ITT Inc.

Welcome to ITT's 2020 First Quarter Conference Call. Today is Friday, May 1, 2020. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Emmanuel Capre, Group Chief Financial Officer. You may begin.

Good morning, and thank you, Maria. Welcome to ITT's first quarter 2020 earnings call. This is Emmanuel, and on the line this morning are Lucas Savi, Chief Executive Officer and President, and Tom Scalera, Chief Financial Officer. Today's presentation, Press Release and Reconciliation of Non-Gap Financial Measures to the Most Comparable Gap Measure, can be found on our website at itt.com forward slash investors. Our adjusted non-gap results exclude certain non-operating and non-recurring items, including, but not limited to, asbestos, restructuring, asset impairment, acquisition-related items, and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I'd like to provide a brief overview on our Q1 GAAP results compared to prior year. Q1 total revenue decreased 5% to $663 million. Segment operating income decreased 30% to $78 million, and EPS of 95 cents increased 19%. Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated. Lastly, today's call will contain forward-looking statements that are subject to risk and uncertainties, including impacts from the COVID-19 pandemic. Actual results may vary materially. All such statements should be evaluated together with the safe harbor disclosures and the other risks and uncertainties that affect our business, including those disclosed in our SEC findings. Now, let's turn to slide three, where Luca will kick things off.

Thank you, Emmanuel, and thank you all. for being with us this morning despite the many challenges and unique circumstances that you're dealing with at this time. I truly wish you and your families all the strength necessary to get through this crisis. This morning, we will do our absolute best to describe the market forces that we're facing and, more importantly, the focused actions that we have taken and will continue to take combat those forces and create an even more resilient ITT for the future. But first, I want to take a moment to thank all the ITTs around the world who worked tirelessly during this pandemic to take care of our customers and to take care of each other during these very challenging times. Every day during our leadership team briefings, we would discuss our people's safety and and all of the local grassroots efforts that our teams championed to support their local communities. As you can see in these pictures, ITTs united to provide face shields, protective masks, and other critical supplies to first responders and hospital workers in our valued communities. This morning, we played Alicia Keys' new song, Good Job, during the whole time prior to our call. We did this to further honor the first responders and essential employees around the world that provide our IT tiers with the opportunity to deliver to our customers in the essential industry that we serve. Without them, this call doesn't happen. So, thank you. Let's now turn to our 2020 priorities on slide four. This morning, we will use words and phrases that we don't often use in these investor calls. like unprecedented, pandemic, and essential businesses. These are truly historic times where resilience in the face of adversity is paramount. And to me, nobody personified leadership at a time of crisis better than Winston Churchill, who reminded us all that success is not final, failure is not fatal, it is the courage to continue that counts. So as IT tiers all around the world master the courage to continue to battle these unprecedented market forces, and as we go through this earnings presentation this morning, there is one word that I want you to remember that best describes today's ITT, resilience. To augment our resilience in the face of the unprecedented challenges posed by the COVID-19 pandemic, IT tiers all around the world are united in their focus on our top three 2020 priorities, and they are the health of our people, the health of our business, and the health of our financials. Our first quarter results are a testimony to this focus priority, to the resilience of our diversified businesses, and to the resilience of our dedicated people. While the vast majority of our businesses are deemed essential, COVID-19 disrupted our operations as we experienced decreased customer demand, temporary plant closures, and stricter health protocols to keep our employees safe. But we stayed nimble, flexible, and humble, and we went to work. And we worked harder than ever in more unusual circumstances than ever before to create value for our customers each and every day. For example, we had employees that stood in line for hours to cross European borders to get to work, We had many employees who were separated for weeks from their families due to various travel restrictions, and all employees adapted to new PPE and social distancing requirements. But, as ITTs have always done throughout our 100-year history, we got the job done and produced results for our customers and our shareholders. And as it relates to the health of our business and the health of our financials, In the quarter, we expanded our work chest of self-help opportunities through significant incremental new actions, totaling $135 million, and we executed measures to boost our liquidity to approximately $1.2 billion. I'm confident that these actions will power ITTs through this challenging period and position us well to aggressively capture opportunities in the future. As you see, our priorities start with the health of our people. And I'm so proud of how hard ITTs around the world work together to share best practices and leverage our collective ingenuity to keep each other safe. But at the highest level, I'm so thankful that the detailed playbook that was first implemented by our indomitable team in China and then leveraged around the globe has helped to contain confirmed ITT COVID-19 cases to just single digits. And to date, No manufacturing facilities shut down due to the spread of the virus amongst our employees. This is a tremendous accomplishment considering our numerous operating locations in hotspots like China, South Korea, Northern Italy, New York, and California. And I can assure you that we will never let our guard down when it comes to the health of our people. Now, I'd like to share with you our Q1 2020 highlights related to the health of our business and the health of our financials on slide five. Starting with the health of our business, from a customer centricity standpoint, we can see that our strong share gain momentum continued at empty friction as we outperformed global OEM production by more than 2,000 basis points. And on the strength of our Mexico operations, we posted almost 1% growth in North America as we run production of our recent share gains with GM. However, I want to caution everyone not to expect this kind of outperformance in the future quarters, as the quarter phasing in 2020 will be erratic, and we will cycle through various customer and end market dynamics. But by the end of the year, we do expect to post a 700 to 1,000 basis points outperformance versus global auto production. This will be our ninth consecutive year of outperformance. Supporting our continued outperformance, empty friction generated yet another quarter of strong global platform wins. Q1 awards include the conquering two platforms with the leading EV manufacturer that we are pursuing for years. Our persistence to build intimacy with this customer coupled with our technological and quality leadership paid off. And these wins add nicely to our already strong win rate on new global EV platforms. Finally, while we face challenges on the aerospace front, our rail and IP businesses delivered solid top-line improvements from both a revenue and order standpoint. Next, from an operational excellence perspective, we continue to drive the productivity actions that have been powering our business over the last several years. We continue to focus intensely on driving efficiency actions, eliminating waste, and bolstering our world chest of self-opportunity across all our sites. In the quarter, the team at Industrial Process produced an 11.3% segment operating margin, representing an improvement of 60 basis points. This margin expansion was supplemented by 180 basis points improvement in working capital. Well done, Georgian team. Considering the sudden drop in demand across industries due to COVID-19, we are executing approximately $50 million of new entity-wide restructuring actions to recalibrate our global workforce and deliver $70 million in annualized savings. As we execute these reductions, we will also optimize the way we work as an organization. This approach was exemplified by our plant in Barge, Italy, that reduced the workforce more and faster than the decline in production, devising new ways to do more with less. and across ITT were also drastically cut in discretionary spending by $20 million and CapEx by $35 million. Next, I provide an overview of the Q1 results and perspectives on the health of our financials. Revenue declined 5% to $663 million. Segment operating income margin was 14.5%, and operating income margin was 13.4%. EPS of 80 cents per share was in line with our expectations and declined 9%, excluding unfavorable effects of $4 million. And lastly, we generated $31 million of free cash flow in the first quarter, representing 143% improvement over the prior year. Next, let me highlight the health of our financials and particularly the strength of our liquidity. For the past several years, we have built a tremendous balance sheet that has been solidly fortified by many strategic decisions that preserved our investment-grade quality for times like this. When a crisis like COVID-19 hits and you have the balance sheet that we have, you know that you are entering the crisis with a strong competitive advantage. So our liquidity position of approximately $1.2 billion is just one element of our financial strength. We have also continued to drive down our net asbestos liability by generating favorable cash settlements like the $66 million settlement we executed in Q1. Many of our actions like these have contributed to a 46% reduction in our net asbestos liability and a 64% reduction in our net environmental liability since spin. And as a result of these settlements, we have ample liquidity in our qualified settlement fund to respond to legacy liability outflows in 2020, which will further preserve ITT's cash during the pandemic. Lastly, the decision we made at the end of 2019 to freeze and immunize our US pension plan at the 108% funded status could not have come at a better time. So our strong liquidity is not only a tremendous weapon to combat current conditions, but it will also enable us to seize on opportunities that will power ITT's future when this crisis dissipates. Now, let me turn it over to Tom to briefly discuss Q1 results before we highlight the decisive actions that we have taken to address market conditions for the balance of 2020. Tom?

