ITT - Q2 2024

Transcript

Operator (participant)

Welcome to ITT's 2024 second quarter conference call. Today is Thursday, August 1st, 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 open for your questions following the presentation. If you'd like to ask a question at that time, please press star one one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star one one again. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.

Mark Macaluso (VP of Investor Relations and Global Communications)

Thank you, Amy, and good morning. Joining me this morning in Stamford are Luca Savi, ITT's Chief Executive Officer and President, and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the three-month period ending June 29th, 2024, which we announced this morning. Before we begin, please refer to slide two of today's presentation where we note that today's comments will 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. Unless otherwise noted, the second quarter results we present this morning will be compared to the second quarter of 2023 and include certain non-GAAP financial measures.

The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix to our presentation, both of which are available on our website. With that, it's now my pleasure to turn the floor over to Luca, who will begin on slide three.

Luca Savi (CEO)

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, continued to deliver margin expansion, utilized 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 a few highlights on Q2. We continued 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 Svanehøj, our latest acquisition. We expanded our backlog and further solidified our long-term growth trajectory.

We generated above-market top-line growth with strong performances in aerospace and defense, friction, and short-cycle flow. We drove significant margin expansion at Motion Technologies and CCT, as both reached margin levels close to 19% this quarter. Collectively, we drove 12% adjusted EPS growth to a new quarterly EPS record of $1.49, while driving a significant acceleration in free cash flow. Before we get into the details, I want to pause and acknowledge that at the ITT level, on a 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 Svanehøj, which contributed four points of growth. CCT grew double-digits organically, driven by Industrial Connectors and Aero & Defense components.

Connectors grew 14% and 5% sequentially to a new record quarterly revenue, another strong quarter for Connectors. Well done, Art and Team. Motion Technologies grew 6% organically. Friction OE outperformed by over 600 basis points, and in China, the outperformance was nearly 900 basis points. We expect this will continue in the future as we executed 40 starts of production this quarter in China and nearly 100 SOPs in just the first half. On margin, we delivered a 100 basis points expansion to 18%. IP was again above its long-term target of 20%, and it was up 20 basis points sequentially. MT expanded margin to 180 basis points and 60 basis points sequentially. This year, we continue to drive an exceptional recovery MT margin, led by Friction and KONI, which will put us above the 18% threshold for 2024.

This is a testament to the relentless drive to generate productivity and value for our products and services. Finally, CCT is also rapidly approaching 19% margin, driven by volume and price. Included in this was a 300 basis point improvement in Connector margin with 42% incrementals. Moving to capital deployment and the ITT portfolio. Today, we announced the signing of an agreement to acquire interconnect solutions provider kSARIA for approximately $475 million, while also having completed the divestiture of automotive supplier Wolverine, which closed in July. These transactions are the foundation of our portfolio reshaping strategy. With kSARIA, ITT acquires a leading provider of customized mission-critical connectivity solutions for defense and aerospace. kSARIA will expand ITT's exposure to defense interconnect products with sole source position on leading platforms, high customer intimacy, and expertise in harsh environment applications. I'll discuss this acquisition more in a moment.

The Wolverine transaction follows two other non-core divestitures executed last year. This will allow us to structurally shift ITT's portfolio to higher growth, higher margin businesses in flow and connectors. As a result of this reshaping, automotive will only represent 30% of the total ITT portfolio, and this is Friction, our highly differentiated, unique, and high-margin braking business. Back to our results. Given the strong performance in Q2, we are sticking to our full-year guidance commitment despite a loss of roughly $0.15 of income from the Wolverine divestiture. I continue to be humbled by the dedication our teams show each day to deliver these results for our customers and for our shareholders. This quarter, our teams also secured several exciting commercial awards, demonstrating once again ITT's differentiation. In CCT, connector distribution orders were up 13%, a second consecutive quarter of profitable growth.

On the OE side, we are in the final stages of DOD approval for Nett Warrior, a critical soldier-worn communications system. We already secured connector content for this application to provide critical situational awareness in combat operations. This is one more example of the growing defense modernization macro trend we're exposed to, reinforced by the acquisition of kSARIA. Moving to MT, Friction has already won nearly 60% of our full-year expected awards, and also in China, the team surpassed 60% of its full-year target. Well done, Su Lei and Team China. We're also taking steps to penetrate India, where we have no manufacturing presence but recently won a third platform with a leading local OEM. In IP, orders were up slightly due to Svanehøj, despite a tough compare from large decarbonization awards in Q2 2023. Legacy pump project orders continue at elevated levels and are up 9% sequentially.

