ITT Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Welcome to ITT's First Quarter 2016 Earnings Conference Call. Today is Thursday, March (sic) [May] (00

[Melissa Trombetta:]

Thank you, Kristine. I'd like to highlight that this morning's presentation, press release, and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. During the course of this call, we will make forward-looking statements as defined in the Private Securities Litigations Reform Act of 1995. No forward-looking statements can be guaranteed and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future events, or otherwise. Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. Now let's turn to slide number three, where Denise will discuss our results.

[Denise L. Ramos:]

Good morning, everyone. Thank you for joining us to discuss our financial results and strategic progress for the first quarter of 2016. When I look back over the past few years, we have consistently emphasized the importance of having a diversified portfolio, one that is balanced across key end markets, geographies, and business cycles. While we have certainly realized the benefits of our diversity during that time, it's hard to recall a quarter when we saw the beneficial impacts quite so clearly as Q1. You'll see as we go through our results that the anticipated weakness in oil and gas and mining project activity, combined with extended delays in maintenance spending, negatively impacted our Industrial Process segment performance. However, despite these headwinds, we were able to report total revenue growth due to the organic strength at Motion Technologies combined with the benefits from our recent transportation acquisition. In addition, despite a larger-than-anticipated foreign exchange headwind, our adjusted EPS exceeded our internal expectations as MT delivered exceptional productivity on higher volumes and we realized the benefits of improved corporate efficiency. So once again, I am pleased with the way teams all across ITT collectively worked to deliver these results in difficult market conditions. So with that overview, let me share some additional perspectives on our first quarter results. Total revenue was up 3.5% and organic revenue, which excludes the impact of our 2015 Hartzell and Wolverine acquisitions and the $14 million impact from foreign exchange, was down 2.5%. Motion Technologies once again delivered an exceptional top line with 14% organic growth. This growth was not only driven by an increase in global auto production rates, but more significantly, it was driven by extensive share gains in all of our key OEM automotive geographies. In addition, MT delivered an 8% increase in the KONI shock absorber business, with all core markets contributing to the growth. These results were offset by declines in our organic IP revenue, which was down 14%, reflecting weak oil and gas and mining market dynamics and delayed maintenance activities. Our ICS business was also negatively impacted by oil and gas weakness, along with soft general industrial activity and anticipated declines in non-core legacy connectors. From a margin perspective, we delivered adjusted segment operating margins of 13.3%, which represented an 80 basis point decline versus the prior year, excluding foreign exchange but including funding of incremental strategic investments to drive long-term growth. Our exceptional execution at Motion Technologies and the benefits from restructuring actions at IP and ICS partially offset the impacts of lower organic volume, unfavorable mix, and pricing. Despite the macro environment, we collectively delivered solid adjusted EPS of $0.59 per share, which was up 5% versus last year, excluding a significant unfavorable foreign exchange impact of $0.09 that was primarily driven by transaction impacts at IP that exceeded our expectations. Our adjusted EPS also reflected a lower share count, a lower effective tax rate, and improved corporate functional efficiencies. So moving on to guidance. We are maintaining our total and organic revenue and adjusted EPS guidance ranges for the full year 2016. However, there are a number of moving parts here that I would like to walk you through at a high level. From a revenue perspective, we have lowered our 2016 expectation for short-cycle baseline pumps and aftermarket activity, primarily in the mining and oil and gas markets at IP. In addition, we now expect incrementally stronger growth in our transportation businesses. From an adjusted EPS perspective, we now expect that the impact of lower volumes and margin pressures at IP will be offset by the benefit from improved transportation volumes and productivity combined with incremental restructuring actions at IP. We will also benefit from a lower full year effective tax rate and continued favorable corporate costs. So now on slide four, let me share with you some of our strategic highlights from the quarter. Starting with optimizing execution. In this difficult environment, we are increasing our operational intensity on advancing our Lean transformation. An example of the sustainable operational improvements we are putting in place is the world-class manufacturing excellence program at Motion Technologies, which is really the next phase in their Lean journey. While the program was embarked upon only about a year ago, the impact has been impressive in a short period of time. These focused improvements are driving operational progress in areas such as safety, quality, and equipment uptime. And the financial benefit of these improvements can be seen in MT's adjusted segment operating margins of 20.7%, or 22.5% excluding the impact of the Wolverine acquisition and foreign exchange. This is an increase of 110 basis points over the prior year. Looking at our acquisition performance, I am happy to report that both of the acquisitions we made in 2015, Hartzell and Wolverine, are on track to deliver on our integration milestones as well as our financial targets, including solid sales growth and margin expansion. Both businesses will be accretive to our 2016 results and both provide meaningful long-term growth opportunities in our core transportation markets. Lastly, we are aggressively executing a structural reset at Industrial Process to better position our businesses for long-term effectiveness, and I will address these actions in greater detail in a minute. With our market expansion activities, during the quarter, transportation, our largest segment, was up 30%, including the benefit from Hartzell and Wolverine. Motion Technologies continued their track record of significantly outpacing the global automotive friction market and grew its friction OEM business 27% compared to the prior year. KONI was also a solid contributor, posting an 8% increase driven by new products and market growth across all key transportation end markets. As Motion Technologies continues to build on its world-class execution capabilities, its material science expertise, and its ability to rapidly develop new technologies to meet our customers' evolving demands, the team continues to win strategic long-term platforms that will help fuel our future growth. I am proud to announce that in Q1, we were able to secure several new major long-term platform wins for the North American market with two of the Detroit 3 OEMs. As we further expand our global reach, these wins support the long-term growth potential of this business in North America. These wins also further validate that for the next several years, our automotive growth story in North America will be driven by share gains on new platform wins and not increasing rates of production. So I would like to congratulate the Motion Technologies team for these transformational strategic wins. They have been a long time in the making and they are well worth the wait. I'd also like to highlight that during the quarter we produced three organic transportation order records. We had record automotive platform wins at Motion Technologies. We had record aerospace and defense orders at Control Technologies, and we had record KONI orders at Motion Technologies. And now for our last focus area

