Welcome to ITT's 2022 Second Quarter Conference Call. Today is Thursday, August 4th, 2022, and this call is being recorded. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations, who will proceed.

Thank you, Chris, and good morning. It's my pleasure to welcome you to ITT's second 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 three-month period ending July 2, which we 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 on 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 any, 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 second quarter results we present this morning will be compared to the second quarter of 2021 and are based on non-GAAP financial measures. These adjusted results exclude certain non-operating and non-recurring items, including but not limited to a charge in the first quarter 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 three.

Thank you, Mark, and good morning. I would like to begin, as I always do, by thanking our shareholders, our customers, and our ITTers for their continued support and investment in ITT. I firmly believe that at ITT, our people made a difference. On this topic, I will show you what I mean in a few minutes when I talk about the resilience of our people in WUXI, China. Let's now discuss the Q2 results. I'm very pleased with ITT's results this quarter, considering the challenging environment that we are operating in today. Our team demonstrated ITT's resilience and the strength of our businesses once again this quarter. I continue to be confident in ITT's future growth and outperformance potential, as evidenced by the long-term financial targets we announced at our 2022 Investor Day. Demand for our products and services remains strong. We saw this in the short-cycle chemical and industrial verticals in Industrial Process where orders grew 26% organically. In aerospace and defense, in Connect and Control, where orders grew 17% organically. And in our friction business where we won 18 new electrified vehicle platforms. Collectively, this demand generation drove 13% organic orders growth. On the strength of this demand, we grew organic revenue by 10%, aided by both volume and pricing across our businesses, despite the disruptions in China coinciding with the reemergence of COVID. On profitability, Industrial Process expanded adjusted margin 210 basis points versus the prior year and 400 basis points sequentially while Connect and Control grew margin 380 basis points versus the prior year and 50 basis points sequentially. We are also seeing signs that commodity inflation pressures are slowing, which should begin to show up especially in Motion Technologies' results in the fourth quarter. In terms of the quarter results, Industrial Process was the highlight. Industrial Process showed exceptional profitability and orders demand. Emmanuel and I spent several days on site in Seneca Falls, driving the performance together with the team. Let's take a moment to discuss the team's achievements. Industrial Process's orders were the highest this quarter since 2014, and the growth in short cycle is coming from share gains, especially in North America. We are seeing growth in project orders, including for LNG, where we strategically won engineering-only orders upwards of two years ago that are now beginning to translate into large wins. We are also capturing price on baseline pumps and aftermarket, which will benefit second half results. Our leading initiatives in Seneca Falls are generating significant benefits, and we have more to go after here and at other Industrial Process sites. Earlier this year, we also announced the closure of the foundry in Seneca Falls. While a tough decision, this is key for the long-term cost competitiveness of ITT. Lastly, as you will hear, the acquisition of Habonim is off to a strong start from a sales and margin perspective, and it is already contributing to ITT's earnings growth this quarter. As a result of all of these, Industrial Process delivered an adjusted margin this quarter that was the highest on record. David and the Industrial Process team, well done and thank you. To conclude, the strong volume growth, pricing, productivity, and acquisition contributions drove a sequential and year-over-year increase in adjusted earnings per share in Q2, despite a long list of macro headwinds that we had to overcome. Regarding capital deployment, our action in 2021 to divest our legacy asbestos liabilities, coupled with the solid results in the first half of 2022 enabled us to continue investing in the business. We deployed over 3% of sales to capital expenditures year-to-date to fund growth, as well as footprint rationalizations in Motion Technologies and Industrial Process. Additionally, we deployed over $170 million towards acquisitions and ITT Ventures investments. In June, we closed our third ITT Ventures investment with minority stakes in CRP. CRP is an industry leader in developing and manufacturing reinforced composite materials for 3D printing and enabled ITT to expand its position in material science. In Q2, we repurchased over $60 million of ITT shares, bringing our year-to-date total to $250 million, or roughly 2.5 times our original full-year commitment. All in, we deployed over $500 million in the first half of 2022. Because of our solid first half performance, the large backlog we have accumulated, the pricing capture we are executing, and the performance momentum especially at Industrial Process and Connect and Control, we are raising our organic sales guidance to a new range of 10% to 12% and we are also tightening our adjusted EPS guidance to a new range of $4.35 to $4.65 and maintaining the prior midpoint. Before moving to the next slide, I wanted to touch on the situation in China. As you know, both