Welcome to ITT's 2024 Second Quarter Conference Call. Today is Thursday, August 1, 2024. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.

Thank you, Amy, and good morning. Joining me this morning -- joining me from Sanford are Luca Savi, Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will provide these financial results for the three-month period ending June 29, 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 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 for otherwise noted, the second quarter results we presented this morning will be compared to the second quarter of 2023 and include certain non-GAAP financial measures. The reconciliation of such measures to most comparable GAAP figures are detailed in our press release and the attendance 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. I would like to begin by thanking all ITTers for an exceptional performance again in the second quarter and our stakeholders for their ongoing support of ITT. The second quarter was a milestone for ITT, aligned with our strategic priorities of operational and financial performance and effective capital deployment. This quarter, we won significant commercial awards, continue to deliver margin expansion, utilize our strong balance sheet to return capital to shareholders and took steps to reshape the ITT portfolio towards higher growth and higher-margin businesses. Let's start with few highlights on Q2. We continue to grow and expand margin in our core businesses with several record achievements. We won significant new awards in Friction, KONI, industrial connectors and in Svanehoj, our latest acquisition, we expanded our backlog and further solidified our long-term growth trajectory. We generated above-market top line growth with strong performances in aerospace and defense, Friction and show cycle flow. We drove significant margin expansion at Motion Technologies and CCT as both reached margin levels close to 19% this quarter. Collectively, we dropped 12% adjusted EPS growth to a new quarterly EPS record of $1.49 whilst driving a significant acceleration in free cash flow. Before we get into the details, I want to pause and acknowledge that at ITT level, on a like-for-like basis, we have now surpassed our long-term margin target in aggregate two years ahead of the 2026 target date. Now let's get into the details. On revenue, we grew 9%, driven by higher volumes across all segments and helped by the acquisition of Svanehoj, which contributed 4 points of growth. CCT grew double digits organically, driven by industrial connectors and aero and defense components. Connectors grew 14% and 5% sequentially to a new record quarterly revenue. Another strong quarter…

Thank you, Luca, and good morning. Let's start with revenue. Volume drove most of the growth this quarter with roughly 1 point of price led by CCT and IP. In CCT, industrial connectors were up nearly 40% largely driven by distribution. Aerospace and defense components were up 10% as the CCT team drove improvements in supply chain and productivity. However, we're starting to see a slight slowdown in commercial original equipment demand from Boeing, whereas aftermarket activity continues to be very strong. In MT, rail grew 11% on share gains, especially in China and Eastern Europe, our Friction OE grew 5% with over 600 basis points of outperformance versus global auto production. Finally, Friction’s aftermarket was up 6%, building on the growth in Q1. In IP, short-cycle revenue grew 4%, bolstered by strong baseline parts and service, while pump projects were roughly flat. On profitability, margin expansion was primarily driven by higher volume and productivity, particularly in MT, resulting in 86% incremental margin. CCT made significant progress on pricing this quarter and nearly reached 19% margin. Finally, IP again exceeded 20% margin, overcoming the 270 basis point impact from the Svanehoj acquisition, which implies a legacy IP margin above 23%. At ITT level, excluding this Svanehoj dilution incremental margin for the quarter was approximately 55%. We drove 50 basis points of productivity and 180 basis points of operating leverage, which more than offset 60 basis points of labor inflation and a 70 basis point gain on a product line sale in the prior year. On earnings, higher interest expense related to the acquisition of Svanehoj and a higher adjusted effective tax rate was more than offset by volume and margin expansion. Finally, we grew free cash flow 9% year-to-date, driven by higher net income and improved inventory management. Working capital…

Thank you, Emmanuel. As you can see, it was a very busy and exciting time at ITT up until Tuesday night when we signed kSARIA. Now before moving to Q&A, a few points. In Q2, we grew our core and continue to outperform in many end markets. We achieved our long-term ITT margin target with MT and CCT approaching 19% and IP above 20% two years ahead of the target date. We deploy capital to grow our business and drive greater value creation and we are reshaping ITT's portfolio to higher-margin and higher-growth businesses. As always, I would like to thank each of you for joining today's call. We appreciate your continued support and interest. Amy, please open the line for Q&A.

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from the line of Damian Karas at UBS. Your line is open.

