 8% to 10% for the year, a 300 basis point increase on both the low and high end of our already increased guidance from the first quarter. These will be driven by the strength in Friction and short-cycle orders growth in both IP and CCT. The increased sales volume and strong productivity expected in 2021 will generate adjusted earnings per share in the range of $3.90 to $4.05 at the high end, which equates to 22% to 27% growth versus prior year. This is a $0.08 improvement at the midpoint after a $0.30 increase after the first quarter. And this with ITT on pace to comfortably surpass 2019 adjusted EPS despite significant inflationary pressure. Let's turn to Slide 4 to talk further about the second quarter results. From a top line perspective, Motion Technologies delivered a solid performance driven by strong growth in the OE business and continued share gains despite the global chip shortage and supply chain disruptions. Our Friction and OE businesses grew over 60% organically. As they always do, this quarter I traveled to a number of our facilities, including our world-class Friction plant in Barge, Italy. Here, I saw the team's engineering expertise on full display, which will enable us to continue winning size share of global EV platforms. Our continued investment in automation in all our plants and hour-by-hour management allows us to continually meet customer demand, despite constant change in production schedules. And we continue to invest in and develop new technologies to address the needs of a new and more environmentally friendly automotive braking system. In CCT, we drove nearly 19% organic revenue growth in industrial connectors, mainly through distribution, continuing the momentum we saw in the first quarter. Demand in commercial aerospace is increasing, as exhibited by the nearly 70% growth in aerospace orders. The book-to-bill CCT was an impressive 1.18 for the quarter, which positions us well for the future. Now moving to operating margins. Our focus on operational excellence produced 250 basis points of expansion in Q2 at ITT level and 390 basis points at the segment level. By segment, MT grew margin 660 basis points, connecting controls 230 basis points with an incremental margin of 37%, and industrial process grew margin 100 basis points to nearly 15% once again. The strong performance was a combination of higher sales volume, commercial actions, and productivity offset by raw material inflation in a favorable mix given the growth in some projects and continued investments for growth, which are critical to sustain ITT's outperformance. Regarding raw materials inflation, the impact this quarter was approximately 240 basis points, which was higher than what we expected. And whilst we are deploying pricing actions with our customers, based on current prices for material purchases for the remainder of 2021, we expect these phenomena will have a significant impact in the second half. Free cash flow for the quarter was impacted by the sale of our legacy asbestos liabilities. Excluding this one-time non-recurring item, adjusted free cash flow was $131 million. The decline compared to the prior year was the result of higher operating income generation in the segments, which was more than offset by strategic investments in working capital to support growing customer demand. So wrapping up, ITT's around the world delivered another outstanding performance in Q2. Organic growth was strong across all three segments. And we converted the highest sales at good margins. We generated over 400 basis points of productivity while investing for future growth and successfully navigated challenging market conditions and are nearly 50% organic growth in orders, positioning ITT for a strong second half. Let me now turn the call over to Emmanuel on Slide 5 to discuss the segment performance in more detail.