Thanks, Luca. On slide six, you'll see that we've provided the Q1 ITT results in greater detail. But for now, I'd like to focus on the segment results starting with Motion Technologies on slide seven. Despite the challenging auto market conditions, MT Organic Revenue declined only 3%. MT Friction declined 5% on a 4% OEM decline that outperformed global OEM auto markets by more than 2,000 basis points, partially reflecting some favorable Q1 timing. Kony and Axtone grew 5% on rail share gains in Europe and North America, partially offset by a 3% decline at Wolverine. MT's segment operating income declined 14% to $53 million. Comparisons to the prior year were negatively impacted by $1 million of unfavorable foreign exchange and $4 million in strategic investments, including $3 million in prior year government grants. Despite the current conditions, MT delivered solid Q1 margins of 17.8%, reflecting unfavorable volume and mix, and 150 basis points of incremental strategic investments. Partially offsetting these items were significant margin improvements at Axtone, Wolverine, and MT Mexico, and the 20% operating margins MT China produced despite the direct Q1 COVID-19 impacts they faced. And on the award front, there were some real bright spots. After many years of pursuit, we finally conquered two strategic North American awards with the leading EV manufacturer. We advanced our global EV platform win rate. We generated a nice conquer win in China based on our execution amid COVID-19 disruptions. And we delivered a 21% award improvement at Wolverine. These awards in combination with the last several years of share gains will continue to power MT's significant outperformance compared to the global auto market we serve. In addition, our structural competitive advantages and world-class automated processes, global process standardization, and cutting-edge research and development will continue to drive MPs' outperformance as it always has during difficult market conditions in the past. Let's now turn to industrial process on slide eight. IP delivered solid results across all metrics. Total revenue and total orders grew 5%. Margins expanded 60 basis points. Operating income grew 11%, and working capital improved 180 basis points. The top line was driven by benefits from the RPG acquisition and a 2% improvement in projects and improved global execution and strong activity in the Middle East. Short cycle sales were flat, mainly due to valve declines that offset 4% growth in the aftermarket and 4% growth in baseline pumps. Total IP orders increased 5%, including the benefit from the RPG acquisition. Organic orders were flat, The difficult project compares offset a 1% increase in short cycle orders driven by baseline pumps and parts. On a sequential basis, orders improved 5% on 15% short cycle strength. IP segment operating income increased 11% to 26 million and margins improved 60 basis points to 11.3%. Excluding the impact of the RPG acquisition, IP margins actually grew 150 basis points. The operating income growth was driven by net productivity, improved project execution, price realization, and restructuring savings, partially offset by unfavorable foreign exchange. Excluding the $3 million of unfavorable foreign exchange, IP's operating income would have improved 24%, and margins would have expanded 160 basis points. As we enter more difficult market conditions ahead, Today's IP is better equipped than ever to combat those headwinds. Our portfolio is more balanced than ever, with upstream oil and gas only representing 12% of IP's business. Our execution is at the highest levels in our history, and we've reduced our cost structure by proactive restructuring actions in advance of the market dynamics that started last year and intensified in 2020. Now let's turn to CCT's Q&A results on slide nine. CCT organic revenue declined 17% on weakness across all major end markets. Operating income declined 37% on lower volumes, and margins declined to 12.6%. The primary drivers of the decline were the volume impacts from COVID-19 and production challenges at Boeing. The CCT book-to-bill ratio in Q1 was 1.0, and we expect volatile market conditions to persist into the second quarter and for the balance of the year. To combat these forces, CCT has undertaken a comprehensive operational reset that will significantly reduce headcount, recalibrate manufacturing capabilities, and slash costs to better align with the current demand expectations. In Q1, prior to fully implementing these actions, CCT's decremental margins, excluding the matrix acquisition, were approximately 35%. So we plan to improve as the year progresses and these new actions take effect. Now I'll turn it back to Luca.