the OE production volumes in China were impacted in Q2 by mandatory lockdowns across the country, which drove significant uncertainty and volatility in customer demand, as well as on the supply side. Despite these headwinds, our teams continue to perform, maintaining the quality and on-time delivery that differentiates us in the market. This performance was further demonstrated by our WUXI China team at the beginning of Q3. I want to take a moment now to tell you about the story. In July, as COVID variants were continuing to spread outside of the large cities, WUXI was directly hit, and our team there performed an amazing feat. Companies in WUXI were ordered to shut down entirely and as the situation on the ground deteriorated, ITT WUXI decided to sell off the entire manufacturing compound in order to be allowed to operate and serve our customers. All essential production and R&D staff volunteered to join this effort. Overnight, the team purchased sleeping bags, water, soap, and other essential items to enable full 24/7 life in the plant. In total, the site housed approximately 420 employees for two weeks, during which time the team prepared nearly 18,000 meals. In addition, nearly 30 indirect staff volunteered to join the team effort. Our leaders took several actions to preserve everyone's safety and well-being. Let me share some highlights. All 400-plus employees received PCR tests every day. We had exercise, games, and other social activities to maintain morale. The team cooked dinners, and leaders replaced production workers on the shop floor for some nights. Finally, our team sent videos with words of encouragement that ultimately went viral in China on TikTok and WeChat. Locally, our team became celebrities, being part of what was deemed an amazing story in WUXI. The operation was covered by newspapers and media, and both government officials and other companies in the region came to WUXI to support us and learn how ITT pulled off such a feat. Through all of these efforts, there were zero COVID cases at the WUXI site, and the team maintained 100% on-time delivery and world-class quality. Our employees proudly embraced the challenge and delivered. To say that I and everyone at ITT are proud of the WUXI team is an understatement. Our employees displayed core ITT values and made sacrifices we have never seen before. WUXI team, I cannot thank you enough. It is a true honor to work with you all. Let's now turn to slide five to recap ITT's 2022 Investor Day. ITT hosted its first Capital Markets Day for investors and analysts in June. The event consisted of presentations by the leadership team, interactive technology demonstrations with the engineers and innovators, and we issued long-term financial targets consistent with our continued growth and value creation. There are a few key takeaways from the event that I want to reiterate today. First, ITT has market-leading positions in attractive and growing end markets including chemical and industrial pumps, commercial aerospace, defense, rail, and electric vehicles. Second, we highlighted how we sustain our differentiation through three pillars: execution, innovation, and culture. Execution starts with the customer, who is at the center of everything we do. Innovation at ITT was on full display in our technology demonstrations, including our smart pad, the EMD or embedded motor drive in Industrial Process, as well as Connect and Control's offering for the fair a program. And culture, the glue that keeps everything together, as demonstrated by our team in WUXI. Third, we have a ton of capital to deploy, upwards of $2 billion based on our expected cash flow generation and leverage capacity. Fourth, regarding ESG, we're making progress with our emissions reduction initiatives and we published our first EEO-1 report earlier this year. Finally, ITT issued long-term financial targets which we are working hard to deliver. Capital deployment is a key element of our Investor Day. Let's now discuss our continued progress in 2022. Following our legacy asbestos liabilities divestiture last year, we spoke about accelerating the pace of capital deployment. Fast forward to today, and we have started to see these materialize. In Q2, we announced the acquisition of Habonim and in June, announced our investment in CRP, an additive manufacturing pioneer. Second, we invested in a breakthrough Rotocoating technology company to minimize fine dust emissions in braking systems that will accelerate the development of new green solutions for the automotive industry. Third, we acquired a more energy absorption product line for high-cycle applications in Industrial Automation, which closed in the second quarter. The product line is complementary to Connect and Control's offering and serves the factory automation, workplace safety, and e-commerce verticals. We continued to invest in growth CapEx to support production line capacity for new electrified vehicle awards in friction. There we convert our EV share gains into revenue. With the wins to date, we are on pace with nearly 37% share of all global OE electrified vehicle volume by 2025. Finally, we have repurchased $250 million of ITT shares to date, which will reduce our full-year share count by 3%. To summarize the quarter, we are winning in the marketplace and all this growth rate outpaces that of our peers. We are offsetting cost inflation through pricing and shifting the pricing paradigm in auto. We're driving productivity in our plans to expand our margins, we are deploying capital to grow our portfolio both organically and inorganically as with Habonim, and we are continuing on the ESG journey on the route to becoming a more sustainable ITT. Now let me turn the call over to Emmanuel to discuss our results and outlook in detail.

