ITT Inc.

May 2nd, 2024. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern time. 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 one one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star one one again. 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 Mark Michaeluso, Vice President Invest Relations and Global Communications. Please, you may begin.

Thank you, Victor, and good morning. Joining me this morning in Stanford are Lucas Avi, ITT's Chief Executive Officer and President, and Emmanuel Capre, Chief Financial Officer. Today's call will cover ITT's financial results for the three-month period ending March 30, 2024, which we announced this morning. Before we begin, please refer to slide two of today's presentation where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially to do several risks and uncertainties, including those described in our 2023 annual report on Form 10K and other recent SEC filings. Except for otherwise noted, the first quarter results we present this morning will be compared to the first quarter of 2023 and include certain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and to the appendix of our presentation, both of which are available on our website. With that, it's now my pleasure to turn the call over to Luca, who will begin on slide three.

Thank you, Mark, and good morning. ITT had a very good and active start to the year. We grew revenue, margin, and EPS above expectations, closed the Svane Hoy acquisition, invested to sustain our differentiation, and continue to gain share with new profitable awards. We also reached an important milestone on our multi-year safety journey. Because of our unrelenting focus on safety, we delivered a 40% -over-year reduction in recordable incidents, leading to an injury frequency rate of 0.5, approaching best in class performance. Our plans are safer and more efficient every day. So for the results you delivered, and for your focus on safety, I want to thank all IT tiers. A heartfelt thank you. Now onto the results. In Q1, we built on 2023 momentum in orders, revenue, margin, and EPS. And all of our businesses contributed to this performance. Here are the highlights. 7% organic orders growth, or 13% in total. Nearly $1 billion in order, leading to a book to bill of 1.07. 9% organic revenue growth, or 14% total, surpassing $900 million of sales in a quarter for the very first time. 120 basis points of adjusted operating margin expansion to 17%, with all businesses making significant progress on our long-term targets. And although we no longer report total segment margin, on that basis, we would be just 100 basis points shy of our 2026 long-term target. As a result of all of this, we drove over 20% adjusted EPS growth to another new level of earnings for ITT. Now the details. On orders, CCT led the way with 23% growth fueled by record aerospace orders and recovering demanding connectors. The connectors performance was encouraging after the business managed through a year of distributor destocking. MT grew 11% with strong growth in rail. Friction also won 47 new hybrid and electric vehicle awards with Tesla, Xiaomi, Geely, and Mercedes, among others. And IP's short cycle business grew 9% sequentially, whilst winning nearly $70 million of project awards, leading to a book to bill of 1.06. On revenue, all three segments deliver strong revenue growth driven by 8 percentage points of volume. This was led by induction process, which drove 64% growth in profitable pump projects. MT delivered 8% growth led by strong friction or outperformance and double digit growth in rail whilst we continue to see recovery in the friction aftermarket. Finally, CCT grew 7% with 13% growth in aerospace and defense. We've seen a multi-quarter ramp in defense that we expect will continue throughout 2024 and beyond. We're driving profitable growth, resulting in a 23% increase in operating income, nearly two and a half times our organic revenue growth rate. Looking at margin by segment, MT surpassed 18% margin in Q1 after improving sequentially every quarter in 2023, highlighted by Coney, which drove margin above the MT segment average. Well done, Yorun and Coney China. CCT also delivered more than 18% margin, driven in part by pricing. Our new CCT president, Michael Goody, is already hard at work leveraging his operational experience from Park & Hennephin and ITW to drive CCT towards its 22% margin target. Finally, on a like for like basis, IP's margin was up 140 basis points, even as the mix of revenues shifts to projects. And including acquisitions, IP was still above 20%. Because of this performance, we're raising the low end of our EPS guidance by 20 cents, or 10 cents at the midpoint, to a new range of 5.65 to $5.90. We now expect EPS growth of 11% at the midpoint, above our long-term target, and given the strong top-line performance and momentum in orders, we are raising our organic growth guidance to 6% at the midpoint, with a 20 basis points increase in our margin outlook as well. Our teams deliver this performance while investing in the businesses. These investments will continue to drive strong returns for our share orders, and I was fortunate to see some of this first hand last quarter. In India and Saudi, I saw the investments that IP is making to expand testing capacity and capabilities. Khaled and the Saudi team will be able to test larger pump packages, sustaining our ability to gain share in the Middle East. Similarly in India, Lala and team are installing nearly four times their current power capacity to shorten lead times to customers and improve testing availability. As we expand our in-region for region strategy, IP expects to continue to gain share in these growing markets. We are also investing in our capabilities to execute decarbonization projects. At our Bonemann site in Germany, we are upgrading our testing facility to replicate field conditions on large pump packages. ITT will be one of few companies in the world with this capability. We're also making progress penetrating the high performance break-back segment. We expect the new production lines in Thermolite Italy to be up and running later this year as part of our 50 million euro investment for plant expansion and upgraded R&D capabilities. Notably, the Friction team has already won low emission break platform awards on high performance vehicles even before the facility construction is complete. In addition, the team secured approval for over $20 million of government incentives in Europe, which will significantly reduce our cash outlay for the facility expansion. And again, in Friction in China, working closely with local OEMs, we drove 38% growth in Friction OE, a substantial outperformance in the largest automotive market in the world. Well done, Friction team. And finally, on innovation, the Embedded Motor Drive or EMD is delivering continued positive results in customer field trials. On average, EMD delivers energy savings of over 50% compared to a standard motor and significant CO2 emissions reduction. We expect to start product commercialization in 2025 and we share more with you on EMD in the coming quarters. All of these investments will sustain ITTs differentiation over the long term through profitable growth. A significant full portion of that growth will come from the nearly $1 billion of orders we booked this quarter. Let me tell you more about this on slide four. Building on our 2023 momentum, we grew orders 13% in total and 16% sequentially with strong performances in all businesses. We are focused on growing and growing profitably. This means we look at each opportunity with a strategic lens and an opportunity level of selectivity. Here are a few examples. By leveraging our proprietary envision valve technology, IP engineer valves won an award of more than $20 million to support the production of a groundbreaking weight loss drug. The strategic award reinforces our partnership with this leading global pharmaceutical company. We're also winning on green orders, not just in IP with larger carbonization projects, but also in friction with awards with hybrid electric vehicles and in CCT with battery connectors. With this and other awards, green applications now represent approximately 16% of ITTs revenue annually. Moving forward, this will be bolstered by Svanahoy with its exposure to low carbon and green fuel applications as part of the clean energy transition. This quarter, Sorin and team grew orders by more than 30% year over year. And we expect this will have delivered double digit revenue growth for the next several years. Moving to CCT, we are seeing good orders momentum in connectors distribution, especially in North America. Whilst this is encouraging, we don't expect full recovery in connectors until the second half of the year. Additionally, aerospace and defense components recorded its highest orders quarter ever. And finally, in Rave, orders were up 37%. As you can see, ITTs growth is accelerating with organic orders growth of 7%. And with a strong performance from Svanahoy, we grew orders 13% in total. Our key one performance demonstrated once again, that ITT is well positioned to grow profitably. Now let me turn the call over to Emmanuel on slide five.

