ITT Inc. (ITT) Q1 2020 Earnings Report, Transcript and Summary

Welcome to ITT’s 2020 First Quarter Conference Call. Today is Friday, May 1, 2020. Today’s call is being recorded and will be available for replay beginning at 12 p.m. Eastern. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Emmanuel Caprais, Group Chief Financial Officer. You may begin.

Good morning, and thank you, Maria. Welcome to ITT’s first quarter 2020 earnings call. This is Emmanuel and on the line this morning are Luca Savi, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today’s presentation, press release and reconciliation of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors. Our adjusted non-GAAP results exclude certain non-operating and non-recurring items, including but not limited to asbestos restructuring, asset impairment, acquisition related items and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I’d like to provide a brief overview on our Q1 GAAP results compared to prior year. Q1 total revenue decreased 5% to $663 million. Segment operating income decreased 30% to $78 million and EPS of $0.95 increased 19%. Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated. Lastly today’s call will contain will contain forward-looking statements that are subject to risks and uncertainties including impacts from the COVID-19 pandemic. Actual results may vary materially. All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affect our business including those disclosed in our SEC filings. Now let’s turn to slide three where Luca will kick things off.

Thank you, Emmanuel. And thank you all for being with us this morning despite the many challenges and the unique circumstances that you are dealing with at this time. I truly wish you and your families all the strength necessary to get through this crisis. This morning we will do our absolute best to describe the market forces that we are facing, and more importantly, the focused actions that we have taken and will continue to take to combat those forces and create an even more resilient ITT for the future. But first, I want to take a moment to thank all the ITTers around the world who worked tirelessly during this pandemic to take care of our customers and to take care of each other during these very challenging times. Every day during our leadership team briefing we will discuss our people’s safety and all of the local grassroots efforts that our teams championed to support their local community. As you can see in these pictures, ITT is united to provide face shield, protective masks and other critical supplies to first responders and hospital workers in our valued communities. This morning, we played Alicia Keys’ new song Good Job during the whole time prior to our call. We did this to further honor the first responders and essential employees around the world that provide our IITers with the opportunity to deliver to our customers in the essential industry that we serve. Without them, this call doesn’t happen. So thank you. Let’s now turn to our 2020 priorities on slide four. This morning we will use words and phrases that we don’t often use in this investor calls like unprecedented, pandemic and essential businesses. These are truly historic times, where resilience in the face of adversity is paramount, and to me, nobody personified leadership at a time of crisis better than Winston Churchill, who reminded us all that success is not final, failure is not fatal, it is the courage to continue the count. So as ITTers all around the word mastered the courage to continue to battle these unprecedented market forces and as we go through this earnings presentation this morning, there is one word that I want you to remember that best describes today’s ITT, resilience. To amend our resilience in the face of the unprecedented challenges posed by the COVID-19 pandemic, ITTers all around the world are united in their focus and our top three 2020 priorities and they are the health of our people, the health of our business and the health of our financials. Our first quarter results are a testimony to this focused priority to the resilience of our diversified businesses and to the resilience of our dedicated people. While the vast majority of our businesses are being essential, COVID-19 disrupted our operations as we experienced decreased customer demand, temporary plant closures and stricter health protocols to keep our employees safe. But we stayed nimble, flexible and humble, and we went to work. And we worked harder than ever in more unusual circumstances than ever before to create value for our customers each and every day. For example, we had employees that stood in line for hours to cross European borders to get to work. We have many employees were separated for weeks from their families due to various travel restrictions and all employees adapted to new PPE and social distancing requirements. But as ITTers have always done throughout our 100 year history we got the job done and produced results for our customers and our shareholders. And as it relates to the health of our business and the health of our financials in the quarter we expanded our war chest of self-help opportunities through significant incremental new actions totaling $135 million and we executed measures to boost our liquidity to approximately $1.2 billion. I am confident that these actions will power ITT through this challenging period and position us well to aggressively capture opportunities in the future. As you see our priority is to start with