Thanks, Tom. So let's start with the health of our people on slide 10. And here we saw that there was no better way to depict how we have kept our people safe than by showing pictures of them in action. As you go around these photos, you will see there is a heavy emphasis on protecting our facilities by perimeter disinfection and temperature checks. And on the inside, we reorganized the workplace from the factory layout to the conference room to the canteen seating to apply distancing guidelines between team members. Many of the actions we have taken to protect our people were based on our successful playbook in China, where we took proactive, detailed, and aggressive actions early in the outbreak of this pandemic to protect the health and safety of our employees. And our team in China also led the way to define appropriate safety and PPE protocols while they work together on the mask mission to provide PPE to ITTs around the world. In addition to this China playbook, we enacted rigorous safety measures to all of our sites in accordance to WHO and CDC standards. We expect to continue these measures until we determine that COVID-19 is adequately contained, and we will take any additional actions necessary to continue to keep our people safe. And as a result of all these efforts today, our global confirmed cases have been contained to the single digit, including no reported cases in China. Before going into details on slide 11, I'd like to highlight that as a result of the demand uncertainty in the end markets we serve, we are withdrawing our previously communicated guidance for 2020. And now let me provide some perspective on our end market and how we see the year playing out for the balance of 2020. We do expect the most pronounced year-over-year and sequential declines due to COVID-19 in the second quarter. And from there, we would expect to see gradual sequential improvement as we progress through Q3 and Q4. The gradual improvements will be the result of the cost actions that we have taken, combined with gradual market recoveries. Next, let me share our high-level expectations by segment for 2020. At MT, based on our share gains and ramping platforms, we expect to significantly outperform weaker global demand for OEM breakpads by 700 to 1,000 basis points. At CCT, Boeing 737 MAX challenges reduced OEM production and lower global commercial air traffic, which significantly impacts demand for OEM and aftermarket components, and connectors for the balance of 2020. At IP, as the year progresses, we anticipate that a decline in customer OPEX and CAPEX due to the economic conditions and the decline in oil and gas prices will result in lower project orders. However, the short cycle business representing 75% of IP's revenue is expected to improve sequentially through the end of the year as global economic output gradually resets. So, going back to the health of our business, in these times of demand stress, we're doubling down on our customer-centric approach. We have been deep diving in our EDI requests to understand the robustness of our backlog to proactively match production with demand. And in Q1, IP executed flawlessly. on two major projects and proactively delivered ahead of expected lockdowns in India and Saudi. We are also taking advantage of the current environment to secure supply for our customers while highlighting to them the benefits of working with ITT in terms of on-time delivery and superior quality. In terms of operational excellence, we are leveraging the Friction standardized global production system to ensure flexibility in serving our customers and guaranteeing them a consistent level of performance. We also continue to optimize our manufacturing efficiency through existing automation. As we discussed earlier, our budget site has been able to produce more with less resources thanks to the well-established MTE approach. Another way we optimize efficiency is by moving aggressively to close some of our facilities to respond to lower demand levels. For instance, Our friction plants in Barge and Termoli, Italy, were closed for two weeks in April and might face similar reduced activity in May. We obviously have to manufacture safely, serve our customers, and optimize our production costs. And so far, we managed to successfully execute on these three goals. We are also accelerating our supply chain redesign by both implementing redundancy by main regions to ensure procurement continuity and and rationalize our supply base to achieve cost reductions through economies of scale. We have taken significant restructuring actions to adjust to reduce demand and aggressively cut costs by only allocating budgets to key expense categories. Finally, we are driving the redesign of our production organization by executing on our product line transfer plan and our footprint reduction, especially at IP and CCT. we anticipate a difficult and challenging balance of the year in the markets we serve. And our ITT team has been working in close collaboration with our customers and suppliers to minimize disruptions. We continue to focus on delivering value for our customers by being flexible and taking advantage of opportunities along the way. Next, let's turn to the health of our financials on slide 12. ITT entered this pandemic with solid investment-grade balance sheet and a very favorable liquidity position. But at today's ITT, we are never satisfied and never complacent. Every day, we're actively monitoring market development and taking aggressive measures to stay ahead of the curve. The five major actions totaling $135 million that we're taking to bolster our financial position include, one, a global restructuring plan that dramatically reduces our structural costs, generating annualized savings of $70 million. Two, salary reductions for board, CEO, and executives, and the suspension of the 401k match, generating $10 million in savings. Three, an entity-wide CapEx cut, generating a $35 million reduction compared to 2019. Four, significant reduction in discretionary spending and supply chain productivity, generating at least $20 million in savings. And five, aggressive renegotiations with all vendors and service providers. In addition, we are reviewing our global liquidity on a daily basis to validate expected outflows and ensure that we get paid on a timely basis by our customers. We're also re-forecasting our next three-month cash flows on a weekly basis, to ensure that we stay ahead of the financial curve. To really bring this sharpened focus to all of our businesses, we have effectively declared war on working capital. We're taking constant action on our accounts receivable past dues. We have reduced credit limits to contain our exposure to risk. We are specifically targeting inventory and working to drive up turns as we are strictly matching production with demand. And we are collaborating with our supply base to extend payment terms as we focus on the most competitive partners. Now, let me turn it over to Tom, who will describe our liquidity on slide 13.

As Luca mentioned, ITT entered this pandemic with a strong balance sheet and solid liquidity due to years of effective balance sheet management. So let me give you a detailed overview of our current liquidity position. We have approximately $1.2 billion in cash on hand and available revolver capacity. A revolving credit agreement had outstanding borrowings of $385 million at March 31st. And since the end of the quarter, we drew the remaining $115 million. It should be noted here that the average interest rate on the $500 million revolver draw is only 1.1%. In addition to the $500 million, we secured $200 million of additional borrowing capacity through 364-day revolving credit agreements executed on April 29th. These revolver actions were conservatively taken to stay ahead of any potential disruptions in the financial markets. With only 15 million in long-term debt, we clearly do not have any material financial obligations on the horizon. We are just being prudent. In addition to our cash position, we have $106 million in assets that will be utilized to fund asbestos and environmental cash obligations in 2020. and our U.S. pension plan was immunized at December 31st, 2019, and today we are 108% funded, which eliminates the need for mandated cash funding as we prepare to terminate the plan toward the end of the year. All of these actions have culminated in producing ICT's solid investment-grade balance sheet that is both a shield of safety today and a weapon of growth in the future. And lastly, as it relates to capital deployment philosophy, We did execute $73 million in discretionary share repurchases in the first quarter, but we decided to temporarily suspend share repurchases going forward. And at this point, our dividend policy remains unchanged. So now let me turn it back to Luca for takeaways on slide 14.

Thanks, Don. We will effectively navigate this crisis. Each and every one of us is rowing in the same direction with clear priorities. the health of our people, the health of our business, and the health of our financials. We have a clear and effective playbook that was successfully battle-tested by our teams in China. This will ensure our effectiveness in delivering on our priorities. We have built operations that are flexible and agile to conquer opportunities as they come. We have fortified our liquidity position, and we will continue to enhance it through cash flow performance. And based on the competitive advantages that we have honed over the last three years, we are uniquely positioned to play a fence for the future. This year, ITT is celebrating its 100-year anniversary, as we were founded just after the last major global pandemic in 1918. Today's ITT is more resilient than ever. Entering this pandemic, our operations were performing at their highest level ever. Our manufacturing lines were more automated than ever, and our world chest of self-opportunities was bigger than ever. And we amassed more liquidity and balance sheet capacity than we've ever had. So with these weapons, we will combat this pandemic by being aggressive on cost, aggressive on execution, aggressive on share capture, and aggressive on preserving liquidity. Because today, we are courageously creating the ITT for the next 100 years. With that, let me now turn it back to Maria to take your questions.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Jeff Hammond of KeyBank Capital.

Hey, good morning, guys. Hi, Jeff. Good morning, Jeff. So I guess just to pin down 2Q a little bit better, can you maybe talk about what you're seeing in terms of April sales and order trends that would help give us some frame on kind of how substantial the sequential decline or year-over-year decline would be in 2Q and maybe just speak to friction certainly with all the auto shutdowns that we've seen here recently. Thanks.