Our project center was up again in Q2, driven in part by green projects, which continue to be strong. In June, I was fortunate to be in Bornemann, Germany, with the team, and together we review our progress on green market penetration. Decarbonization is a large opportunity for Bornemann as we deploy our multi-phase pump technology, building on previous wins with major energy customers. To summarize, at the ITT level, this quarter we won over $900 million of orders, and we delivered a book-to-bill of 1.03. This is thanks in part to Svanehøj, so let's move to slide four to talk more about Svanehøj and two exciting commercial awards that further support our long-term growth trajectory. As we shared previously, the Svanehøj acquisition bolsters our leadership in the green energy transition. This quarter, Svanehøj delivered strong growth once again, with orders up nearly 40%.

Svanehøj cryogenic deep well fuel pumps were selected for eight bulk carriers for a major European shipping company. These are the first commercial merchant vessels designed to use ammonia. Today, this type of vessel is powered by a crude oil mixture. However, Svanehøj's pump will future-proof the vessels in anticipation of transitioning to lower carbon fuels. Svanehøj is leading the way for ammonia pumps on commercial vessels like this. Additionally, Svanehøj will provide cargo pump systems for four liquefied CO2 carriers serving the Northern Lights carbon capture project in Norway. This project is a major element of Europe's climate solution and decarbonization efforts. The carriers will transport carbon capture from industrial emitters to a terminal before the CO2 is pumped more than 1 mile beneath the North Sea. Svanehøj has also won awards on liquefied CO2 carriers elsewhere in the world, including in China.

In May, I spent time with Soren and team in Aalborg, Denmark. After reviewing these projects together, it is exciting to see how we have built such deep trust with customers through technical expertise, flawless execution, and rapid response. The team has an incredible command of the business's growth drivers and the analytics around predicting aftermarket. Svanehøj is poised to become the platform for growth we envisioned at the onset of the deal. Now, let's turn to page five to discuss ITT's strategic portfolio reshaping and capital allocation. On the M&A front, we have been working to shift our business to higher growth and higher margin segments where we can deliver more value. This began in 2022 with the acquisition of Habonim, which grew our vast portfolio by nearly 50%. The results from the acquisition exceeded our expectations from day one.

In 2023, we acquired Micro-Mode to expand our portfolio of hermetics and RF connectors while divesting two non-core businesses in CCT to hone our focus on the core connector business. Finally, we acquired cryogenic pump manufacturer Svanehøj at the beginning of 2024, which added a complementary portfolio of highly engineered marine flow products for the clean energy transition. And today, we announced an agreement to acquire kSARIA. kSARIA's interconnect solutions support applications for avionics, sensors, communications, and networking on marquee platforms with defense prime contractors and aerospace OEMs. The company's capabilities in customized interconnect solutions have led to content on key platforms and long-standing relationships with blue-chip defense customers. There is a lot to like about this business. First, kSARIA's growth outlook is supported by leading positions on a wide range of sought-after A&D programs, of which roughly 70% are sole or primary source positions.

The company operates primarily in nearly $7 billion North American cable assembly defense market that is expected to grow at a high single-digit CAGR through 2028. Second, kSARIA is also a leader in our environmental cabling application and will benefit from the shift to fiber. In addition, macro tailwinds related to the rising global defense budget and rapid modernization of defense systems are expected to drive demand for kSARIA's solutions. Third, the company has grown revenue over 20% on average over the past seven years at attractive EBITDA margins, which we believe you can announce further as part of ITT. Finally, we anticipate realizing commercial synergies from a combined ITT Cannon and kSARIA go-to-market solution that will drive further market share gains. Beyond kSARIA, we continue to cultivate a rich, actionable pipeline of targets, inflow, and connectors, while also putting the balance sheet to work on other capital deployment priorities.

In fact, in Q2, we repurchased $79 million of ITT shares and paid down nearly $40 million of debt thanks to the strong cash generation. In summary, the organic growth and margin expansion generated in Q2 and the portfolio shift we executed will continue to enhance value for our shareholders. Now, let me turn the call over to Emmanuel to discuss our results in more detail.

Emmanuel Caprais (CFO)

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, while 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 Svanehøj acquisition, which implies a legacy IP margin above 23%. At ITT level, excluding the Svanehøj dilution, adjusted incremental margin for the quarter was approximately 55%.