[Thomas M. Scalera:]

Thanks, Denise. Now let's turn to slide six for a detailed review of our first quarter results. Total revenue increased 3.5%, while organic revenue declined 2.5% after adjusting for foreign exchange and the $49 million benefit from the Wolverine and Hartzell acquisitions. In the quarter, we delivered strong growth in our transportation end markets, which were up 11% organically. These gains were offset by a 31% decline in our global oil and gas and mining markets. Motion Technologies was the biggest contributor to our transportation strength as global automotive friction increased 16% organically. This impressive year-over-year improvement partially reflects the automotive market growth, but was actually driven by double-digit OEM market share gains in each of our key geographies of Europe, China, and North America. Moving on to oil and gas, the market continues to be significantly impacted by lower capital spending levels and deferred maintenance activity that impacted both our IP and ICS revenues. In addition, we experienced declines in mining across all major geographies due to weak market dynamics and difficult prior year comparisons. Shifting to orders. While organic orders decreased 3.5%, we did deliver record orders in every one of our transportation markets

[Denise L. Ramos:]

Thanks, Tom. As you noted in the press release and in the 8-K we filed this morning, later this month, we are planning to execute a reorganization that will create a new holding company as our publicly traded parent entity, which will be called ITT Inc. At the same time, we will also be implementing an internal reorganization that will separate operating assets from certain legacy liabilities and related insurance assets. This reorganization is a logical next step in our continued strategy to effectively manage our legacy liabilities and associated insurance assets. This reorganization will also facilitate future growth opportunities by providing greater flexibility in how we think about structuring future M&A transactions. And an additional benefit of the reorganization is the streamlining of the Company's legal entity structure and the associated administrative efficiencies. An important thing to note about this reorganization is that it will not impact our operations, our ability to serve our customers, or our ability to effectively deploy capital in the form of organic investments, M&A, share repurchases, or dividends. In addition, the new parent company, ITT Inc., will have the same consolidated assets and liabilities as ITT Corporation had just prior to the reorganization effective date. As a result, our consolidated financial position and cash flows will remain exactly the same as they were immediately prior to the reorganization. And lastly, this internal reorganization will not impact our capital structure. We expect to formally complete the reorganization in mid-May. From a shareowner perspective, no action is needed, as all outstanding shares will automatically convert into shares of ITT Inc. on a one-to-one basis. And our ITT ticker symbol will remain the same. So with that, let me now turn it over to start the Q&A.

