Welcome to ITT’s 2022 First Quarter Conference Call. Today is Tuesday, May 3, 2022. This call is being recorded and will be available for replay starting at 12:00 p.m. ET. 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 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 warns 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 to last longer, better resist corrosion and reduce fine dust emissions. 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 ultra-high 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 remain 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 the 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 rear and 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 one 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 markets. Second, Habonim is in a 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 which guarantees 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 technologies alongside ITT’s at the 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 achieved 7% organic growth in the first quarter. CCT recorded 23% organic growth, supported by continued strength in industrial connectors and recovery in aerospace. In MT, Friction grew 5% organically, driven by ongoing momentum in the aftermarket. While OE remained flat organically due to the ongoing chip shortage, we still outperformed global auto production. As Luca mentioned, the MT team has been continuous in driving price realization in collaboration with our customers. For ITT as a whole, we estimate that ongoing supply disruptions resulted in a loss of approximately 600 basis points of top-line growth in Q1, with the most significant impact seen in Industrial Process. Turning to operating income, our teams achieved a productivity margin increase of about 350 basis points through a combination of shop floor and sourcing actions, which partially offset a 760 basis points increase in cost inflation. Adjusted earnings per share declined approximately 8% compared to 2021, despite a 7% increase in organic revenue. This discrepancy is primarily due to significant cost inflation and the effects of the war in Ukraine. Additionally, our first quarter results in 2021 were exceptionally strong. We also faced unfavorable foreign currency impacts, which were somewhat mitigated by the benefits of higher share repurchases and a lower effective tax rate. Finally, working capital requirements have continued to affect our free cash flow generation as we strategically invest in inventory to assure delivery to our customers during this challenging period. The timing of accounts receivable collections also affected us due to a large volume of sales in December. We anticipate improved cash generation beginning in Q2, despite the need for inventory investment. Now, let's move to Slide 8 to take a closer look at earnings performance. We are driving strong volume growth and productivity through the deployment of the MT operating model. Included in the $0.29 operational performance improvement is approximately $0.22 from productivity. Pricing actions contributed $0.20 to earnings, while volume added $0.07, particularly strong in CCT. However, these gains are still not keeping pace with rising material, labor, and overhead inflation. Consequently, we are implementing additional pricing actions across our portfolio to address these increasing costs. In Q1, we suspended our operations in Russia due to the war in Ukraine, with direct impacts mainly in MT and IP, as well as indirect effects from OEM customers operating in that region. This led to a loss of about $0.04 in the first quarter. We anticipate this situation will result in a revenue decline of approximately $60 million to $85 million compared to our initial expectations, which is reflected in our current revenue outlook. Additionally, we are actively investing in M&A to fuel future growth at ITT, which incurred roughly $0.02 in earnings this quarter. Moreover, due to changes in foreign currency rates, we faced a $0.03 headwind in Q1 and expect this trend will lead to at least a $0.09 headwind for the full year. However, we will offset this headwind with the advantages from our share repurchases and a slightly lower tax rate. Now, let’s proceed to Slide 9 to discuss segment results. Starting with Motion Technologies, our Friction OE business maintained exceptional on-time performance above 99%, effectively navigating global supply chain disruptions and OEM production challenges stemming from the war in Ukraine. MT stands out due to its innovation, superior quality, and remarkable on-time delivery performance. You may already know about the outstanding quality of our Friction business, which has a defect rate of less than 1 per million parts. In Q1, the Friction team made further progress in improving quality performance, reducing defect rates by double digits compared to 2021. I also want to highlight our KONI shock absorber business, which has significantly improved its customer defect rate by 90% over the last two years, showcasing industry-leading quality performance. Profitability has been affected as MT’s segment margin declined by 310 basis points, primarily due to higher-than-expected material inflation, although this was partially offset by pricing actions and productivity enhancements. We are actively pursuing necessary pricing actions with our OEM customers. Finally, we closed our Lünen facility in Germany and transferred production to Poland during Q1. In Industrial Process, organic revenue increased by 2%, fueled by strength in short-cycle orders, albeit offset by supply chain disruptions and labor constraints. IP shipments were most affected in January due to the COVID-19 Omicron variant impacting our U.S. and India sites. However, performance improved in April compared to the beginning of Q1. From a demand perspective, we