ITT Inc. (ITT) Earnings Call Transcript & Summary

All right. Well -- thank you, everybody. We have ITT here to kick off the afternoon session with us. So very pleased to welcome back Emmanuel Caprais, the Chief Financial Officer; as well as Mark Macaluso, Vice President of Investor Relations. And before we get into the fireside conversation, I would actually turn it over to Mark, who's got some opening remarks Okay.

Thanks, Damian, and welcome, everybody. This is by far Emmanuel's favorite part of the presentation, a quick forward-looking statement. As you know, a lot of the statements we'll be making today contain forward-looking information, which is based on our best view of the world and businesses as we see them today. We encourage you to look at our website and other SEC filings and the latest list of risks and uncertainties that are on our website. So real quick, and then I'll turn it over to Emmanuel. Just a recap of Q1 earlier in May. Revenue -- really strong start to the year. Revenue up 10% organically. Operating margin 120 basis points, 150 basis points on a segment basis, including over 21% in our Industrial Process business, which Emmanuel will also speak about. Over 20% adjusted EPS growth. And as you can see, a substantial improvement in free cash flow, which as you'll hear about, has also continued into the second quarter. So with that, I'll turn it over to Emmanuel.

Thanks, Mark. So as Mark was saying, we had a really strong first quarter. And part of this first quarter, we did an acquisition, Micro-Mode. And so here, you can see Micro-Mode has been with us since the [Audio Gap]. So we've been -- and this has allowed us really to continue to grow our presence in a very good smart defense system market. We already are seeing and executing on some of the commercial synergies, that's what we were planning on. For instance, we are not buying any more -- we're not outsourcing any more RF connectors. This is Micro-Mode core product. We're buying everything from Micro-Mode, and that was a big opportunity for us. We're also accelerating the collaboration on commercial offers. And so as a result, we're getting much more -- a lot of opportunities with their customers as well as them getting opportunities with our customers. So really, really good synergies from a commercial standpoint. And so if you take a step back on our M&A activity, I would say that a funnel of opportunities is progressing really nicely. And so that gives us hope that we're going to continue to be aggressive from an M&A standpoint. Now moving on to Q2, maybe to give you a quick update. So IP continues to do well from the revenue -- so we expect IP to be above 20% in terms of revenue growth for the quarter versus prior year. And what's really interesting with a book-to-bill that's going to be largely above not only we're growing significantly the top line, but our orders are also growing faster than the top line. In MT, the Friction OE outperformance is back to historic levels. So we had said in Q1 that we were around 100 basis points -- a little more than 100 basis points of our performance. In Q2, sequentially, we're improving. And so we're back to the historic level 800 to 900 basis points of outperformance. And a lot of it is coming from China. And obviously, China in Q2 of last year had a bad quarter because of the lockdowns because of COVID. And so not only we're growing really fast in China, so we are outperforming the market. From a CCT standpoint, so we continue to see strong aero demand from an order standpoint. So we expect aero orders growth to be around -- to be high teens -- in the high-teen percentage. Supply chain is still a headwind. Aero supply chain is a mess, and it's impacting us. We're making progress, but getting good information from our customers, Tier 1s also -- OEMs, but also making sure that we get reliable performance from our suppliers is very difficult. Connectors from an order standpoint is still down versus prior year. Mid-single digits, more or less. And this is mainly driven by distribution destocking. We expect the distribution orders from connectors are going to be in the low double-digit area of decline versus prior year. In terms of MT, MT is doing well. Margins are expected to improve sequentially compared to the nearly 15% we had reported in Q1. So this is very positive. And this is despite aftermarket activity that is down. We expect aftermarket to be down in the low double digits in Q2 versus prior year. And for the full year, to be down around 5% to 8%. So that means that the second half of the year is going to -- we're still going to continue to see difficulties. IP from a margin standpoint continues to perform really well. And CCT, as we said, is probably going to be flat sequentially because of the decline in orders that are converting now in terms of revenue. From a pricing productivity standpoint, so we really see the impact of the pricing ramping up. Pricing is ramping up in MT, it's ramping up in IP. And then for CCT, we're going to start seeing some benefits in June also. The pricing is good. Volume is going to help us also. We have strong volume, as I mentioned, in IP, a little less so in CCT. But I've said it is going to drive segment level margin expansion. And so we expect our EPS to be above 20%, growing above 20% in Q2 compared to the prior year. And then finally, from a free cash flow standpoint, so free cash flow has been doing really well. You remember in the first quarter, we were up $60 million versus the prior year, free cash flow generation of roughly $30 million. The first 2 months of Q2, we've already generated more than what we generated for the entire Q1. So collection momentum is up. We're starting to see some progress on the inventory. So we're really happy with the free cash flow, especially because debt is so expensive. So we're happy with the progress we're making on cash. And from a capital deployment standpoint, we did Micro-Mode in May. We also were active in the market, and we did some repurchases so far in Q2. And so -- and then as I mentioned, the funnel of M&A is progressing. So I would say, good performance, strong performance in Q2. And so probably better than what we were expecting. For the rest of the year, we still have uncertainties that we're dealing with. But I would say Q2 is very, very encouraging.

