ITT Inc. (ITT) Earnings Call Transcript & Summary

Wolfe. So we'll continue this morning with ITT. Very pleased to have with us today, CFO, Emmanuel Caprais, and Phil Terrigno, Director of Financial and External Communications. So with that, I'll turn it over to Phil. He has some legal disclaimers to make before we get started.

Thanks, Brad. Good morning. Our comments may contain forward-looking statements, which are based on our best view of the world and our businesses as we see them today. These assumptions and expectations can change, and we ask that you view them in that light. We encourage you to review the latest risks and uncertainties in our Form 10-K and other SEC filings available on our website. Thank you.

Great. Thanks, Phil. So Emmanuel, since this is our first meeting with you at ITT, maybe just start by giving us a little bit of background about yourself and kind of your path.

Sure. Thank you for having us, and good morning, everyone. So I'm Emmanuel Caprais, CFO at ITT. I've been with ITT for now 12 years. I joined in June 2012. And I started as -- in the Motion Technologies segment, under the leadership of Luca, who at the time was the President. We implemented a playbook, that we like to call the MT Playbook, that focused on operational excellence, understanding the performance drivers in this business, which is a very capital-intensive business. So driving machine efficiency was key, and then so that's what we worked on. We worked on reducing variable costs as well. And so we really saw a really increase in expansion of the margin as we were putting more volume through the facilities and maintaining the fixed cost. And then so as a result of that, all the work that we did, the margin expansion, obviously, I moved to corporate where I headed FP&A, I headed Investor Relations. And then, at the start of the pandemic, I was thrown in to the CFO role, and so navigated through ITT. There were times we were calculating how much -- how many months with 0 sales we're going to be able to live through. So those were tough times, but it helped us really big -- build a strong team. And then so here we are a few years later with a significant success story in terms of margin expansion, significant growth, and a drastic improvement in our cash flow profile.

Okay, great. Appreciate that. And I guess, any opening remarks regarding kind of the Q1 performance? And then, since we're kind of midway through Q2, any update on Q2?

Yes. So as you saw, Q1 was very strong. We had strong growth from an order standpoint in all our businesses. IP was down as we were navigating a tough compare. We had a really significant decarbonization order in the first quarter of 2023 and so that impacted our numbers. That is going to be the same in Q2. We added another significant decarbonization order in Q2. So we expect IP's order to be down year-over-year, but still very strong in projects and also very strong in short cycle. Parts, baseline are pretty much in line with what we saw in Q1. So that's pretty good. From a connector standpoint, distribution orders are doing well. In April, we were in the teens, above prior year. Prior year is a low compare, so that's helping us, obviously. But distribution is doing relatively well. Their book-to-bill was above 1. So that's encouraging, means the markets are holding up. Their end markets are holding up. And then from an MT standpoint, we continue to outperform our markets, globally. We continue to see good growth in rail as well. And we are about to come out in the market with a new product for our shock absorbers for aftermarket. By the end of this quarter, we'll come out with a new product that we expect will drive future growth. So I would say in line with our expectations. From a cash standpoint, IP is doing better. In April, they generated more cash than what they generated in the first quarter. That's a good sign. There's still a lot to do in terms of inventory reduction, collection of past dues, but I would say we are heading in the right direction.

Great. And then maybe update us in terms of kind of where you stand in the overall transformation. You guys have done really good on the MT side with what you call the MT Playbook. Maybe update us on kind of what inning you're in and also in terms of the application of that MT Playbook to IP and CCT.

Yes. So definitely a lot of work has been done. I remember when I joined ITT and Motion Technologies, this was a 12% margin business. We're now above 18%. And we had peaks at around 19%. So good progress here. Nevertheless, we see significant, significant opportunities for further improvement. We have a few businesses in our Motion Technologies business, our KONI, Axtone, which are improving from a margin standpoint. KONI is now accretive to MT. And Axtone is heading towards the mid -- the teens, the mid-teens. So things are improving, but we consider that the potential for improvement is much larger than that in those 2 businesses. And we expect that productivity is going to be the main driver of the margin improvement. Motion Tech usually is able to generate 150 to 200 basis points of productivity every year. Obviously, growth -- profitable growth is also really important. We've been growing a lot. We've been outperforming our markets. So I would say, for Motion Technologies, we have a 20% margin target. We're now, for the first time in a while, above 18%. We expect to every quarter sequentially improve based on that. And then in a couple of years, by 2026, largely be at the 20% target. So things are going well. Despite all the progress we've done, we see continuous opportunity everywhere. And then as we really apply that playbook that you were talking about to IP and CCT, we expect to see further expansion also in those businesses. So CCT today is also around 18%. We see a potential for us being at 22%. And this is really mainly driven by productivity, Lean specifically. And the great thing about Lean is that not only it allows you to run more volume through your facility, so a lot of efficiencies, but also it allows you to reduce cost, or at least to redeploy the cost that you have. Because by really leaning out those processes, you simplify a lot your business, at the same time as you run through more volume. And then you could choose either to redeploy those resources or reduce those resources as you see fit. So Lean, automation is going to be a big driver of margin expansion at CCT. It has already started. We are, by the end of -- by the end of Q3, we'll be implementing 2 major automation in our Valencia site, and that should help unlock a lot of volume. And then finally, IP. IP, we are already above our long-term target at more than 20%. But yet, there's still many things to go after. From a supply chain standpoint, the situation is still very difficult. We still have a very inefficient supply chain -- supplier base. We've got to streamline it. So we're doing it, we're consolidating it. We're focusing on on-time performance for those suppliers, as well as quality performance. So I would say, in IP and CCT, we are really early in the transformation phase.

