Welcome to ITT's 2023 Third Quarter Conference Call. Today is Thursday, November 2, 2023. This call is being recorded and will be available for replay starting at 12 p.m. Eastern Time. All participants are currently in listen-only mode, and we will open the floor for questions after the presentation. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.

Thank you, Lisa, and good morning. Joining me in Stamford 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 September 30, 2023, which we announced this morning. Before we begin, please refer to Slide 2 of the presentation available on our website, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to several risks and uncertainties, including those described in our 2022 annual report on Form 10-K and other recent SEC filings. Except where otherwise noted, the third quarter results we present this morning will be compared to the third quarter of 2022 and include certain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. With that, it's now my pleasure to turn the call over to Luca, who will begin on Slide 3.

Thank you, Mark, and good morning. Before we begin, I would like to share how shocked we all are at ITT about the terrorist attack in Israel on October 7. We strongly condemn these terrorist attacks. Israel is a special place to us, given the presence of our colleagues working at our Habonim valves business headquartered in the northeast part of the country. I was fortunate to spend time with Ilan and the team in August, and I was humbled by their capabilities, their strong work ethic, and their commitment to ITT and their customers. Obviously, all their lives were impacted by these tragic events. We'll stay in close contact with our Israeli colleagues there as the safety of our people and their families is always our primary concern. It is our hope that peace is restored in the region. Now to our latest results. The main theme of this call is a step up in performance, a step up in execution, and a step up in capital deployment. We're converting ITT's $1.2 billion backlog. At 19.4%, we are making significant progress towards our 20% long-term segment margin target. We are delivering new levels of earnings with a record EPS this quarter and expected for the full year. Last but not least, we expect over $400 million of free cash flow. And on capital deployment, we are accelerating. Yesterday, we announced the signing of a $400 million strategic acquisition in flow with the addition of Svanehøj. Now let's get into the details. On execution, in Industrial Process, we continue to see strength in projects and aftermarket. Our pump projects, parts, and service businesses all grew revenue double digits organically in the third quarter, demonstrating our prowess in gaining share and emerging as a leader in profitability in flow. Still, there are many more opportunities for growth. For example, this quarter, together with IP's President Fernando, I went to Brazil and Peru. He's intimately familiar with the region coming from Brazil. There, we spent time with our local teams to review our outstanding performance in the region and the new growth initiatives. The talented local ITT team gave us a greater understanding of the growth actions they are working on to capture share in mining, process, and energy. In Connect and Control Technologies, our aerospace and defense components business grew revenue nearly 30% and 6% sequentially, which drove 8% organic growth in CCT. The growth in our connector OE business more than offset the continued distribution destocking impact in Europe. Just to step back for a moment. As you have heard us talk about, we have been managing through the destocking in connector distribution in Europe for the past three to four quarters. And whilst we still see weakness in Europe, our North American team has been able to offset the European weakness with actions in OEM and distribution. Well done, Art and team. Finally, in Motion Technologies. We again won share in the electrified vehicle market with 30 new platform wins this quarter and over 130 awards year-to-date at a win rate that is well above our current market share. Frictional outperformance continued to improve sequentially in Q3, thanks in particular to our China business, which grew sales roughly 25%, driving 20% growth year-to-date. Also in MT, the friction team won new awards in the high-performance vehicle market ahead of the recently announced Termoli plant expansion, where the new line will be up and running in