[Thomas M. Scalera:]

Kristine, we are ready for the Q&A.

[Operator:]

Yes, sir. Our first question comes from the line of Brian Konigsberg.

[Thomas M. Scalera:]

Good morning, Brian.

[Brian Konigsberg:]

Hey everybody.

[Denise L. Ramos:]

Hi, Brian.

[Brian Konigsberg:]

Good morning. I just wanted to maybe first touch on Industrial Process aftermarket. The assumption is that does start to improve from here. Are you seeing some of that early indication throughout April and May already or are there other indicators that are giving you confidence that it does in fact get better?

[Denise L. Ramos:]

You know, the interesting thing with the aftermarket is when you look at Q4 to Q1, we improved the aftermarket, I think it was about 3 percentage points between Q4 and Q1. So that gives us a better jumping-off point and a good start to the year associated with that. And then with the aftermarket and the growth that we're expecting, we've introduced some new technology in the marketplace. We have our i-ALERT2 which is a monitoring system that goes on our pumps. We think that that will give us some benefits in the back half of the year. And then also we've done some other things with 3D printing in our ProCast operation that we think is going to give us some benefits in the back half of the year. And these technology innovations that we have was something that we've started and we've had in place for the last year or so. So we think that's going to help us. And we've also been working with our distribution channels to be able to run more volumes through the aftermarket associated with that. So we feel good about the aftermarket and what the projections are that we have for that based on what we saw from Q4 to Q1 and what we project for the back half of the year.

[Thomas M. Scalera:]

And Brian, I would say we have pretty modest expectations at this stage, recognizing the market dynamics. So our first half expectation versus the prior year is still down 10% in the aftermarket. So we're expecting to see sequential improvement from Q4 to Q1, Q1 to Q2, but our first half expectations are still reflecting a decline versus the prior year. And even as we go into the second half of the year compared to the prior year, we're still expecting to be pretty much flat to the second half of last year. So all in, I think we've grounded these assumptions, but it is an important market for us to see some sequential improvements from where we're starting at this point.

[Brian Konigsberg:]

Got it. Thanks for the detail. And maybe just secondly, just moving over to – just overall for the IP segment on pricing. If I recall from last quarter, the assumptions within that segment were fairly benign, especially when you compared it to some of the commentary of peers. It sounds like maybe that has become incrementally worse. Can you give us an update on kind of what the new outlook is for the year on the pricing front?

[Denise L. Ramos:]

You know, we haven't – we've changed it maybe a little bit, but not significantly from where we were at the time of guidance in February. Where we've seen the biggest impact is on the project side of the business and margins associated with that. But in terms of the baseline and the aftermarket, it's held up, it's relatively consistent with what we saw in 2015.

[Brian Konigsberg:]

Got it. Thank you.

[Operator:]

Our next question comes from Matt Summerville with Alembic Global Advisors.

[Matt J. Summerville:]

Hey, good morning.

[Denise L. Ramos:]

Hi, Matt.

[Matt J. Summerville:]

Couple of things I just want to touch on. Given the OEM visibility that you have in the motion tech business, can you sort of recalibrate that in terms of what we should expect on a full-year basis from both an OEM growth perspective and how you are thinking about aftermarket? You touched on it a little bit in your prepared remarks, but maybe a little more granularity would be helpful.

[Thomas M. Scalera:]

Yeah. Sure, Matt. Our expectations for OEM growth, we have taken those up from where we started the year. And overall, Motion Technologies, organically, we are seeing an increase from what we planned on coming into the year. So they're going to be up a point or two organically in total, and the bulk of that strength is really coming from the OEM side of the business, continuing to take share and do that on a global basis. So I would say the biggest driver is really OEM, where we're seeing the uplift from what we saw coming into the year. The aftermarket, I'd say, is reasonably consistent with what we thought. Certainly if there are more opportunities to capture in the aftermarket, we'll go after those. But our increased view of the motion tech organic revenue is really based on OEM.

[Matt J. Summerville:]

And then I guess my follow-up more has to do with kind of how you are ring sensing, if I call it that, your legacy liabilities. And what the next one, two, three steps might be in terms of how that gets addressed. What is the strategy that sort of underpins the move you're making from a corporate structure standpoint? Thank you.