remain optimistic about the strength of orders in our short-cycle and project businesses. This marks our fifth consecutive quarter of sequential order growth, driven by robust short-cycle demand and a strengthening project activity. IP’s margin decreased by 300 basis points, mainly because of excessively high freight and material costs and a slow start in January due to high COVID absenteeism. Consequently, IP is enacting substantial pricing actions to manage cost inflation, including a second larger price increase in March. In Q1, I spent significant time with our IP team in Seneca Falls and was impressed by the positive momentum we’re generating on the shop floor in recent months. We are continuing to transform our operations by accelerating shop floor velocity and minimizing waste in our processes. For example, we streamlined the throughput of our small MT pump by over 50% by optimizing the product release process and eliminating non-value-adding activities in the assembly line. With these improvements, we are now shifting our focus to our midrange pump line. Lastly, in Connect and Control, we experienced our largest order quarter since Q1 2019, even though aerospace orders are still over 30% below pre-COVID levels. Orders grew 28% organically compared to last year, driven by 40% growth in aerospace and defense. CCT’s margin impressively expanded by 550 basis points to 16.7%, due to higher volume and improved productivity. Notably, CCT achieved a 42% incremental margin in the face of inflationary pressures without significant pricing actions, which we anticipate will begin to take effect in Q2. We also foresee that the product redesigns and range extensions we are implementing, along with forthcoming process automation, will contribute to further margin expansion in the near term. Turning to Slide 10, we will provide an updated outlook for the end markets. Our message remains consistent: demand is strong and we are gaining traction in the marketplace. However, the dynamics surrounding pricing, cost inflation, and the war in Ukraine will affect our immediate results. In the automotive sector, inventories in North America and Europe remain at historically low levels, which should foster further demand, although chip shortages continue to disrupt deliveries. Profitability is being pressured by inflation, and we are navigating additional disruptions, including COVID in China and the ongoing impacts of the war in Ukraine. The war is also influencing our rail business. Although demand is generally strong in industrial sectors, labor shortages and supply chain disruptions are still impacting our top-line growth and margin expansion. Regarding aerospace, while demand is improving, we remain significantly below sales levels from 2019. We anticipate a steady increase in this market in the second half of the year, correlating with a rise in global travel and a reduction in aerospace OEM inventory. This context informs our guidance update on Slide 11. As indicated, we are reaffirming our guidance ranges for revenue, adjusted segment margin, and adjusted EPS. We continue to project organic sales growth of 9% to 11%. Considering our first quarter performance, the strong demand visible in IP and CCT, and additional pricing actions being implemented, we are trending toward the upper end of our organic sales range for the year. Regarding segment margin for the full year, we see a tendency to move toward the lower end of our current range due to considerable cost inflation headwinds. CCT is expected to drive the greatest margin expansion, while the MT margin may decline by nearly 200 basis points. Industrial Process margin will expand as we navigate ongoing supply chain disruptions, which are expected to persist in the first half. Moreover, the acquisition of Habonim will temper margins in 2022 due to associated M&A costs. Consequently, we now project IP to deliver margins between 15% and 16% for the year, with significant improvement anticipated in Q2 compared to Q1. Adjusted EPS will be affected by lost sales in Russia and the repercussions of cost inflation; however, we plan to counterbalance this with better-than-expected performance in CCT, a reduced share count, and the Habonim acquisition. The cumulative effect of these factors suggests we might trend toward the lower end of our adjusted EPS guidance range. Our performance will also depend on raw material costs, the effectiveness of our pricing realization, and the potential impacts of ongoing lockdowns in China. Given our cash usage in Q1, we expect free cash flow to be lower than anticipated, within a new range of $250 million to $300 million, translating to a free cash flow margin of about 8% to 10%. Over the long term, we still aim to enhance our cash flow profile through working capital reductions and earnings growth. Should supply chain disruptions persist or raw material inflation intensify, we are prepared to implement further actions, including pricing adjustments and additional structural cost measures as demonstrated previously. In terms of cadence for the remainder of the year, we expect adjusted EPS for Q2 to be roughly flat compared to Q1. Organic sales growth in Q2 is projected to be in the mid-single-digit range, driven by growth in CCT and, to a lesser extent, in MT. We anticipate an increase in IP organic sales in Q2, with further sequential improvement expected in the third and fourth quarters. ITT’s segment margin in Q2 is likely to remain flat compared to Q1 at around 16%, with margin growth expected in IP and CCT offset by an approximately 200 basis point decline in MT margin sequentially due to material inflation challenges. This performance is not what we aim for from MT; however, we expect MT's margin to begin recovering sequentially in the third quarter as the pricing actions materialize.