Q4 2024. And the progress did not stop here. Both KONI and Axtone grew double digits on the strength of share gains, new product innovations, and pricing actions in rail. In Axtone specifically, we have won many new orders this year. And as a result, we expect our orders to be up nearly 10% for the full year versus a record year in 2019, when we were still operating in Russia. Continuing with execution. At 19.4% this quarter, we again made considerable progress towards our 20% long-term segment margin target. Industrial Process eclipsed 21% for the fifth straight quarter, up 220 basis points year-over-year and 40 basis points sequentially with an incremental margin above 40% as our operational drive continues. Motion Technologies reached 17% margin in Q3, improving 100 basis points sequentially as we anticipated with incrementals of 40%. Notably, we saw a strong improvement in both Wolverine and Axtone due largely to pricing actions, and we expect both businesses to be back to double-digit profitability in Q4. This is quite an accomplishment considering the challenges our teams confronted from high-cost steel inflation and the war in Ukraine. Moving to capital deployment. We are accelerating. In October, we announced a new $1 billion share repurchase program with an indefinite term that we will strategically implement at the completion of the current $500 million plan. But more importantly, yesterday, we entered into a definitive agreement to acquire Svanehøj, a Denmark-based supplier of cryogenic marine pumps and aftermarket services for liquefied gas. The Company operates in attractive industries tied to long-term trends, including decarbonization, energy transition, and growth in marine transportation. I will share more about this exciting acquisition momentarily. Coming back to our full year results. We are raising our 2023 outlook once again across all metrics. At the midpoint, we now expect nearly 8% organic revenue growth, 140 basis points of margin expansion, nearly 17% earnings growth, and over $400 million of free cash flow generation. These set us up for a record year, and I'm really proud of what our teams all over the world are accomplishing. Now let's turn to Slide 4 to talk about our pending acquisition, Svanehøj. Yesterday, we announced our intent to acquire Svanehøj, a leading cryogenic marine pump supplier, for approximately $400 million. The purchase price multiple equates to less than 12x estimated 2023 EBITDA, and the deal is expected to close in the first quarter of 2024. Svanehøj has leading positions in cryogenic applications for the marine sector, including deep well gas cargo, fuel, and energy pumps which have the technology to process all future energy transition fuels. Like IP, the Company has a large installed base of pumps and a sticky profitable aftermarket business, thanks to its differentiated service model with global reach. The regulatory nature of vessel service allows Svanehøj to benefit from recurring aftermarket revenue with sole-sourced positions. Its products and services are also widely regarded as the highest quality in the industry, which drives customer loyalty. Stepping back, there is a lot to love about this business, which adds cryogenic pumps to our flow portfolio. First, the Company has a strong management team that has a deep knowledge of their markets and a clear focus on driving performance. Next, we have good line of sight to future revenue growth coming from decarbonization and energy transition, where Svanehøj has leading positions in three out of four verticals in which it operates. Shipowners are required to service and upgrade their fleet, which we expect will drive recurring demand for Svanehøj's products and aftermarket services. And the shift to more environmentally friendly propulsion technology, coupled with growing ocean cargo activity, will increase demand for new marine vessel builds. With all of this, we expect Svanehøj to lead in the global energy transition across most verticals with multi-year outgrowth supported by their backlog, their differentiated technology, and predictable aftermarket revenue. I would like to welcome Søren and the entire Svanehøj team to ITT. I also want to tell you that our M&A pipeline remains active. In Q3, the business, Emmanuel, and I continued to invest a significant amount of time visiting potential target operations as we work further to enhance our acquisitions pipeline. Let me now turn the call over to Emmanuel for more details on the quarter.