[Denise L. Ramos:]

So in terms of the structure that we're putting into place, I think it's important to note that we've been working on this for a while now. And this is, in our minds, just a logical next step to all the work that we've been doing and how we effectively and efficiently manage these legacy liabilities. So setting up this holding company allows us to separate the operating assets from our legacy liabilities. When you look at managing operating assets versus managing legacy liabilities, you manage them differently. And putting this structure in place and allowing us to focus and having a team of people focused on just managing these liabilities we believe is going to benefit us into the future because you have a different focus, a different intensity associated with that. I talked on the call also about some future growth opportunities and how we'll get more flexibility in structuring future acquisitions that we've got. But it's important to note that we don't see any changes in terms of our liability profile. We have adequately capitalized this new entity going forward. So from that perspective, there's really nothing that's different associated with this.

[Matt J. Summerville:]

Great.

[Operator:]

Our next question comes from Mike Halloran with Robert Baird.

[Mike P. Halloran:]

Good morning, everyone.

[Thomas M. Scalera:]

Hi, Mike.

[Denise L. Ramos:]

Mike.

[Mike P. Halloran:]

So let's touch on the margins. Appreciate the candor in discussing the ICS and the IP margins, in particular. Obviously, control tech saw a nice rebound here. So one, could you talk about if the control tech side is sustainable from these levels? And then secondarily, for the ICS/IP side, maybe a little bit more detail on what that progression looks like through the year and where those expectations now are set.

[Thomas M. Scalera:]

Yeah. Sure, Mike. Yeah, I think CT is starting to get its momentum going in the right direction. We saw a good 19.1% margin performance at Control Technologies. And that was impacted by the acquisitions, kind of getting them back into that 20% margin range. I think we're more confident in the margin trajectory from this level up. So we initially thought maybe they'll be a little slower out of the gates because of some investments in the first half of the year. They've been managing through those much more efficiently. So I think we're kind of on a trajectory with Control Technologies as the year progresses to see sequential improvement from where we start in Q1 through the balance of the year. And our expectations for their margins based on the underlying productivity and some of the trends in the aerospace business and defense business are leading us to actually think that their margins are going to be higher than what we initially planned coming into the year. So we like the momentum there. I would say as it relates to ICS, pretty much consistent with what we thought coming into the year. The kind of mid- to high-single digits as we go through the year at ICS growing quarter-by-quarter. Little bit of a slower start than we anticipated. I think there's more that's going on in Q1 as it relates to closing Santa Ana and moving into our new Irvine facility. But as you heard Denise mention, there were some positive operational trends and some good order intake activity. So we expect ICS to benefit from improving volumes and improving performance quarter-by-quarter as we kind of move to that mid- to high-single digit range from a margin perspective. And then – I'll just kind of go around the whole horn here. Motion tech, we're feeling a little stronger about their productivity and the incremental volume we're seeing. So we're seeing some positive momentum in the margins at Motion Technologies, primarily tied to volume and just the improved efficiency that they're continuing to generate. And at Industrial Process, as we mentioned, we're going to struggle to get back in line with prior year levels. We've got a 100 basis point year-over-year foreign exchange headwind at IP. We've got lower aftermarket volumes than we planned on. We are adding the additional restructuring to kind of start driving those margins forward. The plan is, obviously, sequentially to kind of improve, but I would expect a nice pop up from where we were in Q1 into Q2. And then the benefits of restructuring and higher aftermarket content in the second half of the year.

[Mike P. Halloran:]

That's helpful. And then second one, I don't think it's a surprise to see the end market pressures in the IP side based on what we're seeing in the marketplace and what other companies are talking about. Order progression, obviously, with the oil and gas, mining remains challenging. Good to see some positive signs elsewhere. At what point though, do you need to see the order progression get towards flat, maybe even positive this year, in order to think that 2017 revenue gains are realistic?