Okay. Obviously, this, Jeff, depends market by market. So let me talk about friction first and maybe talk about what we have seen in the orders for April in IP and on the project side to give some color. So we think that Q2 will probably be the worst quarter for April. for ITT and will be the worst quarter definitely for motion technologies and for friction. This is when we will hit the trough for friction. If you think about all the shutdowns that you have, particularly in Europe, as well as in North America. So I think that this is what we will experience in Q2. One relevant point that might be important for you to have is for us to share what we've seen in China during the month of April. Now, if you look at what has happened in China in Q1 and how China is reacting in April, let me give you some numbers. The production of automotive in China worked out this way during the first quarter. It was minus 27 in January, was minus 80 in February, was minus 48 in March for a Q1 of minus 48, roughly. The numbers for April are not out yet, but what we are predicting is a negative high teens. So what you see in China is is a steady recovery. You see China moving in the right direction. And now I'm not saying that Europe and North America will recover the same way, but definitely you have China moving in this direction without any stimulus, with few exceptions in the big cities, on the licensed place, or elsewhere. electric vehicles, but no major stimulus from the Chinese government. So the signs that we see in April for China are positive, right direction, as I said. April, as I said, is going to be a horrible month when it comes to friction in North America and friction in Europe. When you look at another business like IP, for instance, IP had a very good quarter, and it's important to look both at the backlog and at the funnel when we close the quarter. So the backlog for IP went up roughly 3% from the beginning of the year, and when we look at the funnel, the funnel is interesting. because when you look at the funnel from the beginning of the year until the end of March, how it evolved in Q1, the funnel actually for active projects went up in Q1 roughly 6% from January to March. Different picture for different markets. You have oil and gas active proposal that went down roughly 7% in the quarter. and all the others, chemical, general industrial, that actually went up. Totally, for us, was up at the end of March. Going back to your question in terms of what we see in April, what we see in April was oil and gas keeping coming down, the other industries staying stable. Now, if you're asking me, I will expect eventually some of these opportunities in the oil and gas actually to be postponed delayed or some even cancel knowing what is happening in that market. Did I answer your question, Jeff?

Yeah, that's helpful, Color. And then just, you know, as we think about the war chest of opportunities coming into the year and then your incremental restructuring, How should we think about, you know, decremental margins, either overall or, you know, across some of the businesses, you know, as you start to see some of these heavier declines?

Hey, Jeff, it's Tom. So the way we're thinking about the decrementals is we're really targeting, you know, in this 30% range, 30 to 35, you know, anything below 35. And as we gain momentum with these significant actions that we're taking, we'll obviously be getting below 35 and target the low 30s and work as hard as we can to do better than that. That's the kind of drop we're looking at in Q2 on the difficult revenue profile that Luca articulated, whether you look at it sequentially or on a year-over-year basis. We're targeting around called the low 30s on the decremental side. Supporting that is these new incremental actions. So the $70 million of annualized restructuring savings that we talked about today and the other actions we're taking on supply chain, obviously salary and 401k, all of those actions, the $100 million of straight actions that related to CapEx, those actions are all incremental to the war chest that we have amassed. So these are moves that we had contemplated at different times and that we're obviously accelerated in light of the current circumstances. So I would consider these new actions as largely incremental to the ones that we have discussed in the past in our war chest.

So low 30s incrementals in 2Q and then we get a little bit better from there.

Yeah, you'll get decrementals, you know, in Q2 and hopefully by the time we're We're talking about Q3. You're starting to see, you know, the recovery playing through and much stronger drops, you know, on the positive side on a sequential basis as revenue picks up sequentially in Q3 and Q4. So we'll have decrementals on a year-over-year. We'll try to keep those to 30. But we also want to build momentum on the upside when we come out and leverage our new cost structure on a sequential basis to drive better drop as revenue starts to pick up in Q3 and Q4 compared to a tough Q2.

Okay. Thanks a lot. I'll get back in queue.

Our next question comes from one of Damian Karras of UBS. Hi. Good morning, everyone.

Hi, Damian. Hi, Damian.

First, I'm glad to hear that you guys have been able to work through this transition extremely challenging environment with your employees healthy and your facilities, all of them still operational. So glad to hear that that's going all right. Just a follow-up question on the margins here. So you just talked, Tom, about kind of the 30%, 35% defermental that you're targeting. It seems like the majority of the actions you're taking, at least on the restructuring side, is going to be in CCT. So should we think of that as perhaps kind of where the bulk of the savings are going to come? And just thinking of the timing of that, how much of this benefit have you already realized in the first quarter? It seems like you've had these actions in place for some time now?

Okay. Maybe I start, Tom, and you can complement. So we were proactive particularly in CCT and in IP, and we did originally some restructuring towards the end of Q4, beginning of Q1 in these two businesses. So and you see a lot of these savings in terms of restructuring in IP, for example, and in the results of IP. You don't necessarily see it in the margins for CCT because I would say CCT is in the perfect storm today with the 737 MAX, the COVID, the general aerospace situation. Now, when you look at the restructuring savings, that it's happening now in Q2 and some in Q3, it is across all the three different value centers. So I would say probably it's true that for CCT it's going to be the largest. Second is going to be motion technologies. And third is going to be, again, in IP. But it involves also corporates. So what we've done is really trying to hit, you know, the structural cost for ITT as ITT and for each value center. I don't know, Tom, if you want to add something to that.

Yeah, just to kind of underscore the structural element of these new actions. So we're targeting up to about 840 heads. Seventy to 75% of those actions will be structural in nature. And each value center and corporate will be looking at a structural reduction, you know, around 15% to 20%. And that's pretty consistent across all three value centers. So it's a comprehensive entity-wide set of actions, more heavily weighted in the Americas and in Europe. But we have 62 locations that are being impacted by these actions. And the bulk of these new items, so these are new – the bulk of them are going to be completed, 55% to 60% completed by Q2, and then balance as the year progresses. But we're comprehensively moving through this. But these are actions that are kind of new to some of the ones that we took at Q3 and Q4 at IEP and CCT in particular.

And the timing, to build on what Tom said in Q2 and Q3, is U.S. is more Q2, and Europe is more Q3 because there are regulations that you need to follow, and the COVID-19 has caused some governments to impose not to do any restructuring until a certain date. So that's the reason of the different timing. Sorry, Damien. Sure, no, that makes sense.

And then I guess if you look at MT in the first quarter, obviously the decrementals there are much higher than 35%. but in particular, you know, you did step up the growth investment there. Just curious, you know, is that level of investment kind of expected to hold?

Damian, yeah, thanks for the question. When you look at Q1 for MotionTech, we had foreign exchange and the strategic investment impact. If you took those two items out, the decrementals were in the high 20s. So we certainly had a year-over-year impact where we had a strong government incentive that came in last year to the tune of three plus million. So that created a little bit of a distortion in the year-over-year drop. But if you really take that out and foreign exchange are looking at, you know, kind of decrementals in the more classic range that we would be targeting for MT on a go-forward basis. As far as the level of investment, maybe, Luca, if you want to comment on the way MT is approaching investments in the cycle, but certainly that grant was a one-time benefit last year.