Great. Appreciate all that color. So I guess, just -- I mean, 2Q trending better than your prior expectations. No real update in the guidance, but is it fair to assume that we should probably -- and you've done some buyback, you also mentioned. Some -- yes. Should we probably be seeing at least the low end of that EPS range coming up?

So one thing that we said and it remains true is that we feel incrementally confident in us achieving from the midpoint to the higher end of our guidance than really the probability for us to hit the low end is actually much, much lower. So I would say it's too early to say that we're doing the guidance change. We have June that we have to close and everything. But I would say that, so far, Q2 is very positive, better than what we were expecting. And then so it's all about what going to happen in Q3 and Q4. I mentioned the aftermarket for friction is still expected to be weak. Connector distribution are expected to be weak. So we'll give an update early August and in the [indiscernible].

Okay. And your book-to-bill comment, greater than 1, were you referring to the first quarter or sort of you're seeing that continuation mark to market as well.

No. No. No, in the second quarter, we expect book-to-bill superior to 1 in IP, for sure. Which for CCT, not as much, obviously, because we're going through the backlog, converting the backlog. And for MTs not as well.

Got it. And then in terms of -- versus your baseline expectations a couple of months ago, you mentioned trending a little bit better. Could you just highlight on which areas you are acting that?

Sure. Sure. So definitely, in IP, things are trending much better from an order standpoint. And it's true both on projects. which are going to take a little longer for us to convert into revenue, but also on aftermarket, spare parts, service and even our valve business is doing really, really well, including the Habonim acquisition. So from an IP standpoint, I think this is -- we were expecting a little bit of a weak short cycle. We've seen that a little bit on the baseline point, but the rest of the short cycle continues to be strong, very strong. In MT, I would say we're seeing an improvement a little bit on OE. So that's good, but the aftermarket is actually worse than what we were originally anticipating. And actually, Q2 is going to be weaker than Q1 from a year-over-year compare standpoint. So that -- those things. I would say that in terms of productivity, IP continues to fire on all cylinders. There's a lot of investment that still needs to happen. So we don't want to bank all that incremental profit yet because we need to make it sustainable. so we got to invest. But I would say, certainly from a productivity standpoint, IP is doing extremely well. Motion Technologies, both productivity and pricing is performing well. A lot more to go after, but have no doubt in this team, they're able to do incredible things. And CCT is still a developing story. We are struggling from a connector standpoint and market demand. Industrial distribution is very, very weak. But we got to go after that. And in aerospace, I would say what is not as positive as what we were expecting in the supply chain, we were hoping the supply chain issues were improving. And in fact, they're not at all improving. So we're battling as much as we can. But the aerospace -- the conundrum aerospace is that you have really strong demand and you have a supply base that is very weak.

Great. Before we dig in a little bit at the segment level, maybe just kind of taking a step back, thinking about the overall portfolio. I'm sure you, Luca, and Mark, are probably tired of answering this question, but a common investor question that we do get is why keep all of these assets under one hood when you think about the diversification that ITT has in the business. Have you considered separation scenarios? Or what would it take for you to ultimately come to thinking about such a kind of drastic transformative move?