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.

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’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.

In Q1, we were not able to fully offset the cost inflation we’ve been experiencing, primarily due to delays in our pricing efforts at MT. This resulted in a margin impact of nearly 200 basis points for the quarter. However, we anticipate that in Q2 and the following quarters, this situation will improve as we enhance our pricing strategies and productivity. We expect Q2 to show a better performance with a margin impact of just under 100 basis points. For the full year, we anticipate benefits from pricing improvements in Q3 and Q4.

That’s helpful. In IP, there is a lot of activity on the project front. Could you provide some more details about the types of awards you’re experiencing and how we should consider conversion in this area? Will there be some progress later this year, and over the next few years, as you navigate through supply chain conditions?

IP orders have shown exceptional performance this quarter. On the short-cycle, this was our best performance ever, even surpassing the exceptionally strong Q4. We have definitely seen a return in projects. Specifically, our project orders reached $59 million this quarter, marking a 45% increase year-over-year. Additionally, our pipeline remains robust. The activity is widespread across sectors, including oil and gas, chemicals, and general industrial. We are observing this strength in all regions, including Europe, North America, Asia Pacific, and the Middle East. Overall, there has been a strong performance in project orders and a solid pipeline.

Regarding IP and our ability to convert, this quarter we experienced a 600 basis points impact on our sales growth, largely attributed to IP. The situation involves challenges with components such as casing, motors, and seals, making timely availability difficult. We are actively working on the conversion process. An example of this effort is the reduction in throughput time, but challenges remain significant.

Our next question is from Joe Ritchie of Goldman Sachs.

Could you provide more details on pricing? Last quarter, you set a target of around $100 million for the year. Luca, you mentioned that MT achieved 80% of the first quarter figure you anticipated. Can you clarify what you now expect for pricing for the year and how it breaks down by segment in terms of dollars?

Yes, you’re correct, Joe. We initially targeted $100 million. Although we did fall slightly short in the first quarter, we've come to realize that this amount is not enough. Therefore, we have raised our target by approximately $80 million. We are now aiming for a figure between $160 million and $180 million. This change is largely due to MT, which is the sector most affected by inflation in steel, tin, and copper. Consequently, we need to ensure that our customers compensate us for these increases, which is why we have adjusted 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 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 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. Regarding China, we have two factories: one for connectors in Shenzhen and another for friction in Wuxi. In the first quarter, we were already affected by the lockdowns in Shenzhen. Despite this, our factories maintained operations since we had dormitories on-site and were working under a closed-loop system, only shutting down for one day. For the friction plant, the lockdowns in Shanghai did not significantly impact Q1 because they began towards the end of the period. In Wuxi, where we lack dormitories, we also operate in closed loops, using a nearby hotel to keep our workers isolated from external exposure. We've increased our inventory to secure supply. Our operations have continued without interruption; the real concern is demand. As you mentioned, demand in Q2 will be affected, with April likely being the worst month for demand, particularly due to the plants around Shanghai. May should see slight improvements, and we anticipate recovery will begin in June, by the end of Q2.

Our next question is from Mike Halloran of Baird.

On the auto side of things, can you provide some insight into your thoughts on market demand for the rest of the year? There are many factors affecting this situation, including China, Europe, and supply chain challenges. How do you see this evolving, and when do you anticipate inventory levels will begin to improve?

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 flat to up low single digits. China will be down low single digits and North America will be up single digits. But 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 inventories 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. As a follow-up on capital deployment, you have a lot happening internally with your capital spending and externally as well. When considering the balance between M&A and share buybacks, do you think you can maintain this pace moving forward? The guidance suggests further share repurchases, so could you provide context on how you manage that alongside the M&A pipeline?

Okay. The pipeline is a very good pipeline. It’s robust and it’s full of opportunities, similar to 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 I’m confident that we will do more deals in 2022. Now if things do not work out because different expectations 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 dividends.

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.

You would be 2 to 3 points higher if it weren't for Russia. Can you explain how that $60 million to $85 million impacts the different 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?