Thank you, Luca and good morning. Motion Technologies Q2 organic revenue growth of 64% was primarily driven by strength in auto. As you know, the second quarter of last year was down significantly due to the pandemic. However, Friction continues to outperform global auto production by a very wide margin. And from an operating standpoint, our OE business performed very well with 99% plus on-time performance. This was a key reason Motion Technologies revenue eclipsed pre-COVID levels in the second quarter of 2019 by 8%. The strong orders growth in MT this quarter was a combination of both auto and rail, where we continue to gain share. Segment margin expanded 660 basis points versus prior year to 18.8%, mainly due to higher volumes and productivity offset by the impact of higher raw material costs for steel, tin, and copper. As we indicated last year, MT's margins declined sequentially in the second quarter, given the increasing commodities pressure. However, MT delivered almost 30% incremental margin in spite of these headwinds. Wolverine sales growth was over 60% driven by OE shims in North America and Europe and in sealings, while KONI grew by double-digits organically. Margins in Wolverine, KONI, and Axton were all double-digits in the quarter. For industrial process, revenue was up 8% organically. This was driven partially by easy prior comparison, stemming from steep declines in project shipments, which resulted in over 50% revenue growth this quarter. We also saw minor short-cycle declines driven by lower service sales and flat growth in baseline pumps due to the materials shortage. As we have indicated, given the order trends we see across IP, we continue to expect the short-cycle businesses to accelerate in the second half. From an end-market perspective, growth was spread across general industrial, oil and gas, and chemical market. Turning to orders, IP grew 18% organically and 7% sequentially due to the short-cycle, namely parts, valve, and service. Our daily order rates continue to be strong into the third quarter, with orders in all product categories, except baseline pumps, above 2019 levels. And the month of June was our largest month of project orders since 2015. We believe these position us well for the remainder of 2021. IP's margin expanded 100 basis points to 14.7% with an incremental margin of 24%. This was partially impacted by unfavorable mix given the higher proportion of project versus short-cycle sales. We expect the mix to improve from here as short-cycle continues to recover. Lastly, in Connecting Control Technologies, we turned the corner with incremental margins of 37% this quarter. This was the result of continued volume leverage and strong productivity, despite inflationary headwinds and continued declines in commercial aerospace. While OE production continues to improve, our largest aerospace customers are managing through elevated inventory levels on key platforms, which will delay a significant recovery in aero components demand until 2022. Similar to the rest of ITT, orders growth was incredibly strong, driven by our connected business, with continued North American distribution strength and growth in aerospace OE and aftermarket. The book-to-bill was largely above 1 and backlog was up 16% compared to year-end 2020, which again positions us well heading into 2022. Before we move on, just a few additional comments on EPS for the quarter. As you can see on the Q2 adjusted EPS walk on Slide 11, the year-over-year comparisons were negatively impacted by prior benefits related to environmental temporary cost actions and CARES Act credits. Partially offsetting these items was a roughly $0.03 benefit from foreign currency consistent with our outlook and a roughly $0.01 benefit from a lower than planned effective tax rate of 21.5%. Let's turn to Slide 6, to discuss our asbestos liabilities sell further. On July 1, ITT divested 100% of its equity of a subsidiary that holds legacy asbestos liabilities and related insurance assets to Delticus, a portfolio company of Warburg Pincus. At closing, ITT contributed $398 million in cash and Delticus has contributed $60 million in cash to InTelCo. As a result of the transaction, ITT removed all asbestos obligations, related insurance assets, and associated deferred tax assets from our consolidated balance sheet as of the second quarter. The benefits of this transaction include indemnification for all legacy asbestos liabilities and stronger free cash flow generation in the absence of asbestos-related payments that we previously estimated at $20 million to $30 million per year on average over the next 10 years prior to the divestiture. Additionally, the transaction frees up management time and resources to focus more on growing the core business and executing other more strategic initiatives, including ESG and M&A. Coupled with our successful U.S. pension plans transfer executed in October 2020, we are well positioned to grow with a flexible balance sheet and without the risk and uncertainty of managing these legacy liabilities. Let’s now turn to Slide 7 to discuss our end markets and the updates to our full-year outlook. As we saw in Friction's results, global auto production is increasing, albeit constrained by the global semiconductor shortage, which is causing inventory levels to remain low. And while we expect demand will remain strong throughout 2021, the impact of higher raw material prices will weigh on margins and adjusted EPS during the second half. The growth we're seeing in IP orders is mainly in short-cycle. On projects, however, we continue to expect that large project spend particularly in oil and gas will not fully recover until 2022. In the meantime, we're seeing continued momentum in weekly run rates in our short-cycle businesses in industrial process and connectors, which we believe will drive organic revenue growth to a new range of 8% to 10% for the year. Our assumption regarding commercial aerospace is that a substantial recovery will not occur until early 2022, given the level of inventory at our largest OE customers. However, we see encouraging signs in orders as production levels continue to increase. Our outlook for adjusted segment margin remains at approximately 17.1%. At the midpoint, we expect a pronounced impact from raw material inflation, mainly in Motion Technologies. However, our teams are driving commercial actions and additional productivity to minimize the impact. We're planning for raw materials to remain at these elevated levels throughout 2021. As you will see on Slide 7, our revised guidance assumes the incremental impact from this trend will be $0.09 at the high end for the remainder of 2021. Our revised adjusted EPS guidance reflects a $0.08 improvement at the midpoint of our range, eclipsing 2019 levels and our previous high end. The net impact of all other items is roughly $0.01 benefit to full-year adjusted EPS, including a slightly lower than planned effective tax rate. Foreign currency and other items will be a minor benefit compared to our previous guidance. Additionally, we continue to expect a 1% reduction in the weighted average share count, given our share repurchases to date. Let's turn to Slide 8 to quickly look at the components of our revised 2021 adjusted EPS guidance. As you can see, the majority of the improvement in adjusted earnings per share is operational in nature. The higher volumes will likely be partially offset by incremental headwinds from rising raw material costs, which we have already discussed. The remaining changes to outlook are rather immaterial. Before I turn it back over to Luca, I want to share some details on what we're seeing thus far in the third quarter. From an end market perspective, the trends we saw in the second quarter have remained largely consistent throughout July. Auto and the short-cycle businesses in IP continue to perform well. CCT remains comfortably on path to recovery from both a sales and margin perspective. On the other hand, our outlook reflects increased commodity pressure, and we did not see any near-term improvements related to the supply chain. With that, let me pass it back to Luca for closing remarks.