Right. So I think it's a logical question. This business, if you look at them, one is doing pumps for industrial markets, chemical, oil and gas, one is doing auto and broadly transportation for completely different markets and then you have aerospace and industrial obviously. So there's very little overlap. The overlap is not in the end market, it's not on the product. The overlap is on the management operating system and how we're able to deploy what we started calling 3 or 4 years ago, the MT Motion Technology playbook into the other businesses. And you see it in IPI is a prime example, right? You have a business that was a -- that had been underperforming for a really long time. In 2017, our CFO of Industrial Process. And remember closing the year at around a 7% segment margin. Today, we at 20%. And so this is the example of us dedicating attention, implementing the operating system around footprint, around productivity, around pricing, around innovation for new products. That has led us to this 20% -- 20%-plus level of margin. For CCT, CCT also has been recovering in terms of margin. Connector is now at a really good level of margins on par with bigger peers. And aerospace, in my mind, still needs a lot of work, productivity, value-based pricing. In order to grow margins that are pretty good right now, but to grow them to a similar level than what we see in like top aerospace players. And so to me, that opportunity that we have in front of us, together with the recovery of margins in MT is why ITT is still together. We're reviewing -- to answer the second part of your question, we're reviewing our portfolio on a regular basis. we have sessions with the Board. But today, that opportunity is bigger than any of the other opportunities. And so that's why we're -- that's where all the businesses are all together.

Makes sense. A common theme and topic that's discussed is reshoring, onshoring. So would love to hear your thoughts on what -- how you think about that direct impact on your business? Or if not, at least indirect, how you might manage your business based some of these trends?

Yes. So reshoring has been very interesting because we benefited early on from that reshoring. So we won orders with semiconductor projects in the U.S. So we want pumps projects there. We won projects still with the pumps on the battery recycling. We're winning really a lot of -- and you could see our project order performance. We're winning a lot of projects. We're gaining share in projects. It's difficult to measure, but I would say that not only we're winning share, but also the projects that we're bringing home are also more profitable. So the margin in our backlog is at the highest level than it's ever been. So very, very good momentum here. And in addition to this, we're winning on the green side. So there are projects about decarbonization. There are projects about reducing the flaring, carbon capture we won those projects. And those are really large projects for us. They are more than $20 million each. And with the level of profitability that is very good. And so -- I'll give you a stat. So so far, so if you may remember, in 2021, we had more or less $20 million of green projects order ones. In 2022, but that number went to $40 million, so a 50% increase. And then -- I'm sorry, to $30 million, a 50% increase. And then that number quarter-to-date is already $40 million. So we're growing. Obviously, part of it is the market, but I think that we're gaining share whereas it's reshoring or near-shoring as well as on the green energy side.

Got it. And just for clarity, were you suggesting that kind of, in general, your profitability in North America is greater than it is in Europe and Asia? Or are you just saying just sort of some of the opportunities that are coming here onshore those happen to be kind of more profitable?

Yes. I would say, in general, project activity is as the profitability of the project activity has been increased. And some of it is because there's a disconnect between demand and capacity that is available. So prices are going up for suppliers like us. Another aspect is that we've very on purpose -- purposefully, we've been really paying attention to the level of prices we take projects at and really taking advantage of the differentiation that we have in terms of committing to a quality process for the development of the project and delivering projects on time. And so that allows us to really have a different price level compared to the competition.

Got it. And then you touched on a little bit earlier that you guys have done some buybacks since the first quarter I don't know if you're able to divulge how much at this point, but if you can, that would be great.

It's pretty similar to what we did in Q1. In Q1, we did do around $30 million.

Got it. Got it. This is never an easy question to answer, but if you were to just put a probability on some of these deals that you have in the pipeline here, what do you think your assessment is of getting something done before the end of the year?

So I would say that we are really driving hard M&A. The problem with M&A is that you're only controlling probably something like 50% of the deal. So it doesn't only depend on you. And so while we're very focused on M&A because for us, this is really -- after organic investments after CapEx, this is the most important thing that we can do for ITT's future. We don't want to go after bad deals that are going to stay with us for years to come. And that decision is going to haunt us and the next generation. So we don't want to do that. So we're very focused on doing good deals but accelerating all this. If we're not able to do that because for whatever reason, because we're not able to convince the seller, then we're still very committed to deploying very effectively our capital. And so we'll do more buybacks.

Yes. No, I appreciate that. No bad deal is a good deal.

Yes.

All right, maybe we can jump to MT and getting under the hood there a little bit. You talked about kind of like this inventory correction in the aftermarket taking place in Europe. How is that progressing?