Thank you, Luca, and good morning. Beginning with revenue, we generated 9% organic sales growth with all segments contributing. Volume drove most of the growth this quarter. IP projects were up 64%. CCT aerospace and defense components were up 21%. And friction OE was up 12% with an outperformance well above the historical 800 basis point average. Svanahoy added five points to the total revenue growth. And also want to reemphasize that its orders were up over 30% compared to the prior. On profitability, margin expansion was primarily driven by MT, which grew more than 300 basis points to surpass 18% faster than we anticipated. Excluding M&A, IPs margin was up 140 basis points. This was driven in part by over 200 basis points of margin expansion on projects as we continue to improve execution. Collectively, our businesses drove 60 basis points of productivity, which more than offset 40 basis points of strategic investments related to new friction product formulations and product redesigns in IP and CCT. On earnings, adjusted EPS growth of 21% was driven by volume, price, and productivity. In addition, we absorbed higher interest expense and a slightly higher effective tax rate. Finally on cash, after generating $430 million for all of 2023, this quarter we grew our free cashflow by 2% versus prior year driven by increased profits. We continue to see significant opportunities for stronger cash generation as inventory NAR improve. All in a strong start to 2024 that gives us confidence in delivering the midpoint of our new EPS outlook. Let's move to slide six to review the EPS bridge for Q1. Adjusted EPS grew 21% for the quarter to a record $1.42. Strong volume growth and higher price drove 23 cents of operating leverage while net productivity contributed another 5 cents. And the investments Luca described earlier had an impact of 3 cents this quarter. Included in the net M&A bar is roughly $7 million of intangible amortization coming from both Zvenehoy and MicroMode. Of the 7 million, approximately $4 million is related to amortization of backlog that will be recognized over the next 12 to 18 months and then tail off. Once we finalize the purchase price allocation for Zvenehoy, we will provide more call it. Wrapping up the bridge, interest on the term loan and commercial paper drove a 3 cents headwind this quarter. As cash generation picks up, we anticipate paying down our outstanding debt further. Let's turn to slide seven to discuss our 2024 guidance. Today, we are raising our guidance for organic revenue, operating margin and EPS given our strong first quarter performance. To begin, we are increasing the midpoint of our organic revenue guide to approximately 6% due to frictional performance, improvement in connector orders and the backlog we accumulated at the end of Q1, which is up 11% organically year over year. On operating margin, we expect .4% at the midpoint. Both MT and TCT eclipsed 18% this quarter and IP is driving higher margin in the core business, mitigating M&A dilution. The higher revenue growth and operating margin is expected to drive adjusted EPS growth of 11% at the midpoint, 10 cents improvement from the previous guide. Before I move on, I also wanted to provide some color on what we expect in the second quarter. Organic revenue should grow in the mid single digits led by CCT and MT, while IP will navigate a tough prior year compare on revenue and orders growth. We expect total margin expansion of 50 to 80 basis points, which will drive EPS growth in the high single digit range compared to the prior year. Let's turn to slide eight to discuss capital allocation. Let me start by saying that we will always invest organically given the proven returns and organic growth we can generate. And now we're intensifying our focus on M&A. We expect this will be a significant value creation driver for ITT and so we thought it would be beneficial to shed more light on our capital deployment framework. In M&A, our primary targets are close to core acquisitions in flow and connectors. We focus on companies with leading market positions that manufacture highly engineered components and have a strong management team. These targets may also present margin expansion potential, but the dear rationale always starts with a strategic fit. We have significant dry powder and we intend to effectively deploy capital in order to strengthen further our existing businesses. Along with acquisitions, we also regularly review our portfolio to ensure the businesses that we own align to our longer term strategy. After M&A, we focus on returning capital to shareholders through dividends and share repurchases. If we don't find the right targets for M&A, we intend to ramp up the pace of share buybacks, allowing shareholders to benefit from ITT's strong financial position and our $1 billion share repurchase program. With that, let me turn the call back to Luca.

