ITT Inc. (ITT) Earnings Call Transcript & Summary

Okay. Next up, we have ITT. ITT is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial and oil and gas markets. The company's portfolio includes brake pads, shock absorbers, pumps, valves, electrical connectors and aerospace and defense components. Joining us today from ITT are CEO, Luca Savi, CFO, Emmanuel Caprais, and Vice President of Investor Relations, Mark Macaluso. Luca was named CEO of ITT in January 2019 after previously serving as COO. He first joined the company in November 2011 as President of Motion Technologies segment, where in 6 years, he drove an approximate doubling of segment revenue and 400 basis points of segment EBITDA margin expansion. Emmanuel was named CFO of ITT effective October 2020. He first joined the company in 2012 as segment CFO of Motion Technologies, working alongside Luca, and later have responsibilities as CFO of the Industrial Process segment. Mark joined ITT in January 2021 as Vice President of Investor Relations after more than 12 years at Honeywell in financial leadership positions, including Vice President of Financial Planning and Analysis for one of Honeywell's 4 strategic business groups. ITT has 85.3 million shares outstanding. The stock trades around $87, $7.4 billion market cap, $440 million of net cash, $7 billion total enterprise value. Luca, Emmanuel, Mark, thank you very much for joining us. I'll turn it over to you before we do the questions.

Thanks, Brett. I just want to confirm you can hear us.

Yes.

Excellent. So I'll start and I'll turn to Luca and Emmanuel. Very quickly, the safe harbor statement. As you know, our presentation and comments will contain forward-looking statements, which are based on our best unit words and our businesses as we see them today. These assumptions, of course, can change, and we'd ask you to review them in that light. I encourage you to look at our latest risks and uncertainties in our Form 10-K available on our website. With that, it's my pleasure to turn it over to Luca.

Okay. Good afternoon, everybody. Just for your knowledge, if you hear the Italian accent is Luca speaking. And if you hear the French accent, it's going to be Emmanuel. Now before we move to some key messages that you can see in this slide, I would like to just tell you a little bit about ITT. Brett was very good in say what ITT is and doing. But one thing that we do not know is that all our lives are touched directly or indirectly by one of ITT's product. So when your daughter is Nutella and gives you a chocolate filled tooth smile, chances are that the Nutella was moved with our Bornemann twin-screw pump technology. Or when you're looking in awe at your unborn child image, chances are that the connector transferring the data is an ITT canal connector. And when you're driving on the I-95 and you need to break suddenly, chances are that it's ITT break pads that are keeping you safe. So ITT enables every day's life in unexpected ways, and we are doing this while creating outstanding value for our shareholders. Here, you see some of the results for 2021 and Q4. I'm not going to go through this. The only point maybe that I would like to highlight to you is that in 2021, ITT surpassed 2019 performances, pre-pandemic level in orders, in EPS and in operating margin performance, which was pretty outstanding. If we move to the next slide, please. So what we have in 2022 is that the -- we have momentum exiting 2021 because we are at the beginning of the in automotive. Our outperformance in automotive is strong. And also, we had a very strong short-cycle performance in terms of orders in pumps as well as projects that are coming through. On top of that, you add the execution that has been a differentiator for us. So the momentum is strong. We keep on investing in innovation, and we will talk about electrification or VA/VE, electrification is good for ITT, and we will explore that a little bit further later. And VA/VE is an initiative that we have started across the board in pumps as well as in our Connected business, which is bringing a lot of good opportunities for us. And capital deployment. One area probably where we did not perform as well as I would have liked is on the M&A front. But this has not stopped us from deploying our capital properly. And as a matter of fact, in 2021, we deployed 2x our adjusted free cash flow. How? Well the most strategic deployment has really been the divestment of all of ITT legacy asbestos liabilities that happened in the first half of 2021. This was a damage that was on our head for a long, long period of time and now is out. And now that is out, then we can really focus on our inorganic growth. So we are ready, Siamo Pronti as we say, in Italian. If we move to the next slide, I would like to highlight a couple of points on innovation. And so we talk about electrification. Our win rate in electric vehicles, in electric [indiscernible] vehicles, including electric vehicles as well as hybrid is considerably higher than our market share today in the market, which is a good seed for our out-performance in the future. But Motion Technologies is not just automotive, electric vehicles. It's also shock-absorbers for rail. Rail is a big part of the business and also our KONI shock absorbers or our new product Hydroride is a new product for the defense market, which we started developing 5 years ago, and we actually were awarded our first Hydroride order exactly in Q4 of last year. And we have good opportunities for growth with these products in the future. If electrification is one macro trend that is going to favor us, digitization is the other one. And here, we'd like to talk about the i-ALERT. i-ALERT is a product that has been around for a few years. But I would say with our recent partnership with an American partner of ours, we are able to combine this piece of equipment with the knowledge with more than 10,000 algorithmic rules that enable our customers and our people to really study, analyze and predict the performance of the pumps. And this has enabled us to win in order with a pipeline in monitoring more than 270 pumps in North America. The innovation is not only in Motion Technologies, is an industrial process but also in our control and connector business. Here, connectors, when we come to connectors, I really like the connector business. The world gets more and more connected, and the ITT cannot actually invented the connector. To be honest with you, this the business that probably needed to -- has been on the side. We have not invested in the history as much as we should have. And therefore, this is what we are reigniting innovation both from a product point of view as well on the process. And we are developing a good business when it comes also to the EV charger connector platform. So if we move to the next slide, the takeaway is that 2021 has been a strong out-performance. We saw past, as I said, in orders, EPS and operating margin 2019 pre-pandemic levels. The strong orders are giving us momentum, and we've got a strong backlog that for 2022 and beyond. And we have a good balance sheet that now that asbestos is out of the way, we will be able to deploy with organically with M&A as well as with dividend and share repurchases. And with that, I hand it over to you, Brett, for Q&A.