So we -- the feedback that we hear from our customer, which is Continental, is that it's still going to be, for the full year, a decline from a volume standpoint compared to the prior year. We may have some opportunities to compensate some downward pricing because commodities -- we still have adjustments for commodities. But volume is going to be down. And the reason for this is because the inventory destocking at the distributor is progressing, but it's progressing very slowly. And we assume that this is on purpose because if demand was to take off, they would still has something that they could sell immediately, aftermarket is all about the short term. So if you either have the product on your shelf or you don't. And if you don't, you're losing the business. And so we assume this is why it's taking a while for them to drive down inventory. And so this is a big change compared to what we're expecting originally entering into the year entering into the year, we were expecting that aftermarket would be a net contributor to our top line growth, and it's not going to be -- it's going to probably be mid-single digit down from a volume standpoint. So -- but on the other hand, Continental, our customer -- main customer for aftermarket, is telling us that 2024 will be better. We don't -- it's not exactly -- we can't really bet on that, but at least they're not telling us that it's going to be -- that it's going to continue like this.

Got it. Okay. You sounded pretty optimistic earlier talking about capturing some price in MT as the year progresses. So you're pretty confident in that even though it seems like some of the auto manufacturers are facing some pressures now?

No, that's for sure. We're capturing incremental price in '23 compared to '22. We're not exactly where we needed -- we want to be but we're making good progress. We're closing with very key customers on a regular basis. And so we're rolling out our plan. And so this is very positive. We're going on a lot of different opportunities. Obviously, cost inflation compensation is really important for us, but that's not the only thing. The team is working also on how to get price increases on products or businesses that are performing not as good as the rest of the portfolio. So we're going after a lot of different ways because we know that -- with all the humility that we need to have, we know that we play a really large part in the success of our customers. And so -- because of our on-time delivery of 99%, because of our quality of less than 1 ppm. And so it's only fair that we get compensated for the differentiated performance that we provide. And so that's why we don't hesitate to ask for whats ours because one thing is sure, they're not going to give it to us if you don't ask.

Right. Right. I mean, do you think anything is kind of structurally changing? I mean, because if you went back -- or this is just kind of like a near-term opportunity if you're able to capture maybe as a beneficiary of some of the supply chain issues that happened. Because correct me if I'm wrong, but it's been historically, so you give price back every year and you offset that with productivity. I mean, is that the model we go back to next year?

Well, we're certainly trying to change the paradigm. We're certainly trying to, on the back of all the differentiation that we have. I think that given the contracts that we've signed, we're still going to have this indexation on commodities. So that means that when commodities are going to go down, our prices are going to go down. But I'm not worried about this because this was necessary -- given the period we entered, this was necessarily to protect to protect our financials. I will say that we're driving productivity. We're driving the pricing as much as we can. And as I was mentioning, we're also driving pricing on some of the platforms where the margin is not as rich as the rest of the portfolio. So I would expect us to be able to do everything that we can not to go back to where we were in the past with giving eroding price every year, year-over-year. But the level of performance has to continue, and certainly, productivity has to continue. For the moment, I think we are very well positioned.

Yes. So I mean, historically, MT had very robust margins, right, 18%, 20%. So you're still a decent bit below that, making some progress. But what's the recipe to get back?

Yes. So we expect to be around that 18% margin in 2024. The recipe to get there lies with a lot of different things. So productivity is key, and productivity has always been key for Motion Technologies. It's key for existing volumes, but all the future growth that we're having because this is a business that is used to gaining share across the board. So productivity, volume is going to drive a lot of improvement. Pricing also, pricing recovery, not only on the existing platform, but also on the new platform. And on the new platform, what's really interesting is that as we had to suffer on the existing platform because we couldn't get 100% compensation. On the new platform, we got 100% compensation. So as soon as we turn over our existing product portfolio, we're going to be able to benefit with new businesses entering at higher margin than the existing business. And so the combination of this in friction with also the recovery in the Axtone and the Wolverine businesses is going to -- gives us really confidence in line of sight for that 18% level margin in 2024.

Understood.

And you know us. If we can do it sooner, we'll do it sooner. But for the moment, we're comfortable with 2024.

And I trust that you will. So you've noted a lot more EV platforms, right? I mean, nothing new, but I think 40 new ones year-to-date was what you said in the first quarter. What kind of win rate are you seeing on new platforms?