the health of our people and I am so proud of how hard ITTers is around the world worked together to share best practices and leverage our collective ingenuity to keep each other safe. But at the highest level, I am so thankful that the detail playbook that was implemented are indomitable seen in China and then leverage around the globe has helped to contend confirmed ITT COVID-19 cases to just single digits, and to-date, no manufacturing facilities shut down due to the spread of the virus amongst our employees. This is a tremendous accomplishment considering at a numerous operating locations in hotspots like China, South Korea, Nodier Italy, New York and California. And I can assure you that we will never let our gut down when it comes to the health of our people. Now, I’d like to share with you our Q1 2020 highlights related to the health of our business and the health of our financials on slide five. Starting with the health of our business. From a customer centricity standpoint, we can see that our strong share gain momentum continued at MT Friction, as we outperform global OEM production by more than 2,000 basis points. And on the strength of our Mexico operations we posted almost 1% growth in North America, as we run production of our recent share gains with GM. However, I want to caution everyone not to expect this kind of outperformance in the future quarters, as the cost of phasing in 2020 will be erratic and when we cycle through various customer and end market dynamics. But by the end of the year we do expect to post a 700 basis points to 1000 basis points of outperformance versus global auto production. This will be our ninth consecutive year of outperformance. Supporting our continued outperformance, MT Friction generated yet another quarter of strong global platform wins. Q1 awards include the conquering two platforms with the leading ED manufacturer that we are pursuing for years. Our persistence to build intimacy with this customer coupled with our technological and quality leadership paid off and these wins add nicely to our already strong win rate on new global EV platforms. Finally, while we face challenges on the aerospace front our rail and IP businesses delivered a solid topline improvement from both a revenue and order standpoint. Next, from an operational excellence perspective, we continue to drive the productivity actions that have been powering our business over the last several years. We continue to focus intensely on driving efficiency actions, eliminating waste and bolstering our war chest of self-opportunity across all our sites. In the quarter, the team at industrial process produced an 11.3% of segment operating margin representing an improvement of 60 basis points. This margin expansion was supplemented by 180 basis points improvement in working capital. Well, done George and team. Considering the sudden drop in demand across industries due to COVID-19, we are executing approximately $50 million of new entity-wide restructuring actions to recalibrate our global workforce and deliver $70 million in the annualized savings. As we execute these reductions, we will also optimize the way we work as an organization. This approach was exemplified by our planting budget Italy that reduced the workforce more and faster than the declining production devising new ways to do more with less. And across IIT, we are also drastically cut in discretionary spending by $20 million and CapEx by $35 million. Next, I provide an overview of the Q1 results and perspectives on the health of our financials. Revenue declined 5% to $663 million, segment operating income margin was 14.5% and operating income margin was 13.4%. EPS of $0.80 per share was in line with our expectations and declined 9% excluding unfavorable FX of $4 million. And lastly, we generated $31 million of free cash flow in the first quarter representing 143% improvement over the prior year. Next, let me highlight the health of our financials and particularly the strength of our liquidity. For the past several years we have built a tremendous balance sheet that has been solidly fortified by many strategic decisions that preserve our investment grade quality for times like these. When a crisis like COVID-19 hit and you have the balance sheet that we have, you know that you are entering the crisis with a strong competitive advantage. So our liquidity position of approximately $1.2 billion is just one element of our financial strength. We will also continue to drive down our net asbestos liability by generating favorable cash settlements like the $66 million settlement we executed in Q1. Many of our actions like these have contributed to a 46% reduction in our next asbestos liabilities -- liability and a 64% reduction in our net environmental liability since then, and as a result of this settlement, we have ample liquidity in our Qualified Settlement Fund to respond to legacy liability outflows in 2020 which will further preserve ITT’s cash during the pandemic. Lastly, the decision we made at the end of 2019 to freeze and immunize our U.S. Pension Plan at 108% funded status could not have come at a better time. So our strong liquidity is not only a tremendous weapon to combat current conditions, but it will also enable us to seize on opportunities that will power ITT’s future when these crises dissipate. Now, let me turn it over to Tom to briefly discuss Q1 results before we highlight the decisive actions that we have taken to address market conditions for the balance of 2020. Tom?