Thank you, Luca, and good morning. Starting with revenue. Industrial Process once again led the way this quarter with 11% growth on the strength of the aftermarket, driven by both volume and price and project shipments. IP is also growing its backlog, which is up 18% year-to-date, with project orders up 29%, including green projects which are already up 160% versus all of 2022. CCT growth was primarily driven by a more than 20% increase in aerospace components and defense, underpinned by macro trends in these markets. Notably, we also generated 9% sequential growth in Connectors due to share gains in OE and SKU expansion with distributors in the U.S., more than offsetting weaker European distribution. Motion Technologies' growth was driven by friction OE at 7% and higher pricing in KONI, Axtone, and Wolverine. This was mostly offset by timing in the friction aftermarket driven by distribution inventory reduction. Looking ahead, we expect our auto aftermarket business to be flat in Q4 and to start growing again in 2024. Rounding out the ITT top line. Core volume growth contributed 300 basis points, while pricing actions contributed 200 basis points. The pricing was most prominent in the IP aftermarket and aero in CCT. Aero OE contracts is an area where we are dedicating more energy as more long-term agreements are coming up for renewal in 2024. Moving to margin. We improved in Q3 due to a combination of profitable growth and pricing actions. Volume and price contributed over 200 basis points, while our net productivity actions drove 150 basis points of expansion, more than offsetting the impact of foreign exchange and investments. Specifically, we continue to invest in sales and operations planning to augment the Lean improvements in IP and CCT. The impact of stronger organic growth and improved margins drove 14% earnings per share growth, which includes the benefit of a 1% share count reduction. Last but certainly not least, our teams delivered another impressive cash performance, with nearly $150 million of free cash flow or roughly $300 million for the year-to-date. This amounted to over 7x more free cash flow compared to the same period in 2022. Our free cash flow margin this quarter was 18%, driven by stronger collections and higher net income. Cash is improving, but working capital was still a use of cash year-to-date mainly due to inventory. We expect this dynamic to reverse in 2024 with improved inventory management. On Slide 6, you can see we delivered a 14% EPS increase this quarter to $1.37, a new record for ITT. We also continue to invest in new product development, including for IP's embedded motor drive, which is currently deployed in customer field trials, and undergoing reliability and certification testing. As you can see on Slide 7, today, we're raising our full year outlook given the year-to-date growth in orders and robust backlog and higher revenue growth, segment margin expansion, and strong free cash flow generation. This is a testament to the execution our teams have delivered throughout 2023. We are moving our revenue guide to the upper end of the range at 7% to 8% organic growth, which implies the following for Q4. We expect low single-digit organic revenue growth led by Motion Technologies. CCT aero should continue its growth trajectory coinciding with increasing air traffic, and we also foresee a pickup in defense demand near and midterm. We also expect continued strength in the IP aftermarket based on strong daily order rates exiting Q3 as well as in October, offset by lower baseline and project shipments. On segment margin, we are increasing the midpoint of our margin range by 50 basis points to 18.6% and approaching 19% at the high end. Segment margin in Q4 should be roughly flat sequentially. These dynamics should drive low single-digit adjusted EPS growth year-over-year. Finally, cash performance is outstanding. More than a year ago, we made a conscious decision to invest in inventory to support our customers amidst significant supply chain challenges at the expense of our free cash flow. As a result, we won new business, built a robust backlog, and gained market share. Fast forward to today, we have a record backlog, up 13% versus the end of last year, profits are way up, and our collections and cash flow are improving every quarter. As a result, we are increasing our guidance to more than $400 million, and our free cash flow margin is already at 12%, double from last year. Before I turn the call back to Luca, I'd like to share some highlights from our 2023 sustainability update released last Friday. Last year, we made considerable progress on our sustainability journey, including: a 32% reduction in recordable safety incidents; a 7% reduction in greenhouse emissions and in water consumption; and a $25 million commitment to solar energy projects. This year, we connected solar installations in Barge, Lancaster, Oud-Beijerland, and Nogales. These installations, along with other pending projects, are expected to reduce our CO2 emissions by approximately 6%. Last year was a significant step on our sustainability journey, and we look forward to sharing more good news in the future. You can read more about our sustainability highlights in the appendix. Now back to Luca.