So we're definitely seeing a win rate that is much higher than our current market share. In fact, our market share in EV is already higher than our overall market share. So -- and -- so EV for us is going to be a great compounder of growth. So if you think about it, you have an overall market that today is around 82 million, 83 million cars produced globally every year. That number prior -- before the pandemic was around 92 million, 93 million. So there's a significant growth around 10% that needs to -- and then that will happen over time. We won't go from one day to the other, but it will happen. The EV segment within that automotive production is growing also faster, right, than the conventional engine side. Our win rate because of the differentiation that we provide, we provide brake pads that don't make any noise when they brake. We provide brake pads that perform whether they're cold or they're hot. We provide break pads that are also able to handle the incremental mass that comes with an electric vehicle. All this has a value for our customer. And so because when you brake if your brake makes noise, that's a really bad perception that you create with your customers. You don't want that to happen. So because we -- our brake pads are not relatively to the entire vehicle and they don't represent a really large budget item, customers are willing to invest. And then on top of that, you see that the price of at least for the front brake pads so the ones that are used to stop the front wheels, the price of those brake pads is also higher than it is for conventional vehicles, an ICE type of vehicle. And the reason for this is because the brake pad is bigger. Brake pad is bigger because the vehicle is heavier, and then you have more mass that you need to stop. And so on top of all this, you have a higher price on the brake pad, which is really going to drive top line growth. Profitability on EV is pretty similar, a little bit maybe better, but pretty similar to what we have on the ICE. So all in all, EV is going to be very good for friction and for ITT.

Got it. Got it. Okay. Yes, I mean -- just thinking about the outperformance in EV versus where you are -- I mean, you've been gaining share in ICE year-in-year out for over a decade. But -- just curious if it's because the manufacturers of EVs, maybe they value these qualities more than those in ICE or is it just in the conventional space, it's just -- it's -- there's maybe switching costs are just reasons why -- maybe if it was -- we went back in time, you'd be capturing 40%, 50% of that share of the market, but it's just -- it's a slower game. I mean, any thoughts on that?

So we see definitely a strong capture rate, super strong capture rate in the EV market. And I think it's due to the differentiation. In EVs -- I mean, when you drive an EV, it's completely silent. So you cannot afford for your brake to make noise. You cannot afford for your brake to also create vibration because there's no engine that's running that creates -- creating vibration in the car. So all this needs to be perfect. And in fact, we're seeing it with our Chinese customers. So Chinese -- so you know that the Chinese OEMs are much ahead in terms of EV than anybody else. And in fact, there was a comment from the Ford CEO, who was saying that the competition is not really GM, it's all the Chinese OEMs. And so we're seeing that, and we're seeing them, those Chinese OEMs, betting on ITT. Actually, in China, more than 60% of our sales are to Chinese OEMs. So we're actually selling more to Chinese OEM than to Western OEM. And so as they're expanding and as they are deploying their plans to export outside of China, quality perception of quality is going to be even more, right, because you have to overcome a perception gap in terms of the product produced in China with brands that they don't know. It's not the BMW, it's not the Mercedes, it's not the GMs. Those are brands that they don't know. So it's very important for those guys to be able to project that image quality, a measure of performance that the rest of the OEMs have. And so they trust us because we're able to bring that to the market. So as those companies to Chinese OEM are going to expand globally, we'll be there to help them through their expansion.

Yes, I appreciate that. All right. Well, let's put the brakes on brake pads for now and talk a little bit about IP, CCT. So you've captured a lot of price in that business and you've talked about continuing to have some opportunity there. Is it kind of right to think that some of this inherently will fade at some point when inflation starts to normalize? Or do you think that this is kind of sustainable and is this value-based model that you're deploying now?

So for IP, we certainly don't see any sign of that. For IP, as I mentioned, our orders are growing aftermarket valves, service, everything is growing and that after several price increases that we've had. So for the moment, we don't see any trend of price gains receding for IP. And that's really good because I think that as we continue to improve and widen the gap -- the performance gap with our peers, I think it will give us even more reason or more justification in front of our customers to have better prices than the competition. In CCT, I would say the pricing is nowhere near needs to be. We're still working hard to get pricing from the OEMs, from the aero OEMS mainly, so we're making progress. The problem with CCT is that we have been bound to LTA, its a long-term agreement. And a lot of those long-term agreements have either in the best cases a very strict formula to apply inflation or no inflation adjustment clause. And so we are fighting that as much as we can. But the reality is that we can't really do anything if a customer doesn't want to increase prices. And so we're working with them as much as we can. But -- there will be a number of LTAs that are going to expire in '24 in '25. And at that time, we'll be able to pass even more increase. In the meantime, we're going after everything that we can the secret in CCT that we are sole-sourced on a number of applications. And so without gauging our customers because it's not what we want to do. But they have to recognize the value that we provide. And to your point on switching costs earlier for MT, switching costs in that environment -- in that market are very high. And so we provide quality, we provide performance in those customers, and they have to recognize it.