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

Thanks, Tom. So let’s start with the health of our people on slide 10 and here we saw that there was no better way to depict how we have kept our people safe than by showing pictures of them in action. As you go around these photos you will see there is a heavy emphasis on protecting our facilities by permitting disinfection and temperature checks. And on the inside we reorganize the workplace from the factory layout to the conference room to the canteen seating to apply distancing guidelines between team members. Many of the actions we have taken to protect our people were based on our successful playbook in China where we took proactive, detailed and aggressive actions early in the outbreak of this pandemic to protect the health and safety of our employees. And our team in China also led the way to define appropriate safety and PPE protocol, while they work together on the mass mission to provide PPE to ITT around the world. In addition to this China playbook we enacted the rigorous safety measures to all of our sites -- in site in accordance to WHO and CDC standards. We expect to continue these measures until we determine that COVID-19 is adequately contained and we will take any additional actions necessary to continue to keep our people safe. And as a result of all these efforts today our global confirmed cases are being contained to the single digits including no reported cases in China. Before going into details on slide 11, I’d like to highlight that as a result of the demand uncertainty in the end markets we serve, we are withdrawing our previously communicated guidance for 2020. And now let me provide some perspective on our end market and how we see the year playing out for the balance of 2020. We do expect the most pronounced year-over-year and sequential decline due to COVID-19 in the second quarter. And from there we would expect to see gradual sequential improvement as we progress through Q3 and Q4. The gradual improvements will be the result of the cost actions that we have taken combined with gradual market recovery. Next, let me share our high level expectations by segment for 2020. At MT based on our share gains and ramping platforms, we expect to significantly outperform weaker global demand for OEM will pass by 700 basis points to 1000 basis points. At CCT, Boeing 737 MAX challenges reduced OEM production and lower global commercial air traffic will significantly impact demand for OEM and aftermarket components, and connectors for the balance of 2020. At IP, as the year progresses, we anticipate that a decline in customer OpEx and CapEx due to the economic conditions and the decline in oil and gas prices will result in lower project orders. However, the short cycle business representing 75% of IPs revenue is expected to improve sequentially through the end of the year as global economic output gradually reset. So, going back to the health of our business, in this time of demand stress, we are doubling down on our customer-centric approach. We have been deep diving in our EDI requests to understand the robustness of our backlog to proactively match production with demand. And in Q1, IP executed flawlessly on two major projects and proactively delivered ahead of expected lockdowns in India and Saudi. We are also taking advantage of the current environment to secure supply for our customers, while highlighting to them the benefits of working with ITT in terms of on-time delivery and superior quality. In terms of operational excellence, we are leveraging the Friction’s standardized global production system to ensure flexibility in serving our customers and guaranteeing them a consistent level of performance. We also continue to optimize our manufacturing efficiency through existing automation. As we discussed earlier, our Borgia site has been able to produce more with less resources. Thanks to the well-established MT approach. Another way we optimize efficiency is by moving aggressively to close some of our facilities to respond to lower demand levels. For instance, our friction plants in Borgia and Termoli, Italy were closed for two weeks in April and might face similar reduced activity in May. We obviously have to manufacture safely, serve our customers and optimize our production costs, and so far, we managed to successfully execute on these three goals. We are also accelerating our supply chain redesign by both implementing redundancy by main regions to ensure procurement continuity and rationalize our supply base to achieve cost reductions through economies of scale. We have taken significant restructuring actions to adjust to reduced demand and aggressively cut costs by only allocating budgets to key expense categories. Finally, we are driving the redesign of our production organization by executing on our product line transfer plan and our footprint reduction especially at IP and CCT. We anticipate a difficult and challenging balance of the year in the markets we serve and our IIT team has been working in close collaboration with our customers and suppliers to minimize disruptions. We continue to focus on delivering value for our customers by being flexible and taking advantage of opportunities along the way. Next, let’s turn to the health of our financials on slide 12. ITT entered this pandemic with solid investment grade balance sheet and a very favorable liquidity position. But at today’s ITT, we are never satisfied and never complacent. Every day we are actively monitoring market developments and taking aggressive measures to stay ahead of the curve. The five major actions totaling $135 million that we are taking to bolster our financial position include; one, a global restructuring plan that dramatically reduces our structural cost generating annualized savings of $70 million; two, salary reductions for Board, CEO and executives and the suspension of the 401(k) match generating $10 million in the savings; three, an entity wide CapEx cut generating a $35 million reduction compared to 2019; four, significant reduction in discretionary spending and supply chain productivity generating at least $20 million in the savings; and five, aggressive renegotiations with all vendors and service providers. In addition, we are reviewing our global liquidity on a daily basis to validate expected outflows and ensure that we get paid on a timely basis by our customers. We are also re-forecasting our next three-month cash flows on a weekly basis to ensure that we stay ahead of the financial curve. To really bring this sharpened focus to all of our businesses, we have effectively declared war on working capital. We are taking constant action on our accounts receivable for the past years. We have reduced credit limits to contain an exposure to risk. We are specifically in inventory and working to drive upturns as we are strictly matching production with demand and we are collaborating with our supply base to extend payment terms as we focus on the most competitive partners. Now, let me turn it over to Tom, who will describe our liquidity on slide 13.