Great. Thank you so much, Luca. It's a great introduction. So firstly, Luca, since taking over as CEO about 3 years ago, you've emphasized resilience as well as customer centricity. Curious how you would grade the organization over what's been a very challenging and dynamic past 2 years and how you continue to allow ITTers to navigate through what will likely be additional challenges that arise this year?

Sure. When you talk about resilience, I think resilience is the outcome is the outcome of clear and focused priorities, is the outcome of the fact that during time, we created and we are sustaining some of the key value-creation drivers in each of the businesses. And then last but not least, is really who we are in the way of working, right? So this is really what is feeling resilience. And when you look at resilience, I would say, different businesses have got different level of maturity. When we think about Motion Technologies, definitely, that is resilience at its best. If you think about a Q4 in 2021 or the most of 2021, where actually, we were able to deliver to our OEM customers at 100% on-time delivery. So that, I think, just by itself tells you about the resilience of this business. When you look at the other businesses, industrial process pumps and bonds or the connectors business or aerospace, they are not at that level of maturity and resilience, but we're building. It's a journey. So we're learning to make our supply chain stronger and more resilient. We are learning to make our production better and better debottlenecking all the way. And as you've seen from our margin expansion and as you've seen, the performance of our pumps and valves business that despite COVID, despite the last couple of years, continued the journey of margin improvement. So I would say building and with MT already very mature in this journey and the other 2 following up.

And maybe following up on that, focusing on industrial process, particularly since this is a Pump, Valve and Water Systems Conference. Can you discuss the changes you made in terms of order planning and execution and delivery at industrial process and how that's translated into increasing pump project awards and a larger opportunity funnel to that?

Sure. When it comes to projects, when Emmanuel and I got first involved in ITT, in our pumps and valves business in which 2017, our margin was mid-single digit. And a key area where we really had to turn around the performance was on the project. So the first thing that you have to do that we did, I would say, is really working on the order acquisition side. So put some rigor in the process, in the bidding. If it is on the proper cost estimation and cost analysis, proper analysis of the terms and conditions, proper analysis of the technical specification. And so you can put these processes in place. But then the glue also that keeps all of this together is the frank, honest discussion and debate that you must have on those cars, on those [indiscernible] and on that type of specification. And that's on the bidding phase. And then afterwards, it comes on the execution. And the way that we should have managed those projects was much -- should have been much more rigorous and it wasn't. So we put in place, once again, a very rigorous process where we are running project reviews on a monthly basis for every single project in the world for the major projects are happening every twice a week. And in this project reviews, what you're reviewing are, okay, how are we performing technically speaking? Is there any technical risk that we should be aware of? How are the engineering reviews coming along? And then you're looking at your cost, your actual costs, your committed costs, your cost to complete, so that you are able to keep monitoring really if you have some problem coming along because problem always happening in project, but at least you will know sooner rather than later. And then really the timing of the projects. So -- and keeping this process going in a very rigorous way, you're able to keep an eye on what's going on. As I said, problems will happen. When you have a project of $30 million, $40 million that lasts for 3 years, that will happen. But at least you will know sooner rather than later, I would say.

And maybe secondly, on industrial process. From a new product development standpoint, can you talk about some of the recent introductions you've made that help your customers meet their carbon reduction as well as energy efficiency targets?

