ITT Inc. (ITT) Earnings Call Transcript & Summary

Got it. I had the point in covering ITT, where any target that your team puts out there? I really don't push back. Execution has been strong for so long and outperformance. Just phase that outperformance along the way, has been exceptional and industrial process next discussions of it, it really, really stands out in that regard. Pre-pandemic, I remember chatting to Luca and he very openly stated, we're going to create the MT at the [indiscernible]. And I was admittedly a nascent at that time. Your team is certainly wrong and then some. So there is an excellent growth story margin expansion, EPS contribution, all the boxes have checked. Maybe touch on the key strategic and structural changes that have been made and that are ongoing? And help us think about the path forward for that segment because it has been such a great contributor to the growth of recent debt?

Yes. So I think industrial process has not been always a great story. We started 2017 with very depressed level of margins. And we've been really working to bring it to that 20% plus where we are today. And despite the fact that we are again here from a margin standpoint, outperforming our closest peers, we still have a lot of opportunity to -- a lot of opportunities to further improve our profitability. We continue to see that there is a lot of growth out there from a market standpoint. And we certainly have been able to gain market share, as I was saying, on the product side. So when you think about what has enabled to performance, a lot of it has to do with basic performance -- basic focus on performance. We worked on improving our quality. We worked on improving our on-time delivery. We certainly worked on improving the safety within our factories. And all this has driven efficiencies through our plants, through the system, which has allowed us to -- when we saw that big wave of volume coming in from the business that we've been winning, we've been able to convert those orders very much more efficiently than what we used to do in the past. And so as a consequence, you saw that expansion from a margin standpoint go really fast. And as we were able to improve the performance for our customers and our customer experience, we've been able also to get more price. So it's a really virtuous cycle that we have been implementing in IP, where we've been improving customer experience. We've been improve through the improvement of our own experience. We've been driving innovation with the increased profits that we were able to generate. And as a result, we've been able to outgrow the markets pretty significantly. We talked about the Exxon deal that we got where in the past, we used to have a very little amount of market share with them. All of a sudden, we are 100% supplier for all their pumps for all the refineries globally. And with that, that's going to generate an incremental $50 million to $80 million of revenue in the next 3 years. We talked about the Valve business that we've been really able to expand with the award of capacity increase for weight loss drug that one of our key customers is developing is commercializing right now. So a lot of share gain opportunities. This is an industry that -- when you come from automotive like I am, you used to a certain level of -- certain standard of operations. You use -- you know that you can survive if you're not at least a 95% on-time delivery. You can survive if you're not in the low double-digit defective parts per million. And so when we see where we are today in industrial process, despite all the progress that I just described, we're not even close to those performance requirements. And so we want to bring that rigor, we want to bring that ambition to industrial process as well as CCT in order to drive further outperformance.

Yes, the proof and strategy and execution certainly there, momentum is great. You mentioned some technology rollout that's helped to drive share gains? Any key technologies that you would call out that really influenced the outgrowth in the segment and thinking about growth prospects, 2025, '26 and then beyond. EMD stands out as really interesting. For those unfamiliar, maybe introduce the technology? And it would be great to hear more about field trials, what you can share and the potential commercial path forward for that line?

Yes. So let me start with the basics. So again, in order for us to be really in a position to outperform and we have to provide super competitive products. And so a lot of the work that we've been doing on our current product portfolio has been to redesign our current product portfolio, and that is especially true in industrial process and in Connect and Control Technologies. And so as we were redesigning our portfolio of products, we've been able to improve the performance of these products, while at the same time, reducing costs. And so that has made us even more competitive because we are able, in some cases, to place pumps that are much smaller than the competition but deliver the same hydraulic performance. And so you can see the benefit because if a pump is smaller, it's also less cost. So we've been able to really redesign and I wouldn't say entirely because we still weigh -- away from completely redesigning our portfolio, but we've really been able to make significant impacts in the performance and the cost basis of our products. And this has helped feed the outperformance that you see. But that's, let's say, continuous improvement of the existing product portfolio. Now you were mentioning EMD and EMD is very exciting to us. EMD stands for Embedded Motor Drive. And this is a motor that goes on the top. And the differentiation that we are working on is to provide energy savings for our customers. So today, the way it works is when you put a motor to a pump, you have to regulate the flow of that's coming out of the pump downstream. So imagine if you were -- you're always running your motor at 100% and then you regulate the flow with valves downstream from the pump. Now if you think about it, this is as if you were driving your car and you were pressing the accelerators all the time. And then in order to reduce the speed of the vehicle, you would brake while pressing the accelerate. So you can see that it's not very efficient. And so what we've designed is a product where you have a variable frequency drive which is able to modify the speed of your motors, so make you motor smart in other words. Inside the motor, today, you can put that Variable Frequency Drive but it's usually outside, and it takes up a lot of space in an environment where usually industrial environment where you don't have a lot of space. So by putting that Variable Frequency Drive on to the motor, we're able to make the motor smart to deliver 50% energy consumption savings and get rid of all the hardware that is downstream from the pump. So providing significant savings for our customers. We have launched 10 trials late last year. And I'm happy to report that all these trials with 10 different customers are going really well. And we're ready to kick off the commercialization of this product in 2025. So a lot of exciting news. We got really very positive feedback from the customers that are included in those trials. And we can't wait to be able to provide this new product to the market.