So on the investment, so we are reviewing absolutely everything. Just to give you an idea also, we changed all our DOA, the Delegation of Authority, in terms of this is another action that we've taken. to challenge more every single investment that is proposed company-wide. We are reviewing the CapEx of every single business. And as you can see, we are reducing the capital expenditure by $35 million. And yesterday morning, I was having a call actually with Carlo and the team in terms of reviewing a major investment that was planned for motion technologies in friction and trying to find, with the typical friction ingenuity, a different way of doing it, drastically reducing, you know, million dollars of investment. So everything is on the table. Everything is under review. Everything that's already been approved needs to be re-approved again.

Okay, understood. That's really helpful. Good luck, gentlemen. Thanks, Damien.

Our next question comes from the line of Brett Lindsey of Vertical Research Partners.

Hey, good morning, all. Hope you're doing well.

We are.

Good. Just first a point of clarification on the decrementals. You talked about the 30% to 35%. Was that a pre-cost out number, or did that include the actions you've already taken?

So, Brett, that's where we're kind of starting off as we come into the year. I would say 35 is pre-action, and the goal as we start to drive these actions into Q2 and Q3 and into the balance of the year is to start to see us getting, you know, to the low 30s and keep driving from there. So, yeah, the progression will certainly accelerate to the good in Q2, and the actions start to really take hold in Q2 and Q3. Okay.

Okay, great. And then just shifting to MT and the outgrowth, you mentioned for the year you're looking at 700 or 1,000 basis points of outgrowth. Was that an annual number or were you saying each quarter going forward?

Okay, so that's an annual number, Brett, between 700 and 1,000 basis points. What is likely to happen in 2020 is is more of an erratic path just because it's a very volatile environment. So what you've seen in Q1, we outperformed the market by more than 2,000 basis points. But I do not expect to deliver 2,000 basis points on a yearly basis. So we will see more of an erratic outperformance as we move through the quarters. but we will expect that outperformance in every region, in Europe, in North America, and in China.

Okay, got it. I'll leave it there and pass it along. Thanks, guys.

Thanks, Brad.

Thanks, Brad. Our next question comes from the line of Mike Halloran of Baird.

Hey, good morning, everyone. Good morning, Mike. So... You're making a lot of actions here, obviously moving very fast, very aggressively. How do you balance the long term and the short term here? In other words, what are you guys using as metrics to make sure you're not cutting too hard to the bone? When you think about some of these CapEx reductions and how you're thinking about some of the growth initiatives that are going to be really positive for you longer term, how do you think about that and reducing some of those actions in the context of, the long-term versus the short-term, and then I guess the second piece of that is just, is part of it that some of the returns on some of these investments are also getting pushed out, which enables you to push out how the dollars are getting spent? Any kind of color and context on the thought process would be helpful.

Okay, so let me address the first part, and Tom, I'll leave you for the second, maybe. Okay. So it's a good point, Mike, in terms of what we are trying to do is, of course, to play defense. But we are playing offense for the future at the same time. So let me give you a couple of examples here. When we think particularly on the, if you think about motion technologies, if we think about the friction side, we're playing defense on really going granular in the process. analysis and critical analysis of the backlog and the order book in order to ensure that we match supply with demand. We need to understand really what is the real demand here and how much is just the tier one telling you to produce just to have a safe inventory because we need to understand really how much labor we need and how much raw materials so that we do not pump up the inventory raw materials to finish with an inventory of finished goods. So that is the fence Defense on the reduction of the workforce. We have our strategy in the past, which was quite right and has been until yesterday, to have quite a sizable amount of temporary workers, for instance, working in our plants, and that has been an immediate flexibility that we had at our disposal. But because of the size of the crisis that we're facing, the uncertainty and the volatility, we had to go down deeper. and we went down on the structural cost. Some of the reductions that Tom was talking about in terms of the restructuring are structural, and some of those are there to stay. We will be a better company and stronger when we come out of that. The CapEx reduction is we are really looking at every single one to ensure that we apply all our ingenuity to come up with the best solution for that and reducing the CapEx that at this point in time we don't need. But at the same time, I want to give you, we play offense for the future. Let me give you a couple of examples on that one. In China, we went out in terms of developing a product and conquered, during the middle of the COVID-19 in China, a sizable platform with a customer of ours just because the competitor was not able to supply at that time. This is going to be temporary. It's going to be for the next six or nine months. I don't recall exactly, but it's a good opportunity, and it's opening up the opportunity to bid for that platform when it comes to the market early next year, and we score points with the customer. When we close our plans in Italy during the month of April for a couple of weeks, we Our dynos, where we were working for new products, smarter products or greener products, when we were working for new programs, they kept on running and they were open. We would keep on investing in the new programs. And I think also because of our strong balance sheet, our liquidity position, and our competitive landscape, we are well positioned in there to really play offense in the mid-long term when we're coming out of this crisis. And these are just some examples of how we're balancing defense and offense. Tom, you want to?

Yeah, and I would just kind of add on balance that the investments are still going up year over year. Some of the actions that we're taking are really kind of pulling back from budget, and I think Luke had described the logic, which is focusing where we have the customer's attention, where we have the opportunity to go conquer something now, and putting our efforts and going after those conquer wins that have been our winning formula for downturns of the past. And, you know, when we have more mind share and focus from some of our customers on some of the medium and longer-term things, we would plan to pick that back up. But I think we're still looking at a year-over-year increase in investments, but just not at the level that we initially planned. And if I can give you... Oh, go ahead.

Go ahead, Mike. Sorry. Please continue, Luca.

I thought you guys were done.

So I wanted to give you a couple of examples also where we kept on investing in the other businesses. So we've been successful on the order intake for IP with our new BB2 pump, where we have taken metal out, better hydraulic performance, some intellectual property in it, This brings some very good results on the odor intake. We kept on investing on new VAV activity for new pump families, and we approved some of those investments just last month. And on the CCT front, just to reward the ingenuity of one of our engineers, he came up with a new low-cost respirator. Now, I don't know if this will turn out to be a success or not. We filed the patents. We got the prototype working. But those investments keep on going, and we're trying also to take opportunities for what is happening around us in the world.

That's very helpful. And then the second question is just how to think structurally about where the IP margins are today. Obviously, a lot better mix in the business from previous actions, from better pricing mechanics, but also as project activity comes down, your mix of business gets a little bit better. So any context, kind of twofold here, how do you guys think about what the bottom end of that new structural range could look like? And then also, what kind of ability do you have to really mitigate what the downside looks like?