Thanks, Emmanuel. ITT continues to execute on its strategic priorities to position the company for long-term success. The actions we took to eliminate our legacy asbestos liabilities will allow our teams to drive better growth in the core and increase our capability in capital deployment. We are now even more laser-focused on growing ITT organically and through acquisitions while funding high-return growth investments, given our capital flexibility and strengthened cash flow profile. We continue to outperform across all our businesses. We see encouraging signs in our orders growth, which positions us well for the remainder of 2021, 2022, and beyond, and continues to drive strong cash generation through increased income and effective working capital management.

Thank you. The floor is now open for questions. Please limit your questions to one question and one follow-up. Thank you. Your first question is coming from Jeff Hammond with KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning, Jeff.

Good morning, Jeff.

Good morning, Jeff.

Yes, I just want to get a better feel for sequential margins in the segments. It sounds like MT maybe is under a little bit more pressure and then you get mixed benefits in the other two segments, is that the right way to think about it?

So, MT is being impacted by raw materials. And I think that if you look at between Q1 and what happened in Q2, there's definitely the impact of those raw materials inflation in Q2, and this is going to go in accelerating in Q3 and Q4 also, and the difference what we're going to see in the second half is we're going to see a ramp-up of all the pricing and productivity actions that we're going to drive to compensate for those negative impacts.

Okay, and then just on the pricing, where are you specifically pushing price?

Good morning, Jeff. When analyzing pricing, we have seen a positive impact in both IP and CCT, which are areas where we maintain distribution as has been traditionally practiced. A notable positive from Q2 is that pricing has remained neutral for Motion Technologies. This marks the first time pricing has been neutral in this sector. However, we need to intensify our negotiations with all our OEM customers as material costs have significantly changed. We anticipate improved pricing in Motion Technologies in the second half of the year.

Okay, great. And then just last one, if you look at the three-point raise in organic growth, would you say that's fairly balanced between the segments? Or is that a heavier lean towards MT?

I would say that…

I think Jeff….

Go ahead Emmanuel, please.

I think, Jeff, it's pretty balanced across all segments; all segments are growing versus our previous expectations. And this is really good news. And as we discussed, short-cycle has been really strong in terms of orders for IP and CCT. So I think that we're going to benefit from that. And then we continue to see really good momentum from an auto standpoint, even though volumes have been impacted by chip shortage.

Okay, great. Appreciate it, guys.

Thanks, Jeff.

Thank you, Jeff.

Your next question is from Andrew Obin with Bank of America.

Yes, good morning.

Hey, Andrew.

Good morning, Andrew.

Just a bigger picture question, right? You guys have been very good at sort of managing the downturn, managing the upturn. But given the inflationary pressures both on labor and inputs? Are you guys changing sort of the way you're thinking about approach to costs, supply chain processes in a more structural way? i.e. do you think what's happening is more permanent in nature? And if so how are you guys adjusting the organization, because execution so far has been superb?