[Thomas M. Scalera:]

Mike, I think for us, kind of the sequence that we're looking at, the market really is first through the lens of the aftermarket and the baseline business, getting that velocity back up to the level that's going to help us power through 2016 and 2017. We think those activities will start to produce more positive order trends faster than the projects. And that's because of the maintenance deferrals and the activity that seems to be kind of boiled (42

[Denise L. Ramos:]

You know, the other thing that I would add to that is, so Tom gave a good review of what we need to see from an IP perspective. But when you pull back and you look at it from an ITT perspective, you've got the IP dynamics going on, but then you've got the rest of the portfolio and the strong growth that we've had in the transportation side of things here. We've been investing in the transportation side and we expect to see continued improvement as we get into 2017 associated with these investments that we've been making, that's going to help, again, from a cyclical standpoint and diversified portfolio is going to help to offset some of the challenges we may have from an IP perspective.

[Mike P. Halloran:]

Thank you.

[Denise L. Ramos:]

Thanks Mike.

[Operator:]

Our next question comes from Joe Ritchie with Goldman Sachs.

[Joseph Alfred Ritchie:]

Thanks. Good morning, everyone.

[Thomas M. Scalera:]

Good morning, Joe.

[Denise L. Ramos:]

Good morning, Joe.

[Joseph Alfred Ritchie:]

So Denise, I just wanted to go back to your comments on the reorganization and the opportunities for potential future growth opportunities. I just want to make sure I understand it correctly. Because clearly, if you're separating the assets and the liabilities, it would seem that certain parts of your business, particularly the IP business, would be a much cleaner entity if you were thinking about potentially divesting the business units. So I want to get your thoughts around that specifically, and then maybe touch on the future growth opportunities and how this new structure helps that.

[Denise L. Ramos:]

You know, we didn't do this in terms of looking at doing anything as a follow-on associated with this reorganization. This was done as a standalone action because we decided that this was the best thing for us to do going forward and the benefits that we're going to get associated with that. So I think it's important that everybody understand that, that it was done as just the next logical step in how we manage this as best as the liabilities that we have here, all the legacy liabilities, and the associated assets associated with that. It's clear to me that when you've put a structure in place and you've got focused people just working on that entity and that structure, you begin to move the needle and you begin to see things and do things somewhat differently associated with that. And we think that there could be some benefits again associated with that. And the other one that I talked about was the acquisition benefits that we would have, where you acquire a company and we're able to now put these assets directly under the new holding company with the operating assets and keep them separate from legacy liabilities going forward. And then just as a follow-on to this, it helps clean up our legal entity structure and it created some efficiencies associated with that. So we think that this is just going to be a better process for us to help managing these legacy liabilities going forward.

[Joseph Alfred Ritchie:]

Okay. But no changes expected at this point from a portfolio perspective?

[Denise L. Ramos:]

No changes at this point.

[Joseph Alfred Ritchie:]

Okay. And I guess my follow-on question, Tom, perhaps maybe stepping into the ICS margins and the ramp expected for the rest of the year. Fully (47

[Thomas M. Scalera:]

No, Joe. You know, I think it's – we still have the same view of the entitlement margins for this business that we've had when we took the decision to exit Santa Ana, move in to Nogales. It certainly it's a complex product that we produced. It's highly engineered, and our focus has been getting this right for the long-term. And obviously, as we've talked about, it's taken longer than we initially planned. But because of the highly engineered content and the unique nature of what we manufacture at ICS, whether it be medical, oil and gas, or aerospace and defense, I think the margin entitlement is a very strong one. So it really has always been for us about operations and getting the efficiencies up. And I think what we're seeing month-by-month in 2016, particularly in the Nogales, I think is a good sign. We haven't locked and sustained these improvements, but we're seeing what we used to see out of Nogales before this move, because keep in mind Nogales for us has been one of our top manufacturing locations in ITT. And we've added a lot of complexity and we're going to get through that and we're going to get back to the type of performance that we've had historically out of Nogales prior to this move. So the entitlement is still there, Joe. And I think as we exit this year, we're planning to get closer to the jumping-off point that we've been shooting for. But we have a lot of work to do between now and then to get there. Part of it is volume, so we're encouraged by some of the order momentum. The book-to-bill is going to help as well. But if we can add some more volumes on top of this, that would certainly help. Because, as you know, one of the big headwinds inside of this business that is market driven is oil and gas. And that's probably the external factor that we don't have much control over right now, is how much is that's going to slow our margin progression. What we'll focus on is continuing to make Nogales better every day.

