ITT Inc.

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 Macaluso, Vice President in Vest Relations and Global Communications. You may begin.

Thank you, Amy, and good morning. Joining me this morning in Sanford are Lucas Sali, Chief Executive Officer of President, and Emmanuel Cabray, Chief Financial Officer. Today's call provides these financial results for the three-month period ending June 29th, 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 put forward-looking statements that are based on our current expectations. Actual results may differ materially due to several risks and uncertainties, including those described in our 2023 annual report on the Form 10-K and other recent STD files. If you have, or otherwise, noticed, the second quarter results we present this morning will be compared to the second quarter of 2023 and include certain non-GAP financial measures. The reconciliation on such measures and most comparable GAP figures are detailed in our press release and the appendix of our presentation, both of which are available on our website. With that, it's now my pleasure to turn the phone for Lucas who will begin on slide three.

Thank you, Mark, and good morning. I would like to begin by thanking all IT tiers for an exceptional performance, again, in the second quarter and our stakeholders for their ongoing support of ITT. The second quarter was a milestone for ITT, aligned with our strategic priorities of operational and financial performance and effective capital deployment. This quarter, we won significant commercial awards, continued to deliver margin expansion, utilized a strong balance sheet to return capital to shareholders, and took steps to reshape the ITT portfolio towards higher growth and higher margin businesses. Let's start with a few highlights on Q2. We continue to grow and expand margin in our core businesses with several record achievements. We won significant new awards in Friction, Coney, Industrial Connectors, and in Svanahoy, our latest acquisition, we expanded our backlog and further solidified our long-term growth trajectory. We generated above-market top-line growth with strong performances in aerospace and defense, friction, and short-cycle flow. We drove significant margin expansion at Motion Technologies and CCT, as both reached margin levels close to 19% this quarter. Collectively, we drove 12% adjusted EPS growth to a new quarterly EPS record of $1.49, whilst driving a significant acceleration in free cash flow. Before we get into the details, I want to pause and acknowledge that at the ITT level on a -for-life basis, we have now surpassed a long-term margin targeting aggregate two years ahead of the 2026 target date. Now let's get into the details. On revenue, we grew 9% driven by higher volumes across all segments and helped by the acquisition of Svanahoy, which contributed four points of growth. CCT grew double digits organically, driven by Industrial Connectors and aerospace and defense components. Connectors grew 14% and 5% sequentially to a new record quarterly revenue, another strong quarter for Connectors, well done, art, and team. Motion Technologies grew 6% organically. Friction OE outperformed by over 600 basis points, and in China, the outperformance was nearly 900 basis points. We expect this will continue in the future as we executed 40 starts of production this quarter in China and nearly 100 SOPs in just the first half. On margin, we delivered a 100 basis point expansion to 18%. IP was again above its long-term target of 20%, and it was up 20 basis points sequentially. MT expanded margin to 180 basis points and 60 basis points sequentially. This year, we continue to drive an exceptional recovery MT margin, led by friction and Coney, which will put us above the 18% threshold for 2024. This is a testament to the relentless drive to generate productivity and value for our products and services. And finally, CCT is also rapidly approaching 19% margin, driven by volume and price. Included in this was a 300 basis point improvement in connector margin with 42% incrementals. Moving to capital deployment and the ITT portfolio. Today, we announced the signing of an agreement to acquire interconnect solutions provider, Kessaria, for approximately $475 million, while also having completed the divestiture of automotive supplier, Walgreens, which closed in July. These transactions are the foundation of our portfolio reshaping strategy. With Kessaria, ITT acquires a leading provider of customized mission critical connectivity solutions for defense and aerospace. Kessaria will expand ITT's exposure to defense interconnect products with sole source position on leading platforms, high customer intimacy, and expertise in harsh environment applications. I'll discuss this acquisition more in a moment. The Wolverine transaction follows two other non-core divestitures executed last year. This will allow us to structurally shift ITT's portfolio to higher growth, higher margin businesses, inflow, and connectors. As a result of this reshaping, automotive will only represent 30% of the total ITT portfolio, and this is Friction, our highly differentiated, unique, and high margin-breaking business. Back to our results. Given the strong performance in Q2, we are sticking to our full year guidance commitment despite the loss of roughly 15 cents of income from the Wolverine divestiture. I continue to be humbled by the dedication our teams show each day to deliver these results for our customers and for our shareholders. This quarter, our teams also secure several exciting commercial awards, demonstrating once again ITT's differentiation. In CCT, connector distribution orders were up 13%, a second consecutive quarter of profitable growth. On the OE side, we are in the final stages of DOD approval for