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

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

Thank you. [Operator Instructions] Thank you. Our first question is coming from Jeff Hammond of KeyBanc Capital.

Hey. Good morning, guys.

Hey. Jeff.

Good morning, Jeff.

So, I guess, just to pin down 2Q a little bit better can you maybe talk about what you are seeing in terms of April sales in order trends that would help give us some frame on kind of how substantial the sequential decline or year-over-year decline would be in 2Q. And maybe just speak to Friction certainly with all the auto shutdowns that we have seen here recently? Thanks.

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

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

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

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

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

Okay. Thanks a lot. I will get back in queue.

Our next question comes from the line of Damian Karas of UBS.

Hi. Good morning, everyone.

Hi, Damian.

Hi, Damian.

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

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

Yeah. Just to kind of underscore the structural element of these new actions, so we are targeting up to about 840 heads, 70% to 75% of those actions will be structural in nature and into value center and corporate we will be looking at a structural reduction around 15% to 20% and that’s pretty consistent across all three value centers. So it’s a comprehensive entity wide set of actions more heavily weighted in the Americas and in Europe, but we have 62 locations that are being impacted by these actions. So -- and the bulk of these new items, so these are new actions, the bulk of them are going to be completed 55%, 60% completed by Q2 and then balance as the year progresses. But we are comprehensively moving through this. But these are actions that are kind of new to some of the ones that we took at Q3 and Q4 at IC and CCT in particular.

And the timing to what Tom said in Q2 and Q3 is the U.S. is more Q2 and the Europe it is more Q3 because there are regulations that you need to follow and there are some that the COVID-19 has caused some government to impose not to do any restructuring until a certain date. So that’s the reason of the different timing, sorry Damian.

Sure. No. That makes sense. And then I guess if you look at MT in the first quarter, obviously, the decrementals they are a much higher than 35%. But in particular you did step up the growth investment there. Just curious is that level of investment kind of expected to hold?

Damian, yeah, thanks for the question. When you look at Q1 for Motion Tech we have foreign exchange and the strategic investment impact. If you took those two items out the decrementals were in the high-20s. So we certainly had a year-over-year impact where we had a strong government incentive that came in last year to the tune of the $3-plus million. So that created a little bit of a distortion in the year-over-year drop. But if you really take that out and foreign exchange you are looking at kind of decrementals in the more classic range that we would be targeting for MT no a go-forward basis. As far as level of investment, maybe Luca, if you want to comment on the way MT is approaching investments in the cycle. But, certainly, that grant was a one-time benefit last year.

So, on the investment, so we are reviewing absolutely everything just to give you an idea or so. We changed all our [inaudible] delegation of authority in terms of at least now the action that we have taken to challenge more every single investment that these proposed are company-wide. We are reviewing the CapEx of every single businesses and as you can see, we are reducing the capital expenditure by $35 million. And yesterday morning, I was having a call actually with that with Carlo and the team in terms of reviewing a major investment that was planned for that Motion Technologies in friction and trying to find with the typical Friction ingenuity, a different way of doing it, drastically reducing $1 million of investment. So as the roofing is on the table, everything is under review, everything that’s already been approved needs to be approved again.

Okay. Understood. That’s really helpful. Good luck, gentlemen.

Thank, Damian.

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

Hey. Good morning all. I hope you are doing well.

We are doing as we are.

Good Brett.

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

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

Okay. Great. And then, just shifting to MT and the outgrowth, you mentioned, for the year, you are looking at 700 or -- 700 basis points to 1000 basis points of outgrowth. Was that an annual number or were you saying each quarter going forward?