Thank you, Emmanuel. Before I wrap up, I want to reemphasize a few points Emmanuel made on M&A. Historically, we created value through growing organically and expanding our margins. And whilst this will continue, now we also expect to drive further value inorganically as we continue to build the M&A muscle. In the past few years, we added experienced deal makers to our leadership team and strengthened our M&A teams in the business. As a result, we have stronger capabilities and our success in this area is growing as evidenced by the three acquisitions in the last two years. Among these was Habony, which expanded our Valve business by more than 50%, generated more than 100% cash conversion in 2023 and exceeded our expectations in all metrics, adding eight cents of EPS in year one. And whilst it's too early for Svanahoy, the initial signs are encouraging. We continue investing in our capabilities and expect to accelerate the pace of M&A in a disciplined manner. And as Emmanuel said, it all starts with a strategic fit. Now, let me wrap up with a few points before Q&A. Q1 was another milestone quarter for ITT. And as a result, we raised our sales margin and EPS guidance. Our businesses are outperforming their end markets, be it energy, transportation or air and the sense, generating nearly $1 billion of orders and a book to bill above one, leading to a record $1.5 billion backlog. We have many opportunities still to create value organically. And with our strong financial position, we are working to compound this growth with enhanced M&A performance. As always, it has been a pleasure speaking with you today. Thank you for joining. Victor, please open the line for Q&A.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 101 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 101. Again, we do ask that while you pose your question, you pick up your handset to provide optimal sound quality. Please leave your questions to one question and one follow-up. One moment for our first question. Our first question comes from the line of Joe Giordano from TD Kallen. Your line is open.