Sure. When we look at the orders, the growth in orders. I would say, correct me if I'm wrong, Emmanuel, but probably 200 basis points of our growth are related actually to new energy or environmental-friendly projects. One probably proud of that I would like to emphasize is what I told at the beginning, our Bornemann twin screw pumps. So the technologies are pumping, water, oil and gas together. So we have a major framework agreement with an oil producer, where instead of having the oil well, the useful equipment, they can go with one of our system so that they can extract everything. And rather than flaring the gas that separate there at the well, they pump the water oil and gas to a central state should be able to separate and distribute and put the gas in distribution. This is just one small example, but there are many other examples where we're happy, North African company in the Middle East, actually to have a better performance at the oil well. Last but not least is the high alert and the efficiency that we will be able to gain with the i-ALERT I was talking to you about before.

Fantastic. Switching over to Motion Technologies. Can we discuss the EV platform wins. ITT has been able to secure recently, what kind of customers and which geographic regions those fall in and how that positions your brake pad business from a market share perspective in terms of the transition towards a more electric global auto fleet?

As I said at the beginning, electrification is good for ITT. Electrification is good for Motion Technologies and for our brake pad business. So let me tell you, every time you have a technological change if it is a copper-free brake pad or in the case of electric vehicles, the technology that you need is a little bit different because the dynamic between the brake pad and the rotor is going to be different for electric vehicles. This is where really your R&D comes to play. And R&D is one area where we differentiate from our competition. And in terms of speed, in terms of material science, in terms of knowledge. And therefore, this has enabled us to win more. Our win rate in electric vehicles is substantially higher than our market share. So therefore, when you think of automotive, you have automotive, which is a very early of the growth cycle. On top of that, you've got electric vehicles and hybrid breakers, which are going to grow even more. And in that segment, our win rate is even higher. So you're going to have a compounding effect in terms of our out performance of the market in the years to come because let's not forget that when I'm talking to you about awards, I win an award today, and I know that the start of production is going to be in 24, 36 months. So I do have a very good visibility of what our market share will be or what our production will be and our out-performance of the market in the next 2, 3 years.

And along those lines of your R&D and innovation differentiator, can we talk about the Smart Pad innovation that ITT has developed and what that provides in terms of both lowering carbon emissions as well as improving performance?

Sure. Well, you're talking about the break pads. I mean, today, a break pad is not necessarily an intelligent component. It's an important and critical safety criteria. This is why it's so important for the OEMs and Tier 1, but it's not an intelligent one. It doesn't give you any data. We have invented and we have the patents to make this brake pad intelligent with 3 or 5 electric sensors that we enable to give you data. And with our algorithm, that data will be feeding back to the computer of the car in order to break better and reduce with the IBS, reduce the braking distance and therefore save lives. But the other thing today, Brett, if you're driving your vehicle, you will not know if you have a residual drag. Residual drag is when your brake pad is still touching the rotor. You don't know -- you don't know if you have that malfunction. But if you have it, you will keep on consuming route. You will keep on consuming the brake pad -- and because you've got that friction, you will keep on consuming more fuel and emitting more CO2. If you have an intelligent brake pad, a Smart Pad then we'll be able to know it, we'll be able to give the signal. So an intelligent caliber would be able to move it. And/or if you know it, you will be able to address it at the dealership or else. So that will be a benefit for the environment as well as saving more lives.

Maybe lastly on your friction platform. Given the very challenging inflation environment, can you discuss the approach that ITT has taken in order to really fundamentally change the nature of price dynamics at your light vehicle brake pad business?

Sure, absolutely. So there has been quite a journey. And you may remember that in Q4, we announced that our GoGet or our target for 2022 was around $100 million in terms of price recovery. And most of that price recovery, I would say 75% is going to come from Motion Technologies. So a lot of it in our auto business. And so that has been a journey because, first of all, we're dealing with customers that are not used to increasing prices. They're used to getting price erosion. And so there was a whole mindset shift that needed to happen at the customer and also internally. And so we worked really hard to make sure that we had a good understanding of our cost base -- and as a result, we went back to our customers and we're able to be very concrete about the impacts that we were sustaining from a cost standpoint. There was a lot of fights. It was really -- it felt like really knife fight with all the customers. And we had limited success in Q2. We had limited success in Q3. And then in Q4, a lot of things came together, and so we were able to obtain a significant amount of the recovery in 2021 in Q4. And at the same time, what we did as we were getting those successes with customers is we started discussing about 2022. And so for 2022 now, we are in a much better shape than we were when we started this activity. And as we mentioned during the call, we are around 40% of the price increases or the price recovery secured for 2022. And in the past 2 weeks, we've made some progress. So that number is now a little bit higher also. So we're working really hard to make sure that our customers understand the dynamic we're facing. It is probably easier now because some of those customers have built in their budget, the price increases for 2022, but there is a lot of work that still needs to happen, both in Motion Technologies and in the other 2 value centers.

And ITT has an excellent balance sheet. Luca. You already touched on the elimination of the company's legacy asbestos as well as pension liabilities. Can you discuss the recent steps ITT has taken to build up its internal M&A resources as well as technology investments?