Absolutely. Right. Of course, as you can imagine, not only are we working with our commercial team on the sales front with our OEMs, but our supply chain team is working hour by hour to find new sources. Today, it is particularly in terms of securing the supply, because of all the disruption that we have in the supply chain, being it one port or being with one supplier. So it's more the way that you're working, which is hour by hour, as we said in the prepared remarks, because this is exactly what's happening right now.

Got you. And just a little follow up, you said something about the aero industry having inventory. And I'm just trying to understand, because I think some companies highlighted the fact that on the defense side, there was some pull forward of activity last year, as the detailed supply chain was working in this downturn. But we've also heard some companies talk about the fact that aero framers have pre-ordered some components last year to also sort of keep the supply chain what so to speak, is that what you're referring to in terms of inventory of your customers? Thank you.

Yes, our aerospace customers currently have a lot of inventory. Although they have been using some of it, they informed us earlier this quarter in April that they have such excess inventory that they do not plan to order our components until next year, in 2022, when they actually need them. Therefore, our aerospace customers are well-stocked at this time, and we do not anticipate significant changes in the near future. On the defense side, our orders have been quite strong. They have not only increased year-over-year but have also shown sequential growth across several high-profile programs. We expect to see mid-single-digit growth in orders for the year, and revenue should be stable as well.

Your next question comes from the line of Joe Giordano with Cowen.

Hi, Joe.

Hi. Good morning, Luca, how are you?

Hey, Joe, you're cutting in and out. Try one more time and if not, we'll come back to you.

Better now.

Yes, go ahead.

Yes, I have a question.

Yes, sir. Your next question comes from Scott Davis with Melius Research.

Hi, Scott.

Good morning, guys.

Hey, Scott how are you?

Good morning Scott.

I understand that I understand…

I'm sorry, presenters. We have lost him. Your next question comes from the line of Vladimir Bystricky with Citigroup.

Good morning, guys.

Hey, how are you?

Good morning, Vladimir.

I am doing all right. Fingers crossed here that lasts for a question or two.

We count on you, Vlad, please. Stay on.

So, nice quarter guys, obviously and particularly on the order side, so you've now had, I think 700 million plus in orders each of the past two quarters. So can you talk about sort of your confidence in sustaining these stronger order trends? And just given all of the supply chain and logistics challenges throughout the industrial economy? Are you seeing any pull forward or extra ordering from customers looking just to secure supply? Or do you think this is really sort of end market levels of demand that you're seeing on the order side?

Thank you, Vlad. Let me answer your question directly and then provide more context. The demand is strong, and our performance reflects our effective collaboration with customers. The trends we observed in Q1 have continued into Q2 across all sectors. In rail, orders increased year-over-year, continuing in Q2. In the automotive sector, we secured new contracts in Europe, China, and North America, particularly in electric vehicles. In connectors, we've also seen strong results. For instance, our distribution connectors orders in Q2 reached approximately $46 million, the highest ever for ITT, while inventory levels remain low. Additionally, the short-cycle for IP showed solid performance throughout Q2. Observations in July confirm these trends, indicating no inventory buildup in the automotive or connector sectors. This reflects strong demand and solid performance on our part.

And Vlad, let me add some information regarding customer inventory for automobiles specifically. Our customers' inventory levels are very low, particularly in North America, where inventory is approximately 40 days, significantly lower than previous quarters. It is not anticipated to recover throughout the year due to the chip shortage. We are not only observing strong orders but also a significant demand from customers, which is promising for the future.

Okay, that's really helpful. And then just digging in, specifically on the IP side of the business. Can you talk a little more about sort of what you're seeing on the project side there obviously very strong shipments in the quarter sort of how long visibility to sort of those strong project shipments? And then what are you seeing in terms of new project activity? Are you starting to see activity ramp for quotes on newer projects going forward?

