ITT Inc. (ITT) Earnings Call Transcript & Summary

Luca and Emmanuel, CEO, CFO, respectively. They're going to give some prepared remarks here, and then we're going to dive into a Q&A session. So if you have any questions, please e-mail me or raise your hand. We'll make sure your questions get included in the Q&A session, there should be the cards on either side over there. We'll tell you which room to e-mail to, and we'll make sure we address them. But with that, I really appreciate your time today, gentlemen. And I'll turn it over to you, Luca.

Emmanuel?

You're Emmanuel, I apologize. I lied. I lied.

Yes. It's okay. Everyone. So our presentation and 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 you that you view them in that light. We encourage you to review the latest risks and uncertainty in our Form 10-K and other SEC filings available on our website. Thank you.

Okay. Good afternoon, everybody. We hope that we're going to keep you awake. So I would be very brief in the presentation, and then we go straight into Q&A. So ITT. So ITT is an engineering and manufacturing company. We make components for harsh environment. So what are those are the brake pads, brake pads in your vehicles, in the cars, the car that keep you safe, while you're driving. We have roughly 30% market share worldwide. Or the shock absorber, the shock absorbers in trains, in locomotives, in the high-speed trains around the world. Those are some of the components that we are making in Motion Technologies. In IP, Industrial Process, we make pumps and valves. So pumps that are helping in carbon capture or stop flaring, but also centrifugal pumps in the petrochemical or in mining. And that is the second business that we're in. And third is CCT, the components and control technologies. We make Connectors, Connectors that could be in aero and defense or in medical and general industrial, and also components for aerospace. We are roughly $3.3 billion in terms of revenue, more than 11,000 people and quite spread internationally around the world. Now if you look at ITT in the last 5 years, we generated a lot of value. Our market cap at the beginning of 2019 was roughly $4 billion. Today, it's more than $12 billion, so 3x as much. How this value is being created, is mainly through organic growth and margin expansion. This is how we created value in the last 5, 6 years. And this is what has happened also in 2024. This is what has happened in Q3. You see the numbers over here. The orders that were up 14% organically, 17% in total. Revenue up 6%, 8% in total, and margin that continue to expand. Now this will continue. But what we have been doing, what we have been working in the last couple of years is add to this value creation, organic value creation, also the M&A muscle. We are building the M&A muscle. And here, this is the capital deployment, the capital that we deployed. And you see from an M&A perspective that we have been building this muscle in the last couple of years with the acquisition of Habonim, a valves business in the Middle East. This was a business that was bought at 12 EBITDA multiple. If you look at the actual, it's actually around 8. Then we bought Micro-Mode, a connector company, small company out of California. And then at the beginning of this year, Svanehøj, cryogenic pumps, out of Denmark that works in the energy transition, so it's about LPG, LNG, ammonia. And the last kSARIA, fiber cable and cabling business in the defense out in the U.S. So you see M&A mainly focused in flow, pumps and valves and Connectors. So the takeaway here is really that our value creation through organic growth and margin expansion is here to continue, and this is our DNA. This is -- thanks also to the differentiation, differentiation through execution and innovation that we are able to have in all the three businesses. And on top of this is the M&A muscle that we are building right now. So this is all I wanted to say, over to you, Mike.

That's great. Why don't you go back one more slide because we're going to start -- I get it. Because I want to start on this capital deployment piece. If I think about your tenure as CEO, it feels like the first chunk of it was let's effectively deploy capital internally, let's effectively work on our growth and margin profile and get the muscle moving. It feels like over the last couple of years, [indiscernible] centralized, had more resource, your time shifted. Maybe talk about what that philosophy then looks like and how you identify, how you pursue, what your criteria looks like and then focal points?