Okay. So, that’s an annual number, Brett, between 700 basis points and 1000 basis points. What is likely to happen in 2020 is more of an erratic path just because it’s a very volatile environment. So what you have seen in Q1 that we outperformed the market by more than 2,000 basis points and -- but I do not expect to deliver 2,000 basis points on a yearly basis. So we will see more of an erratic outperformance as we move through the quarters. But we will expect that our performance in every region, in Europe, in North America and in China.

Okay. Got it. I will leave it there and pass it along. Thanks, guys.

Thanks, Brett.

Thanks, Brett.

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

Hey. Good morning, everyone.

Good morning, Mike.

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

Okay. So, let me, let me address the first part, and Tom, I will leave you for the second maybe. So, it’s a good point, Mike, in terms of, what we are trying to do is of course to play defense and -- but we are playing offense for the future at the same time. So, let me give you a couple of examples here. When we think particularly on the, if you think about Motion Technologies, if you think about the Friction side, we are playing defense on really going granular in the analysis and critical analysis of the backlog and the order book in order to ensure that we match supply with demand. We need to understand really what is the real demand here and how much is just the Tier 1 telling you to produce just to have a safe inventory. Because we need to understand really how much labor we need and how much raw materials so that we do not pump up the inventory raw materials to finish with an inventory of finished goods. So that is defense, defense on the reduction of the workforce. We have our strategy in the past, which was quite right and it’s been, and yes they do have quite a sizable amount of temporary workers for instance working in our plants and that has been an immediate flexibility that we had at our disposal. But because of the size of the crisis that we are facing, the certainty and the volatility, we had to go down deeper, and we went down on the structural cost. Some of the reduction that Tom was talking about in terms of the restructuring, our structure and some of those are there to stay. We will be a better company stronger when we come out of that. The CapEx reduction is, we are really looking at every single one to ensure that we apply all our ingenuity to come up with the best solution for that and reducing the CapEx that at this point in time we don’t need. But at the same time, I want to give you, we play offense for the future. Let me give you a couple of examples on that one. We -- in China, we went out in terms of developing a product and conquer during the middle of the COVID-19 in China a sizable platform with customer of our just because the competitor was not able to supply at that time. This is going to be temporary. It’s going to be for the next six months or nine months, I don’t recall exactly. But it’s a good opportunity and is opening up the opportunity to bid for that platform when it comes to the market early next year with -- and we score points with the customer. When we close our plants in Italy during the month of April for a couple of weeks, our diners where we were working for new products, smarter products or green products, when we were working for new programs, they kept on running and they were open. We were keeping on investing in the new programs. So -- and I think also because of our strong balance sheet, our liquidity position and our competitive landscape, we are well-positioned in there to really play offense when in the mid long-term when we are coming out of this crisis and these are just some example of how we are balancing defense and offense. Tom you want to?

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

And then if I can give you…

And then -- go ahead.

No. Go ahead, Mike, sorry. We can take…

No. No.

What?

Please continue Luca. I thought you guys are done.

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

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

Okay. So let me talk -- let me start -- talk a little bit about. And I think that when you look at the margins for IP, they keep on improving despite the negative mix. So if you think about last year when we improved quarter-after-quarter despite the negative mix because the project revenue was keep on going up. And then when you look at Q1 our negative mix actually impacted was a headwind of roughly 30 basis points and despite that we were able to improve 60 basis points, so despite it also in negative effects. I think that the result of that is a better execution mind. So let me give you a couple of examples to contextualize this. We are working -- and we mentioned two major projects. One was in Saudi and one that was executed in India for the Dangote Refinery in Africa. The new ITT, the new management is able to work in this way is able to deliver that. The first one was after the attack to the refinery in Saudi. The Saudi team operated -- the Saudi operation work very closely with the customer to adapt previous orders to what their need were. They were able to deliver ahead of time. And the same happened for the Dangote Refinery. We executed a project. We finished ahead of time and because of that, we delivered before both Saudi Arabia and India went in lockdown. This is something that the new ITT, the new management is able to work and deliver. So, project execution. That is one example. I always talk about Korea, as well as Saudi. Let me talk finally about SFO as well. SFO delivered in Q1 an on-time delivery on the anci [ph] line of more than 90%. Unfortunately, mid-range was not in the high-80s but they got it back in April. We close -- I think, we closed last week April, I think, and the on-time delivery of the mid-range was actually 88%. There were people shot in Seneca Falls in this number in their entire life in Seneca Falls. So that execution is really what is bringing better margin. But it’s not just better margin, Mike, it’s also better working capital. Because if you look at the improvement of the working capital, IP generated $29 million of cash in Q1 and all of that came from working capital improvements, 108 basis points year-over-year, 300 basis points improvement since the end of 2019 and all of that is coming from inventory. So that’s my comment and color on the margins.