Thank you, Luca, and good morning. We continued to see strong demand in all our businesses. We drove 10% organic sales growth after 7% in the first quarter, with Connect and Control again leading the charge. As we anticipated, growth in connectors and aerospace and defense components is driving a great performance in Connect and Control from both a revenue and a margin perspective. Demand across Industrial Process short cycle continues to be strong, and this quarter we approached 20% organic growth. We are also gaining share in projects where orders grew 48% organically this quarter. All of this drove a 26% increase in orders at Industrial Process, and the funnel continues to increase with larger multimillion dollar projects moving to the FID stage. In Motion Technologies, friction was up 6% organically, driven by the continued momentum in aftermarket similar to Q1. Our OE business was up 3% organically despite the ongoing chip shortage. The Motion Technologies team has been relentless in driving price realization in partnership with our customers, and the negotiations in friction with customers are almost complete at this time. We also saw over a 200 basis points impact to reported revenue growth from Habonim. We estimate that the ongoing supply chain disruptions cost us approximately 200 to 300 basis points of top-line growth, with the most pronounced impact in Industrial Process. Adjusted operating income was roughly flat this quarter, with margin declining 70 basis points. We saw higher sales volumes in Industrial Process and Connect and Control, and pricing and productivity benefits in all businesses. Adjusted segment operating margin was 15.9% in line with our expectations from last quarter. However, as you will see on slide 14, volume, pricing, and productivity were outweighed by 880 basis point headwind from cost inflation. The teams drove productivity of roughly 220 basis points through a combination of shop floor and sourcing actions. Furthermore, our strategic FX hedging actions of the euro delivered a 120 basis points benefit. From an earnings perspective, adjusted EPS increased sequentially and on a year-over-year basis, despite impacts from significant cost inflation, supply chain disruptions, the China lockdowns, and an estimated $0.05 impact from the war in Ukraine. The share repurchases, higher tax rates, and higher interest expense netted to a benefit of roughly $0.02. On cash, working capital requirements continue to weigh on our free cash flow generation. We are purposefully investing in inventory to ensure we can secure delivery to our customers in this difficult time. Cash improved sequentially from Q1, but we're still below our expectations through the first half. However, this performance should continue to improve in the second half. Additionally, today we have committed $8 million for energy efficiency and renewable projects. These green projects will protect us from energy scarcity and inflation and make ITT a more sustainable company. Finally, foreign currency translation negatively impacted our cash flow generation. And now let's look further at the earnings performance. I want to make just a few key points on this slide. First, we continue to drive strong volume growth, pricing capture, and productivity across our businesses. In 2021, this was led by Motion Technologies, and now Industrial Process and Connect and Control are building on Motion Technologies' performance. We are driving productivity in the second half, which will help to overcome lingering inflation and foreign currency headwinds, the latter of which was not contemplated in our previous outlook. We drove $0.16 of productivity and $0.16 of volume growth, while pricing actions contributed $0.32. On pricing, we made significant progress in Q2. The negotiations with OE customers in friction are almost completed. And while the total amount realized is below what we initially anticipated, the agreements secured will deliver growth and value creation in the long term. In Industrial Process, we are already seeing the benefits of our pricing efforts in our Q2 orders, which will flow through to earnings more impactfully in the second half. These improvements in total are still lagging the pace of material, labor, and overhead inflation. Today, we're seeing slowing commodity pressures, and we expect this will begin to drive benefits for us in the fourth quarter, most prominently in Motion Technologies. The lagging realization is due to a strategic decision earlier in the year to lock in supply of steel, zinc, and copper to ensure we could deliver to our customers on time. As you know, in Q1 we suspended the majority of our operations in Russia, given the war in Ukraine. We are seeing direct impacts mainly in Motion Technologies and Industrial Process, as well as indirect impacts from auto OEM customers that sell or supply into Russia. This cost us approximately $0.05 of EPS in the second quarter. In 2022, we continue to expect this will impact revenue by approximately $80 million, which equates to an approximate $0.20 headwind to earnings. Our acquisition of Habonim is already contributing to earnings, given the strong start. As that continues, the effective purchase multiple of less than 13 times adjusted EBITDA should continue to decline, further demonstrating the strength and strategic rationale for the deal. Finally, as we have done throughout 2021 and 2022, we continued to ramp up our strategic investment to fund all of the groundbreaking