We drove 50 basis points of productivity and 180 basis points of operating leverage, which more than offsets 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 Svanehøj and a higher adjusted effective tax rate was more than offset by volume and margin expansion. Finally, we grew free cash flow 9% year to date, driven by higher net income and improved inventory management. Working capital was a source of cash, driven by significant inventory reductions in IP and CCT. We expect to continue this momentum on a path to approximately $455 million for the year. As for the Wolverine divestiture, we're deploying the cash proceeds to pay down debt.

All in, Q2's strong results give us confidence in achieving our outlook in the second half, even considering the impact of the Wolverine divestiture. Let's turn to the adjusted EPS bridge on slide seven. I just want to make a few points on this slide. Volume and price drove an incremental $0.22 of earnings, while net productivity contributed $0.05. This is a dynamic we have seen for several consecutive quarters and speaks to the quality of the results. We also realized a $0.03 benefit from M&A. This performance allowed us to overcome $0.03 of dilution from temporary acquisition amortization and $0.06 for the prior year gain on sale. Wrapping up the bridge, higher interest expense, foreign currency, a higher adjusted tax rate, net of a lower share count amounted to $0.05 headwind this quarter. Let's move to slide 8 to discuss our 2024 guidance.

We are sticking to our full-year revenue, operating margin, EPS, and free cash flow guidance after our strong results in the first half. We expect to overcome the impact from the Wolverine divestiture, which is a testament to the resilience of the ITT team. We expect revenue growth to be driven by continued outperformance in Friction OE, aftermarket, IP projects and short cycle, and a continued recovery in industrial connectors. On operating margin, we expect a continued sequential increase in MT and CCT, while IP is expected to remain above 20%. Lastly, we expect a strong second half cash performance, mainly due to further improvements in working capital. Let's look quickly at the full-year EPS bridge. As you can see, we are sticking to our full-year commitments. Our EPS, excluding the Wolverine divestiture, is improving given the strong first half performance and our expectation for a strong back half.

In essence, for our ongoing operations, we are raising our EPS midpoint. This is in addition to the $0.10 raise in the first quarter. This is a testament to the strength of the core portfolio and our ability to execute. Before I hand it back to Luca, I wanted to briefly discuss our outlook for the third quarter. We expect organic revenue growth will be in the mid-single digit range across all segments, and margin should be roughly in line with Q2. As a result, we expect EPS growth to be in the low single digit range, including the impact of the Wolverine divestiture. This does not include the impact of the kSARIA acquisition, which is expected to close later in Q2. Let me turn the call back to Luca on slide 10 to wrap up.

Luca Savi (CEO)

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 continued to outperform in many 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 deployed 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.

Operator (participant)

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star one one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star one one. Again, we do ask that while you post your questions, you pick up your handset to provide optimal sound quality. Please limit yourself to one question and one follow-up. Thank you. Our first question comes from the line of Damian Karas at UBS. Your line is open.

Damian Karas (Analyst)

Hey, good morning, everyone. Congratulations.

Luca Savi (CEO)

Good morning.

Damian Karas (Analyst)

Congrats on the transactions.

Luca Savi (CEO)

Thank you.

Damian Karas (Analyst)

Yeah, so maybe we can open up with the kSARIA deal. Would love to hear, Luca, kind of how you see that fitting in with the existing A&D interconnect business. And are they already up to your standards, or is there 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 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?

Luca Savi (CEO)

Okay, thanks, Damian. So when we look at the rationale of kSARIA, so definitely it's aligned with the growing defense trends. kSARIA is a leader in the fiber cable application with defense prime contractors. We really like the sole source position that they gained through the intimacy that they've got with the customer. Intimacy 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 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 have opportunity to bid for cable assembly operation, and not always we are able to follow through. So kSARIA together with Cannon, ITT Cannon, will be very synergistic. It's really a great strategic fit when you look at the M&A priorities and the shifting of the portfolio for higher growth, higher margin businesses. When it comes to the upside and the standard, 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?

Emmanuel Caprais (CFO)

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 1. 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 Svanehøj with large growth and an EBITDA around 20%. Then if you look at what's happening in the year with all those transactions, so obviously, 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 analyze that. That's pretty much the impact that you're going to get. And then 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 that negative impact that we're going to have in the second half.

Damian Karas (Analyst)

Okay, that's really helpful. Thanks for all of 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 bucking kind of, I think, some of the broader auto market trends, could you just maybe take us a little bit of a walk around the globe, what you're seeing there, how you're feeling about the rest of the year and what that business looks like heading into 2025? Thanks.