Appreciate it, gentlemen. Thank you.

Thanks, Mike.

Thanks Mike.

Our next question comes from line of Joe Ritchie of Goldman Sachs.

Thanks. Good morning, everybody I hope you are all well.

Hi, Joe.

Yeah. Hi, Joe.

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

So the management of the situation -- of this situation has been a daily management and what has been clear in terms of our expectation and the managements in ITT’s to adapt to that is that you have to be hands on all the time. This is the case where you really need to see your lead -- your leaders are the shepherds and they need to smell like a sheep, because there are down there with them. You need to manage every single time the logistics, because it got more and more difficult in terms of finding transportation when Italy was locking down, when the borders were locking down. So that was tricky. But we didn’t face any major hiccup and we were able to deliver everything that we were supposed to deliver. But it was not easy with a daily manager, with a hourly management. When you look at the supply chain we were able to go through China when we -- when COVID-19 exploded in China we developed our supply chain contingency plan, our backup scenario. And the backup scenario was ensuring that if some of our suppliers were not getting through COVID-19 and there were a couple of critical ones that needed a lot of help from our resources, we had developed a backup from Europe. And fortunately, we never had to use it. We also had a backup of our own plants just in case we face difficulties in our plant in China. And the fact that we have the same process, the same machine, the same manufacturing helped us in making these redundancy working. We didn’t have to use it though. Now, when we went the other way around then, obviously, the reverse happened. So our backup plan when we started -- when Italy was locking down, it was okay, if we are having issues in terms of manufacturing and serving our customers from Italy, okay, what can China do? What can our Chinese supplier do to support Europe? It didn’t come to that because it was not necessary. But once again it was a daily management. To give you an idea and so that is for the first question. The other point is that we faced several difficulties during these lockdowns, Joe. Let me give you, when -- in the prepared remarks, I was talking about people waiting hours at the border. Think about it, you have a plant in Ostrava and freights are making brake pads and the shock absorbers. And what you have is a lot of Polish workers crossing the border and come to our factories. Now, there were days where they had to wait in line for hours and then the border was closed. So, think about you are a Plan Manager and you have to find labor, temporary workers to ensure that you supply your customers and you make your pad, so all of that is really daily management, hourly management every day for 24x7. Sorry for the long answers.

No. No. That’s -- that was super helpful. I really appreciate it. And maybe my one follow-up and this question is for Tom. In just thinking about the cost action, the $100 million or so non-CapEx related actions. I guess, if I am thinking about how much that actually benefits 2020, it sounds like because of some of the actions, particularly in Europe, happening in 3Q, is it fair to say that less -- you will see less than half of the savings in 2020? I am just trying to make sure that I think about it right from borrowing standpoint.

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

Okay. Perfect. Thanks, guys.

Thanks, Joe.

Thanks, Joe.

Our next question comes from the line of Nathan Jones of Stifel.

Good morning, everyone.

Hi, Nathan.

Hi, Nathan.

I’d like to -- a little bit of a finer point on the MT outlook. Luca, you shared some of the order bills that you saw in China down 48% in the first quarter. As the virus has rolled from east to west, are those the kind of auto OEM build up is that you are expecting to see in 2Q in Europe, in 2Q in the U.S. or is that a reason why they would be better or worse than that?

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

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

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

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

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

Okay. Fair enough. Thanks for taking my questions and stay safe.

Thanks Nathan.

You too.

Our next question comes from the line of John Inch of Gordon Haskett.

Thanks. Good morning everyone and thanks for letting the call run a little bit longer. Can I just go back to decremental just for a sec. On the surface, Tom and Luca, so the headline detrimental if you look at the total number was 50%, but then Tom you actually called out, you said MT was high-20s if you look at the core, right? I think that’s what you said. What was the core for…

Correct.

Yeah. What was the core for the other two businesses if you want to think about it that way?

Well, the kind of face print, I would say, IP is probably pretty consistent without pulling it apart in the 23% range for Q1. And CCT, we said a quick core was 35%. It published its 39% because of Matrix was in this year…

Right.