Sure. I think that when you look at capital deployment, the priority #1 is internal. These are the best returns. So we've got plenty of opportunity to deploy capital internally, and this is where the money goes first. This has been true at the beginning, and this will continue to be true. We have opportunities to keep on growing organically and continue to expand our margins. Now at the beginning of the first couple of years, we also work to -- work harder to clean our balance sheet. So we managed to get rid of the U.S. pension liabilities. We sold our ITT Legacy's best liability to Warburg Pincus. And therefore, in 2021, we had a pristine balance sheet. At that point in time, we were able to focus also on the M&A. So we recruited Bartek Makowiecki, who's expert in M&A and business development. And we start building a clear strategy on M&A, a clear pipeline of opportunities, and we start executing. So I would say this has been really programmatic. We plan it in this way, and we are executing in this way. And so M&A, for sure, is more visible now. But I will not forget the organic portion that still keeps on happening across the business. And I can give you an example. I was in Saudi last week. And this is a business that is growing very well, very profitably. We are winning market share, it's in the pumps and valves business. So it's a flow. In Q3, we delivered 100% on-time delivery to our customers. So think about it, all those orders, every single line of every single order for all those pumps was delivered on time. And if you look at around the pumps world, this is not normal. You can talk to every PC, you can talk to Saudi Aramco. That's not normal. But because of that performance, we are winning market share. So we are expanding. So we bought the land in the north, and the land in the east of our plant, and we will be tripling our footprint over there. So those investments, as an example, will keep on happening.

So what's that pipeline of M&A look like? And then I want to come back to the internal stuff in a sec. Is it rich? Is it actionable? And are there limitations on how much you can go after right now? Or do you think you've built the team up internally and the processes up enough internally to be able to be effective going after a myriad of things at the same time?

Okay. So when you look at the funnel of opportunities in M&A, it's rich. And we have opportunities that are actually actionable. These opportunities have been cultivated. I can tell you, there is a couple of these have been cultivated for the last 2, 3 years. This is what helps to make the difference. So yes, reach and actionable once again, connectors and flow, connectors, pumps and valves. So that is on the funnel. When it comes to our ability to execute financially yes, there is no issue. Emmanuel can talk more about that. But from an execution point of view, it depends. So if you look at these acquisitions, Habonim, Svanehøj, kSARIA, those were three very well-run company with three strong management teams. And therefore, we managed to keep these management teams. Habonim has been with us 2.5 years, the entire management team is still with us. Svanehøj was bought in January, the entire management team is still with us, and they are perfectly competent and capable. So as long as you find these kind of companies, there is no issue on an execution point of view. If you decided to buy a turnaround, then is a little bit more tricky than you really need to understand, do we have the resources to make the turnaround. And you really need to be sure that actually you know how to do it and be humble enough to understand if you can do it or not. That resources, sure, but it depends.

So what about the flow space, what about the connector space? Why are those the priorities or have been the priorities? I still think those are the priorities moving forward. Maybe there's a little bit on the A&D side you can do from a technology add breadth perspective. But why has that been the focal point for you? And where do you see that from a vision perspective evolving to?

So if you look at -- this is where we come from, right? If you look at our legacy business, our IP business is -- Goulds Pumps is a very well-known pump brand. And there's a -- the history at ITT has been that we brought this business from 7% margin in 2017 to almost 24% in 2024. So that's a large improvement. We've been able to not only grow but expand margin. And so this is an end market or an activity that we feel very comfortable with. It's highly fragmented, so there are many opportunities. And so we know what we've been able to do in IP. And we think that we can do the same with other companies. In the case of Habonim, for instance, that Luca was talking about, this was already a very well-run company, so we can incrementally help them from a commercial standpoint. But it fits really well into our cryogenic portfolio. And Svanehøj gives us an opportunity to branch into Marine, which was a segment that today we were not present. Svanehøj has significant opportunity to grow from a top line standpoint, low double digits over the next 5 years, and has an opportunity also to improve from a margin standpoint, implementing lean through [indiscernible]. So IP is very -- pumps and valves are very familiar to us. We know what we can do. We have experience. This is a market that we expect is going to continue to expand. And so we think we can play and add value there. And I would say it's a little bit the same thing for Connectors. Connector has been with -- Cannon Connectors have been with ITT for a really long time. We went through a turnaround in 2015, when we moved one of our sites from California to Mexico. We experienced what it was, it gives us a good visibility of what we can do in Connectors. And this is also a very fragmented segment. So we think we can add value. And those are the reasons why we want to push into those areas.