Yes. Got it. I guess thinking specifically about IP, and you've had some pretty outstanding margin expansion. We have seen some other peers out there also capture some additional margin and then others not so much. I think certainly, you guys have been kind of at the forefront of driving a lot of that. But I'm just curious if you think that in general, the industry, right -- I mean IP is a very fragmented kind of market globally. Has there been sort of maybe a change, a little bit more discipline, anything happening kind of in the industry that's beyond what obviously, you're doing like [indiscernible]?

So we're not seeing a lot more discipline in the industry. I think a lot of the progress in IP, and I would say not all the progress, is due to our execution on our own performance. You mentioned the competition. Main competition has not seen [indiscernible] margin. In the meantime, as I was mentioning, we went from around 7% to now more than 20%. This is hard work. It is not the market that's carrying us. These are choices that we made on purpose to drive margin performance. We decided to reduce costs. We decided to reduce our footprint. We decided to invest in productivity. We decided to invest in lean manufacturing. We decided to track on-time delivery, quality and demand from our teams improvement. And all this is adding up to a margin expense. We decided to pick the projects where we were the most competent and invest in the way we manage projects to be successful. And we decided also in any projects -- a lot of projects are appealing, not to go below a certain threshold from a profitability standpoint. But in my mind, these are very deliberate actions that have nothing to do with the onever market. The market is growing, that's great. But if we're disorganized, we wouldn't be able to take advantage of this. We were just -- we would grow our delinquent backlog, and that's not what we do. We are providing better service. We're providing -- we're supporting the growth of our customers, and that's why we're rewarded, I think.

Makes sense. Maybe just thinking about the project funnel for IP. Could you give us a little bit of an update on what that looks like? I mean, which end market verticals, sort of the composition, right? I mean, because you go through these IP cycles, do you have like a high quantity of projects in the funnel or smaller quantity, larger size? Maybe just walk us through what you're seeing? And at this point, how much visibility do you have to 2024?

Yes. So the funnel, despite the orders that are growing a lot in IP, the funnel is also growing a lot. So year-over-year, the funnel was a little less -- was up a little less than 40%, 40%. And sequentially, the funnel was up a little less than 10%. And I'm talking about the numbers as of May, right? So we're seeing a lot of projects. We're seeing large projects like the ones we won for decarbonization or carbon capture and anti-flaring projects. We're seeing also some smaller projects in the $5 million to $10 million. And so for us, if we can win them at good margins, we'll go after them. Keep in mind also our internal capacity, making sure that we don't get ahead of us is really, really important for us. So -- because this is sustainable progress, right? We were not interested in driving huge numbers and then a couple of quarters later unable we are really focused on sustaining the momentum at IP. And so in this business, if you fail, customers remember for a really long time. So we don't want to give an -- anybody an opportunity to steal market share from us. We want to steal market share from them. And that's what we're seeing in projects.

Great. And then thinking about some of these green energy, energy transition areas of the business that you are playing and competing in, how should we think about that from a competitive standpoint? Because if you think about kind of like the old oil and gas kind of boom and bust cycles where you guys were more competitive and bidding on those projects. It could get very competitive. Now that market has changed a little bit, there's less plan there. But it seems like everybody kind of wants to go where the growth is. So how are you viewing the competitive environment and kind of energy transition pockets?

So I think the -- on the green -- the energy transition segment, we're going to see significant inflows of capital for a really long time. And so today, for these projects and for the rest of the projects, there's a disconnect between the installed capacity at suppliers and what the demand is. And so I think -- so we're very disciplined. So we're certainly trying to invest where it makes sense. So for instance, in one of our German plants, we expanded our test run to increase the power or the test rig power to be able to produce and sell bigger pumps. So that's an investment that makes sense. We're not going to invest in production capacity without having clear line of sight that we see that we see a significant growth out there. So we're making some investments. We're very mindful. I would say for the moment, the project economics are very positive. It is possible that they will tighten a little bit along the way. But I think we're very committed to creating value even to those projects. Projects used to be the type of business that was creating negative mix for IP from a margin standpoint. The difference now between our short cycle, let's say, baseline pumps and our projects is not as big. And so we continue to expect that the margin will continue to age.

Got it. Well, unfortunately, the short clock went off here. I must have to go through a dozen more questions that I'd like to ask you, but I guess we'll have to wait until next time. So we really appreciate all your insight, Emmanuel, Mark, and thanks, everybody, again, for joining.

Thank you, everyone.