Welcome to ITT's 2024 First Quarter Conference Call. Today is Thursday, May 2, 2024. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. Operator Instructions. It is now my pleasure to turn the floor to Mark Macaluso, Vice President, Investor Relations and Global Communications. Please, you may begin.

Thank you, Victor, and good morning. Joining me this morning in Stamford are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the 3-month period ending March 30, 2024, which we announced this morning. Before we begin, please refer to Slide 2 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 due to several risks and uncertainties, including those described in our 2023 annual report on Form 10-K and other recent SEC filings. Except or 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 in 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 3.

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 Svanehøj acquisition, invested to sustain our differentiation, and continue to gain share with new, profitable awards. We also reached an important milestone on our multiyear safety journey. Because of our unrelenting focus on safety, we delivered a 40% year-over-year reduction in recordable incidents, leading to an injury frequency rate of 0.5, approaching best-in-class performance. Our plants are safer and more efficient every day. So for the results you delivered and for your focus on safety, I want to thank all ITT-ers with a heartfelt thank you. Now on to the results. In Q1, we built on the 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 orders leading to a book-to-bill of 1.07; 9% organic revenue growth or 14% total, surpassing $900 million of sales in the 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 will 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 demand in 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 while winning nearly $70 million in project awards, leading to a book-to-bill of 1.06. On revenue, all 3 segments delivered strong growth driven by 8 percentage points of volume. This was led by industrial process, which drove 64% growth in profitable pump projects. MT delivered 8% growth led by strong Friction OE outperformance and double-digit growth in rail, while we continue to see a recovery in the friction aftermarket. Finally, CCT grew 7% with 13% growth in Aerospace and Defense. We have seen a multi-quarter ramp that we expect will continue throughout 2024 and beyond. We are driving profitable growth, resulting in a 23% increase in operating income, nearly 2.5 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 KONI, which drove margin above the empty segment average. 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 Parker-Hannifin 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 shifted to projects. And including acquisitions, IP was still above 20%. Because of this performance, we are raising the low end of our EPS guidance by $0.20 or $0.10 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 point increase in our margin outlook as well. Our teams delivered this performance while investing in the businesses. These investments will continue to drive strong returns for our shareholders, and I was fortunate to see some of this in the first and last quarter, in India and Saudi. I saw the investment that IP is making to expand testing capacity and capabilities. Khalid 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 4 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 Bornemann site in Germany, we are upgrading our testing facility to replicate field conditions on large pump packages. ITT will be one of the few companies in the world with this capability. We're also making progress penetrating the high-performance segment. We expect the new production lines in Termoli, Italy to be up and running later this year as part of our EUR 50 million investment for plant expansion and upgraded R&D capabilities. Notably, this Friction team has already won low-emission brake platform awards on high-performance vehicles even before the facility construction is complete. In addition, the team secured approval for over $20 million in government incentives in Europe, which significantly reduced 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 will share more with you on EMD in the coming quarters. All of these investments will sustain ITT's differentiation over the long term through profitable growth. A significant 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 4. 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 the strategic clients and an opportunity level of selectivity. Here are a few examples. By leveraging our proprietary Envision valve technology, IP engineered 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 a leading global pharmaceutical company. We're also winning on green orders, not just in AP with large decarbonization projects but also in Friction with awards with hybrid and electric vehicles and in CCT with battery connectors. With this and other awards, green applications now represent approximately 16% of ITT's revenue annually. Moving forward, this will be bolstered by Svanehøj, which has exposure to low carbon and green fuel applications as part of the clean energy transition. This quarter, Svanehøj grew orders by more than 30% year-over-year, and we expect this will deliver double-digit revenue growth for the next several years. Moving to CCT. We are seeing good order momentum in Connected Distribution, especially in North America. While 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 rev, orders were up 37%. As you can see, ITT's growth is accelerating with organic orders growth of 7%. And with a strong performance from Svanehøj, we grew orders 13% in total. Our Q1 performance demonstrated once again that ITT is well positioned to grow profitably. Now let me turn the call over to Emmanuel on Slide 5.