Hey, good morning, guys. Hi, Joe. Hey, so on MT, and the margins there were really good. I'm guessing like higher than maybe you thought in the 1Q. I see in the slides, you're talking about full year kind of being roughly similar than you did in 1Q. Can you kind of just frame that with, you know, you got new platforms or anything, and you have, you know, where are you with price? Like how much of that full year guide, it feels kind of conservative in light of what you put up in the 1Q, so maybe just walk us through the puts and tastes there.

Sure, thank you, Joe. So first of all, we are very happy with the performance that MT put in Q1, more than 80%. Now, I think that we are working on consolidating this for the full year, Joe. Now, when it comes to the dynamic of the price cost, as you can see, the price cost for the full year will be roughly neutral when it comes to motion technologies, and will be roughly neutral for ITT as well. Of course, there are a lot of programs that we want, and therefore there is a lot of SOP and a lot of process validation that are happening in the line. And while this will help in the future sometimes, it's also impacting the efficiency in the line.

Perfect. And can you maybe on CCT, on connectors specifically, just what's going on here with you guys on the order side, it just seems very different than what we're seeing at others. I mean, it goes in market by in market, but generally one of the only markets we see doing well right now are aerospace and connectors and IT with data centers. So where are you seeing this kind of strength, and how kind of company specific is this to ITT?

Sure. Thank you. When it comes to the orders of CCT, they were at the record high, and specifically on the connectors, at roughly 122 million total, they were a record high as well. The growth there were aero, for sure was up, defense was up, but also industrial orders were up. The only orders where we saw some declines were actually in the EV connectors. Now, if you want to look at those in another dimension of the connectors between the OEMs and distribution, we had good growth both on the OEM side and on the distribution side. This was probably the highest order on record for connectors that we had. Having said that, it's just one quarter. Great

to see you. Thanks, guys.

Thank you.

One moment for our next question. Our next question will come from Jeff Hamon from Key Bank Capital. Your line is open.

Hey, good morning, guys. Morning,

Jeff.

So, yeah, I want to stay with the orders. So, clearly, impressive orders on MT. I'm just wondering a little more color in terms of what's inflecting there and how much is just the aftermarket kind of through the de-stock and growth and then just on CCT, any lumpiness in any of that orders, particularly on the aero side? I know that can change quarter to

quarter. I would say when you look at the orders picture, Jeff, Q1 orders are definitely one of the highlights of the quarter. For total ITT, a record, almost $1 billion. And when you look at each value center, it's a good picture in each and every one and in the business in there. In motion technologies, don't forget about rail. Rail is a good market right now, and then the business is outperforming tremendously, both in Europe and in China. The friction awards, I mean, those 47 awards also in EV and a hybrid, we are already in terms of the awards at more than 40% of the total full year target, and we don't tend to give easy target, Jeff. On CCT, the highest orders on record when it comes to distribution connectors, the highest on the components, obviously pushed from the defense. When you're talking about aero, and for sure, there are news out there in terms of some of the production coming down, we are keeping an eye on the production rate of some of our customers. So far, talking to our customers, things have not changed, but we're keeping an eye. And last on IP, the short cycle performed very well as well, with 1% growth year over year and 9% growth sequentially. So overall, a very good picture on orders.

Okay, great. And then I appreciate the slide on capital allocation. I'm just wondering, as we look a year or two out, what you think the kind of optimal balance sheet leverage is, and do you think you have a pipeline that can support getting there over a couple of years?