NetWarrior, a critical soldier war communications system. We already secure connector content for this application to provide critical situational awareness in combat operations. This is one more example of the growing and the sales modernization macro trend we're exposed to, reinforced by the acquisition of Kisarian. Moving to MT, Friction has already won nearly 60% of our full year expected awards. And also in China, the team surpassed 60% of its full year target. Well done, Sulaia and Team China. We're also taking steps to penetrate India, where we have no manufacturing presence, but recently won a third platform with a leading local OEM. In IP, orders were up slightly due to Svanayoy, despite a tough compare from large decarbonization awards in Q2 2023. Legacy PAM project orders continue at elevated levels and they're up 9% sequentially. Our project center was up again in Q2, driven in part by green projects, which continue to be strong. In June, I was fortunate to be in Bornemann, Germany with the team, and together we review our progress on green market penetration. Decarbonization is a large opportunity for Bornemann as we deploy our multi-phase PAM technology, building on previous wins with major energy customers. To summarize, at the ITT level, this quarter we won over $900 million of orders and we delivered a book to bill of 1.03. This is thanks in part to Svanayoy. So let's move to slide four to talk more about Svanayoy and two exciting commercial awards that further support our long-term growth trajectory. As we shared previously, the Svanayoy acquisition bolsters our leadership in the green energy transition. This quarter, Svanayoy delivers strong growth once again, with orders up nearly 40%. Svanayoy cryogenic deep well fuel pumps were selected for eight bulk carriers for a major European shipping company. These are the first commercial merchant vessels designed to use ammonia. Today, this type of vessel is powered by a crude oil mixture. However, Svanayoy's pump will future prove the vessels in anticipation of transition into lower carbon fuel. Svanayoy is leading the way for ammonia pumps on commercial vessels like this. Additionally, Svanayoy will provide cargo pump systems for four liquefied CO2 carriers serving the Northern Lights Carbon Capture Project in Norway. This project is a major element of Europe's climate solution and decarbonization efforts. The carriers will transport carbon capture from industrial emitters to a terminal before the CO2 is pumped more than one mile beneath the North Sea. Svanayoy has also won awards on liquefied CO2 carriers elsewhere in the world, including in China. In May, I spent time with Soren and teaming in Aalborg, Denmark. After reviewing these projects together, it is exciting to see how we have built such deep trust with customers through technical expertise, flawless execution, and rapid response. The team has an incredible command of the business's growth drivers and the analytics around predicting aftermarket. Svanayoy is poised to become the platform for growth we envisioned at the onset of the deal. Now let's turn to page five to discuss ITT's strategic portfolio reshaping and capital allocation. On the M&A front, we have been working to shift our business to higher growth and higher margin segments where we can deliver more value. This began in 2022 with the acquisition of Habonim, which grew our vast portfolio by nearly 50%. The results from the acquisition exceeded our expectations from day one. In 2023, we acquired Micromod to expand our portfolio of hermetics and RS connectors while they invested into non-core business in CCT to hone our focus on the core connector business. Finally, we acquired cryogenic pan manufacturers, the beginning of 2024, which added a complimentary portfolio of highly engineered marine flow products for the clean energy transition. And today we announced an agreement to acquire Kessaria. Kessaria's interconnect solutions support applications for avionics, sensors, communications, and networking on marquee platforms with the SensePrime contractors and aerospace OEMs. The company's capabilities in customized interconnect solutions and led to content on key platforms and long-standing relationships with blue chip defense customers. There is a lot to like about this business. First, Kessaria's growth outlook is supported by leading positions on a wide range of sought-after A&D programs, of which roughly 70% are sole or primary source positions. The company operates primarily in nearly $7 billion North American cable assembly defense market that is expected to grow at a high single digit CAGR through 2028. Second, Kessaria is also a leader in our environment cabling application and will benefit from the shift to fiber. In addition, macro tailwinds related to the rising global defense budget and rapid modernization of defense systems are expected to drive demand for Kessaria's solutions. Third, the company has grown revenue over 20% on average over the past seven years at attractive EBITDA margins, which we believe you can enhance further as part of ITT. Finally, we anticipate realizing commercial synergies from a combined ITT canon and Kessaria -to-market solution that will drive further market share gains. Beyond Kessaria, we continue to cultivate a rich actionable pipeline of targets, inflow and connectors while also putting the balance sheet to work on other capital deployment priorities. In fact, in Q2, we repurchased $79 million of ITT shares and paid down nearly $40 million of debt thanks to the strong cash generation. In summary, the organic growth and margin expansion generated in Q2 and the portfolio shift we executed will continue to enhance value for our shareholders. Now, let me turn the call over to Emmanuel to discuss the results in more detail.