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. IT 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. Svanehøj added 5 points to the total revenue growth. And I also want to reemphasize that its orders were up over 30% compared to the prior year. 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, IP's 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 cash flow by 2% versus the prior year, driven by increased profit. We continue to see significant opportunities for stronger cash generation as inventory and AR 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 6 to review the EPS bridge for Q1. Adjusted EPS grew 21% for the quarter to a record $1.42. Strong volume growth and higher prices drove $0.23 of operating leverage, while net productivity contributed another $0.05. And the investments, Luca described earlier, had an impact of $0.03 this quarter. Included in the net M&A bar is roughly $7 million of intangible amortization coming from both Svanehøj and Micro-Mode. 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 Svanehøj, we will provide more color. Wrapping up the bridge, interest on the term loan and commercial paper drove a $0.03 headwind this quarter. As cash generation picks up, we anticipate paying down our outstanding debt further. Let's turn to Slide 7 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 Friction outperformance, 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 17.4% at the midpoint, both MT and CCT 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, a $0.10 improvement from the previous guidance. 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 comparison 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 8 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 strong management teams. These targets may also present margin expansion potential, but the deal rationale always starts with a strategic fit. We have significant dry powder, and we intend to effectively deploy capital in order to strengthen our existing businesses. Along with acquisitions, we also regularly review our portfolio to ensure that the businesses we own align with 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 organic growth and expanding our margins. And while this will continue, 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 dealmakers 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 Habonim, which expanded our valves business by more than 50%, generated more than 100% cash conversion in 2023, and exceeded our expectations in all metrics, adding $0.08 of EPS in year one. And while it's too early for Svanehøj, 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 Aerospace and Defense, generating nearly $1 billion in orders and a book-to-bill above 1, 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.

Operator Instructions. Our first question will come from the line of Joe Giordano from TD Callon.

The margins for MT were unexpectedly good, likely higher than anticipated in Q1. According to the slides, you mentioned that the full year outlook is expected to be similar to Q1. Can you clarify where you stand with new platforms ramping up and pricing? How much does this influence your full year guidance? It seems somewhat conservative given Q1's performance. Could you explain the factors at play?

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 dynamics 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 won, 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 on our end market by end market. But generally, one of the only markets we see doing well right now are Aerospace and Connectors and like IT with data centers, so where are you seeing this kind of strength? And how kind of company-specific is this to ITT?

Sure. When it comes to the orders of CCT, they were at a record line and specifically on the connectors at roughly $122 million total, they were a record high as well. The growth there was 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 also 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.

And our next question will come from the line of Jeff Hammond from KeyBanc Capital.

So yes, I want to stay with the orders. So clearly impressive orders in 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 destock 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 business in there. In Motion Technologies, don't forget about rail. Rail is a good market right now, and the business is outperforming tremendously, both in Europe and in China. The Friction award, I mean those 47 awards also in EV and hybrid, we are already in terms of the award that more than 40% of the total full year target. And we don't tend to give easy targets, Jeff. On CCT, the highest orders on record when it comes to distribution connectors, the highest on the components obviously pushed from 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 in 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 appreciate the slide on capital allocation. Just wondering as we look a year or two out, what do 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 year period?

Yes, Jeff. We're quite pleased with the state of our balance sheet. We have minimal debt, and we have put in a lot of effort to achieve this. When considering our M&A potential, we've created substantial value organically, contributing to both revenue growth and margin improvement due to those investments. In fact, our margin has expanded by 350 basis points since 2019, and we plan to keep that momentum going. As I mentioned, we are ramping up our M&A efforts. Luca pointed out that we have been strengthening our M&A capabilities, and we now have a skilled and experienced team in place along with a clear strategy. Consequently, we have developed a robust pipeline of targets, currently identifying more than 10 serious candidates, each with average revenues of approximately $200 million to $250 million. Our objective is to invest roughly $500 million to $700 million annually in a disciplined way to foster ITT's inorganic growth. Our focus remains on flow and connectors, which hasn’t changed. We are carefully advancing our M&A execution.