Thanks, Emmanuel. Before we move to Q&A, I'd like to share a few closing thoughts about our execution and accelerated capital deployment. First, we continue to outperform in some of the world's fastest-growing end markets, and we are finding new avenues to differentiate, whether with groundbreaking innovations or new areas for growth. Second, we are well on our way to reaching the 20% long-term segment margin target that we set just last year. Industrial Process led the charge beginning at the end of last year and eclipsed their long-term target for five straight quarters. Third, because of the momentum we've built, we raised our outlook for revenue, margin, earnings, and free cash flow. And with a double-digit increase in our backlog expected by the end of this year, we are confident that ITT will continue to grow in 2024. This is our third straight quarter of raising EPS guidance, and our progress towards our long-term margin target is accelerating. Finally, we are also accelerating capital deployment. We are acquiring Svanehøj to grow our flow portfolio, and we continue to evaluate other high-quality targets in flow and Connectors to put our strong balance sheet to use. Additionally, our new $1 billion share repurchase program gives us flexibility in allocating capital effectively. We have reached another new stepped-up level of performance for ITT. Thank you for joining us today and for your continued interest in ITT. Lisa, please open the line for questions.

Thank you. Our first question will be coming from Michael Halloran of Baird.

Can we discuss the IP aspect and what you are observing regarding the fundamental order trajectory? Additionally, could you break it down by the end-market applications, including energy, short-cycle general industrial, chemical businesses, mining, and any other markets I may have overlooked?

Sure. Let me start and then, Emmanuel, you can build on that one. So when we look at the orders, the orders in Q3 declined 2%. You have short cycle that was flat year-over-year, and the project, there was a decline. Now having said that, there was a lot of timing that shifted from the quarter to October. And what I can tell you, that looking at the orders in October, they are considerably strong year-over-year. The short-cycle orders in October are up, and our rate is higher than what has been in Q3. And the projects in October are more than 40% higher year-over-year because some of the projects shifted. So that is the picture on the orders, and the funnel is still very, very healthy.

Yes. And by end market, just to add a little bit more color, we see a slowdown in chemical, but our general industrial markets are really strong. We continue to gain share there. And then if you look at the funnel, I would say the funnel is also very strong. As Luca was mentioning, year-over-year, our project funnel is up 16%. Versus the beginning of the year, it's up almost 10%. And this is driven by really energy, chemical, general industrial. So pretty good picture from a project standpoint also.

Great. Really appreciate that. And then follow-up is, maybe, Luca, you could give some thoughts on how you see the auto market tracking and any thoughts on the 2024 build rates on a global basis. You always give really good color there. Certainly appreciate Emmanuel's comments on the sequential improvement on the aftermarket side going into next year, but any other color would be great.

Thank you, Mike. In Q3, the market increased by 3.8%. Production grew in Europe and North America, despite the strike, while it remained flat in China. This followed a strong first half of the year. For 2023, we anticipate the overall market will rise by about 7%, with Europe seeing low double-digit growth, North America mid-single-digit growth, and China also mid-single digits. China exceeded our expectations for the year, which we originally forecasted to be flat. Additionally, we continue to outperform the market, achieving approximately 800 basis points of outperformance in Q3, with year-to-date performance around 400 basis points. For 2023, we estimate around 88 to 89 million vehicles produced. Looking ahead to 2024, it's still early to make definitive predictions, but we expect low single-digit growth. Regarding the aftermarket, we project it will remain flat in Q4 year-over-year, as Q3 was a tough comparison to 2022. However, we anticipate growth based on customer feedback in Europe for 2024.

And our next question today will be coming from Damian Karas of UBS.

Congratulations on the deal. I have a broader question regarding market trends and challenges in the automotive sector, given the current disruptions such as the strikes in the U.S. that are affecting electric vehicle production timelines, as well as the price competition among manufacturers in China. Luca, how do you see these factors impacting your business? Additionally, concerning the MT margin, do you anticipate reaching the 19% threshold sooner or later?

Okay. So let me address the last part of the question first. The long-term target for Motion Technologies is 20%. This has not changed, and we have a clear path to get there. You can see our margin already up sequentially year-over-year to 17%. This will keep on improving. We will be able to achieve 18% in some time in 2024. Now going back to some of the dynamics that you shared, the strike. The strike was really immaterial for us. Probably what was the hit was a couple of million dollars in terms of revenue, so really immaterial. When you look at the EV production, sure, when you're listening, particularly in the North American market, you may see some slowing down in terms of the adoption and maybe investment from the OEMs. But this is really, I would say, a North American dynamic. The electrification is really going full speed when you look at Europe and North America. And by the way, Damian, we are really targeting all electrified vehicles. You're talking about AV, you're talking about hybrid, you're talking about IC, and we are winning across the board. So we are also very successful in defending all our platforms that we are in, in the internal combustion engine. That is on the EV. When it comes to China, I'm glad that you are mentioning China because China is a great story for us. When you look at our China business, $300 million, 80% of that is friction. We are winning. It's a great, good operation, good financially. Let me give you a couple of examples. When you're talking about financially, this is a plant that is only producing OE, no aftermarket. Still, it's the most profitable plant for friction in the world. When you look at operations, in Q3, we had roughly 40 process validations every month. This is when you run your PPA for the SOP for the start of production. When you do that, you have a lot of interruption. You have a lot of disruption in production. Despite all of that, the fantastic Chinese team delivered 99.93% of on-time delivery. And this is why the Chinese keep on awarding us the platforms. Today, at the end of September, they've already reached 90% of their full year award target. And we are winning with the winners. More than 60% of what we are producing is for the Chinese OEM. So it's a great story there, too.