Thank you, Luca, and good morning. Let's start with revenue. Volume drove most of the growth this quarter with roughly one point of price led by CCT and IT. In CCT, industrial connectors were up nearly 40%, largely driven by distribution. Aerospace and defense components were up 10% as the CCT team drove improvements in supply chain and productivity. However, we're starting to see a slight slowdown in commercial original equipment demand from Boeing, whereas aftermarket activity continues to be very strong. In MT, rail grew 11% on share gains, especially in China and Eastern Europe, while friction OE grew 5% with over 600 basis points of outperformance versus global auto production. Finally, frictions aftermarket was up 6%, building on the growth in Q1. In IP, short cycle revenue grew 4%, bolstered by strong baseline parts and service, while pump projects were roughly flat. On profitability, margin expansion was primarily driven by higher volume and productivity, particularly in MT, resulting in 86% incremental margin. CCT made significant progress on pricing this quarter and nearly reached 19% margin. Finally, IP again exceeded 20% margin, overcoming the 270 basis point impact on the Zanahoy acquisition, which implies a legacy IP margin above 23%. At ITT level, excluding the Zanahoy dilution, adjusted incremental margin for the quarter was approximately 55%. We drove 50 basis points of productivity and 180 basis points of operating leverage, which more than offset 60 basis points of labor inflation and a 70 basis point gain on a product line sale in the prior year. On earnings, higher interest expense related to the acquisition of Zanahoy and a higher adjusted effective tax rate was more than offset by volume and margin expansion. Finally, we grew free cash flow 9% year to date, driven by higher net income and improved inventory management. Working capital was a source of cash driven by significant inventory reductions in IP and CCD. We expect to continue this momentum on a path to approximately $455 million for the four years. As for the Wolverine Devestiture, we're deploying the cash proceeds to pay down debt. All in, Q2's strong result gave us confidence in achieving our outlook in the second half, even considering the impact of the Wolverine Devestiture. I turn to the adjusted EPS bridge on slide seven. I just wanna make a few points on this slide. Volume and price drove an incremental 22 cents of earnings while net productivity contributed 5 cents. This is a dynamic we have seen for several consecutive quarters and speaks to the quality of the results. We also realized a 3 cents benefit from M&A. This performance allowed us to overcome 3 cents of dilution from temporary acquisition and organization and 6 cents for the prior year gain on time. Wrapping up the bridge, higher interest expense, foreign currency, a higher adjusted tax rate, net of a lower share count, amounted to 5 cents headwind this quarter. Let's move to slide eight to discuss our 2024 guidance. We are sticking to our full year revenue, operating margin, EPS and free cash flow guidance after a strong result in the first half. We expect to overcome the impact from the Wolverine Devestiture, which is a testament to the resilience of the ITQ. We expect revenue growth to be driven by continued outperformance in friction OE, aftermarket, IP projects and short cycle and a continued recovery in industrial connections. On operating margin, we expect a continued sequential increase in NT and TCT or IP is expected to remain above 20%. Lastly, we expect a strong second half cash performance, many due to further improvements in working capital. Let's look quickly at the four year EPS bridge. As you can see, we're sticking to our four year commitments. Our EPS excluding the Wolverine Devestiture is improving, given the strong first half performance and our expectation for a strong back half. In essence, for our ongoing operation, we are raising our EPS midpoint. This is in addition to the 10 cent raise in the first quarter. This is a testament to the strength of the core portfolio and our ability to execute. Before I hand it back to Luca, I wanted to briefly discuss our outlook for the third quarter. We expect organic revenue growth will be in the mid single digit range across all segments and margin should be roughly in line with Q2. As a result, we expect EPS growth to be in the low single digit range, including the impact of the Wolverine Devestiture. This does not include the impact of the case area acquisition, which is expected to close later in Q2. Let me turn the call back to Luca on slide 10 to wrap up.

Thank you, Emmanuel. As you can see, it was a very busy and exciting time at ITT, up until Tuesday night when we signed Kessaria. Now, before moving to Q&A, a few points. In Q2, we grew our core and continue to outperform in many markets. We achieved our long-term ITT margin target with MTNCCT approaching 19% and IP above 20% two years ahead of the target date. We deployed capital to grow our business and drive greater value creation. And we're reshaping ITT's portfolio to higher margin and higher growth businesses. As always, I would like to thank each of you for joining today's call. We appreciate your continued support and interest. Amy, 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 1-1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 1-1. Again, we do ask that while you pose your questions, you pick up your handset to provide optimal sound quality. Please limit yourself to one question and one follow-up. Thank you. And our first question comes from the line of Damian Cares at UBS. Your line is open.