Okay, so let me start talking a little bit about this. And I think that when you look at the margins for IP, they keep on improving despite the negative mix. So if you think about last year when we improved quarter after quarter despite the negative mix because the project revenue was keep on going up. And then when you look at Q1, our negative mix actually impacted with a headwind of roughly 30 basis points. And despite that, we were able to improve, you know, 60 basis points, despite also a negative FX. I think that the result of that is a better execution, Mike. So let me give you a couple of examples to contextualize this. We are working, and we mentioned two major projects. One was in Saudi Arabia. and one was executed in India for the Dangota refinery in Africa. The new ITT, the new management is able to work in this way, is able to deliver. The first one was after the attack to the refinery in Saudi. The Saudi team operation, the Saudi operation worked very closely with the customer to adapt previous orders to what their needs were. They were able to deliver ahead of time And the same happened for the Dangote Refinery. We executed the project. We finished ahead of time. And because of that, we delivered before both Saudi Arabia and India went in lockdown. You know, this is something that the new ITT, the new management is able to work and deliver. So project execution, that is one example. I always talk about Korea as well as Saudi. Let me talk finally about SFO as well. SFO delivered in Q1 an on-time delivery on the ANSI line of more than 90%. Unfortunately, mid-range was not in the high 80s, but they got it back in April. We closed, I think we closed last week, April, I think, and the on-time delivery of the mid-range was actually 88%. There were people shocked in Seneca Falls. in this number in their entire life in Seneca Falls. So that execution is really what is bringing better margin. But it's not just better margin, Mike, it's also better working capital. Because if you look at the improvement of the working capital, you know, IP generated $29 million of cash in Q1, and all of that came from working capital improvements. 180 basis points year-over-year, 300 basis points improvement since the end of 2019, and all of that is coming from inventory. So that's my comments and color on the margins.

Appreciate it, gentlemen. Thank you.

Thanks, Mike.

Thanks, Mike. Our next question comes from one of Joe Ritchie of Goldman Sachs.

Thanks. Good morning, everybody. Hope you're all well.

Hi, Joe. Hi, Joe.

Hey, so maybe, Luca, if you could just comment a little bit on the supply chain, particularly in the U.S. and Europe. You made some comments around how you guys manage through China, but I'm just wondering how are we set up to manage during this downturn in both of those regions and then also Are there any additional costs that you have to take on as well, whether it's freight or logistics? Just any comments around that would be helpful.

Sure. So the management of this situation has been a daily management. And what has been clear in terms of our expectation and the management in ITT stood up to that is that you have to be hands-on all the time. This is the case where you really need to see your leaders are the shepherds and they need to smell like a sheep because they are down there with them. You need to manage every single time the logistics because it got more and more difficult in terms of finding the transportation when Italy was locking down, when the borders were locking down. So that was tricky. but we didn't face any major hiccup, and we were able to deliver everything that we were supposed to deliver. But it was not easy. It was a daily management, it was a hourly management. When you look at the supply chain, we were able to go through China. When COVID-19 exploded in China, we developed our supply chain contingency plan, our backup scenario. And the backup scenario was ensuring that if some of our suppliers were not getting through COVID-19 and there were a couple of critical ones that needed a lot of help from our resources, we had developed a backup from Europe. And fortunately, we never had to use it. We also had a backup of our own plants just in case we faced difficulties in in our plant in China. And the fact that we have the same process, the same machine, the same manufacturing helped us in making this redundancy working. We didn't have to use it, though. Now, when we went the other way around, then obviously the reverse happened. So our backup plan when Italy was locking down was, okay, if we are having issues in terms of manufacturing and serving our customers from Italy, okay, what can China do? What can our Chinese supplier do to support Europe? It didn't come to that because it was not necessary. But once again, it was a daily management. To give you an idea, so that is the first question. The other point is that we face several difficulties during these lockdowns, Joe. Let me give you, in the prepared remarks, I was talking about people waiting hours at the border. Think about it. You have a plant in Ostrava in friction making brake pads and shock absorbers. And what you have is a lot of Polish workers crossing the border and come to work to our factories. Now, there were days where they had to wait in line for hours, and then the border was closed. So think about you're a plan manager, and you have to find labor, temporary workers, to ensure that you supply your customers and you make your path. So all of that is really daily management, hourly management every day for 24-7. Sorry for the long answers.

No, no, that was super helpful. I really appreciate it. Maybe my one follow-up in this question for Tom, in just thinking about the cost action, you know, the $100 million or so, you know, so the non-TAPEX-related actions, I guess if I'm thinking about how much that actually benefits 2020, it sounds like because of some of the actions, you know, particularly in Europe happening in 3Q, it's fair to say that less...

you'll see less than half of the savings in 2020. I'm just trying to make sure that I think about it right from a modeling standpoint.

Sure. We'll definitely jump on and already have, as you can imagine, the discretionary cost, the vendor renegotiation, the 401K, the salary-related items, which is the $30 million. So we're going to get good realization on that portion soon. very quickly, and a lot of that has already been implemented, executed, or negotiated. So we'll start rolling benefits there. On the headcount side, you know, really 55% of those actions should be done through Q2, so we will get a good run rate momentum, and some of those actions have already taken place, Joe. So hard to give an exact spacing of it, but we're – you know, best data point I can kind of give you is on track to get 55% of the actions done in Q2. So we should see a good chunk of that savings coming through in 2020 as the year progresses. Okay, perfect. Thanks, guys. Thanks, Joe.

Our next question comes from one of Nathan Jones of Stiefel.

Morning, everyone. Hi, Nathan. Hi, Nathan. I'd like to put a little bit of a finer point on the MT outlook. Luke, you shared some of the auto builds that you saw in China down 48% in the first quarter. As the virus has rolled from east to west, are those the kind of auto OEM build numbers that you're expecting to see in 2Q in Europe, in 2Q in the US, or is there a reason why they would be better or worse than that? Okay.

Thanks, Nathan. I believe that North America and Europe will be probably worse than China. That's my personal belief. Now, when we look at the full year, you can look at the IHS numbers. We have taken a more conservative approach in our scenario planning. in worldwide, but also in each region, and both in Europe, North America, and China. But going back to your original question, I think that probably Europe and North America, just looking at how the lockdown has been working in Europe and also in North America, the shutdown and our customers' customers, I believe North America and Europe Q2 will be worse than Q1 China.

Okay, and then you also have a big chunk in MT that's aftermarket, that's replacement brake pads, which will typically slow down in a recession as well. Maybe if you could comment on how you think the lockdown in Europe affects that business in 2Q, and then if you just have any thoughts on a general kind of recession impact that that might have in 3Q and 4Q as we're getting back open.

Okay, so... Now, when it comes to the aftermarket, of course, when you look at, for instance, our aftermarket is OES and independent aftermarket. I talked to Continental and some of the customers on what they see in the aftermarket. Obviously, they see the aftermarket going down as well. When you've got everybody locked down in their houses and not traveling, this is what will happen. So it will be in the negative territory as well. There is a belief out there that the aftermarket is not going to be as negative as the OEMs. So that is what some of our customers are thinking today. And they see Q2 as the trough as well for the aftermarket. When it comes to the recovery, I would say I see... I see a nice direction in China. I do not necessarily know if Europe and North America are going to recover exactly in the same way or if it's going to take a little bit longer. I would say China is recovering that way without any incentive. Europe and North America are going out with incentives, so I know if this will impact positively, we will have to see. We're looking at leading indicators to ensure that our actions are ahead of the time and we stay ahead of the curve.