Great. And I know I'm going to botch the name of this, but on the Svanehøj deal, any color you can give on EPS accretion? And if my math is correct, it looks like it may be slightly dilutive to IP margins. Just curious if there's any synergies with Habonim or the rest of the pumps business.

Thank you, Damian. We are very pleased to have finalized the acquisition of Svanehøj. It's an excellent business that allows us to enter the cryogenic technology sector, and we are quite enthusiastic about it. From an earnings per share perspective, Svanehøj will add positively in 2024. However, it's important to note that this business has a substantial long-term backlog, which will result in some intangible depreciation impacting us negatively in 2024. Overall, it's a robust business, and as Luca pointed out, it has a strong management team, which excites us further. Regarding margins, while it may slightly reduce our EBITDA margin, there are numerous growth opportunities. This business targets markets expected to grow over several years, and we anticipate that growth will be reflected in its performance. Additionally, the team has identified significant cost synergy opportunities. During our visit in August to their facilities, we found them to be in excellent condition, but we believe we can assist in making them even more efficient.

Our next question will be coming from Andrew Obin of Bank of America.

You have Sabrina Abrams on for Andrew Obin. Yes, the gross margin expansion in the quarter is really impressive. Some of your peers have mentioned that the price/cost spread is peaking in the third or fourth quarter, with expectations for the spread to narrow in the fourth quarter. I wanted to ask how sustainable these levels are and if you have any thoughts on whether it can hold.

Yes. Thank you, Sabrina. And I think you pointed out a really good stat. Our gross margin, indeed, has been on a path of increase year after year and also within the year 2023. We started the year with a little bit more than 33%. We're now at 34%, and we expect in Q4 to continuously improve on top of that. So what's really good about our operating margin improvement, both segment and EBIT, is that it's underpinned by a strong gross margin improvement as well. From a pricing standpoint, I think 2023 has been really strong from a pricing. I mean we're going to probably finish the year at ITT level with a little less than $100 million of pricing that we recovered. This is less than what we recovered in 2022, but keep in mind that it's obviously incremental. But I would say with commodity cost as a tailwind, we created an even bigger spread from a price/cost standpoint. And then on a quarterly standpoint, so thinking about Q3, Q4, maybe 2024, for sure, it's stepping down in the second half, and that's logical, right? So the third and fourth quarter will have less price benefits year-over-year, but on an absolute basis, this is a really large contributor to our margin expansion story in 2023 and in 2024. And then going forward, we expect IP and CCT to be price-takers as we differentiate even more on our value proposition.

Great. And then looking at the backlog commentary, it sort of suggests having somewhere around 35% backlog coverage next year based on '24 consensus versus maybe somewhere around 30% last year. Could you guys provide some color on that coverage relative to history? And any timing on when you expect backlog to return to historical levels? Or do you think we remain elevated going forward?

Yes. So the backlog has kept on growing. And as we mentioned, in IP, for instance, year-over-year, the backlog is up 11%, so more than double digits. And we expect to finish the year with also a backlog increasing versus 2022. So I think in IP, today, we are at a lot higher level of coverage than we have usually, which is very, very positive. The backlog story is also very good in CCT, where we're growing backlog. And since the beginning of the year, we added almost $30 million of backlog in CCT, obviously driven by aerospace and defense. The coverage there is much higher than it is typically for our aerospace components business. And also what's really good is that there's a lot of long-term backlog, so into '25 and '26.