Our next question will come from the line of Mike Halloran from Baird.

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.

Thanks, Mike. In the last quarter, we saw a global decline of about 0.8%, which was somewhat unexpected. Europe performed notably weaker, with a decline of 2.5%, while China showed a surprising increase of over 4% in car production. North America experienced low single-digit growth. For the full year, we anticipate that Europe will decrease in low single digits, while our forecast for China has improved. We now expect it to rise in low single digits, with North America following the same trend. Overall, for 2024, we estimate production to be around 90 million vehicles. It's worth noting that we outperformed expectations, particularly in the first quarter. In China, even with the market growing by 4.4%, our business surprisingly grew by 38%, which is remarkable. In Europe, while the market struggled, our business not only exceeded expectations but also achieved year-over-year growth. Overall, the Friction team delivered an exceptional performance.

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

Sure. Let me discuss the digital cycle and the market. When looking at short cycle orders, they increased by 1% year-over-year, primarily driven by valves and service. Sequentially, they rose by 9%, which was mostly due to volume. All components of the short cycle in the quarter saw a sequential increase, including baseline parts, service, and additional variations, indicating that this growth is primarily volume-related. The short cycle orders are likely the second-highest we've recorded, with an average of a million dollars per week. Regarding the market, there seems to be some weakness in the chemical sector, but the general industrial sector remains strong. Geographically, the strength is predominantly in North America.

I would like to add that we are seeing significant activity in the Middle East, particularly in oil and gas, chemicals, and mining, creating a robust market for IP, as demonstrated by our book-to-bill ratio of 1.06. Regarding Svanehøj, we closed Q1 as expected in terms of sales and income, and we experienced strong orders with a 30% growth. Their strategic fit remains strong as they are a market leader and active in energy transition, building a long-term backlog with orders extending into 2025. The integration process is also going smoothly, reinforcing our strategic rationale, and they have begun generating cash, which is a positive development.

Our next question will come from the line of Scott Davis from Melius Research.

Congrats on the start to the year, and it's been fun to watch you guys kick some tail over the last few years. So anyway, 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 has been the main barrier to perhaps maybe some of the transactions not occurring already? Is it more just a function of timing? Is it price? Is it that a lot of these things are niche assets and there just hasn't been much of an appetite? I'm just kind of curious more big picture than anything else. Luca, you're working on this, why we haven't seen more consolidation already.

Yes, that's a good question. I'm not entirely sure I have the answer. In this fragmented market, there are many opportunities. Sometimes, people focus on what they know and miss out on potential acquisitions, but there are also many aspects to address internally first. Looking at many companies in the sector, their performance may not be where it needs to be before pursuing mergers and acquisitions. If you had asked me five years ago, it would have been tough to be optimistic about acquisitions in intellectual property, but the situation has changed now.

Okay. That's helpful. And guys, just a cleanup item, are rail margins higher than auto? Or are they pretty similar?

So when you look at KONI business, rail margins are clearly on par, a little higher 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 are still driving pricing to offset the cost inflation. 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 the mid- to high teens this year. But I would say rail margins, especially in KONI, are trending really well.

Our next question will come from the line of Joe Ritchie from Goldman Sachs.

Let's just maybe focus the first question on IP. So the projects business up 64%, but you still saw margins north of 20%. That's pretty incredible, 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 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. Great observation, Joe. Even with the significant challenges in our mix, the margin improved by over 140 basis points on an organic, like-for-like basis. This improvement is primarily due to our selective approach in acquisitions, strong project execution, and our disciplined approach. We expect this trend to continue. For instance, the backlog in our project business currently has a very healthy margin, which has increased by 300 basis points year-over-year. This improvement in margin for our projects will persist as we advance in both acquisitions and execution. Regarding the foundry, we successfully closed it down, leading to a reduction in headcount at Seneca Falls, improved safety performance, and enhanced quality of castings sourced from low-cost regions and North America, including Mexico. Overall, this transition has been successful and completed.

