Emmanuel Caprais: 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. A modest plus 3% for our friction business, but we continue to monitor really, closely. We think that we’re done with destocking and we continue to monitor the end-customer demand.
Damian Karas: That’s very helpful. Thank you. And then the Svanehoj orders up 30% really stood out. Would you say that Svanehoj is outperforming your expectations since you acquired the company? And maybe if you can just any color that you can share on that part of the business would be appreciated.
Emmanuel Caprais: Sure. So keep in mind, Damian, that we said that for the next five years, this company should be able to deliver 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% 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. I think then from a financial standpoint, Luca mentioned that it was really a good business, really delivered a revenue and income in-line with our expectations. Cash, as I mentioned, was very positive.
So if you think about it, this is a roughly 20% currently of 20% EBITDA business. And they delivered that in Q1 and we expect that they will deliver that for the full-year as well. So yeah, a lot of really good positive things, but it’s just the beginning.
Damian Karas: Yes. Thanks guys. Keep up the good work.
Luca Savi: Thank you.
Emmanuel Caprais: Thanks, Damian.
Operator: Thank you. Our next question will come from the line of Vlad Bystricky from Citigroup. Your line is open.
Luca Savi: Good morning, Vlad.
Vlad Bystricky: Hey, good morning, guys. Thanks for taking my call. So I wanted to ask you guys about the rail strength that you’re seeing. Obviously, 37% rail orders growth in 1Q was quite strong. So can you talk about the duration or expected timing of delivery of these orders and then also how you’re thinking about potential lumpiness in rail orders going-forward and whether you think you can sustain double-digit growth in orders in rail through the year?
Emmanuel Caprais: So let’s put some context around this. So as you know, there is massive government programs on rail in all three main regions where we are. 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-pandemic 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. Strong market, strong demand and then the outperformance. I think if you think about the way our rail business works is that we usually book orders that will deliver between six months to 12 months later. So right now we’re continuously booking backlog that we will deliver in — at the end of 2024 and then also at the beginning of 2025.
Luca Savi: And if I can add to that, when you think about the — that we like this market because 60% of this market in rail is aftermarket plan. 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 years to 40 years. So it’s a very good business to be in.
Vlad Bystricky: That’s really helpful color on 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?
Luca Savi: Sure. This is something that we do on a regular basis, you know, Vlad. In terms of this is also what we started doing last year, right, when we were able to sell the [indiscernible] 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 [indiscernible] came on-board, we made our strategy crisp and very focused. We looked at the long-term and therefore we are assessing that. So I say, 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, it might well be some other pieces of the business, we are not the rifle owner anymore and probably there will be underperforming parts of the business, I would say.
Vlad Bystricky: Yes. Okay, that makes sense. Appreciate it. Look, I’ll get back-in the queue.
Luca Savi: Thanks, Vlad.
Operator: Thank you. And our last question will come from Andrew Obin from Bank of America. Your line is open.
Sabrina Abrams: Hey, good morning. You have Sabrina Abrams on for Andrew.
Luca Savi: Good morning, Sabrina.
Emmanuel Caprais: Good morning, Sabrina.
Sabrina Abrams: 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 terminally plan on. Should we think that reinvestment ramped sequentially through the year?
Emmanuel Caprais: Yes. 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, KONI was an underperforming asset. We drove operational improvement. And so we reinvested in modernizing the factories, invested in R&D. Same thing for IP. If you think about the VAV and the VAV activity initiatives that we’ve 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, we productivity gave us 60 basis-points of margin expansion and we expect to continue to be able to do that.
In terms of investments, 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 a material impact and reinvest some of that to make sure that we’re going to be able to drive long-term profitable growth.
Sabrina Abrams: Okay. 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 market relative to Europe and the US?
Luca Savi: Yes. 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 that 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 validations, which are future SOP.
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 confidence that’s performing like this for you, you tend to be loyal. And this is what we see.
Sabrina Abrams: Thank you.
Emmanuel Caprais: Thank you, Sabrina.
Operator: Thank you. And this does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.