Luca Savi (CEO)

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 quarter ago. The production will probably be around 89 million vehicles. People were forecasting right, 90 million vehicles last quarter. That difference is mainly because of Europe. Europe production is down probably more. Having said that, we continue to outperform. And it's fair to say that probably our outperformance for the year is 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, their performance was more year to date than 1,600 basis points. And so also our performance in North America. So why is the market probably a little bit worse? Friction performance, we are sticking with that, and our performance will be higher than expected.

Emmanuel Caprais (CFO)

In addition to this, Damian, 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 their dealership.

Damian Karas (Analyst)

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

Emmanuel Caprais (CFO)

Thanks, Damian.

Operator (participant)

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

Scott Davis (Analyst)

All right. Good morning, everyone. Luca, Emmanuel, 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.

Luca Savi (CEO)

Sure, Scott. Well, we were able to work with kSARIA in the past. And we've 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 followed through during this process. I think there has been established a very good relationship together with the team. 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 price, which represents roughly a 13.4x EBITDA multiple. And we're going to keep on working closely with the team because there are a lot of synergies that we can get out of this deal, revenue synergies.

Scott Davis (Analyst)

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

Luca Savi (CEO)

This is something that we are debating between me and Emmanuel and Mark. 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.

Scott Davis (Analyst)

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

Luca Savi (CEO)

Thank you, Scott.

Emmanuel Caprais (CFO)

Thank you.

Operator (participant)

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

Joe Giordano (Analyst)

Hey, guys. Good morning.

Luca Savi (CEO)

Hi, Joe.

Joe Giordano (Analyst)

I know you're not going to get into specific discussions with our customers, but I know that your Boeing contract expires soon, and you're negotiating a new one. So 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?

Emmanuel Caprais (CFO)

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

Joe Giordano (Analyst)

Perfect. And then I'm going to ask two in this question. One is probably a very quick answer. So the real question is, what is going on in connectors? I mean, +39% in industrial connectors is 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.

Emmanuel Caprais (CFO)

So on connectors, you're right. We are very encouraged by the growth we're seeing in industrial connectors, but also in connectors overall. Distribution, for instance, was up. Distribution orders were up 13% this quarter, which is really strong, especially given the growth we've seen in the first quarter. And we're driving growth in aero defense, general industrial, but also medical, for instance. So the picture is really good. I think there's still a question mark in terms of the de-stocking at the distribution.

We don't know if really this has ended. But we're focusing on what we can control, which is delivering on time to our customers and making sure that we provide the differentiation that Luca has been talking about for a really long time. So very positive. We stay alert to understand the market dynamics.

Luca Savi (CEO)

If I can add to that one, Joe, I think that Art 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.

Joe Giordano (Analyst)

Thank you.

Emmanuel Caprais (CFO)

Sorry. And 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, an M&A execution standpoint. This is a very difficult thing to do because in M&A, at best, you control 50% of the outcome. So we are very happy with the progress we've done with Svanehøj. We deployed $400 million of cash. With kSARIA, we're going to deploy $475 million of cash. So really, it's about executing that strategy. And then the accounting treatment will follow that.

Joe Giordano (Analyst)

Thanks, guys.

Luca Savi (CEO)

Thank you, Joe.

Operator (participant)

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

Mike Halloran (Analyst)

Hey, good morning, everyone.

Luca Savi (CEO)

Hey, Mike.

Mike Halloran (Analyst)

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

Luca Savi (CEO)

Sure. Thanks, Mike. First of all, when you look at IP, IP orders were up 2%. And this is mainly thanks to Svanehøj 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 the elevated level. And when you look at the rate in Q2, it's exactly the same rate that we had for the full year of 2023.

Now, the legacy projects 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 the negotiation is taking a little bit longer. And as a matter of fact, what we see in July is a very strong July order performance, both on the project where we saw the closing of some of the projects from Q2 that shifted to Q3, as well as on the short-cycle. We expected 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 our on-time delivery is continuing to improve, and this helps us differentiate from the competition. Also, the supply chain is improving, and this helps in reducing the lead time.

Mike Halloran (Analyst)

Great. Helpful. Appreciate that. Then second question on more the portfolio side of things, two-parter. One, what was the revenue base for Wolverine that we should use? And then secondarily, at the risk of sounding greedy, since you just did a lot of transactions, I'd love to understand how you're thinking about the ability to continue to lean in in the short horizon. Certainly, have the capital 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?