technology that was on display at Investor Day. This will drive further value analysis, value engineering, and product redesign for the next generation of pumps and game-changing brake pad formulations. This is the best use of our capital. Let's turn to slide 9 to review the segment results. Let me begin with Motion Technologies. Friction maintained its outstanding quality and on-time delivery performance, effectively managing the global supply chain disruptions, auto OE production volatility, and the lockdowns in China that Luca alluded to earlier. We also saw strong demand in the aftermarket, given the continued low level of new vehicle sales. On profitability, Motion Technologies' adjusted segment margin declined 430 basis points, mainly resulting from higher than expected material inflation. This was partially offset by productivity benefits and enhanced pricing actions. Motion Technologies made significant progress in securing price commitments for most of its OE customers, which we will begin to realize at a greater pace in the second half. We believe this quarter was the trough for Motion Technologies, and results should improve from here. Industrial performance this quarter was exceptional. We saw growth across most short cycle product categories, despite the supply chain disruptions and labor constraints that continued to hamper the industry. This was the sixth consecutive quarter of sequential order growth, and Industrial Process's highest order quarter since 2014. We see strength in both short cycle and project orders. Our book-to-bill was an impressive 1.25, and the organic backlog is up 50% since the prior year. Industrial Process's margin improved on both a sequential and a year-over-year basis after a slow start in Q1. We are improving Industrial Process's execution and manufacturing throughput, and we're seeing the benefit of the pricing captured to offset inflation. The result was a 33% incremental margin in Q2. Furthermore, Habonim's profitability was accretive to Industrial Process's adjusted segment margin, even after including the impact of purchase price amortization. Lastly, on Connect and Control, we drove another strong quarter of orders and revenue growth, stemming from the continued recovery in commercial aerospace, as well as in distribution. On connectors, we saw growth across the industrial and defense verticals, while components were primarily aerospace-driven. Distribution revenue was up over 40% organically this quarter. Connect and Control's margin expanded an impressive 380 basis points to over 17%, driven by higher sales volumes and continued shop floor productivity. Notably, Connect and Control delivered a 35% incremental margin in the face of continued inflationary headwinds. Let's now turn to slide 10 to discuss our updated financial guidance. Today, we are raising our organic sales growth outlook to 10% to 12%, given our strong first half performance, the strong demand and backlog growth in Industrial Process and Connect and Control, and the pricing we are realizing. Our total revenue growth is impacted by foreign currency headwinds of approximately 5 percentage points. We are maintaining our adjusted segment margin and will likely be at the low end of the range. This is stemming from continued cost inflation headwinds that we are working to offset through pricing and productivity. Nevertheless, we saw strong sequential and year-over-year margin improvements in Industrial Process and Connect and Control, which we expect will continue in Q3 and Q4. For the full year, Industrial Process margin will expand above 16%, overcoming ongoing supply chain disruptions, and Connect and Control's margin should end above 18%. We continue to expect Motion Technologies' margin will likely decline close to 200 basis points to end around 17% for the full year. To recap what I discussed, we are overcoming the lost earnings in Russia, the Q2 lockdowns, foreign currency headwinds, and higher cost inflation, and we're doing this through stronger sales including pricing, better margin in Connect and Control, the lower share count, and the addition of Habonim. We expect commodity pressures will slow in Q4 and we have firmed up the pricing benefits for the remainder of 2022, which gives us greater confidence in achieving our full-year outlook. This is reflected in our tighter range for adjusted EPS of $4.35 to $4.65 or growth of 7% to 15% versus the prior year. Lastly, we continue to expect that free cash flow will be $250 million to $300 million, and free cash flow margin will be approximately 8% to 10%. Longer-term, we expect this will improve on the path to our free cash flow margin target of 11% to 13%. Looking at the third quarter, organic sales growth in Q3 is expected to be in the low teens range. Thanks to the growth in Connect and Control, we should approach 20% and to a lesser degree in Motion Technologies, where revenue will ramp up sequentially as pricing benefits materialize and China volumes recover. We expect Industrial Process organic sales to increase in Q3 around 10%, with an additional step up in Q4. ITT's adjusted segment margin in Q3 will improve sequentially to the high teen range, with margin expansion led by Industrial Process and Connect and Control. We expect Motion Technologies margins to inflect from Q2, given the firming of our pricing benefits and easing commodity costs. This will drive adjusted EPS growth in Q3 of roughly 20% year-over-year. With that, let me pass it back to Luca to wrap up.