Yeah, Jeff. So definitely, we're very happy with the health of our balance sheet. We have almost no debt. We have worked really hard to make it the way it is today. When you think about the prospects from an M&A standpoint, clearly, as I discussed, we created a lot of value organically, both from a top line and a margin standpoint, thanks to those organic investments. In fact, if you look at our margin extension, it was 350 basis points since 2019. And obviously, we will continue with that. But as I said, we're accelerating on M&A. Luca mentioned that we've been building the muscle on M&A. We have built a talented and experienced team. We have a clear and effective strategy. And so as a result, we've been able to really build a rich and actionable pipeline of targets. We have today a pipeline of serious targets of more than 10. The average revenue size of each company is around 200, 250 million. And I think our goal internally, obviously, doing it in a disciplined manner, as Luca mentioned, is to try to deploy roughly 500 to 700 million dollars on average each year to really get to grow ITT inorganically. Our targets are still flowing connectors. That hasn't changed. And so, yeah, we're patiently building our execution on M&A.

Okay, perfect. Thanks, guys.

Thanks, Jeff.

Thank you. One moment for our next question. Our next question will come from Mike Helleran from Baird. Your line is open.

Hey, good morning, everyone. Hi, Mike. So a couple here, following up on the order side, MT specifically, maybe just talk about the auto piece and how you're thinking about production on a full year basis and just inventory levels in the channel.

Sure. Thanks, Mike. So when you look at the quarter, the quarter worldwide was declining roughly 0.8 percent. And it was a little bit different than what expected in terms of Europe was much weaker. Europe was down 2.5. Whereas China was surprisingly up more than 4 percent. And I'm talking about car production here, of course. And the North America was up low single digits. So when we look at the full year, Mike, we're expecting Europe to be down low single digit. We expect China actually, the projection on China is better than at the beginning of the year. We expect it to be up low single digit, whereas North America up low single digit as well. Overall, the production for 2024, we expect roughly around 90 million vehicles. On all of these, as you know, we outperform and our performance was amazing in Q1. Granted, it's a quarter. And I want to mention two data points. One is China that despite the market growing 4.4, I mean, our business grows 38 percent, an outstanding performance there. And Europe, even though the market declined, the business not only outperformed, but was able to grow year over year. So an exceptional performance from the friction team.

Appreciate that. And then on the IP side of things, maybe just talk about underlying the dynamics there, specifically two areas. One, what you're seeing on the short cycle, chemical side of the business, the external industrial side of the business, any trend changes either way there, as well as how Sabinoe is doing as far as the organic business goes and kind of the momentum you're seeing there.

Sure. Let me talk about the short cycle. Maybe the market, I leave it for Emmanuel. When you look at the short cycle orders, as I said, they were up 1 percent year over year. And that was mainly thanks to VARPS and service. When you look at sequentially, they were up 9 percent. That 9 percent is mainly only volume. And all the components of the short cycle in the quarter were up sequentially. Baseline parts, service and VARPS. And all of that is really volume. If you look at that short cycle orders, it's probably the second highest ever when we look at the million of dollars that we recorded per week. Now, when it comes to to market, I would say that I don't know if you want to say it. I would say that we see some weakness probably on the chemical side, but the general industrial was strong. Now, and on the geographical basis, I would say the strength is mainly in North America.

And I would just add, even when we look at our funnel, a lot of activity coming from the Middle East, really strong oil and gas chemical mining prospects for orders. So, so very, very healthy markets for the moment for IP. And you see it in the book to bill. Our book to bill was 106. I think, Mike, you had also a question on Zvenerhoi. And so just to give you a little bit of update on this. So we closed Q1 in line with expectations, both on sales and income. And as Luca mentioned, on top of that, we had really strong orders. They registered 30 percent growth on orders. And so when you think about the strategic fit that continues to they continue to ring to ring true, they're market leader, they're a very, very active player in energy transition. And we continue to see that they built they continue to build long term backlog. So we're booking orders well into 2025 now. The integration also is progressing really well. So all this is reinforcing our strategic rationale. And then finally, I would say they already started generating cash, which which is always.

Great. Really appreciate everyone. Thank you.