[Joseph Alfred Ritchie:]

Okay. Got it. Thanks, guys.

[Thomas M. Scalera:]

Thanks Joe.

[Operator:]

Our next question comes from John Inch with Deutsche Bank.

[John G. Inch:]

Thanks. Good morning everyone.

[Denise L. Ramos:]

Good morning, John.

[John G. Inch:]

Good morning. Does this reorganization allow you, Denise, to raise financial leverage in the future? Because I know the ratings agencies historically have – you look at asbestos price and (49

[Denise L. Ramos:]

You know, I guess what I would say, I'll leave that to the ratings agencies to make that determination. I think the important thing to note is that nothing really changes from a consolidated financial perspective here. We've got the same capital structure, we've got the same cash deployment strategies. None of that has really changed by this structure that we've put into place here. So I don't – there's no change in external or internal access to capital. We're not utilizing third party debt. So we'll leave that to the rating agencies to determine that, but from our perspective, when you look at the consolidated financial statements, everything is the same.

[John G. Inch:]

Okay. So does it give you any other benefits, though? I mean I'm still trying to – I'm not completely sure I understand why you're doing it. If there aren't these benefits – like, does it give you any sort of a tax benefit going forward? I think you said it allows people to focus on managing operations versus legacy, but were they not doing that now? I guess – I don't want to beat a dead horse. I'm just trying to understand – there's got to be some sort of a benefit to this, no? Down the road or why do it?

[Denise L. Ramos:]

Well, you know, there is no tax benefits associated with it. We think the liability profile remains the same. Again, John, it's what I said on the call

[John G. Inch:]

Yes. No, I get it. That makes sense. Hey, Tom, as raw material prices have gone up, can you remind us – some of the feedback we've had from other energy companies is oil in the mid $40s isn't enough to get projects going. I guess it maybe helps to stabilize the market. And I think you talked a little bit about that with respect to sort of expectations for sort of longer-term aftermarket benefit. But it does theoretically put some pressure on your COGS. If I'm not mistaken, historically, you've been able to just pass that along certainly on the pricing side for projects, but what about the non-project side? So just kind of the recurring pumps business. Is this going to be some sort of a margin pressure because steel prices, et cetera, are all up from kind of where they were a few months ago?

[Thomas M. Scalera:]

You know, John, we're not anticipating any additional headwinds across the portfolio from the change, particularly in steel. It is a raw material that we use in the Motion Technologies side of the business, perhaps, and I think we've done some of the right activities there to make sure that we're locking in at the right prices. As it relates to the pumps, you're spot on. We do typically pass that to our larger projects, less so on aftermarket and baseline activities. So there could be some pressure there, but it's not something that we've seen elevate to a new risk factor that we're not able to address with our sourcing initiatives and other activities we have. I think you saw on our transformation slide, we're looking to drive a lot of incremental sourcing benefits, including the consolidation of 35% of our supply base. So some of the headwinds that may come through from pricing, we are – I'd say probably more aggressively than ever going after our supply chain in the Industrial Process business, driving consolidation, driving efficiencies. So I think we'll stay ahead of those increases at this point.

[John G. Inch:]

Yeah. Okay. That makes sense. Maybe one last one. You guys continue to knock the cover off the ball for motion – right up 14% organic. Yet, the year-over-year, without nitpicking, but I will anyway – the year-over-year margins were kind of flattish. Is that all because it was such a high OE in the mix? Or is it just incremental pricing associated with some of these wins, call it, in China or wherever?

[Denise L. Ramos:]

You had two impacts that impacted Motion Technologies' margins in the first quarter. One was the acquisition that we did at Wolverine, which was about 110 basis points impact. And then we also had foreign exchange, which was 70 basis point impact. So if you adjusted for that and you looked at how they grew their margins year-over-year, they grew them about 100 basis points. So...

[Thomas M. Scalera:]

Yes. And we did make the additional investments, too, John, in the North American facility. But just to touch on, one other quick point on China growth, the margin profile of our business in China is at parity or at times slightly above what we see elsewhere in Europe. So as we've grown in China, we're very happy to kind of report that. We have not experienced incremental headwinds from an OEM perspective. And in addition, our operations have quickly scaled up to the margin profile that we have in Europe. And that same blueprint is what we're going to use to scale up our growth in the North American operations.