Luca Savi (CEO)

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, we have an immense Svanehøj acquisition largely operate on a standalone basis. They have a very strong leadership team. As you remember, that was one of the reasons why we acquired them. And the Svanehøj team, Habonim team, they're intact practically today. And these are off to a great start. So we stay close to this business that we acquired. We visit the facilities. We work with the leadership team. But I would say the amount of time and resource that we spend to operate them is manageable. They're a very good business when we 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 limitations for further acquisition to be made. But as I said, we will never bite off more than we can chew.

Emmanuel Caprais (CFO)

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

Mike Halloran (Analyst)

Great. Thank you.

Luca Savi (CEO)

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

Mike Halloran (Analyst)

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

Luca Savi (CEO)

Thanks, Mike.

Operator (participant)

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

Nathan Jones (Analyst)

Good morning, everyone.

Luca Savi (CEO)

Hey, Nathan.

Nathan Jones (Analyst)

I'm 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.

Emmanuel Caprais (CFO)

Yeah. The process we went through is that we reviewed every platform they're on. In addition to this, we reviewed the platform we are on in order to identify potential commercial synergies. We expect for the next three to four years, a top-line growth for kSARIA in the high single-digit range. 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. Then also, I mean, there's been a significant increase in defense budget. I think it's fair to say that it's probably not going to stay like this forever.

Nathan Jones (Analyst)

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.

Luca Savi (CEO)

Sure. Thanks, Nathan. So really, a couple of things, and they're on both sides. First is when sometimes we are receiving requests for quotation of interconnect system made of our connectors and fiber cable. Today, our fiber cable is very, very small. It's very little. And now with kSARIA, among our companies, our capabilities, we will be able to address all those opportunities. Sometimes we just pass by. Okay? So that is one. Second, as you walk around kSARIA's 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're very good. They're very strong with some customers where we can expand our penetration and vice versa. So very similar to what has been also with Micro-Mode.

Nathan Jones (Analyst)

Great. Thanks for taking my questions.

Luca Savi (CEO)

Thanks, Nathan.

Emmanuel Caprais (CFO)

Thanks, Nate.

Operator (participant)

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

Luca Savi (CEO)

Good morning, Vlad.

Emmanuel Caprais (CFO)

Hi, Vlad.

Vlad Bystricky (Analyst)

Hey, good morning. 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 Q2. I think you were somewhere around 60% in Q1. So can you just talk more about what's really driving those elevated incrementals in the first half year, 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?

Emmanuel Caprais (CFO)

Yeah. 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 timely production and revenue. So this is really driving a lot of the margin expansion. Price has been very good as well. The reason for this is because while commodity prices have gone down, we have been able to maintain, for the most part, our prices with customers. 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. 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. Then in addition to this, you see all the new platforms that are starting production. Luca mentioned the start of production in China, but there are many starts of productions also in the other regions. And then structurally, the profitability of the portfolio is improving as all platforms where we didn't get as much compensation are exiting, and new platforms that fully reflect the new cost base with increased prices from a commodity standpoint are kicking in.

Vlad Bystricky (Analyst)

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

Luca Savi (CEO)

Hi, Vlad. When you look at the size where Svanehøj is, the main size is really Aalborg in Denmark, Jutland 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 site as really in Asia close to Singapore and in Aalborg, Denmark. Now, there is no need for further investment in terms of many of these operations that are actually operating at roughly between 1 and 1.5 shifts. So this growth doesn't really require footprint investments.

Vlad Bystricky (Analyst)

Okay. That's helpful. Luca, I appreciate it. I'll get back in the queue.

Luca Savi (CEO)

Thank you, Vlad.

Operator (participant)

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

Jeff Hammond (Analyst)

Hey, good morning, guys.

Luca Savi (CEO)

Hi, Jeff.

Jeff Hammond (Analyst)

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'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.

Emmanuel Caprais (CFO)

Yep. So yeah, Jeff, you're right. So I think that if you strip out the acquisitions that they've done over the years, they're still growing at more than 15% in terms of 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 when we looked at the platforms that I was talking about, their presence on the marquee platforms that I was talking about earlier. So I think kSARIA is poised for growth as Svanehøj 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.

Luca Savi (CEO)

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

Jeff Hammond (Analyst)

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.