Thanks, Emmanuel. Before jumping into Q&A, I want to recap a few key points. We are encouraged by the strong demand across the portfolio and by our team's ability to deliver for our customers and outperform in all our businesses. Thanks to this performance, ITT built a robust backlog that provides the runway for growth in 2022 and 2023. On pricing, our actions are ramping, with particular strength in friction. We have reached agreements with the majority of our OE customers, which provide good visibility to profitable growth over the long term. And we are making significant progress at Industrial Process and Connect and Control, that we begin to accelerate in the second half of 2022. Our unrelenting focus on continuous improvement remains. We are working daily to improve our operations and replicate the success at Motion Technologies in our two segments. And finally, we are executing all elements of our capital deployment plan, while continuing to invest in the business. As ever, it has been my pleasure speaking with you all this morning, and we will happily take your questions now. Please open the line for Q&A.

Our first question comes from Mike Halloran with Baird. Your line is open.

So Luca, you guys gave great context on how you're looking at the auto market. So we've always been a little bit more conservative than the trend line there. So maybe you could talk a little bit about how you see the recovery cadence going, what it means for this year, and what it means for next year? Obviously, ITT differentiation versus what those end markets look like, but any color you could give there would be great.

Sure. So let me start by saying that ITT outperformed the market in Q2 and we expect to outperform the market also this year, like we have done in the last 10 years. When talking specifically about the market, in Q2, it was really flat year-over-year after a Q1 that was down. Looking at the 2022 projection, we are probably looking at around 80 million vehicles produced, a growth of 4% to 4.5% for the year. The picture is different in various regions: flat to slightly positive in Europe, flattish in China and double-digit growth for North America. What was interesting, Mike, is that we’re seeing China as a resilient market, particularly considering what happened in Q2 in April and May. Still, the focus for the full year has not changed, thanks to the resilience of the market and the government incentives there. Let me reiterate also the continuous outperformance. If you look at the market projected to return to pre-COVID levels, it may happen in 2024 or 2025. ITT had surpassed pre-COVID levels in 2021, so that outperformance will continue.