Thanks, Mike.

Thank you. One moment for our next question. And our next question will come from Scott Davis from Mellius Research. Your line is open.

Morning, Scott. Hey, good morning,

guys.

Hi, Scott. Congrats. Congrats on the start to the year. And it's been fun to watch you guys kick some tail the last few years.

So anyways,

you've been very generous on the M&A commentary, but I'm just kind of curious. We've been talking about flow in particular consolidating for two decades now, and there hasn't been a lot of consolidation. What what what what has been the main barrier to to perhaps maybe some of the transactions not occurring already? Is it is is it is it more just a function of of timing? Is it price? Is it is it that a lot of these things are niche, niche assets? And there just hasn't been much of an appetite. I'm just kind of curious. More big picture than anything else. Look at your years of working in this. Why why we haven't seen more consolidation already.

Yeah, sure. I think that, you know, it's it's a good question. I'm not so sure I do have the question that they answer, Scott. In these very fragmented markets, there are plenty of opportunities. I think probably sometimes is that people tend to play in in the courtyard, that they know and therefore they've you know, they haven't they haven't made the proper acquisition. But there is also a lot of things to do in cleaning your your house, in putting your house in order first. So I think that when I look at many companies in flow, probably the performance is not up to up to where it's supposed to be before starting M&A. If you're asking me, for example, Scott, five years ago, it would have been very difficult to to be, you know, bullish on acquisition in IP. It's a different story now.

OK, that's that's helpful. And guys, just to clean up item, are rail margins higher than an auto or are they pretty similar?

So when you look at when you look at Coney business, rail margin are clearly on par a little higher than than our friction business. And then when you look at Axtone, Axtone is in the low teens. And the reason for this is because we're still we're still driving pricing to offset the the cost inflation and the cost inflation has been really taking longer than expected because we had such a long backlog. So we have good line of sight to bring Axtone to to the mid to high teens this year. But but I would say well, for the real wear margins, especially in Coney, are trending really well.

OK, that's a lot this year, guys. Thank you. Thank you, Scott. Thank you.

Thank you. One moment for our next question. And our next question will come from Joe Richie from Goldman Sachs. Your line is open.

Morning,

Joe. Thanks. Hey, good morning, guys. Great. I'm sure. Let's just focus on the first question on IP. So the project business, you know, up 64 percent, but you still saw, you know, margin north of 20. That's that's pretty incredible. Just just just given historically what the mix has been on that business and what the margins have been on that business. Can you just kind of mark to market the margins that you're seeing on the project business? And then if there's an update that you can give us on the foundry closure that occurred last year and whether you're starting to reap those benefits as well.

Sure. Well, well spotted, Joe. I think that, you know, despite the big headwinds of mix, the margin improved more than 140 basis points on an organic basis on a like for like. And the reason is really the result of the selectivity that we had in order acquisition and the good project execution and the rigor that we have. Just and we expect this to continue, Joe. I think that we are not done here. So just to give you an example, the backlog that today we have in our project business is very healthy margin and on a year over year basis is up 300 basis points. So this will continue the improvement of margin in IP on an organic basis. That is for for the project and that rigor continue both in acquisition as well as in execution. Now, when you think about the foundry, the foundry, we were is closed. So we've been able to close it successfully. We now we we have been able to reduce our our headcount in Seneca Falls because of the closing the foundry, improve our safety performance and also improve the quality of the casting that today we are getting either from low cost region or also from North America and Mexico. So it has gone well and completed.

That's super, super helpful and great to hear. And then I guess maybe just continuing on the margin front. I know there was a question earlier on motion tech and obviously the strong incremental margins this this this quarter. Just just help us help us kind of understand maybe the trajectory of the margins from here. You know, do we do we move higher off of the, you know, .2% number? And what does that look like for the rest of the year?