If I can add a point there, Sabrina, is that, particularly when you look at IP, both the projects and the short-cycle backlog are up year-over-year versus the beginning of the year. At the end of the year, we will be up 16%, which will feed the growth in 2024. And last but not least is the profitability of the backlog. Now when we look at the profitability that the backlog has, it's roughly 200 basis points better than what it was at the beginning of the year.

Our next question will come from Vlad Bystricky of Citigroup.

Congratulations on a strong quarter and the recent deal announcement. I wanted to follow up on your comments regarding IP and the reacceleration of orders you've observed in early October. Could you share your thoughts on the potential for that segment to sustain positive organic growth over the next few quarters, especially as comparisons become significantly more challenging?

Sure. I think that all of that is linked to the performance and the continuous improvement that we're pushing through Lean and the reduction of lead times when it comes to the short cycle. So it's very important to continue to execute on the project side of the business. And because we are executing in a rigorous and good manner, this improves the customer loyalty and the customer giving us more opportunities and more win when we're bidding. So that is on one side. When you look at the projects, and the green project in particular, we are also using some differentiation from a technical point of view. If you look at our multiphase pumping technology with our Bornemann Pumps, this is something that enables us to win with Chevron, with some of our customers for their green projects, be it in carbon capture, be it in eliminating flaring. So all of those will continue to feed organic growth. And also, we are working with some customers where our market share is not so high to improve index, let's say, call it MT style.

Great. That's helpful color, Luca, and just really nice performance from IP. Maybe just shifting to CCT. The Connectors' weakness obviously isn't new on the channel destock. But can you just give us more color on whether the weakness you're seeing there is still really mainly channel destock-driven or whether you're seeing signs of incremental end market or sell-out weakening?

Okay. No, the weakness is mainly distribution and it's mainly European. It's linked. A little bit of a weakness probably in Asia Pacific on the Connectors side of the business, but this is very localized. As a matter of fact, when you look at our Connector business in North America has been very successful with great orders on the OEM, and those are nice long-term orders that will keep on feeding the revenue. But also with the SKU expansion that Emmanuel was talking in the prepared remarks, we were able also to have very good distribution orders when it comes to North America. And all of that has been able to offset some of the weakness that we had in Europe.

Yes. And so if we look at our Connectors orders, they were up 3% this quarter. And for the full year, we expect them to be roughly flat. And a lot of the strength is coming obviously from aerospace and defense that are way up in the double digits, and energy also. I think that it's true that we are seeing weakness in European distribution. But I think the strength of our portfolio and the commercial actions we're taking are able to nicely offset that weakness and still in Q3 come out with growth in terms of orders.

Our next question will be coming from Joe Ritchie of Goldman Sachs.

Can you provide the figures for how much the European Connectors business declined this quarter? This downturn may create a favorable comparison for you as we move into 2024.

This quarter, Connectors was down in the low double digits, and this is mostly driven by industrial. So we expect that probably in terms of the destocking, we're going to be nearing the end of that destocking. And then sometime in 2024, we'll see an improvement.

And Emmanuel, is that better than where you were last quarter on the connectors side, specifically in Europe for the industrial connectors side?

I'm not so sure because also you have to think about in Europe some seasonality in Q3 with August. So it may not be the case.

Okay. That's helpful. I have a longer-term question. The Industrial Process margins continue to surprise positively. I know you are focused on continuous improvement as you consider 2024 and potential margin expansion for this business. Can you discuss some of the strategies and your long-term perspective on this business?

Sure. When it comes to our intellectual property, we will share our new long-term target with you next year. As we evaluate this business, we recognize the need for investments, some of which we are currently making. We are focusing on enhancing our Sales and Operations Planning process to strengthen our long-term fundamentals. Additionally, we are making progress in closing the foundry, having already shut down one line. We expect to complete the closure by the first quarter of 2024, which will help us be more cost-competitive and reduce lead times. We are also leveraging our purchasing capabilities and supply chain efficiencies. Our ongoing value analysis and value engineering efforts across our product family are important as well. Furthermore, we are committed to continuously reducing our cost structure. These are the key strategies we have at our disposal.