Thanks. Really appreciate the color, and then follow-up on the Industrial Process side of things. Obviously, a really good backlog grant. Maybe talk about two things: one, the visibility you're seeing right now with the front-log conversations with clients and some of the key markets there; and secondarily, anything going on competitively that would be concerning? Obviously, you're gaining some share there; I'm just curious about the pricing dynamics in the marketplace and competitive pressures as these new projects start coming forward.

Sure. When we're looking at the markets, we see strength across all markets—oil and gas, chemical, and general industrial. We see that in the orders; we see that in the funnel of opportunities. When looking geographically, we see very strong orders and a funnel, particularly in North America, Asia Pacific, Latin America, and the Middle East. However, we do not see those trends in Europe, which is the area where we don't see that. When it comes to pricing, pricing discipline is key, especially for projects. If you do not have that price discipline, there's no way you can deliver the margins that we are delivering today. So we will continue executing on this front, and I will simply not change.

The next question is from Jeff Hammond with KeyBanc. Your line is open.

So maybe these questions are connected, but your price-cost gap was $0.29 in Q1 and $0.27 in Q2, and I'm just trying to think how we should look at the price-cost gap in Q3 and Q4. And then similarly, margin trajectory in Motion Technologies into the second half—do we expect to bounce back to Q1 levels in Q3 or just how to think about that snapback?

Yes, you're right. Our margins were heavily impacted by the price-cost gap. As we move into Q3 and Q4, we're seeing a much better picture. In Motion Technologies, we are finally closing on all the price negotiations with our auto customers. While we didn't get everything that we wanted, I think this was a good compromise, especially to maintain long-term, healthy relationships with them. As the commodities impact lessens, Motion Technologies should be in a better position from a price-cost standpoint. Industrial Process and Connect and Control are driving strong price actions, and we mentioned that we are seeing a nice price impact in Q2 orders for Industrial Process that will convert into strong sales in Q3 and Q4.

Okay, great. And then, great performance in Industrial Process. I recall in Q1, there was a lot of issues with the supply chain. I think you still mentioned supply chain being a problem in Industrial Process. But it doesn't seem to have shown through in the results or into the second half guide. So, just how should we think about some of the supply chain challenges? Are you just overcoming them elsewhere, or are you seeing some improvement?

Thanks, Jeff. On supply chain, the short answer is: it is improving slightly. Let me share some data to give you some perspective. If you look at Q1, the revenue impact from supply chain was roughly 600 basis points. In Q2, it was between 200 and 300 basis points. So, this shows an improvement, especially in Industrial Process. Lead times have slightly decreased, and commodities have also seen some reduction, but there are still bottlenecks remaining. We are looking to control and focus on the internal bottlenecks, which are mostly on the production line to improve the velocity in our plants.

The next question is from Nathan Jones with Stifel. Your line is open.

Hi, good morning. This is Adam Farley on for Nathan. There's been some talk of an automation production ramp in Europe in the second half. What is your view of the likelihood of this and what are customers saying?

We are seeing the supply chain challenges easing, and customers are talking about a better situation for chips. However, when looking at the European production forecast for the full year, it hasn't dramatically changed. We're still looking at low single-digit growth for Europe overall. We see a good order book in our front, but we know there’s still a slight growth forecast for Europe.

Okay, thank you for that. Just turning to the orders—overall, really strong and robust, especially in Industrial Process and Connect and Control. What was the cadence of orders through the quarter? Also, can you provide any color on July in each business?

The cadence of orders in the quarter was pretty even across every month. July was not that different from what we've seen in Q2. ITT had a really strong month in June, mainly due to project orders that accumulated out of the first phase. Overall, the growth in orders was even, and the numbers were solid across the board in Q2. In terms of Connect and Control, it’s the same thing; July orders are not that different from what we've seen in Q2. However, there is a lot of ground to cover before the end of the year. We remain very attentive to that order number and what it indicates about the market.