When we evaluate these projects, they typically span from six months to two or three years. Our largest recent project extends beyond three years, giving us strong visibility for the upcoming year and beyond. Interestingly, our backlog for IP has shifted from being 60% project and 40% short-cycle to currently 55% short-cycle and 45% project. The current short-cycle backlog is the highest we've seen since 2015. Regarding how we feel about projects, we noted last quarter that they were warming up, and that's indeed what has happened. June saw a considerable increase in project orders, followed by another strong month in July. Additionally, our project opportunity funnel continues to improve sequentially; it grew by 11% from Q1 to Q2 and increased by 2 percentage points in July. While the funnel is down year-over-year, if we exclude oil and gas, it has risen by 22% year-over-year and increased by 37% sequentially compared to Q1. These positive indicators lead us to believe that project activity will pick up towards the end of this year.

That's really helpful color, guys. Thanks very much.

Thanks, Vlad.

Thank you, Vlad.

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

Thanks. Good morning, everybody.

Hey, Joe.

Good morning, Joe.

Let me briefly outline our capital deployment over the past couple of years. During this time, we have continued making organic investments in our businesses. In 2019, we completed two acquisitions. We have consistently increased our dividends, especially in recent years. We repurchased $73 million in shares in 2020 during the COVID year and $50 million in share repurchases in 2021. Additionally, we transferred the U.S. pension liability and, most importantly, on July 1, we addressed all our pending and future legacy asbestos obligations. As you might expect, we were in a blackout period during this time. This approach to capital deployment has been strategic, positioning us to enhance our efforts moving forward, particularly in organic growth and mergers and acquisitions, with greater flexibility. Our pipeline is strong. Even while in blackout, we were actively building it, and I can confirm it looks promising, presenting opportunities across all three businesses. We consistently emphasize that we will remain diligent and rigorous, both strategically and financially. Any deals we pursue must add value from both strategic and financial standpoints. Got it. That's helpful, Luca. And then maybe my follow-on, you guys continue to keep us updated every quarter on all your EV platforms getting some pretty good share, particularly in China. I'd be curious at this point how big is your EV backlog? And how should we be thinking about that as a percentage of what we can see coming through from a growth standpoint in the coming years?

Joe, when it comes to EV, this story today is still very much in the award success story and the EV volumes that are still very low. We are projecting, though, our market share in EV to be substantially higher than our current market share in IC in 2023. So pretty early. Now, these will not necessarily be very meaningful because also in 2023, EV vehicles will not be that big number. But you can imagine as EV adoption accelerates in the next eight, nine years from 2023 to 2030. We will benefit tremendously from already starting high market share in EV. So I don't know if this helps you to frame it.

Yes, that's perfect. Thank you. Have a great weekend.

Thank you, Joe.

Thanks, Joe.

Thank you.

Okay, we were able to reconnect and we have Scott Davis with Melius Research.

Yes, I guess my landline comment was a little premature. I’ll try the cell phone next time and see if that works.

No, next time you will be in the room with us Scott.

I had asked about on-time deliveries, and I have no idea what he heard my question or not, but you were, you just mentioned 99% on Motion on OE, which is extremely high for the auto side. I mean, I don't know anybody that's anywhere close to that so far this quarter, but we would love to just get some color on where you're at in your other major businesses even if it's just ballpark?

Sure. So as you've seen this quarter, we had some impacts due to supply chain issues. And if you look at the impact of all the other businesses, it's probably something around a little bit more than $10 million that we weren't able to ship because we didn't have the raw material that was needed. A lot of it is in Wolverine. And that's specifically for steel. And then some of it is in IP and also CCT. So overall, not a very large impact. And we're working really hard with our suppliers to make sure that we correct this and arrive at the end of the year with a much better picture.

Thank you.

Okay, that's really helpful. Now turning to the EV side, you've mentioned that you don't have a lot of cars on the road, but you have enough to assess their performance and how the aftermarket is progressing. Is it developing as you anticipated? It seems like brake usage in EVs is somewhat lower, but the brakes themselves are different. Can you share your thoughts on the aftermarket potential now that you've had some time in this area?