Okay. Great. And then maybe digging in deeper to the MT segment. I believe over the last 10 years you guys have outgrown auto builds on average by about 800 basis points per year. The guidance for this year implies about 500 basis points of outgrowth. You guys have had a very strong win rate on the EV side of it. So maybe how should we think about that and maybe the potential for that outgrowth versus builds to kind of reaccelerate closer to that 800 basis points.

So we are outperforming on all different segments, on all different verticals of the auto market. EV, of course, we have a win rate that is fantastic, much higher than the market share we have. And so that bodes well for the future. And on the rest of the powertrains, hybrid or ICE, we're outperforming really strongly. So in Q1, our outperformance was higher than average that you just cited. And that was in line with what we saw in Q3 and Q4. In 2023, that outperformance accelerated during the year. And then so Q1 confirms the gains that we made in Q3 and Q4. I would say that, for the moment, we're comfortable with that outlook in terms of our performance for 2024. The reason for this is because we don't really control which platforms are successful, what situation of stocking or destocking some of our customers are in. So we're very confident that we can achieve 500. And I mean some of you already know us, if we have the opportunity to outperform the number, we will do it.

Okay. Great. And then in terms of the margin target, the 20% target by 2026. You talked about productivity earlier. But how should we think about the different components of that bridge from the 18% to the 20%?

Right. So as I mentioned, 150 to 200 basis points per year of productivity, which is a big driver. I think when you think about all the commercial actions we've deployed, we've really been focusing on improving the profitability of existing platforms and recover the cost inflation that we faced over the last 2 years. And we've gotten some good success about that. We -- so driving profitable growth for us, since we are really a grower from a top line standpoint, driving profitable growth is really, really important. And that's what we're focusing on, both on the new platforms that we're quoting and that will enter in production in a couple of years, as well as the existing platform where we wanted to recover the cost inflation, as well as fix some of the lower margin situation that we've had with some of our customers.

Okay. And then in terms of the high-performance car market, I think this is a market that you guys have historically not participated in. You announced the $50 million initial investment in the Termoli plant based on kind of your early awards. Maybe just talk about what you see as sort of the opportunity set.

Yes. So this is a really interesting segment for us. As you mentioned, this is something that we have not played in at all. So we start with 0% market share, which is kind of surprising when you know our background as being really performance-driven from a product standpoint. So this fits naturally with our DNA. This is a market that is a little bit more than 10 million brake pads per year. But what's really interesting about this is that the ASP is so much higher than the regular, the conventional brake pad ASP. So we get a big boost from a growth standpoint based on this. And obviously, the margin goes with it. So the margin is also a multiple of the current margin. So it's going to be really interesting. Our customers are really giving us orders ahead of the plant being finished. So that's really good. We expect to be able to produce the first pieces in Q4 of this year, and then start ramping up in 2025. We probably expect to be probably full -- let's say, full capacity with that $50 million of investment probably in a couple of years.

Okay. Have you guys talked about from kind of a longer-term perspective what kind of share you think you can capture in the market?

Yes. So today, on our regular business, we are around 30% market share. On the high-performance, we start at 0. And I would say there's no reason why we wouldn't be able to have a similar type of market share. Just as a side note, in Europe, and this is mainly, I would say, a European opportunity, the high-performance one, we have a really large market share, more than 50%. And so it would be logical to aspire to, over the long term, to be a dominant player in the high-performance market.

Okay, great. Maybe switching over to the IP segment. So you guys grew 13% organically in Q1. Projects were up over 60% year-over-year. And then short-cycle, you were up 9% sequentially. Maybe if you could just talk about kind of the outlook for the year between the projects and the short-cycle.

Yes. So we continue to see strong growth from both those segments from an order standpoint. On projects, we see our pipeline is growing. Our pipeline is up high single digits year-over-year for new projects. So this is very positive. It's driven a lot by the Middle East, as well as a little bit by North America and Europe to a lesser extent. We continue to see a way for us to really differentiate from a profitability standpoint also on those projects. And so if you see our numbers in Q1, we were able to, as you mentioned, increase the top line significantly, but that was really profitable growth, hence, the margin improvement that we saw in IP outside of the acquisition of Svanehøj. So we continue to see good -- especially because we have a really large funnel, our funnel is up double digit year-over-year -- sorry, our backlog. And so we expect that we're going to be able to see continued improvement from a growth standpoint, and so our shipments of projects during the year because we have to convert the backlog, as well as a significant improvement from a productivity standpoint, the project margin in our backlog keeps on improving. And from a short-cycle standpoint, we're really focused on shortening those lead times, really improving our on-time delivery so we can continue, because this is a market that is super, super sensitive to those type of metrics, and so that we can continue to gain share.

Great. And then maybe on the margin side, you noted project margins were up about 200 basis points year-over-year. Maybe just help us understand how much room there is for further margin improvement on the project side of the business. And then maybe kind of higher level, how do you think about the phasing of IP margins through the year and kind of maybe where the...