One thing we would expect going forward, particularly in Industrial Process, is that project orders will gain more momentum, while short cycles may level off. Currently, 55% of our backlog is short cycle while 45% represents projects, which should eventually shift to 60-40.

The next question is from Vlad Bystricky with Citigroup. Your line is open.

Good morning, guys. Thanks for taking my question here. Following up on the Industrial Process comments, when we see short cycle orders up 21% in the quarter, can you talk about how much of that is actual end-market demand versus any channel stocking for inventory?

For the moment, our distributors, which represent a lot of our short cycle business, are not reporting any increase in inventory. We don't monitor the inventory at their customers, but for now, we don't see any inventory buildup anywhere. These are really strong order growth numbers, and we expect that over time, this level of short cycle orders cannot sustain, and we will see a leveling off, as Luca said. Importantly, pricing is key, and we are seeing real benefits from the pricing actions.

Okay, that's really helpful color, appreciate it. Shifting to capital allocation, you’ve been leaning into share repurchases more here given where the share price has been. What's your thoughts on continuing to lean into share repurchases considering current prices? Also, can you discuss your appetite for larger-scale M&A given the health of the balance sheet versus macro concerns?

Regarding capital deployment, the priorities remain unchanged. The money goes first into inorganic investments, where we see the best returns. These are less risky investments we've seen in Industrial Process, Motion Technologies, and Connect and Control. This is where the money goes first, and approximately 80% of that CapEx is directed towards growth and productivity. Second is M&A, which you have seen apply this first half of the year with the acquisition of Habonim. That acquisition is already accretive and a great story. We have assessments for ventures like Cuts Works, WECODUR, and CRP, in adjacencies to the business. This means money goes second into M&A. Finally, dividends and share repurchases are the third priority. We have the opportunity to pursue all three avenues, and we will continue with these as we progress.

The next question is from Damian Karas with UBS. Your line is open.

Good morning. Congrats on the hard work and accomplishments in WUXI.

Thank you, Damian.

Just a follow-up question on price as it relates to orders. When we look at those robust order rates in Industrial Process and Connect and Control, could you unpack how much is from inflationary effects versus underlying unit demand? I mean, you're talking high single-digit, low double-digit pricing. The rest on orders—maybe just help us unpack that a bit.

In Industrial Process, the majority of the growth is through volume. We're seeing pricing building into our backlog, but for the moment, the majority of the growth is driven by volume, particularly in the short cycle with baseline pumps and spare parts. In Connect and Control, I would say the large majority is also volume, as there is less advancement on pricing. The only exception might be industrial connectors, which are seeing some flat volume, and what reflects slightly above that is pricing.

Okay, that's helpful. Just thinking about expectations going into the quarter, a lot of investors were concerned you'd be lucky to hit the low end of your EPS guide, considering all the exogenous issues out there from your markets. Just thinking about the updated guidance, where would you say the biggest risk is of not hitting that guidance this year?

The biggest risk is primarily external factors, such as demand disruptions like we faced in Q2 with the China lockdowns. We have a really strong backlog in Industrial Process and Connect and Control. We've proven our ability to ramp up volumes, as seen in Q2—Industrial Process was approximately $25 million above Q1, and Connect and Control was $10 million above Q1. So we can effectively manage through these additional products in our facilities. Our cost control also remains vigilant, and we are tightening all expenses. Therefore, I would say the downside potential is mainly due to external factors.

Damian, the team did an amazing job in the quarter. If you think about all the headwinds we had to face, and the many pieces of the puzzle that have come together—the backlog, pricing, execution on the shop floor, and WUXI—this is the reason we really tightened the range. Things are coming together nicely.

The next question is from Joe Giordano with Cowen. Your line is open.

I had a similar question on that, but maybe just asked a little differently. Last quarter when you were talking around the lower part of the guidance, it did sound qualitatively like the guidance was getting a little worse. Raising the low end now is a significant statement. I'm curious if anything actually changed in your mind between Investor Day commentary and today?