Sure, it's probably still a little bit too early Scott to draw a conclusion because different OEMs are really adopting different approaches. There are OEMs that are using these brake pads exactly in the same way, and there are different OEMs that are really reducing the thickness of the pads. And therefore for them, the aftermarket probably will continue to persist. It's still probably too early to assess; it’s still at the embryonic stage, it has not matured enough to know exactly how it's going to pan out, the aftermarket I mean.

Okay, I'll keep asking. Appreciate it.

Thanks, Scott.

Your next question comes from Mike Halloran with Baird.

Hey, good morning, everyone.

Good morning, Mike.

There are many factors at play concerning the Motion segment. In particular, regarding the Friction segment, I would like to understand your outlook for the next 12 to 18 months. You mentioned that inventory levels are low and that inflation has prompted pricing changes, which seems different from past trends. Additionally, the supply chain challenges remain significant. Are you anticipating delays on the multiple project awards you have been receiving? How do you foresee the timeline for these developments? What does your longer-term perspective look like beyond the next six months?

Honestly, we see a strong wait on the projects. And if I think about the timing, we'll see how the requests come in. But what gives us pace is the momentum from the win we already have in the backlog. I would say the more uncertainty lies within the rolling demand of the short-cycle business.

Thanks for that. And then just on the connector side, maybe just a little bit thoughts on sustainability underlying trends here, the short-cycle pieces seem like they're doing well. How much of that is just kind of a catch up from a bottom versus what you think is sustainable demand as we sit here across those specific end markets?

When I talk to some of our distributors, some of our rep council, some of the reps in connectors is really market demand. And this is confirmed by the lower level of inventory that we see in all our distributors on the connectors. The strength in the connectors comes from the defense and the industrial, and we start seeing moving also in the aerospace industry, too. So it's really demand. The inventory levels are low. Auto connectors is not a concern at all today.

Thank you, Luca. Appreciate it.

Thank you, Mike.

Your next question comes from the line of Damian Karas with UBS.

Hey, good morning, everyone.

Hey, Damian. How are you?

Hi, Damien.

So Damian, that is correct, but it's important to remember that we are discussing a business that consistently outperforms the market. It's true that the market is expected to grow between 8% and 10% in 2021, depending on the source. However, I see some positive trends in the market since production is currently not meeting demand. You can see this when speaking with our customers and even when trying to buy a car; just ask the dealers. Additionally, we've outperformed the market every year for the last nine years by about 900 basis points annually. In 2021, we will exceed market performance even more strongly. Because of this, we anticipate surpassing 2019 levels at Friction this year, while the market is likely to reach 2019 levels in 2023. It’s always about outperforming the market, both in downturns and recoveries. That's helpful. I have a follow-up regarding the inflation in raw materials you're experiencing. I'm curious if, as the prices of copper, tin, and steel that you mentioned begin to decrease next year, will you see a complete offset of those costs or, since it's primarily in MTs, should we view that as some ongoing expense?

So in terms of raw materials for the moment, there's no sign of abating; the copper has flattened out at the highest level but still is really very much on an accelerating path. And so for us the game is to go back to customers and to really negotiate price recovery to offset those negative impacts. And that's what we're going to do. And that's what we're doing also already to some success in the second quarter.

That's all. Thank you.

Thanks, Damian.

Your next question comes from the line of Joe Giordano with Cowen.

Hey, guys, can you hear me better now?

We can hear you? Great. Welcome back.

It’s perfect. It’s perfect Joe. Thank you.

Excellent. So just on the raw materials. I'm curious, like from a bigger picture standpoint, as you look at the markets, and you think about the future, like when do you start thinking, okay, this is something that's going to be a temporary increase that kind of goes back down cyclically or maybe we should think about redesigning certain of our products to use different types of materials or be lighter, or I know you guys are kind of going through that process in IP more broadly. But what was like that threshold where you begin to think about raw material costs on a more structural basis, rather than kind of cyclical changes?

Right. Okay, that's helpful color there. I think you mentioned that Wolverine, KONI, and Axton were all at double-digit margins in the quarter, which is good to see what's like a realistic target for businesses like that over like a one to two-year period from here?