And in the price level, what we are trying to do is trying to add to the portfolio company with a higher growth profile and higher margin. So this is why we're focusing also in these markets. And you have seen also the reshaping of the portfolio with the sale of Wolverine in July, and therefore, the reduction of our auto exposure that today is around 30% of the total portfolio.

Yes. And much more concentrated on a single product category where you have a pretty strong competitive advantage, right?

Definitely the -- Yes. Yes.

So let's shift gears then to the organic investment piece of it, just briefly, what's the -- what percentage of revenue do you spend in R&D? And use that as a pivot point to discuss with some details, I mean every one of your segments is outperforming market at this point. And what are the drivers behind that sustainability behind it? Any context?

Sure. So when you look at the outperformance, where it started was really in Friction, in our auto business. And the outperformance to put it simply, is through performance and through innovation. So if -- I know it may sounds not exciting and simple, but it is that simple. If you really perform in a consistent manner for your customer, think about our auto business, it has been on-time delivery, 99.95% every single month for the last 6 years. And this is despite everything that was going around in the world. When you look at the quality is measured in PPBs, in parts per billion, okay? There is no competition, no competitor that is able to perform at this level. We're able to support our OEM customer in flawless launches when they launch a new platform. So all of this make your customers loyal, and you keep on winning market share. And this is what we have been done for the last 5 years, what's happening today. And we can confidently say that we will continue to outperform for the next 2, 3 years because we won the awards last year and this year. Those awards will start production 2 years from now. So we know the platform that we will be in. And we know that we won platform where we're not able -- though, where we were not able to be in before. So that's our performance. Outperformance through good performance also in IP. I'll give you the example of Saudi. Now if you are a Saudi Aramco, that EPC, you want to stick to a supplier like us that delivers everything on time and doesn't give you any trouble because you've got plenty in your project already. So that and the speed at which we are designing the Connectors and customize these Connectors for military and for aero is also unique. So all of that delivers the outperformance. And therefore, we keep on feeding internal investment. When it goes to the innovation, we tend to spend roughly 4% of our revenue in R&D. And on top of that, we had some new products that are going to change the game and change the world that we are running as venture capital under the M&A and business development head.

So growth profile, mid-single digits, maybe parse that down between just kind of core markets and what that percentage of outperformance is, price, anything like that. But maybe more the direction of the question is, as you look at the changes you've made in the portfolio, does that mix up or put you towards high end, maybe better what that opportunity set might look like for this portfolio over time?

Yes. So when you look at our growth expectations, the majority comes from volume. We'll have a couple of points of price, but the majority comes from volume. And in that volume, you can assume that global GDP maybe is around 2% to 3%, and then the rest is market share gains. It's even more impressive, I think, in auto because in auto, the production is down, and we're still growing. And we're on pace to outperform global auto production by 600 to 700 basis points this year. After being able to outpace the market by 800 basis points for the past 12 years. So I think that our revenue growth equation or algorithm is very clear. It's been driven by volume. And on top of that, we're able to get price. What was the second part of your question?

If I can add also in terms of outperformance, if you look at also the last year, in the last year, the economy has not been that strong if you look at the short cycle, right? But despite all of that, if you look at our show cycle in flow, it has been incredibly strong. we've been able to grow as Emmanuel was saying, it's volume, it was not just price in terms of number of units. And in Q3, our show cycles in pumps, in valves was the highest it's ever been, and so it was a 4% growth and 3% was volume. Our Connector business, short cycle of the show cycle, the last 12, 15 months has been a little bit of a struggle for the market. But we have been able to grow our Connector business, not just overall because of aero and defense exposure, but also in the industrial connectors. So that outperformance, we have been able to put it across all the three different businesses.