We were disappointed with our performance in Q1 as we didn't achieve the revenue we anticipated for January. We put in significant effort to recover in February and March, but the impact of Omicron made it quite challenging. Looking ahead to Q2, we expect margin improvement to be primarily driven by an increase in volume, as we are already seeing a nice uplift in April compared to January. Additionally, we launched a pricing campaign in March that should contribute positively to Q2 results, along with enhanced productivity. These factors will be the key drivers for margin expansion in IP.

So Jeff, just to give you a sense, in terms of 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 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, we are experiencing positive effects from higher growth rates in our orders, particularly in IP and CCT. We are seeing strong orders that we will convert into revenue in 2022 and 2023 across various end markets. Our growth is broad-based, with double-digit increases in chemical, oil and gas, mining, and general industrial sectors, which will aid our revenue conversion for 2022. Additionally, pricing will contribute positively. In CCT, we are witnessing a significant increase in orders from aerospace, defense, and general industrial for both components and connectors. We have also launched a new pricing campaign that will affect our revenue in Q2 and will continue to influence Q3 and Q4. These two main businesses will significantly enhance revenue through both volume and pricing improvements.

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.

That's great to hear, and it's encouraging regarding the aerospace sector. As a follow-up on the momentum in IP project orders, can you elaborate on what's driving that? You mentioned it's widespread across regions and industries; is it due to deferred capital expenditures returning now? Are there indications of new projects starting? Specifically in North America, are you observing any activity related to reshoring?

I believe there are several factors at play here, Vlad. When we consider the oil and gas sector, it's clear that this area hasn't attracted sufficient investment in recent years, and this issue is evident across the board, including in the Middle East. While we don't currently see it, we expect there will be investment in Europe as they confront their upcoming energy challenges and strive to reduce their reliance on Russian gas. Additionally, we anticipate increased capital investment in North America due to reshoring efforts. All of these elements contribute to our positive outlook on 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 is 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?

If we consider the challenges with our intellectual property, the COVID-related absenteeism was significant in January and continued into the first half of February, impacting our ability to recover. This was mainly due to ongoing supply chain issues. As Emmanuel mentioned, we estimate that about $30 million in revenue for the first quarter was not realized, which we anticipate delivering later in the year. This shortfall was related to seals, motors, and casting. That missing $30 million in revenue would have positively affected our margins, aligning them more closely with last year's performance. The lack of supply chain improvement hindered our recovery in the first quarter.

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, the 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. We don’t have a single solution that will address everything. Let me provide a couple of examples to illustrate how we’re operating. Regarding Motion Technology, I spoke with Silvano in Shanghai. We managed to increase our inventory because some warehouses were locked down, making access difficult. In those situations, we worked with the government to obtain special permission to access critical materials for our production. Sometimes, we even had a special team that would pick up trucks at highway gates and guide them to our campus. This is how the China team has ensured a consistent level of service so far. Additionally, when it comes to the Shanghai port, we proactively shifted our shipments to other nearby ports or to the north of China to stay ahead. However, challenges remain. Some of our suppliers, particularly in steel, are hesitant to commit to full volumes for Q4 of this year. We must remain vigilant, maintain communication with them, and ensure our supply. This is essential in today’s landscape as it allows us to provide leverage with our customers since we can 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?

We faced challenges with price and cost in the first quarter, primarily due to poorer price recovery and rising cost inflation, particularly concerning raw materials. This situation adversely affected us, mostly from the MT segment. Moving ahead, we are focused on improving price recovery and enhancing productivity, as we cannot significantly raise prices for customers and are struggling to secure supplies from our suppliers. We are working hard to establish pricing with customers while ensuring we offer unique value. I have previously mentioned that we are raising our price recovery targets, which will be crucial for offsetting the cost inflation we are experiencing. While productivity is important, it alone won't suffice; recovering costs will predominantly rely on price adjustments.

So Nathan, if you look at Motion Technologies, 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's point, gross productivity is not able to cover for that. You have to go for pricing.

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?

We haven't yet identified the necessary investment in the pipeline to reduce our reliance on Russia. However, this adjustment is expected due to the geopolitical situation. Potentially, we could see increased investments in LNG terminals for supplies from Qatar or the U.S. While these projects are not currently in the pipeline, we recognize they are under development. This will represent a positive momentum for our investment strategy, but it is more of a medium-term outlook rather than an immediate one.

Great, that helps. Can you provide an update on how this has impacted your M&A strategy in Europe and the different assets you are considering there? I believe you are exploring some opportunities within rail.

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, 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 from 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.