So, Joe, for us, there's no reason why we are not able to bring those three businesses in line with where Friction is today. That's going to require a lot of work. But we have definitely line of sight. And we're making both the improvement and the investments in terms of our production capability, but also in the way we manage our existing assets and our existing resources. We've seen some really nice progress, especially in Wolverine that had been impacted very much so by the tariffs. But we're very confident that we can bring those businesses to the level that Friction is at today in the next few years.

Awesome, thanks. Thanks for letting me jump back on.

No problem, Joe.

Your next question is from Nathan Jones with Stifel.

Good morning, everyone.

Hey, Nathan.

Good morning, Nathan.

I just wanted to follow up on the pricing and cost discussion related to the brake pad business. Historically, that segment has relied heavily on fixed price contracts, and auto OEMs have not made it easy to renegotiate these contracts. Luca, you mentioned being price cost neutral in the second quarter and expecting to maintain that in the latter half of the year for brake pads. Can you explain how this is achievable given the traditional structure of those contracts? What approach are you taking to create these pricing improvements despite the historical contract framework?

Nathan, just a quick rectification here. So in the quarter, what Luca said is that we were price neutral on the price so we didn't give any price reductions to customers. Like we usually do, and usually it’s something like between 1% to 3%. So we didn't give any price reductions because we were able to get some price increases. And then so we were neutral in terms of margin from a price standpoint in the quarter; the impact of commodities in the quarter was already high in Q2. And I would say that the price cost impact, this quarter was around 200 basis points overall at ITT level or higher at Motion Technologies. We expect that price cost impact to be around 200 basis points as well for the full year as the commodity pricing is ramping up, but it is offset by higher price negotiations or higher price impact from the negotiations with customers. And keep in mind that there is a timing component to it, where we're going to reach a much different picture by the end of Q4 than where we're going to be for instance in average in Q3.

And, Nathan, if I can build on what Emmanuel said regarding the process. There is no secret recipe here; we really need to work harder on pricing, sit down and negotiate with our customers a good and fair deal that reflects the completely different raw materials cost base. This is a must. This is what we have already started doing with some good results and some mixed results. We've been able to sit down with some customers and have constructive conversations. And we had some strong resistance from others. Now, on our side, Nathan, what helps is our quality track record. We are the best quality supplier in terms of brake pads, and our on-time performance at 99%. plus during a period of market instability and other supply chain disruptions helps us in the negotiation for sure.

You have significantly higher margins in the brake pad business compared to the overall industry, where most competitors typically operate with low single-digit margins. This suggests that they are facing more pressure from raw materials than you are. Are you finding that these circumstances create additional opportunities for you to increase market share as some of these competitors may be struggling more than in previous years?

I think that if I look at the priority today, Nathan, I see that we are already winning market share because of the performance we have, because of the differentiation we have in terms of our product, and because of the quality we're delivering. Those are the key criteria that are helping us to win market share. As of today, we are not envisioning really using price to win market share. Today, I think the effort would be really to use price to compensate for some of the headwinds that we have because of the raw material cost. That would be the priority.

And just one last one, I think you guys had signaled last quarter that you are anticipating a poor mix in industrial process with higher project shipments in the quarter. Clearly had short-cycle orders being stronger here. Are you expecting improvement in mix as we go through Q3 and Q4 and any comments you can give us on how that impacts margins in the back half?

Nathan, this is Emmanuel. Yes, absolutely, we are expecting an improving mix in Q3. And then to the point that in Q4 as well to the point that the mix impact for the full year will be substantially lower than what we have experienced in Q2. And this is on the back of really strong short-cycle growth. Obviously year-over-year, but also very much so from a sequential basis compared to Q1, we've seen really strong service and valve order growth sequentially. And some pretty decent also activity from a baseline standpoint. So we expect these will contribute very positively to the mix in Q3 and Q4. And I would say we're happy with that. But this is not what we're using to really drive margin expansion at IP. For us, fundamental progress on the fundamentals is much more important. We'll take some positive mix any day. But this is not the indicator of success for us.

We have reached the allotted time for questions. This does conclude today's conference call. Please disconnect your lines at this time. And have a wonderful day.