Hey, good morning, everyone. Congratulations. Good morning. Congrats on the transactions.

Thank you.

Yeah, so maybe we

can open up with the Coserio deal. Would love to hear, Luca, how you see that fitting in with the existing A&E interconnecting business and are they already up to your standards or is there gonna require some conversion to the ITT way? And maybe just a manual, if you wouldn't mind just helping to kind of unpack the financial impacts on an annualized basis. I know you kind of gave the 15 cents solution from the Wolverine sale this year, but what's a good way to think about on a kind of full year top line down to the EPS impact from the two transactions?

Okay, thanks, Damian. So when we look at the rationale of Coserio, so definitely is aligned with the growing defense trends. Coserio is a leader in the fiber cable application with defense prime contractors. We really like the source position that they gain through the intimacy that they've got with the customer. Intimacy comes from a flawless execution as well as the fact that they could develop solution with the customers. There is a lot of complementarity between the Canon product and Coserio. You go to their plants, you see the Coserio, fiber cabling and the cabling and connectors at the end, our connectors and the competitors connectors. And in many cases also, Damian, we have opportunity to bid for cable assembly operation and not always we are able to follow through. So Coserio together with Canon, IT Canon will be a very synergistic. It's really a great strategic fit when you look at the M&A priorities and the shifting of the portfolio for higher growth, higher market businesses. When it comes to the app standard, the plants are very well run. I was able to visit the two of their plants, meet a very competent management team and Tony, Mike and Mike have been able to run those plants and the business very well indeed. Emmanuel.

And then from a financial standpoint, just to give a little bit of context Damian, so this is a business that since 2017 has grown on average 27% in terms of top line. They expect to have a 2024 year to be also really strong. They expect a book to bill largely above one. And so for 2024, the expectation in terms of revenue is around $190 million with an EBITDA of around 18%. So this will be from a financial standpoint, something that is similar to the profile of Svantehoi with a large growth and an EBITDA around 20%. Then if you look at what's happening in the year with all those transactions, so obviously the first, there's no financial impact right now in our guidance. We have to close the deal and the deal will be closed by the end of September. Second, if you think about Wolverine, so we talked about the 15 cents EPS impact for the second half. And you can analyze that, that's pretty much the impact that you're gonna get. And then what it means for us, so if you look at our 2024 guidance, mostly driven by volume, price and productivity. And so because we were able to really drive those items and aid it a little bit by lower commodity costs, we are able to maintain the four-year guidance for 2024 despite that negative impact that we're gonna have in the second

half. Okay, that's really helpful. Thanks for all of that. And then maybe

I could just ask you guys about MP and friction seem to be seeing good growth momentum there, orders up 5% and that's on a tougher comp from last year. So bucking kind of, I think some of the broader auto market trends. Could you just maybe take us a little bit of a walk around the globe, what you're seeing there, how you're feeling about the rest of the year and what that business looks like heading into 2025? Thanks.

Sure, Damien, let me talk about 2024. As you can see, the market in 2024 probably is gonna be a little bit worse than what people were projecting one quarter ago. The production will probably be around 89 million vehicles. People were forecasting, right, 90 million vehicles last quarter. That difference is mainly because of Europe. Europe production is down probably more. Having said that, we continue to outperform. And it's fair to say that probably our outperformance for the year is gonna be better than what we forecasted one quarter ago. So our focus for friction performance has not changed. Look at the performance here today. Despite the fact that Europe declined year to date 3.5%, we grew and we outperformed by 550 basis points. In China, their performance was more year to date than 1,600 basis points. And so also our performance in North America. So why is the market probably a little bit worse? Friction performance, we are sticking with that and our performance will be higher than expected.

In addition to this, Damien, if I can add, so production levels, as Duca was saying, are going down. Inventory levels, at least in Europe and North America, are under check. And so this is positive because at least our customers are not building inventory at their dealership.

Great, thanks guys. I'll pass it along. Thanks, Damien.

Our next question comes from the line of Scott Davis at Milius. Your line is open.

All right, good morning everyone. Luke, Emmanuel, Mark, congrats. Thank you, Scott. Another congrats on finding this Kisaria and getting that inked. I wanted to follow up on that a little bit. I don't know the business all that well, but the purchase price looks really attractive for the financial profile. And I was wondering, is this something that was kind of sourced, you guys have been working on for some time? Is there any color you can share around kind of why you were chosen as the buyer? I have to imagine there were other folks out there who would be interested in this asset.