Emmanuel Caprais (CFO)

Yeah. So let me start by saying that from a revenue standpoint, commercial OE is still growing pretty strong. We were up 6% this quarter. Aftermarket was up in the double digits. So aerospace overall as a business is doing well. What we're seeing is on the horizon, we're seeing a slowdown in the growth. And if you think about it, that makes sense because we know of the production issues that some OEMs have had. And so it wasn't realistic to expect that 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 continues to be really, really strong for us. On a four-year basis, we still expect commercial aero OEM to grow. And keep in mind that we have not hit the pre-pandemic levels from a customer standpoint, from an industry standpoint. And in addition to this, as you know, we are more oriented towards the wide-body platforms. And these, from a volume standpoint, have really not recovered compared to the pre-pandemic levels.

Jeff Hammond (Analyst)

Okay. Thank you.

Luca Savi (CEO)

Thanks, Jeff.

Operator (participant)

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

Joe Ritchie (Analyst)

Hey, good morning, guys. Hi, Jeff. Hey, Emmanuel, can you maybe elaborate on your answer to Vlad earlier around the steel? Or you said cost inflation basically coming through results on MT. Obviously, steel prices have been down a lot so far this year. So can you maybe just give us a little bit more color? 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.

Emmanuel Caprais (CFO)

Sure. In terms of the way we manage commodities, we book roughly six months in advance. Right now, we are essentially booked until the end of the year for everything that's steel, copper, and tin. We're very secure. The good thing about this is that we communicate very openly with our customers. We're very transparent in the price we buy at. That solidifies the negotiation we have with them from a price compensation standpoint. In terms of the incremental, thank you for reminding me. We were very happy with the incremental since Q2, 86%.

This follows 63% in the first quarter. For the full year, we expect MT to deliver incrementals largely above 50%. So a little bit less incrementals in the second half of the year. And so this is the result of everything that we were talking about, which is productivity, this recovery from a price standpoint, the volume growth as well. I don't think it's long-term. It's long-term, it's sustainable to have this type of incrementals. But they are largely the factor 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 MT team, something that we were not expecting at the beginning of the year for them to be able to do it as quickly. So they've over-delivered. And so we're going to continue to drive productivity.

We're going to continue to drive recovery in order to continue to improve margins for MT.

Joe Ritchie (Analyst)

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 Barge in June. One of the things that really stood out to me was just how much visibility you have into the platforms over the next couple of years based on what you've already won. And I'm just curious, Luca, just around the order trajectory for friction, just help me level set. How did the quarter go? What's the visibility into the rest of the year? And how do you feel about the potential for increasing your share gains from here?

Luca Savi (CEO)

Sure. First of all, Joe, thanks for taking the time and visiting the team. The team was very excited as well. I think from an awards perspective, the team is performing incredibly well. Year to date, we have already more than 60% awards, the target awards for the full year. This is worldwide. This is also in China. We are well-positioned for new platforms coming out also in the next six months. So I think that these awards, as well as the incredible amount number of startup production that the team is performing right now, will keep on feeding the market share gain. And we project to be probably above 30% market share in 2024 for the very first time. So this is good. And we are winning market share, I can share with you, both on the EV side. The last thing that we talked about, the leading Indian OEM, 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.

Joe Ritchie (Analyst)

Great to hear. Thank you, Luca.

Luca Savi (CEO)

Thanks, Joe.

Operator (participant)

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

Sabrina Abrams (Analyst)

Hey, good morning. You have Sabrina Abrams on for Andrew.

Luca Savi (CEO)

Morning, Sabrina.

Sabrina Abrams (Analyst)

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 Svanehøj 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.

Luca Savi (CEO)

So a couple of things. First of all, we really like the 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 in auto, the same in aerospace. And when you look about these projects, it's a long cycle. So we definitely like that. Now, when it comes to the shift of the portfolio, it's really towards higher growth and higher margin businesses. So this is the second dimension. And the last one is the ability to outperform in the market. So when we look at these acquisitions, for example, Svanehøj.

Svanehøj 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 these will enable us to feed the outperformance. And that's the third dimension.

Sabrina Abrams (Analyst)

Thank you. And then just to 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.

Emmanuel Caprais (CFO)

Yep. So I think we're finally seeing a little bit of improvement from the supplier side. As I mentioned, we've been able to reduce inventory. And this is a result of the fact that our teams have managed our suppliers more effectively. We've been able also to increase our on-time delivery to our customers. This is very good because this is fully in the range of what we can control. 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. So our team is focused on trying to do the best we can for our customers. We're improving slowly. But this is an industry, this is an end market that has a lot of challenges, so.

Sabrina Abrams (Analyst)

Thank you.

Emmanuel Caprais (CFO)

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