Our next question will be coming from Jeff Hammond of KeyBanc Capital Markets. Our next question will be coming from Bryan Blair of Oppenheimer.

You've highlighted green energy transition momentum in IP seems to be quite strong. Bornemann wins some Habonim applications now Svanehøj, hopefully, I'm pronouncing that correctly. What is the current scale of that, I guess, aggregated revenue stream for green energy or energy transition for IP? And where should we expect that to go over time?

We are very excited about this because we have successfully created a new segment for IP that is independent of any considerations regarding energy prices, as it is primarily driven by regulation. Currently, our green projects for the year have exceeded $80 million. To put this into perspective, this figure was about $20 million in 2022, indicating substantial growth fueled by the technological advantages of our Bornemann product line, along with the contributions from Habonim in the hydrogen sector. We are pleased with this growth and recognize the market potential it presents.

I appreciate the detail. And just to level set on the auto aftermarket. You mentioned flattish Q4. So that stabilization is encouraging. Where do you expect, with that outlook, full year organic sales decline to shake out? And if we were to just kind of snap the line on destocking impact and have that lap year-on-year, what kind of growth would that imply for 2024?

So when you look at 2023, the total aftermarket will be probably down for the full year 6%; 5% would be the OES; and roughly 10% the independent aftermarket. That is for the full year of 2023. And I think that out of that base, we will start growing again in 2024. When it comes to exactly the growth for 2024 now, it's a little bit early to tell, I would say.

Our next question will be coming from Nathan Jones of Stifel.

I'll follow up on Bryan's question about the aftermarket. You mentioned a 5% decrease in OES and a 10% decrease in the independent aftermarket. Do you have an insight into how much of that is due to inventory destocking versus actual softer end-market demand?

It's mostly inventory destocking. The aftermarket is pretty stable in Europe. I think it's up 2% to 3%. And so it's mostly our specific customers, which had been ordering a lot last year, and that is working through that excess inventory they have.

When considering the categories for M&A, you are primarily looking at the flow and the Connectors business, with a small component in rail. The two acquisitions we made this year are Micro-Mode on the Connectors side and Svanehøj in flows.

I wouldn't say that the European region is a focus for us when it comes to mergers and acquisitions. We really prioritize high-quality companies that can differentiate themselves from the competition, which we found with Habonim. Similarly, we observed this with Svanehøj. Being European makes it easier for us to understand the business and connect with the people there, and we definitely take that into consideration. However, I wouldn’t classify Europe as a priority for our acquisition targets.

No, that's right.

I would have thought this Svanehøj business would be definitely more focused on growth and probably less focused on cost synergies. Can you talk about the cost synergies that are there and whether this is more of a don't break what's going on there already in terms of taking cost out and focus more on growth?

You're spot on, Nathan. And I think that when one of the things that we really liked about Svanehøj is the team, is Søren, Johnny, the management team very competent. They know their market. They know their customers very well. They've got a differentiated service, differentiated products, and leadership position. So it's a growth play more than cost synergies. So definitely, that's the case in industry in attractive markets. So it's cryogenic pumps, which is adding to our portfolio. And that probably would be another lever for growth for our goods, parts, and our pumps business traditionally over here, it's marine, where there's going to be investment in terms of green in the future. And while you talk about the energy transition and alternative fuels being ammonia, Svanehøj would be a great player in that. So this is really what we like, the growth opportunities and the team. And for sure, they know what they do. And we are very happy with that.

We expect that for at least the first four to five years, growth will be in the low double digits, and after that, it will move to high single digits.

Our last question will be coming from Jeff Hammond of KeyBanc Capital Markets.

So it doesn't sound like we can talk to Jeff. I think we can close the call.

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

Thank you.