Sure, Scott. Well, we were able to work with Kisaria in the past. And we've been known Kisaria for a while. You know, they've been a customer of ours. You know, we have been able to meet with Kisaria for quite a long time, and we follow through during this process. I think there has been established a very good relationship together with the team. And I think that the team, the Kisaria team together with us saw the benefit of putting ITT Canon and Kisaria together. So all of that enabled us to get in a good position and fast in dealing with Kisaria. And this has enabled us to get to the $475 million of price which represents roughly a 13.4 EBITDA multiple. And we're gonna keep on working closely with the team because there are a lot of synergies that we can get out of these revenue synergies.

Revenue, okay, interesting. And then just following up, I know, Luca, you mentioned you've already exceeded your 2026 targets. Will you be issuing new targets? Is that something we should be looking for this year?

This is something that we are debating between me and Manuel and Mark. And so I think that either towards the end of this year or beginning of next year is when we were gonna issue our new targets.

Well, best of luck, I'll pass it on. Thank you. Thank you, Scott, thank you.

Our next question comes from a line of Joe Giordano with TD Cowan, your line is open. Hey guys,

good

morning.

Hi, Joe. I know you're not gonna get into specific discussions about customers, but I know that there's your Boeing contract expires soon and you're negotiating a new one. So like any update on timing of when that might be kind of wrapping up and when we would start seeing kind of results of new economics?

Yeah, Joe, so you're right. We are in the start of the negotiations with Boeing. This is a renegotiation that is really important for us because we haven't been able to increase our prices since 2017. So we were locked in this long-term contract which is very customary for aerospace suppliers. And so now we have the opportunity to go back to Boeing being also a good performer and to extract the value that we supply with our product. And so we'll be, we're in the full swing of the negotiations right now. We'll continue in 2025 and probably 2021, 2025 we'll be able to close those negotiations. Those are pretty lengthy negotiations. And so as a result, we should see the impact after that.

Perfect. And then I'm gonna ask two in this question. One is probably a very quick answer. So the real question is what is going on in connectors? I mean, plus 39 in industrial connectors is like nowhere even close to what we're seeing elsewhere. That's just significantly better. So I'd love to know where you're seeing that strength. And then I have to ask, I'm obliged to ask the question now that you're getting the M&A going more consistently, what are your updated thoughts on how you're gonna present earnings with M&A? Thanks.

So on connectors, you're right. We are very encouraged by the growth we're seeing in industrial connectors, but also in connectors overall. Distribution, for instance, was up, distribution orders were up 13% this quarter, which is really strong, especially given the growth we've seen in the first quarter. So, and we're driving growth, you know, in aero, defense, general industrial, but also medical, right? So the picture is really good. I think there's still a question mark in terms of the talking at the distribution. We don't know if really this has ended, but we're focusing on what we can control, which is delivering on time to our customers and making sure that we provide the differentiation that Luca has been talking about for a really long time. So very positive. We stay alert to understand the market dynamic.

If I can add to that one, Joe, I think that Arthur and Dan, the head of engineering, have done a tremendous job in terms of developing new products in being very fast and working with the customer and developing the prototype, and that has led to new awards and new orders because of that.

Yeah, and on the second question. So this is a matter that we have not come to a conclusion yet. I think what we wanna do is we wanna show that we're able to really step up in terms of an M&A standpoint, an M&A execution. And this is a very difficult thing to do because in M&A, at best, you control 50% of the outcome. And so we are very happy with the progress we've done with Vanahoy. We deployed $400 million of cash. With QSARIA, we're gonna deploy $475 million of cash. And so really it's about executing that strategy. And then the accounting treatment will follow that.

Thanks, guys. Thank you, Joe.

Our next question comes from the line of Mike Halloran for AtBear. Your line is open.

Hey, good morning, everyone.

So on the IP side of things, maybe just some thoughts of what the underlying demand trends are looking like from an order perspective, specifically on any changes in the conversion cycle between front log to back log, any signs of change in how you're thinking about the underlying markets. It doesn't really sound like it, but we love any context on what you're seeing on any thought there.

Sure, thanks, Mike. First of all, when you look at IP, IP orders were up at 2%, and this is mainly thanks to Vanahoy that more than cover a tough compare versus prior year when we had a big decarbonization project. When you look at the short cycle, the short cycle stayed at elevated level, and when you look at the rate in Q2, it's exactly the same rate that we had for the full year of 2023. Now, the legacy project for IP, they were up sequentially 9% year over year.