Sure. So when it comes to technology is that, first of all, you've seen our investment in CapEx in 2022 and more than $150 million. Not more almost like 90% of that is really in growth and innovation. So that is really an important part for us. But as I said at the beginning, probably M&A is the area where if I look in the mirror, I would not give ITT, will not give a high score at all. Sure, we deployed our capital twice the cash flow that we generate in 2021 because of these vessels. But on the M&A, we had to perform better. So where are we looking at? We are looking at Motion technologies at rail. Rail, we like rail, rail got secular growth, is going to be pushed by the macro trend, is going to have a big exposure to the aftermarket. So we've seen it with the infrastructure bill over here in the U.S. So definitely, rail is an area where we are cultivating and we will make acquisitions. Pumps and valves is another market where very, very fragmented. And I think that the journey that we went through with our pumps and valves business is something that we can replicate with companies that face the same challenges or it would be nice also to add companies that are already at very good level of performance that strategically fit our portfolio or our geography or our technologies. And last but not least, it's also the connector side of the business. So these are the 3 areas where we are looking from an M&A perspective, and we are cultivating in the last few years. We have recruited Bartek Makowiecki. Bartek is an experienced M&A professional, is responsible of strategy business development, M&A. And I think that when it comes to M&A really is the experience. He's having done deals, et cetera, that will enable you to do better and better in M&A. We have built a solid team around Bartek and within the businesses. And we have seen an acceleration because of that, of the deals that we had in the pipeline and the generation of new opportunities in the pipeline. So we have different deals at different level of maturity across the different businesses, and I'm very excited about the speed that I've seen coming in with Bartek and hopefully, 2022 will bring some good addition to the ITT family.

Great. And maybe just lastly on Connect and Control Technologies. We haven't touched as much on. We've seen very dramatic margin improvement in that segment, up 250 basis points last year, 540 basis points in Q4 alone. Can you discuss some of the operational initiatives you've been implementing at CCT and further runway for potential additional operational improvement and margin expansion from here?

Maybe I'll start and then Emmanuel, if you take it after. I would say when we look at CCT, one key thing that we did at the beginning. -- is related to actually dismantle the global organization and made organization more regional. More regional so the Europe was there for the European customer, American there for the North American customer and China there for the Chinese and Asian customer. Why? Because you need to be close to the customer. And let's face it. If you're sitting in somewhere in California, that European customer or that customer Asian then is the last thing that you're thinking at the end of the day. So that regionalization is an important aspect, an important change that we did. And then one key component is also the reset of our make an dbuy. In the past, probably ITT decided to make and buy based on what was easier. And we changed in terms of what is strategic for us to make internally and what we should buy. And then when you have decided the proper make and buy, they say, okay, if this is a make, where are we going to make it? So the importance of Nogales or importance of Shenzhen. And all of this has really helped. And while keeping on working on the fundamentals. But as you said, there are more opportunities out there, Emmanuel?

Thank you, Luca. And also, I think that all the work that we've done, including all the short flow productivity that we were able to extract has given us really good hopes in terms of the level of margin that we can expect from CCT. I think in 2022, we will be solely in the range portfolio 17% in terms of margin. We will see some really nice incremental 40% to 50%. And as aerospace comes back in the second half. This is where we'll see really CCT really take off. And so I think that we don't need necessarily to see the 10% revenue that we're missing still compared to pre-pandemic levels to get back to pre-pandemic levels type of margins.

Terrific. And maybe just one more sneak in. Luca, you've mentioned in the past conversations you're having at the Board level with what's taking place today. Can you help us think about geopolitical risk across the footprint as well as for your customers?

Yes. It's -- we are global. We're all over the world. If it is China, if it is Russia, obviously, with all this [indiscernible] what we see on the screen today. This is something that we need -- that we have to deal with, and we try to really control what we can control. So we analyzed for quite a while now what has been our business in that part of the world. And we -- the business is less than $20 million, the business that we have in Russia. But that is in our business continuity planning, in our enterprise risk management. We're looking at our supplier base. We are looking at the -- I can tell you the transportation that comes from China to Europe, if it is rail or if it is shipped and if it is rail, how much that will be impacted by this war in Ukraine, and therefore, the impact that, that will have on the shipping and try to stay ahead and look at connecting the dots and look at all the dominant facts. So these are the conversational discussions that we've been having as a management team, as leaders and also with the Board. And it's part of our normal running of the enterprise risk management system.

That's very helpful. Luca, Emmanuel, Mark, I know you're traveling today. Thank you very much for joining us. We really appreciate it.

And Brett, on behalf of everyone here at ITT, we would just like to thank the Gabelli team and its clients for their support of ITT. Thank you.

Thank you.