Okay, just one final one on the balance sheet for Tom here maybe. You guys have got essentially no long-term debt on the balance sheet. Interest rates are about as low as they're going to get. We may look at inflation on the backside of this as we recover and higher interest rates. Can you talk about how you're thinking about the potential to place some medium to longer term debt on the business here, trading off the short term increase in interest expense for a potentially lower long term interest expense?

Yeah, Nathan, I would say that in the environment where we're looking at all of the options and kind of keeping those available to us, there are also government programs that are out there that are medium and longer term in nature on a global basis that have some very attractive interest rates. So I would say our plan has been to explore every option and keep rebalancing our liquidity profile in the most optimal way. So I would say everything on the table and being constantly evaluated. Obviously, we've had some good success with our current strategies, but everything from government programs to bonds to kind of everything in between. I would say we explore and we'll see what the best opportunity is for us. But, you know, nothing on the immediate horizon at this point other than the liquidity that we currently are maintaining.

Okay, fair enough. Thanks for taking my questions and stay safe. Thanks, Nathan.

You too. Our next question comes from one of John Inch of Gordon Haskett.

Thanks. Good morning, everyone, and thanks for letting the call run a little bit longer. Can I just go back to decrementals just for a sec? On the surface, Tom and Luca, so the headline decremental, if you look at the total number, was 50%. But then, Tom, you actually called out, you said MT was high 20s if you look at the core, right? I think that's what you said. Correct. What was the core for the other two businesses, if you want to think about it that way?

Well, kind of the face print, I would say IP is probably pretty consistent without pulling it apart in the 23% range for Q1. And CCT, we said a quick core was 35%. It published at 39% because of Matrix was in this year but not in last year, so it just creates some distortion there. So really once you recalibrate, you're – the quarter you're kind of getting into the type of run rate that we would be expecting as we enter Q2 and then we're going to layer on these incremental benefits and actions. So I wouldn't read anything into the 50% ITT level other than a couple of anomalies at MT and CCT and the lack of new actions playing through.

Yeah, no, I understand. It's just trying to parse the headline. So if you're talking low 30s, then is the headline going to look like low 30s or that's... you're talking kind of almost on a core basis. Is that the way to think about it?

Yeah, generally we're thinking on a core basis in the low 30s and trying to break through that. Now, each business is going to have a different dynamic just based on their progression of savings. Obviously, you're going to have an array of outcomes, but we're targeting this kind of 30% range, and as the actions gain momentum, our goal is to see if we can break through that. But on balance, that's how it is. CCT is going to start at the higher end and come down given the nature of the business and their margin profile. IP is kind of at the lower end because of where they're starting. But on balance, 30% plus or minus is what we're targeting, and we hope we get below it as quickly as we can.

I want to go to the project business of IP that, you know, coming out of the 15-16 oil heavy industry downturn, probably didn't see pricing come back all the way. And now we're facing an oil and gas complex that could even be, well, looks pretty darn challenging, if not, you know, more to the nth degree. Luke, I know you've been sort of spearheading, redesigning pump products and other things kind of on a lower structural cost basis. to deal with that sort of a challenge, I guess, in terms of future project mix in pricing. Could you talk a little bit about that and if some of that's already running through your numbers and, you know, how those opportunities maybe will help to sort of blunt some of what could be some very long-term pricing headwinds in the project's business for IP?

Sure. Thanks, John. I would say when you look at the VAVE activity in terms of the new pumps and the new product, more cost competitive and also more differentiated from a product and quality point of view, I would say they're not really running already on the project execution side, John. We start seeing them impacting the orders. because we have won some nice orders with them because we were also price competitive and the customer liked the performance of those products. So the improvement that you see today on the project margins that we are executing are really more on what we have put in place from an order intake point of view and also from a project execution point of view. and the manufacturing efficiency in the operations. The products are still to come. Did I answer your question, John?

You did, you did. Yeah, no, that's perfect. And maybe just one final one there, Luca. I'm wondering if the performance of ITT, and specifically the tough challenges ahead for markets where you have, you know, a proportionally high amount of exposure, so aerospace, oil and gas, et cetera, does that cause you to rethink the portfolio's strategic positioning? maybe because obviously there will be future up cycles and future down cycles, hopefully not pandemic oriented, but, you know, maybe with an eye to broadening your end market exposures, you know, inorganically or through M&A, just so that you're not so heavily impacted. You guys are doing a great job, but, you know, in terms of just sort of thinking about future down cycles, you can never really start too soon. How are you thinking about this overall with it?

Yeah, John, it's Tom. I'm going to jump in, just give some framing portfolio, you know, kind of weighting perspectives, and then Luke can give you some of the strategics. I think sometimes, you know, in our diversified multi-industrial portfolio, sometimes there's some assumptions out there that we just want to make sure we get everybody on the same page around. So as we kind of think about the current portfolio distribution, We're looking at chemical and industrial pumps in and around 25% of the portfolio. Oil and gas, and this is at the ITT level, oil and gas is less than 10% of ITT today. And when you break that oil and gas apart, you were 4% upstream and 6% downstream at the ITT level. And our upstream, which is only 4%, is not exposed in a meaningful way to the U.S. shale play. We're, between rail and auto, we're in about the 45% weighting. And aero today is around 8% of our portfolio. Defense is five. And then general industrial connectors and all other medical is 6%. So that's just the current profile. And I would want to just give that framework. So some of these areas where we're seeing more headwinds generally are you know, below 10% in the case of oil and gas and aero in particular. So with that, I'll just turn it back to Luca to give the strategic perspective with those numbers in the background.

So this goes back to the usual, you know, strategic process that we go through on a yearly basis. I think that, you know, when we look at overall of our businesses, there is still a good opportunity in terms of value creation in all the markets that we're in. And as it stands right now, we are more focusing on trying to outperform the markets than really reconsidering portfolio decision at this point in time. John?

So in other words, a share focus orientation versus a diversification focus. Is that fair? In other words, like the diversification seems to be happening naturally based on sort of Tom's commentary.

Is that how you look at it?

That is fair.

That's fair. And to be honest with you, I was talking to you about the respirator, you know, the ingenuity of our designer, our engineer. I mean, if you look at medical, it's a business that probably we're making between $130 and $180 million of revenue. And it might well be that it gets a little bit more attention, you know, just because of, you know, some of the macro trends that you start seeing around the world with the pandemic, et cetera.

Perfect. Thanks very much, everyone. Thanks, John.

Thanks, John.

Our next question comes from one of Brian Blair of Oppenheimer.

Good morning, everyone. Happy to hear you.

Hi, Brian.

Doing well. Staying safe.

Thank you.

Brian. And thank you for fitting me in here. No problem. I have a question to help us think about more of friction's intermediate term trajectory. Is there any update you can offer on the five-year awarded OE revenue and how that's trended relative to the prior $3 billion level? Understanding there are a lot of moving parts here, I'm just wondering if you can somehow quantify the net effect of friction-strong win rate versus legacy production declines, potentially smaller size of new platforms, et cetera.