Now,

having said that, what we saw, Mike, is that some of these projects shifted to the second half. No major concern of that, it's just a negotiation is taking a little bit longer, and as a matter of fact, what we see in July is a very strong July order performance, both on the project where we saw the closing of some of the projects from Q2 that shifted to Q3, as well as on the short cycle. We expect for the full year to have the legacy orders up, single digit, and the funnel that we see is still very healthy. The funnel, I think, is up, if I'm not mistaken, roughly 14% year over year, and 4% since January 2024. I think that what we see is that our on-time delivery is continue to improve, and these help us differentiating from the competition, and also the supply chain is improving, and these help in reducing the lead time.

Great, helpful, appreciate that. And then second question on with the portfolio side of things, two-parter. One, what was the revenue base for Wolverine that we should use? And then secondarily, at the risk of sounding greedy since you just did a lot of transactions, love to understand how you're thinking about the ability to continue to lean in on the short horizon, certainly have the capacity from a balance sheet perspective, so thinking about it from a personnel perspective as well as what the pipeline looks like, and then any thoughts on whether there are other Wolverine type things in the portfolio?

Okay, so let me start addressing the latter, and then Emmanuel, you go for the first. Well, let me start saying, Mike, that we will never bite off more than we can chew. Okay, now regarding our capacity to do more deals, with Habanim and Svanehoi, both acquisitions largely operate on a standalone basis. They have a very strong leadership team. As you remember, that was one of the reasons why we acquired them. And Svanehoi team, Habanim team, they're intact practically today, and the deals are off to a great start. So we stay close to this business that we acquired, we visit the facilities, we work with the leadership team, but I would say the amount of time and resource that we spend to operate them is manageable. They're a very good business when we acquire them and continue as such today. So from a financial standpoint, we certainly have the capacity to do more M&A, and with these in mind, so I don't think that there are really limitations for further acquisition to be made. But as I said, we will never bait off more than we can chew.

Yeah, and from a financial standpoint, the Wolverine revenue is around 160 million on a yearly basis.

And then you said also, in terms of further divestiture, I don't see any other large divestiture eminent today, Mike, just to follow up on your final question.

Thanks, Luca, appreciate it. Thanks, Emmanuel. Thanks, Mark.

Thanks, Mike.

Our next question comes from the line of Nathan Jones at Stiefel. Your line is open.

Good morning, everyone. Hey, Nathan. I'm gonna ask a couple of follow-ups on Kisaria. You talked about the seven-year growth rate at 27%. Is there any expectation you can lay out for what the forward growth rate would be? I'll start there.

Yeah, so we reviewed, the process we went through is that we reviewed every platform they're on. And in addition to this, we reviewed the platform we are on in order to identify potential commercial synergies. So we expect for the next three to four years, the top-line growth for Kisaria in the high single-digit range. So less than what they've seen since 2017, I think some of it is due to the fact that we wanna be realistic and prudent. And then also, I mean, there's been a significant increase in defense budget. And I think it's fair to say that it's probably not gonna stay like this forever.

And then maybe some more color on where you see the revenue synergy opportunities. I mean, it seems like maybe you could replace competitors with Canon, but that's also fairly difficult to get approved when you're talking about defense platforms. So maybe those kinds of synergies are a bit longer dated. Just any color you could give us on expected revenue synergies.

Sure, thanks Nathan. So really a couple of things, and they're on both sides. First is when sometimes we are receiving requests for quotation of system, of interconnect system made of our connectors and the fiber cable. Today, our fiber cable is very, very small, is very little. And now with Kisaria among our companies, our capabilities, we will be able to address all those opportunities sometimes we just pass by. So that is one. Second, as you walk around the Kisaria's plans, I mean, you see the opportunities of having more of our connectors into systems, but it will take time of course. But that is on the product side. And then there is the customers. They're very good, they're very strong with some customers where we can expand our penetration. And vice versa. So very similar to what has been also with MicroMode.

Great, thanks for taking my questions.

Thanks Nathan.

Our next question comes from the line of Vlad Bostricki at Citi. Your line is open.

Morning Vlad.

Hi

Vlad.

Hey, good morning guys. Thanks for taking my call. Maybe for my first question, I'll just start with MT. And you mentioned obviously the 86% incremental margin in that business in two Q. I think you were somewhere around 60% in one Q. So can you just talk more about what's really driving those elevated incrementals in the first half here? Whether it's additional pricing coming through and just how you're thinking about incremental margins in that business in the back half and into 2025.