I think you'll appreciate that the environment is very volatile, impacting our visibility on what we see out there. We've been appropriately cautious in our description of what was seen, while simultaneously driving execution within our segments. We've observed strong performance improving in May and June compared to earlier months, and significant progress was made in pricing, particularly at Motion Technologies, where we’ve now seen nearly all price negotiations solidified. We need to focus on taking advantage of the declining commodity prices as well as the execution seen in Q2 regarding on-time delivery and quality across all our businesses.

Joe, if you consider the volatility we faced, it's quite striking. One moment you're on a call celebrating Independence Day here in the US, and the next, you're speaking with WUXI staff where companies are shutting down, and our team is performing incredible feats. This volatility is something we must manage. However, things are indeed coming together nicely thus far.

I appreciate that. Again on orders, I know we've talked a lot about business. Just thinking about stripping MT out as it's its own entity; if we focus on IP and Connect and Control orders, in terms of dollar basis, how do you see that progressing from Q2 levels? Do orders per day still go up?

When looking at Q2 in terms of short-cycle indicators—baseline pumps, service, valves—we closely monitor those numbers weekly. Q2 was a very strong quarter, and showing these sequentially is a good sign. However, we expect that short cycle orders in Industrial Process will level off, while project orders should gain stronger momentum. The current backlog shows 55% of our backlog is short cycle and 45% is project work, whereas it should typically be a 60-40 balance.

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

Hi, you have Sabrina Abrams on for Andrew Obin. How are you guys?

Good morning, Sabrina.

Can you talk about the structure of inventory on your balance sheet and sort of how much of the issue is a golden screw issue? How do you think about dealing with the potential bulwark fact down the line when lead times normalize, and when do you think working capital levels start to normalize?

Working capital is a huge issue for us. It has used cash significantly in the first half. We are targeting to reduce working capital by roughly over $100 million in the second half. This will be driven by collecting past due accounts receivable and some pricing that hasn’t been collected yet, along with a large part from inventory. It's what you referred to as the golden screw issue; we have many projects half-finished and not leaving the dock because we’re missing components. Our focus now is to improve our supply chain while also enhancing production line velocity.

Great, thank you. How are you thinking about getting the European business ready for potential disruptions related to Russian gas this fall/winter?

There are two things we’re doing. In the short term, we are paying close attention to energy consumption across all sites globally. We are actively working to reduce electrical energy consumption. Over the medium to long term, we are investing heavily in renewable energy. I mentioned earlier today we committed $8 million towards renewable projects; these solar initiatives will enough to run our facilities and will come online between the second half of 2022 and the first quarter of 2023. This will help substantially reduce our dependence on external energy.

Our final question is from Matt Summerville with D.A. Davidson. Your line is open.

Thanks. A couple of questions on Motion Technologies. What will the price-cost coverage actually look like once all actions you’ve taken and the contract negotiation process is fully complete? Will this coverage ratio look structurally different moving forward regarding how you might be able to pass on raw material inflation?

Thanks, Matt. First of all, I'm proud of the results achieved by the team. They have been able to change the paradigm, shifting from merely providing price to effectively obtaining price. If looking at the entire inflationary costs, including energy, we still cannot cover everything. But for the material side, we are moving closer. The contract negotiations moving forward will involve sharing not just the pains of inflation but also the benefits when things improve.

Got it. During the quarter, I think you mentioned 18 new EV platform wins. How should we interpret that win rate? And how is that tracking to the plan you laid out during your Analyst Day?

Sure. These are electrified platforms, covering both fully electric and hybrid. Winning 18 electrified platforms in a single quarter is significant. Notable customers include BYD and parts of Tesla, all of which are outstanding successes. The win rate in awarded platforms is considerably higher than our current global market share. For 2022, as in 2021, our market share in electrified platforms will indeed be higher than in internal combustion engines. This aligns perfectly with our target of achieving 37% market share, as discussed during our Investor Day, and the progress is on track.

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