[John G. Inch:]

So you are, Tom, when you strip everything out, you're looking at your core variable contribution in motion, you actually are seeing – because you would expect it to be very high because the profitability of the segment is so high. You actually are seeing that fall through, right? Is that what you are saying?

[Thomas M. Scalera:]

We are. It's exactly right.

[John G. Inch:]

Okay. Good. Thank you. Appreciate it.

[Denise L. Ramos:]

Thanks John.

[Thomas M. Scalera:]

Thanks John.

[Operator:]

Our next question comes from Nathan Jones with Stifel.

[Adam M. Farley:]

Hey, good morning. This is Adam Farley on for Nathan Jones.

[Denise L. Ramos:]

Hi, Adam.

[Adam M. Farley:]

Hey. My first question is, you talked about the development and progress for the new brake pads facility in Mexico. Maybe just some of the expectations?

[Denise L. Ramos:]

Sure. We're very excited about the new facility going into Mexico for Motion Technologies. The opportunity that we see there is a share gain opportunity. And we know that there are lot of new platforms that are coming on in 2018 and 2019, so we want to be positioned to take advantage of those platforms when they come on. We've located a site for a facility. The facility is being constructed. We expect to startup that facility in the second half of 2017. As I said on the call, we have already won all of the what we call Phase 1 award, for how we're building out this facility. And we do it in a very modular fashion, which is very similar to what we did with China. So with that first phase that we're building out, we already have all of the platforms associated with that, that we've been awarded. So it's a good story. We feel good about it, and we see that there's going to be a lot of growth associated with it as we go into the future.

[Adam M. Farley:]

Okay. Great. Then following up, in the M&A pipeline are you guys seeing any companies that you're targeting or – is it a buyer's market at all?

[Denise L. Ramos:]

You know, we're active in the M&A arena. And in the pipeline, we've got our list of companies that we focus on, that we're looking at. New ones come into the mix all the time. So we actively assess that to see how it fits in with our strategy and with the portfolio that we've got. I would say that there are still some disconnects between buyer and seller expectations from a price perspective. There was one recent deal that we've walked away from because we thought the price got way too high on it. So we remain disciplined from that perspective. So yes, I think that there is still a disconnect from a pricing perspective between buyers and sellers. But saying that, we're still active in this space. We're still looking at good acquisitions to complement and supplement the portfolio that we have.

[Adam M. Farley:]

All right. That's great. Thank you.

[Operator:]

Our next question comes from Joe Giordano with Cowen.

[Joseph Giordano:]

Hey, guys. Thanks for taking my question. It's been about a little less than a year now, but I was just curious. As far as Wolverine, you had talked initially about the ability to leverage some interesting material science capabilities. And I'm just curious how – what you've seen there and what do you think you can do with that, with that kind of new technology?

[Denise L. Ramos:]

Well, I went and visited Wolverine recently, just to see the progress associated with that. You know, we've owned them for about maybe six months now. I will tell you that there is no major surprises. We had done some extensive due diligence associated with that acquisition, and no major surprises. We still see a lot of opportunity associated with that. We do see that there are some operational synergies that we're going to get over a period of time, but it takes some time to get those in place. And so we have an action plan over the next couple of years in order to make some of those operational improvements associated with Wolverine. And then we're looking also at the gasket business that we acquired associated with that, to look and see if there are any strategic opportunities that we have associated with that. So early days; we like the acquisition. It's meeting all of our benchmarks. The integration is going well and we're excited about the future.

[Joseph Giordano:]

Great. And then on IP aftermarket, I just want to clarify. Did you say that the mix – aftermarket mix as a percentage was down year-on-year? That seems a little bit surprising, just given the magnitude of the OE decline. So I just wanted to kind of clarify there. And I know you said it's up on a sequential basis on the aftermarket, but that mix on a full year seemed a little bit surprising to me.

[Thomas M. Scalera:]

Yes. Joe, the mix challenge is probably more versus our initial expectations from a guidance perspective. So that's where we're seeing the bigger headwinds relative to how we entered the year.