That's super helpful and great to hear. And then, I guess, maybe just continuing on the margin front, and other question earlier on Motion Tech and obviously, the strong incremental margins this quarter. Just help us kind of understand maybe the trajectory of the margins from here? Do we move higher off of the 18.2% number? And what does that look like for the rest of the year?

Yes. Thanks, Joe. You're correct that the incrementals were very strong in Motion Technologies, exceeding 60% in the first quarter. We anticipate a similar result for the remainder of the year, which is exciting for us. A lot of effort went into pricing strategies, managing commodity costs, and securing steel prices in advance, allowing us to benefit from reductions seen late last year and early this year. From a margin perspective, we can confidently expect Motion Tech's margins to improve sequentially each quarter, although we expect them to remain within the 18% range for the full year. As Luca mentioned, we'll focus on maintaining that elevated margin level. This business was previously performing at much lower margins, and our goal is to ensure we consistently achieve a higher level of profitability.

And our next question will come from the line of Damian Karas from UBS.

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

Maybe I'll start with the European aftermarket, Emmanuel. So when you look at the market, Damian, the market was down in Q1. I'm talking about production, roughly 0.8%. We expect the market to be flat for the full year overall at 90 million vehicles produced was a little bit of differing pictures from what we expected at the beginning. In terms of Europe, it was worse, down 2.5% in Q1, and we are 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 in low single digits. So this is great news. And then North America was up low single digits, and it will be up low single digits also for the full year. In each and every one of these regions, we outperformed quite well. Europe, despite the decline of the market, we actually grew. And China, we grew 38%. So an incredible outperformance. We won an extraordinary 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% for our Friction business. But we continue to monitor very closely. We think that we're done with destocking and we continue to monitor the end customer demand.

That's very helpful. The Svanehøj order has increased by 30%, which is significant. Would you say that Svanehøj is exceeding your expectations since you acquired the company? Any additional insights you can provide about 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 low double-digit 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 a really good business, delivering revenue and income in line with expectations. Cash, as I mentioned, was very positive. So if you think about it, this is a roughly 20% EBITDA business. They delivered that in Q1, and we expect that they will deliver that for the full year as well. So yes, a lot of really good positive things, but it's just the beginning.

Our next question will come from the line of Vladimir Bystricky from Citigroup.

So I wanted to ask you guys about the rail strength that you're seeing. Obviously, 37% rail orders growth in Q1 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?

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 U.S., I think this number is around 50 billion. And in China, because ridership is back to pre-pandemic levels, 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 of 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, we usually book orders that will deliver between 6 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 why 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 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, right, when we were able to sell the 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 assessing 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, it might well be that some other pieces of the business, we are not the rightful owner anymore. And that probably there will be underperforming parts of the business, I would say.

And our last question will come from Andrew Obin from Bank of America.

You have Sabrina Abrams on for Andrew. 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 Termoli plan. Should we think that reinvestment ramps sequentially through the year?

Thank you for the question. Productivity is a key factor that enables us to reinvest in the business, which has been a consistent narrative across many of our operations. KONI was previously underperforming, but by improving operations, we were able to reinvest in modernizing factories and enhancing R&D. The same applies to our IP initiatives; they became feasible as our profits increased significantly. Looking at this year, we anticipate ongoing substantial productivity gains across our companies. In the first quarter, productivity contributed 60 basis points to our margin expansion, and we expect to maintain this trend. In terms of investment impact on margins, this quarter it was about 40 basis points, and we foresee this continuing for the remainder of the year. We are focused on enhancing productivity and implementing pricing strategies to counteract significant impacts while also reinvesting to ensure sustainable long-term growth.

And then a 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 U.S.?

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, 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 that'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 validations, which are future starts of production. So when you look at all of this, think about the disruption that you have in the line. And despite all of that, the OE, the overall efficiency of the line is more than 90%, and the on-time delivery 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, Sabrina.

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