Yep, thanks Vlad. So the core competence of MT is to drive productivity. And so when you think about the margin expansion that we're seeing, a significant portion of it is driven by our internal productivity. Our ability to use our asset base, our ability to convert all the awards and the growth, the share gains that we've had into a timely production and revenue. So this is really driving a lot of the margin expansion. Price has been very good as well. And the reason for this is because while commodity prices have gone down, we have been able to maintain for the most part our prices with customers. And this is executing on the playbook that we discussed several times in the past, which is that we may not have been able to get the compensation from a cost inflation standpoint from our customers in 22 and 23. But for us, it was always a matter of being able to get that compensation over the cycle. And so right now what you're seeing is that we're getting the compensation for prior year when we were not able to get it. And then in addition to this, you see all the new platforms that are starting production. Luca mentioned the start of production in China, but there are many starts of productions also in the other regions. And then structurally, the profitability of the portfolio is improving as all platforms where we didn't get as much compensation are exiting and new platforms that fully reflect the new cost base with increased prices from a commodity standpoint are kicking in.

Okay, that's very helpful,

Keller. Emmanuel, I appreciate it. And then maybe just one other one from me. Svanahoy obviously seems to be performing very well. 40% orders growth you highlighted. Can you just talk about where they are in terms of factory utilization and their manufacturing capacity and whether you see the need for meaningful incremental investment to deliver on the future growth that's embedded in these orders they're booking?

Hi, Vlad. When you look at the site where Svanahoy is, the main site is really Alborg in Denmark, Jogland in Denmark, and then we have a site also in Singapore and a very small site in the north of France. Now, when you look at the main pump site as really in Asia, Singapore and in Alborg, Denmark. Now, there is no need for further investment in terms of many of these operations that are actually operating at roughly between one and 1.5 shifts. So this growth doesn't really require footprint

investments. Okay, that's helpful. Luke, I appreciate it. I'll get back to you.

Thank you, Brad. Bye.

Our next question comes from the line of Jeff Hammond at KeyBank Capital Markets. Your line is open.

Hey, good morning, guys.

Hi,

Jeff. Love the friction business, but good to see the auto piece getting to that 30%. Just a couple follow-ups on the deals. Because sorry, I think you mentioned 27% top line, but it looks like they've done three deals, I think, under private equity ownership, just maybe talk about the organic, and then if it comes with a pipeline of some of these bolt-ons that they've been doing, and then just on Wolverine, maybe Levelset us on kind of the margin run rate of that business, I know it's bounced around a bit.

So yeah, Jeff, you're right. So I think that if you strip out the acquisitions that they've done over the years, they're still growing at more than 15% in terms of K-year, year on year. So really definitely a strong growth, benefiting from obviously market growth, but also share gains. And we've seen all these share gains when we looked at the platforms that I was talking, their presence on the market platforms that I was talking about earlier. So I think this area is poised for growth, as Xenor was poised for growth, and we're very confident that we're gonna be able to complement them and add our connector expertise to their cable assembly.

On the Wolverine side, I think that what we improved the margin substantially, and that these were really in terms of timing, the best timing to really sculpt the portfolio, I would say. So it was the right thing to do. It's something that we share in terms of strategy, in terms of reshaping the portfolio, focusing on really high growth and high margin businesses. So this was the right time to do it.

Okay, great. And then I think, Emmanuel, you mentioned commercial Aero OE slowing, if I heard that right. Maybe just unpack what you're seeing there. It seems like more a supply chain, and maybe the OE's not able to ramp, but maybe just expand on that comment.

Yeah, so let me start by saying, that from a revenue standpoint, commercial OE is still growing pretty strong. We were up 6% this quarter, after market was up in the double. So aerospace overall as a business is doing well. What we're seeing is on the horizon, we're seeing a slowdown in the growth. And if you think about it, that makes sense, because we know of the production issues that some OEMs have had. And so it wasn't realistic to expect that orders were gonna continue to grow, and that we were gonna see that growth forever. So nothing really concerning, especially because we have the after market, which continue to be really, really strong for us. On the four year basis, we still expect commercial Aero OEM to grow. And keep in mind that we have not hit the pre-pandemic levels from a customer standpoint, from an industry standpoint. And in addition to this, as you know, we are more oriented towards the wide body platforms. And these from a volume standpoint, that really not recovered compared to the pre-pandemic level.

Okay, thank you. Thanks, Jeff.

Our next question comes from the line of Joe Ritchie at Goldman Sachs. Your line is open.

Hey, good morning guys. Hi, Joe. Hey, Emmanuel, can you maybe elaborate on your answer to Vlad earlier around the steel, or you said cost deflation, basically coming through results on MT. Obviously, steel prices have been down a lot so far this year. So, can you maybe just give us a little bit more color, like how far in advance are you guys purchasing your commodities? Should we expect these above average incrementals to continue into the second half of the year? Does any help around that would be helpful?