Yeah, thanks, Joe. So you're right. Incrementals were super strong in motion technologies over 60% in the first quarter. We expect a similar number for the rest of the year as well. So so we're very we're very excited with the performance. There was a lot of work that was done from a pricing standpoint, from a managing the commodity cost as well and trying to book in advance sale prices, for instance, and taking advantage of the reduction that we've been seeing towards the end of last year and at the beginning of this year. If you think about from a margin standpoint, I think we can confidently say that we expect motion tech to improve sequentially its margin quarter after quarter. But I would say remain still within that 18, 18% range. Right. For the for the for the four year. So as Lucas said, we as Lucas said, we're going to work on sustaining that higher level of margin. This is a business that not very long ago was was lower than much lower than this. And what we want to do is to make sure that we're able to deliver on a on a consistent basis, a higher level of profitability.

Great, guys. Thank you. Thank

you. One moment for our next question. And our next question will come from Damien Carras from UBS. Your line is open.

Hey, good morning, guys. Hi, Damien.

Apologies. I'm joining the call a little bit late here. So sorry for rehashing anything you've already discussed, but maybe you could just give us a little bit of a walk across the globe for your auto business. Any updates on how you're feeling about the OE side in each region, as well as European aftermarket?

Maybe the European aftermarket manual. So when you look at the market, Damien, the market was down in the Q1. Talking about production, roughly 0.8 percent. We expect the market to be flat for the full year. Overall, at 90 million vehicles produced was a little bit of a different picture from the beginning of what we expected at the beginning. In terms of Europe was worse, was down 2.5 percent in Q1. And we're expecting Europe to be down low single digit for the full year. China, which was expected to be flat, was actually up 4.4, which tells you something about the resilience of the market. And we expect to be up for the full year low single digit. So this is the great news. And then North America was up low single digit, and it will be up low single digit also for the full year. In each and every one of these regions, we outperform quite well. Europe, despite the decline of the market, we actually grew. And China, we grew 38 percent. So an incredible outperformance. We won an incredible number of awards already in Q1 when it comes to the aftermarket, Emmanuel. So on

the aftermarket, we continue to see a little bit the same pattern we saw in Q4, where we are showing increased revenue for aftermarket. So revenue growth in Q1 versus prior year. Modest plus 3 percent for friction business. But we continue to monitor really closely. We think that we're done with the stocking, and we continue to monitor the end customer demand.

That's very helpful. Thank you. And

then the Fentahoy order is up 30 percent, really stood out. Would you say that Fentahoy is outperforming your expectations since you acquired the company? And maybe if you could just, you know, any color that you can share on that part of the business would be appreciated.

Sure. So keep in mind, Damian, that we said that for the next five years, this company should be able to deliver a low double digit in terms of revenue growth. So obviously, that implies significant growth from an order standpoint, especially because this is a long term business. So there's a lot of long term backlog. That being said, we weren't expecting as much as 30 percent year over year order growth for Q1. So it's only one quarter. So we take it for what it is. But we're very happy. I think it really demonstrates the leadership that they have. That they have. I think then from a financial standpoint, you know, Luca mentioned that it was really a good business, really delivered revenue and income in line with our expectations. Cash, as I mentioned, was very positive. If you think about it, this is a roughly 20 percent currently, you're 20 percent EBITDA business. They delivered that in Q1 and we expect that they will deliver that for the four year as well. So, yeah, a lot of really good positive things, but it's just the beginning.

Thanks, guys. Keep up the good

work.

Thank you. Thanks, Damian.

Thank you. One moment for our next question. Our next question from the line of Vlad Bistricki from Citigroup. Your line is open.

Morning, Vlad. Hey, good morning, guys. Thanks for taking my call. So I wanted to ask you guys about the rail strength that you're seeing. You know, obviously, 37 percent rail orders growth in one queue is quite strong. So, okay, can you talk about, you know, the duration or expected timing of delivery of these orders and then also how you're thinking about, you know, potential lumpiness in rail orders going forward and whether you think you can sustain double digit growth in orders in rail through the year?