Hey, good morning, everyone. [Multiple Speakers] Congrats on the transactions.

Thank you.

Yes. So maybe we can open up with the kSARIA deal. I would love to hear, Luca, kind of how you see that fitting in with the existing A&D interconnection business? And are they already up to your standards? Or is that going to require some conversion to the ITT way? And maybe just Emmanuel, if you wouldn't mind just helping to kind of unpack the financial impacts on an annualized basis. I know you kind of gave the $0.15 dilution from the Wolverine sale this year. But like what's a good way to think about on a kind of full year top line down to the EPS impact from the two transactions.

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

And then from a financial standpoint, just to give a little bit of context, Damian. So this is a business that since 2017 has grown on average 27% in terms of top line. They expect to have a 2024 year to be also really strong. They expect a book-to-bill largely above one. And so for 2024, the expectation in terms of revenue is around $190 million with an EBITDA of around 18%. So this will be from a financial standpoint, something that is similar to the profile of Svanehoj with a large growth and an EBITDA around 20%. Then if you look at what's happening in the year with all those transactions. So obviously, the first kSARIA, there's no financial impact right now in our guidance. We have to close the deal, and the deal will be closed by the end of September. Second, if you think about Wolverine, so we talked about the $0.15 EPS impact for the second half, and you can annualize that, that's pretty much the impact that you're going to get. And then the -- what it means for us, so if you look at our 2024 guidance, right? So mostly driven by volume price and productivity. And so, because we were able to really drive those items and aided a little bit by lower commodity costs, we are able to maintain the full year guidance for 2024 despite the negative impact that we're going to have in the second half.

Okay. That's really helpful. Thanks for all that. And then maybe I could just ask you guys about MT and Friction seem to be seeing good growth momentum there. Orders up 5%, and that's on a tougher comp from last year. So packing kind of, I think, some of the broader auto market trends. Could you just maybe like take us a little bit of a walk around the globe, what you're seeing there, how you're feeling about the rest of the year and what that business looks like heading into 2025. Thanks.

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

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

Great. Thanks, guys. I’ll pass it along.

Thanks, Damian.

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

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

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

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

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

Okay. Best of luck. I’ll pass it on. Thank you.

Thank you, Scott. Thank you.

Our next question comes from the line of Joe Giordano with TD Cowen. Your line is open.

Hey, guys. Good morning.

Hi, Joe.

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

Joe. So you're right, we are in the start of the negotiations with Boeing. This is a renegotiation that is really important for us because we haven't been able to increase our prices since 2017. So we were locked in this long-term contract, which is a very customary for aerospace suppliers. And so, now we have the opportunity to go back to Boeing being also a good performer and to extract the value that we supply with our partner. And so, we'll be -- we're in the full swings of the negotiations right now, will continue in 2025. And probably in Q1 2025, we'll be able to close those negotiations. Those are pretty lengthy negotiations. And so, as a result, we should see the impact after that.

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

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

If I can add to that one, Joe, I think that [Art] (ph) and Dan, the Head of Engineering, have done a tremendous job in terms of developing new products in being very fast in working with the customer and developing the prototype, and that has led to new awards and new orders because of that.

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

Thanks, guys.

Thank you, Joe.

Our next question comes from the line of Mike Halloran, Robert Baird. Your line is open.

Hey, good morning, eceryone. On the IP side of things, maybe just some thoughts with the underlying demand trends are looking like from an order perspective, specifically on any changes in the conversion cycle between [frontlog] (ph) to backlog, any signs of change in how you're thinking about the underlying markets. It doesn't really sound like it, but would love any context on what you're seeing on any thought there?

Sure. Thanks, Mike. First of all, when you look at IP, IP orders were up 2%, and this is mainly thanks to Svanehoj that more than cover a tough compare versus prior year when we had a big decarbonization project. When you look at the short cycle, the short cycle stayed at elevated level. And when you look at the rate in Q2 is exactly the same rate that we had for the full year of 2023. Now project, the legacy project for IP, they were up sequentially 9% year-over-year. Now, having said that, what we saw, Mike, is that some of these projects shifted to the second half, no major concern of that. It's just a negotiation. It's taking a little bit longer. And as a matter of fact, what we see in July is a very strong July order performance, both on the project where we saw the closing of some of the projects from Q2 that shifted to Q3 as well as on the short cycle. We expect for the full year to have the legacy orders up single digit and the funnel that we see is still very healthy. The funnel, I think, is up, if I'm not mistaken, roughly 14% year-over-year and 4% since January 2024. I think that what we see is that our on-time delivery is continue to improve, and this help us differentiating from the competition and also the supply chain is improving, and this helps in reducing the lead time.