You called out a few times that we're running ahead of the 20% IP target. What wasn't long term target and quite significantly [indiscernible] standalone. It's got to be more like 23% growth rate. Any sneak take you can offer on where that margins are as we go later this year, given the momentum?

So yes, I think that's an important point you're mentioning. So today -- so we made an acquisition early January that is a great business, Svanehøj. It's a marine pump business focused on energy transition. So they do both fuel pumps as well as cargo pumps to transport LNG as well as ammonia and hydrogen. So a very good long-term play as well. We expect they'll be able to -- they're going to be able to grow low double digits for the next 5 years in terms of revenue. But, however, in the short term, that has had a dilutive impact on industrial process margins. And so those margins, which were around 23% and now around 20% after we include Svanehøj, which is bearing the temporary amortization cost of basic backlog step-up. So we expect this to continue for the next year, 1.5 years. So by mid-2025, we should be free of that incremental cost. This is a business that is around 20% EBITDA margin. So obviously, from a margin standpoint, a little bit of an impact. But IP, if you remove the impact of that business, IP margins still grew by more than 100 basis points in Q1 year-over-year. So continued strong performance. We expect to come out with increased margins -- an increased margin target probably towards the end of this year. That is going to be obviously above 20%, probably around that 25% mark. But I think more importantly, I think what's really important for this business to understand is that we're driving -- while we're giving those type of margins for the next 2 years, we're driving for much more than that because the potential in that business is so huge. We have made a lot of progress, but we still have so much to go after. So we expect this business to be much -- to be a much more profitable business than it is today. We just need time to execute all these opportunities.

Understood. Again, very encouraging and further evidence of how wrong I was years ago. Let's very quickly touch on CCT momentum, what you're contemplating in terms of guidance for the year and the growth trajectory of that business? And then talk about the capital deployment for a few minutes after that. That's very intriguing lever looking forward for your team given balance sheet position, market leadership, how prime you seem to be to deploy [indiscernible]?

So CCT has been a fantastic business for us because we're benefiting from all the growth from Aerospace and Defense. And in fact, if you look at our Q1 orders, both aerospace and defense were up year-over-year from an order standpoint. So we have really a strong backdrop of growth because of our exposure to Aerospace, to Defense -- to commercial aerospace to defense and to medical as well. There is a lot of that is needed to further improve operational performance. In fact, if you look at our expected growth from a top line standpoint, the constraints that we're facing is not really due to lower demand even from a connector standpoint where we are facing headwinds in distribution connectors. In Q1, our distribution connector orders were much stronger. The major constraint we're having is due to supply chain, where we're not able to -- because of our supply base and because also of some issues that we have internally from a labor availability standpoint. We're not able to convert as efficiently the backlog that we have, we currently have in hand into revenue. And so this is limiting our revenue growth. We expect this to be much better in the second half. But for the moment, it's a significant constraint for us. So given this business is a business that, in general, you should be able to deliver 40% incremental margins at least. The fact that we're not able to ramp up revenue as fast as we would like is a headwind from a margin expansion standpoint. We still expanded margins year-over-year in CCT, but we're not doing it as fast as we would like. And so we're going to be focusing on improving our supply chain, improving the velocity that we have also inside our factories to be able to offset some of that yes, supply base issues that we have. So the prospects in CCT are very, very interesting. Very, very good, but if they're going to take time for us to be able to execute on all those opportunities. From a capital deployment standpoint, we're also in a really good position. We have a really good balance sheet. We intend to be able to deploy between $500 million and $700 million on a yearly basis in average, to fund mostly M&A. We have a very robust and active pipeline, mostly focused on pumps and valves as well as connectors. And so we're confident that we're going to be able to deploy that cash efficiently and in a disciplined manner because we just -- it's not because we don't have any debt that we're just going to deploy it everywhere. We just want to be very thoughtful and make sure that we focus on the returns for that cash appointment. And if the M&A prospects don't really materialize, then we won't hesitate to do buybacks like we've done after earnings. We've been really -- we've been in the market doing buybacks, taking advantage of -- taking advantage of the share drop movement.

Understood. I think that's a great place to answer Emmanuel and Mark, thank you very much for your time. Look great to see you guys.

Thank you, Bryan.

Thank you.