So let's put some context around this. So as you know, there is massive government programs on rail in all three main regions in Europe. We're around 60 billion of direct investment in improving rail, both in infrastructure and in cars. In the US, I think this number is around 50 billion. And in China, because ridership is back to pre-candemic level, we know that the government is continuously investing as well. So we have a very favorable backdrop for our rail business. And we're seeing the early signs or the benefits of those government programs being executed. On top of that, we're gaining a lot of market share. So if you think about China, for instance, we are clearly the leader in high speed train. And there's a lot of investment that is happening right now for that market. So that's the context, you know, strong market, strong demand, and then the outperforms. I think if you think about the way our rail business works, is that we usually book orders that we'll deliver between six to 12 months later. So right now, we're continuously booking backlog that we will deliver at the end of 2024 and then also at the beginning of 2025.

And if I can add to that, when you think about the visit, we like this market because 60% of this market in rail is after market, Vlad. And on top of that, you have an incredible amount of visibility. Some of the awards that we're winning are going to last for the next 30 to 40 years. So it's a very good business to be in.

That's really helpful color and clearly an exciting time for your rail business. Just separately on the capital allocation topic, that was a helpful slide. And you had mentioned on there that you regularly review the portfolio as well. So can you talk about whether we should be thinking about potential for any meaningful divestitures over time or just how you're thinking about the go-forward portfolio from here?

Sure. This is something that we do on a regular basis, Vlad, in terms of this is also what we started doing last year when we were able to sell the innovate business and the matrix, the innovate business in the first half of last year and matrix by the end of the year. So this is something that we have been doing more and more since Bartek came on board. We made our strategy crisp and very focused. We looked at the long term and therefore we are reassessing that. So as we are adding more and more businesses through M&A in terms of leaders in their market, close to core critical components, technology and proprietary technology, in my will be that some other pieces of the business, we are not the rightful owner anymore. And that probably there will be underperforming part of the business, I would say.

Okay, that makes sense.

Appreciate

it. Look, I'll get back to you. Thanks, Vlad. Thank you. One moment for our next question.

And our last question comes from Andrew Oben from Bank of America. Your line is open.

Hey, good morning. You have Sabrina Abrams on for Andrew.

Morning, Sabrina. Morning, Sabrina.

When we think about the margin cadence through the year, how should we think about the balance between productivity and reinvestment? And I think you have more capacity coming online. You have the termally plan. Should we think that reinvestment ramps sequentially through the year?

Yeah, so thank you for the question. For us, productivity is one of the drivers that allows us to really drive reinvesting in the business. And that has been the story of a lot of our businesses. You know, Coney was an underperforming asset. We drove operational improvement and so we invested in modernizing the factories, invested in R&D. Same thing for IP. If you think about the VAVE, the VAVE activity initiatives that we drove, those were possible because we started increasing profit tremendously. So when you think about this year, we expect to continue to drive productivity significantly through our businesses. In Q1, productivity gave us 60 basis points of margin expansion, and we expect to continue to be able to do that. In terms of investment, the contribution or let's say the impact on the margin of investment this quarter was around 40 basis points, and we expect also to be along those lines for the rest of the year. So we are driving productivity. We're driving pricing to offset material impact. And reinvest some of that to make sure that we're going to be able to drive long-term profitable growth.

Thank you. And then question on China and friction. OE, the share gains, are really impressive and the outgrowth is really impressive. What is ITT doing that's driving such strong performance in this particular region? And what sort of visibility do you have in this relative to Europe and the US?

Thanks Sabrina for asking this question. We got a special eye on China. Our China business is performing incredibly well. And when you look at our China business, roughly $350 million is 90% is motion technologies, which is made of rail and auto. So don't forget about rail because rail is big in China. It's a big market. It's growing and we are outperforming the market. When it comes to auto, listen, the team has been performing exceptionally well. Flawless execution. You have in Q1 an on-time delivery in China of 100%. Quality less than 1 PPM. If you look in Q1, they had 50 starts of production. So 50 new programs started production in Q1. Now, not all of those will be successful, but think about that. More than 100 process validation, which are future SOPs. So when you look at all of these, think about the disruption that you have in the line. And despite all of that, the OE, the overall efficiency of the lines, is more than 90% and OTD of 100. If you're a customer and you have a company that's performing like this for you, you tend to be loyal. And this is what we see.

Thank you.

Thank you Sabrina.

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