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

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

Yes. And from a financial standpoint, the Wolverine revenue is around $160 million on a yearly basis.

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

Thanks, Luca. Appreciate it. Thanks, Emmanuel. Thanks, Mark.

Thanks, Mike.

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

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

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

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

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

Great. Thanks for taking my questions.

Thanks, Nathan.

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

Good morning, Vlad.

Hi, Vlad.

Hey, good morning, guys. Thanks. For taking my call. Maybe for my first question, I'll just start with MT. And you mentioned, obviously, the 86% incremental margin in that business in 2Q. I think you were somewhere up 60% in 1Q. So can you just talk more about what's really driving those elevated incrementals in the first half here, whether it's additional pricing coming through? And just how you're thinking about incremental margins in that business in the back half and into 2025.

Yes. Thanks, Vlad. So the core competence of MT is to drive productivity. And so when you think about the margin expansion that we're seeing. A significant portion of it is driven by our internal productivity. Our ability to use our asset base, our ability to convert all the awards and the growth, the share gains that we've had into a product -- timely production and revenue. So this is really driving a lot of the margin expansion. Price has been very good as well. And the reason for this is because while commodity prices have gone down, we have been able to maintain for the most part, our price with customers. And this is executing on the playbook that we discussed several times in the past, which is that we may not have been able to get the compensation from a cost inflation standpoint, from our customers in 2022 and 2023. But for us, it was always a matter of being able to get that compensation over the cycle. And so right now, what you're seeing is that we're getting the compensation for prior year when we were not able to get it. And then in addition to this, you see all the new platforms that are starting in production. Luca mentioned the start of production in China, but there are many starts of productions also in the other regions. And then structurally, the profitability of the portfolio is improving as all platforms where we didn't get as much compensation are exiting and new platforms that fully reflect the new cost base with increased prices from a commodity standpoint are kicking in.

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

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

Okay, that's helpful, Luke. I appreciate it. I'll get back in queue.

Thank you, Vlad.

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

Hey, good morning, guys. I love the Friction business, but good to see the auto piece getting to that 30%, just a couple of follow-ups on the deals. kSARIA, I think you mentioned 27% top line, but it looks like they were -- they've done three deals, I think, under private equity ownership. Just maybe talk about the organic. And then if it comes with a pipeline of some of these bolt-ons that they've been doing? And then just on Wolverine, maybe level set us on kind of the margin run rate of that business? I know it's bounced around a bit.

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

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

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

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

Okay. Thank you.

Thanks, Jeff.

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

Hey, good morning, guys.

Hi, joe.

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

Sure. So in terms of the way we manage commodities, we book roughly six months in advance. So right now, we have essentially booked until the end of the year for everything that's steel, copper and tin. So we're very secure. And the good thing about this is that we communicate very openly with our customers. So we're very transparent in the price we buy at. And so that solidifies the negotiation we have with them from a price compensation standpoint. In terms of the incremental. Thank you for reminding me. So we were very happy with the incrementals in Q2, 86%. This follows 63% in the first quarter. For the full year, we expect MT to deliver incrementals above -- largely above 50%. So a little bit less incremental in the second half of the year. And so this is the result of everything that we were talking about, which is productivity, this recovery from a price standpoint and the volume growth as well. I don't think it's long term, it's sustainable to have this type of incrementals. But they are largely the fact of the fact that we have been recovering from a margin standpoint. Being in Q2 at 18.8% is really a strong achievement by the entity, something that we were not expecting at the beginning of the year to be -- for them to be able to do it as quickly, so they have over-delivered and so we're going to continue to drive productivity. We're going to continue to drive recovery in order to continue to improve margins points.

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

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

Great to hear. Thank you, Luca.

Thanks, Joe.

Our final question comes from the line of Andrew Obin at Bank of America. Your line is open.

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

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

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

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

Thank you.

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