So I think the way to look at that, Brian, is really what you have is that... You have two dimensions here and two directions. You have the market that is resizing, right, because you went from more than 90 million vehicles produced in 2018 to less than 90 in 2019. And, you know, it's going to be considerably less this year in 2020. So you've got the production of vehicles going down, which is a headwind. that is reducing your backlog in a way. On the other side is our market share gain is actually improved because all the awards that we're sharing with you that are new and conquered are actually new awards where we are not participating, and therefore you've got these other dimensions on the positive side. So this is how it's really going to play out. A lot depends also on the production, as I said, and it depends on the recovery that is going to happen towards the second half of 2020 or 2021.

Okay, that is fair. And then another longer-term one, as we think about the margin potential of your segments over time and the entitlement margins that you've cited previously, Is there any change to that outlook with mid-teens plus IP, high-teens plus CCT? Is that simply pushed back a bit, or are there other factors in terms of the realistic scale or mix of segments, anything else that may pressure the post-COVID outlook?

No, I would say I don't see any change on those ones, with the exception of exactly what you said, that it might be pushed back just because of the global reset of what's happening out there. and the reset of the market that we're operating in. That would be the only dynamic that I see that's today.

Got it. Thank you for all the color today.

Thank you.

Thanks, Brian. Our next question comes from one of Andrew Obin of Bank of America.

Yes, good morning.

Hi, Andrew.

Hey, just a question about free cash flow this year. How do you think, I think what's a little bit unique about, well, a lot unique is that you do have these longer cycle businesses like oil and gas and aerospace. So as you think about releasing working capital, can you just talk about both challenges of getting paid in aerospace and oil and gas and also sort of the long-term nature of orders? How long would it take for you guys to sort of take working capital out. Thank you.

Okay, so let me start addressing this one, and I don't know if you want to add any color afterwards, Tom. One thing that we have improved is our cash. Of course, our cash management right now is getting more attention than ever because in this kind of situation, volatile uncertainty, So on a daily basis, we put a system in place. On a daily basis, we have a cash call where the treasurer is really looking at how the cash is moving in every single legal entity around the world. It's got 100% visibility of everything. And then on a weekly basis, I do have a call on cash when we are looking really, has the cash moved in the direction of our forecast for the month and for the next three months. And part of that call, we are looking at our top 10, top 20, receivables and the accounts receivable past due. I can tell you, just to give you some data, on the call of last week, our accounts top 20 accounts receivable past due amounted roughly to $8 million, and out of this $8 million, $6 million were in the 130 days. So, We haven't seen really major shifts, major changes in the payment from our customers. Really, there are more exceptions than the rule. On top of that, I would say because our execution has improved, I think about the two projects I shared with you. You were talking about IP security. the project in Saudi, and the project Dangote in Africa. Think about this Dangote project in Africa. It's through an engineering EPC contractor with an African customer, and the payments are almost spot on, both with our customers in Saudi as well as with our customers in Africa. So I haven't seen it so far anything that concerns us. And the improvement of IP comes from inventory. and I will expect all the businesses to improve their inventory in the months ahead.

So basically no specific challenges related to long cycle nature of these businesses?

Not so far. At this moment in time, I haven't seen them.

And just a little bit more color, and it's not really about the auto industry by itself, but just sort of unlocking the supply chain and restarting the manufacturing. You know, European automotive manufacturers... are starting to reopen. European countries are starting to reopen. And I know people talk a lot about sort of the Chinese experience. But in terms of logistics, in terms of just how much visibility you have, can you just talk specifically about what's happening in the European autos? Because it seems like it's a more relevant experience to the U.S. than China. Thank you.

Yeah, sure. I think that the situation in Europe is has been a little bit different than when you look at China overall. And it seems that particularly when you look at the situation in Italy, in France, in Spain, in the U.K., it's more like a Wuhan experience, a Hubei experience, in the sense that they really went for the heavy lockdown like the one that Hubei and Wuhan experienced. where other countries like Germany, like Poland, like Holland, like the Nordic countries have experienced more the COVID-19 in the way that the remaining of China has experienced. I'll give you a couple of examples. In Germany, our plants working in rail, they never shut down, and we have almost like zero absenteeism. In Holland, our plants never shut down, making shock absorbers. They had some absenteeism problems. Our plans in Poland, they never shut down. They're working in rail. But countries like Italy, France, Spain, and UK had experienced differently, and therefore they went in a heavier lockdown. So this is why it would be difficult to compare really the entire Europe with the entire China. It seems more like parts of Europe is comparable to Europe with a longer lockdown, which will make the recovery a little bit longer as well. That's how I see it, but it's a personal interpretation, Andrea.

Thank you very much. Really appreciate the detailed answer.

Thanks.

Thanks, Andrea.

Our next question comes from the line of Joe Giordano of Cowan.

Hey, guys. Morning. I'll keep it quick. We're running super late here, so just briefly. Tom, if you could just clarify what the write-down in the quarter was. And then just on the balance sheet, you know, I appreciate the moves you guys made to keep liquidity. But with, like, zero net, with negative net debt, you know, what's your thoughts on being more aggressive here? You know, suspended buyback, is that more kind of like PR reasons than liquidity reasons at this point? And how aggressive do you think about being in M&A here? Thanks. Thanks.

Thanks, Joe. So the $16 million write-down was in the industrial process segment. It was an impairment primarily related to our upstream business, just getting recalibrated to the longer-term demand environment. But again, the upstream business is only 4% of ITT at this point, but we just thought it was a prudent move based on the global upstream dynamics to look at some of those assets in light of the current economic conditions and the projections that we're seeing there. On the liquidity front, I would say, you know, we're certainly being proactive and conservative in obtaining liquidity and doing it in a very conservative way from an interest rate perspective. It's a very low-cost insurance policy right now just to make sure that we are staying ahead of any uncertainties in the financial markets. So, you know, we'll continue to monitor that as far as our degree of liquidity and You know, we were super aggressive on the repurchase front in Q1, getting a good $73 million in. That will certainly help our share count as we go throughout the year. The dividend was, you know, kind of executed $15 million in Q1, and that's, you know, our plan is to maintain that momentum there. So I would say it's a little too early, Joe, to start thinking about more deployment of capital. I think the world should cycle through Q2. and see how customer payment behaviors play out, how other dynamics play out. My suspicion is by the time we get through Q2, we'll have more clarity on the pace and sequencing of deployment in some of these other categories. We may even be able, in a better position, to start to put guidance back on the table. So I think for us right now, let's get through Q2, take another read, see where we are on these issues, And go from there. And lastly, I would say on the M&A front, we're not currently active on M&A, but we are continuing to cultivate, continuing to engage with targets that we've identified over the years and looking for any changing dynamics there, but we're not planning any transactions in the short term. Thanks. Thanks, Joe. Thanks, Joe.

And thank you, ladies and gentlemen. This concludes the question and answer session and today's teleconference. Please disconnect your lines at this time and have a wonderful day.