As we mentioned, this is a business with end markets that are in growth for multi years. And so we expect that to be reflected in the growth rate of this business in the years to come. And then the team has identified significant opportunities from a cost synergy standpoint. We visited in August their facilities. They’re in great shape, but we think that we can help them become even more efficient.
Operator: Our next question will be coming from Andrew Obin of Bank of America.
Sabrina Abrams: You have Sabrina Abrams on for Andrew Obin. Yes, the gross margin expansion in the quarter is really impressive. And I think some of your peer — as is the price/cost spread. And I think some of your peers have been talking about price/cost peaking here in 3Q or in 4Q and the spread narrowing in 4Q. Just wanted to ask, like how sustainable are these levels? And any thoughts on — around whether it can hold?
Emmanuel Caprais: 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 — it’s going to step 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.
Sabrina Abrams: 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?
Emmanuel Caprais: 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 it’s — there’s a lot of long-term backlog, so into ’25 and ’26.
Luca Savi: 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.
Operator: Our next question will come from Vlad Bystricky of Citigroup.
Vlad Bystricky: Congratulations on a nice quarter and the deal announcement there. So maybe just following up on that commentary around IP and the orders sort of reacceleration you’re seeing into early October — or into October here. Can you talk about how you’re thinking about the potential for that business to continue maintaining positive organic growth overall over the next couple of quarters as comps get notably more difficult?
Luca Savi: 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.
Vlad Bystricky: 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?
Luca Savi: 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 have been able to offset some of the weakness that we had in Europe.