[Joseph Giordano:]

Okay. Fair enough. And then just to clarify, did you update FX rates in your new guidance to the current rates or are they still using year end? (01

[Thomas M. Scalera:]

Well, we update them, Joe. And I think one of the challenges that we certainly saw in Q1 is it's very hard to predict transaction impacts, which kind of are much more difficult for us to forecast. So we can forecast translation using current rates. The variation that we saw in Q1 relative to the prior year of the $0.09 and certainly relative to our expectations, which was about a $0.03 or $0.04 headwind. Those came from transaction impacts that are much more difficult for us to forecast, and we don't try to call those. Often they net out over time or in shorter increments of time, but we certainly had positive 2015 transaction that turned to negative transaction in Q1. We're hoping to pick up the benefits of some translation as the year goes on at the current rates, but we're watching some of the potential transaction impacts that could eat into that benefit.

[Joseph Giordano:]

Okay. Thank you.

[Thomas M. Scalera:]

Thanks Joe.

[Operator:]

Our final question comes from Shannon O'Callaghan with UBS.

[Shannon O'Callaghan:]

Morning.

[Denise L. Ramos:]

Hi, Shannon.

[Thomas M. Scalera:]

Hi, Shannon.

[Shannon O'Callaghan:]

Hi, Denise. Hey. Maybe start with Tom, just on the corporate and the tax, where are those going to come in this year? And are those things sustainable or jurisdictional? And then some of the environmental stuff, I mean should we – whatever the numbers are this year, is that a good future run rate? Thanks.

[Thomas M. Scalera:]

Sure. Yeah, so for tax, we're probably looking at a rate now between 25% to 25.5% is the range. I think it kind of goes hand-in-hand with what we're seeing in North America. So a lot of the weakness in the aftermarket and the baseline business is high margin North American revenue. And there is a tie, if you will, between what we're seeing in that mix and how our tax rate is playing out relative to initial expectations. As it relates to corporate, we are driving sustainable improvements in efficiency. We would expect it to come down from our initial guide maybe in the range of about $5 million. And we are driving many activities to sustain that kind of improvement. Environmental is, as you know, a little bit of a wildcard because events happen that are kind of beyond our control. I would say that when we do have a site, we manage it as effectively as we possibly can. And if we have an opportunity to recover from our insurance carriers, we also aggressively go after those opportunities. But the one externality that we struggle with to project is environmental because we don't have all the control, if you will.

[Shannon O'Callaghan:]

Okay. Great. And then just on the restructuring benefit, it was 170 basis points for the first quarter. Maybe just a little more color on how does that 170 basis points sort of trend through the year by the different segments and what drives it?

[Thomas M. Scalera:]

Yes. So one of the key elements for, certainly, for IP is the incremental restructuring that we're driving for the year. And we have stepped up that number from our initial expectations. So I'll kind of give you more of an indication from a dollar perspective. The total year-over-year savings that we're driving at IP in 2016 are between $30 million and $35 million. So it's a big set of activities that we're driving, primarily, around head count to really right size the organization for the long-term strategic reset that we talked about. That's probably the biggest area where we're seeing the benefit, but if you look within our ICS business, which is the next largest beneficiary of restructuring, on a full-year basis, we're looking at about anywhere from $8 million to $10 million of restructuring benefits from actions that we've put in place or that are in the works. Lesser benefit, certainly, at Control Technologies and motion tech. But really where our focus has been is on the IP. And that is a big factor in our second half guidance, where for both IP and ICS, we expect those restructuring benefits to build momentum in Q2 and certainly into the back half of the year as well. So we would expect probably net-net anywhere from $10 million to $14 million more benefit in this second half from restructuring actions across the portfolio than we had in the first half.

[Shannon O'Callaghan:]

And how much hit in IP and ICS in the first quarter?

[Thomas M. Scalera:]

From a margin perspective, how much benefit did those guys pick up?

[Shannon O'Callaghan:]

Or just the dollars – like on the $30 million to $35 million in IP, how much was in 1Q?

[Thomas M. Scalera:]

So restructuring benefits in the first quarter for IP were in and around $6 million to $7 million for IP and ICS was around – about $3 million, $3.5 million year-over-year. Those are year-over-year savings that we generated in those two segments.

[Shannon O'Callaghan:]

Got you. Okay. Great. Thanks a lot.

[Thomas M. Scalera:]

Thanks, Shannon.

[Operator:]

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