Sure. So, in terms of the way we manage commodities, we book roughly six months in advance. So, right now we are essentially booked until the end of the year for everything that's steel, copper, and tin. So, we're very secure. And the good thing about this is that we communicate very openly with our customers. So, we're very transparent in the price we buy at. And so, that solidifies the negotiation we have with them from a price compensation standpoint. In terms of the incremental, so thank you for reminding me. So, we were very happy with the incremental thing too, 86%. This follows 63% in the first quarter. For the full year, we expect MT to deliver incrementals above, largely above 50%. So, a little bit less incremental in the second half of the year. And so, this is the result of everything that we were talking about, which is productivity, this recovery from a price standpoint, the volume growth as well. I don't think it's a long-term, it's long-term and sustainable to have these type of incrementals. But they are largely the fact of the fact that we have been recovering from a margin standpoint. Being in Q2 at .8% is really a strong achievement by the MT team. Something that we were not expecting at the beginning of the year, for them to be able to do it as quickly. So, they've over-delivered. And so, we're gonna continue to drive productivity, we're gonna continue to drive recovery in order to continue to improve margins for MT.

That's great to hear, Emmanuel. And then my follow-up question, and my apologies if I missed this, but on the friction side, first of all, it was great to visit with the team in Barza in June. One of the things that really stood out to me was just how much visibility you have into the platforms over the next couple of years, based on what you've already won. And I'm just curious, Luca, just around the order trajectory for friction, just help me level set. How did the quarter go? What's the visibility into the rest of the year? And how do you feel about the potential for increasing your share gains from here?

Sure. First of all, Joe, thanks for taking the time and visiting the team. And the team was very excited as well. I think from an awards perspective, the team is performing incredibly well. Year to date, we have already more than 60% awards, the target awards for the full year. This is worldwide. This is also in China. We are well positioned for new platforms coming out also in the next six months. So I think that these awards, as well as the incredible amount of number of start-up production that the team is performing right now, we keep on feeding the market share gain. And we project to be probably above 30% market share in 2024 for the very first time. So this is good. And we are winning market share. I can share with you both on the EV side. The last thing that we talk about, the leading Indian OEM, it was an electric vehicle platform. And they came to us because of our expertise there. But we're winning market share on the hybrid. And we're winning market share also on the internal combustion engine. So it is across the board.

Great to hear. Thank you, Luca. Thanks,

Joe.

Our final question comes from the line of Andrew Obin at Bank of America. Your line is open. Hey, good morning. You have Sabrina Abrams on

for Andrew.

Morning, Sabrina. Good morning, Ariel.

So thinking about the portfolio changes you have going forward, so motion gets a little bit smaller. CCT and the defense portion of the business gets a bit larger. And Santa Joy also shifted the portfolio a little more towards backlog, longer cycle businesses. How does that impact how you think about the business when the portfolio is more skewed to a long cycle than it has been historically? Clearly, you guys are top tier performer and very hands-on management team. But I just want to understand if and how it changes the algorithm for the business as you become longer cycle and have better visibility.

So a couple of things. First of all, we really like these long-term businesses. Think about it when you win a platform in the rail with an OEM, you have the visibility for the next 30 to 40 years. The same in auto, the same in aerospace. And when you look about these projects, it's a long cycle. So we definitely like that. Now, when it comes to the shift of the portfolio, it's really towards higher growth and higher margin businesses. So this is the second dimension. And the last one is the ability to outperform in the market. So when we look at these acquisitions, for example, Svanahoy, Svanahoy are the leaders in the markets where they play in terms of the LPG, the LNG. When you look at Kessaria, they are the leader in fiber cable applications. And all of these will enable us to feed the outperformance. And that's the third dimension.

Thank you. And then just to follow up on one of the earlier aerospace questions, can you talk a little bit about Aero's supply chain? I think you mentioned that there were improvements. We've heard mixed feedback from other suppliers. Just want to understand what's still a constraint and what's getting better.

Yeah, so I think we're seeing, finally seeing a little bit of improvement from a supplier side. As I mentioned, we've been able to reduce inventory. And this is a result of the fact that our teams have managed our suppliers more effectively. We've been able also to increase on-time delivery to our customers. And this is very good because this is fully in the range of what we can control. And that further differentiates ITC compared to the competition. I think that what remains still very difficult is end customer demand. Order patterns are very volatile. And so our teams is focused on trying to do the best we can for our customers. And we're improving slowly. But this is an industry, this is an end market that has a lot of challenges.

Thank you.

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