…but not in last year, so just create some distortion there. So really want to recalibrate your -- the quarter is kind of getting into the type of run rates that we would see expecting as we enter Q2 and then we are going layer on these incremental benefits and actions. So, I wouldn’t read anything into the 50% ITT level other than a couple of anomalies at MT and CCT and the lack of new actions playing through.

Yeah. No. I understand. It’s just trying to parse the headline. So the -- if you are talking low 30s, then is the headline going to look like low 30s or that’s -- you are still going to have these -- you are talking kind of almost on a core basis? Is that the way to think about it?

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

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

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

You did. You did. Yeah. That’s perfect. And maybe just one final one there Luca, I am wondering if the performance of ITT and specifically the tough challenges ahead for markets where you have a proportionately high amount of exposure so aerospace, oil and gas, et cetera. Does that cause you to rethink the portfolio strategic positioning maybe, because obviously there will be future up cycles and future down cycles and hopefully not pandemic oriented. But maybe with an eye to broadening your end market exposures inorganically or through M&A just sort of that you are not so heavily impacted you are doing -- as you are great job, but in terms of just sort of thinking about future down cycles you can never really start too soon. How do you think about this overall Luca?

Yeah. John, it’s Tom. Let me jump in and just give some framing portfolio kind of weighting perspectives and then Luca can give you some of the strategics. I think sometimes in our diversified multi-industrial portfolio, sometimes there are some assumptions out there that we just want to make sure we get everybody on the same page around, so as we kind of think about the current portfolio distribution. We will look at chemical and industrial pumps in and around at 25% of the portfolio. Oil and gas and this is at the ITT level. Oil and gas is less than 10% of ITT today and when you break that oil and gas apart you are 4% upstream and 6% downstream at the ITT level. So -- and our upstream which is only 4% is not exposed in a meaningful way to the U.S. shale play. We are -- between rail and auto we are in about the 45% weighting and aero today is around 8% of our portfolio, defense is 5% and then general and industrial, connectors and all other medical at 6%. So that’s just the current profile. And I would want to just get that framework, so some of these areas where we are seeing more headwinds generally are below 10% in the case of oil and gas and aero in particular. So, with that, I will just turn it back to Luca to give the strategic perspective what those numbers are in the background?

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

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

Yeah. That’s fair. That’s fair. And to be honest with you, I was talking to you about the respirator, the ingenuity of our design engineer. I mean, if you look at medical, it is a business that were probably we are making between $130 million and $180 million of revenue and it may well be that it got a little bit more attention just because of some of the macro clients that you start seeing around the world with the pandemic, et cetera.

Perfect. Thanks very much everyone.

Thanks, John.

Thanks, John.

Our next question comes from the line of Brian Blair of Oppenheimer.

Good morning, everyone. I have been hearing you are doing well…

Hi, Brian.

Thanks.

Thank you, Brian.

And then thank you for fitting me in here. I have a…

No problem.

…question to help us think it as more of frictions intermediate term of trajectory. Is there any update you can offer on the five-year mortgage OE revenue and how that’s trended relative to the prior $3 billion level? Now understanding there are a lot of moving parts here, I am just wondering if you can somehow quantify the net effect of Friction strong win rate versus legacy production declines potentially smaller size of new platforms, et cetera?

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

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

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

Got it. Okay. Thank you for all the color today.

Thank you.

Thanks, Brian.

Our next question comes from the line of Andrew Obin of Bank of America.

Yes. Good morning.

Hi, Andrew.

Hi, Andrew.

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

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

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

Not so far at this moment in time I haven’t seen them.

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

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

Thank you very much. Really appreciate the detailed answer.

Thanks.

Thanks, Andrew.

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

Hi, guys. Good morning. I will keep it quick, I know we are running super late here. So just Tom if you can just clarify what the write-down in the quarter was? And then just on the balance sheet, I appreciate the moves you guys made to keep liquidity, but like zero and that’s what negative net debt. How -- what are your thoughts on being more aggressive here? I mean, you suspended buyback and is that more kind of like [inaudible] reasons and the liquidity reasons at this point and when -- how aggressive do you think about being in M&A here? Thanks.

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

Thanks.

Thanks, Joe

Thanks.

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