And then so in terms of the impact of the portfolio reshaping and what it has -- the impact it has on our growth. So if you look at Svanehøj, the great thing about Svanehøj is that it gives us significant visibility into the future. They're really tied to the ship builds, and the ship builds, there's limited capacity around the world. And so you know for the next 5 years, how many ships are going to be built, where and who is going to build. And so when you think about that, when we visit them last year before the acquisition, they showed us that visibility and for us it really was an incredible story. And so we expect them based on this data. We expect them to grow low double digits for the next 5 years. And it's -- you have the next 2 years where they already have booked a lot of backlog, but it's pretty much in the back end. And then when you think about Connectors. So kSARIA, cable assembly and connectors, they've been growing 15% for the past 5 years organically. And so we expect them because of the defense programs that are going to come to be able to grow in the high single digits for the next 5 years.

Okay, might as well move into the margin side of things, I have a question here on it as well from the audience. But at a high level, where do you think the margins can go from here? You've had really good execution over the last chunk of years here. driving things higher. Motion has been relatively static despite all of these end market headwinds, particularly in some of the supply chain pricing side that has come through. But where do you think the entitled margin looks like for the portfolio? You're already above your targets in IP. I don't feel like you think any differently on the CCT or the Motion piece.

So when -- at the Investor Days in 2022, we committed to long-term targets to hit by 2026. So the segment operating margin, so when you put all these segments together, we have already hit that target for 2 quarters in a row. So now it's a different mix in terms of IP, our pumps and valves, legacy business closed Q3 at 23.9%. The long-term target was 20%. So it's above 20% already. Motion Technologies, our brake pads and shock absorbers business, long-term targets of 20% and by 2026. So we have a clear path to get there. And then CCT, 22% operating margin by 2026, and a clear path to get there. So overall, as ITT, we're already there. I think that in 2025, we will communicate the new long-term targets, which, of course, are going to go up.

So what do you think those main drivers are to get you that next level beyond volume?

I think that if you think about the CCT, for example, is there is a lot of efficiency that still you can put through the plant, a lot of automation and leaning out through the operations and a lot of pricing. Last night at dinner, we were asked what are the things that, what are the mistakes that you guys did in the last few years. And Emmanuel told me, you just said, one, only one, stick to one. And that one was probably pricing in CCT. We could have been probably more aggressive in the pricing. So pricing is a leverage to get us to that 22% operating margin. That's the CCT. IP, I would say, similar story. I think that there is a lot of efficiency in our operation that we can gain. A lot of efficiency through purchasing, where we have a best-in-class in Motion Technologies, where we're really good. But in the other businesses, we are not as proficient in purchasing as we should be. And when it comes to Motion Technologies, it's continuous efficiency and continuous improvement in the plant, in R&D, in finding a new product, develop a new product and the cheaper one.

So let's go into some of the segment dynamics, maybe start with the IP side of things. How do you feel about the sustainability of the underlying demand cadence that you have? And maybe just talk through what you're seeing in some of the end markets, and we have some follow-ups after.

Sure. Think about it. If you look at what has happened in the last year in the results, right, we are growing 6%. With this good organic growth, the book-to-bill is more than 1. Our orders are going up organically 14%. So good growth on the revenue and the orders are even growing more which is pushing your backlog up. And then what is interesting when you look at the funnel of opportunities, so that what you have -- what you are bidding is actually growing year-over-year, which means that the opportunities are replenishing the funnel faster than the speed at which you're booking the orders. So I tend to feel good about the opportunities ahead. If I think about the different markets, there is the energy transition. So the green energy project, probably there has been a little bit of post there, but this is a project that keep on happening. The world is moving in that direction. And I feel positive also in terms of the traditional energy because that energy transition will take longer, and there are plenty of opportunity in the Middle East and probably also here in the Americas. So the short cycle has been strong, probably mainly because of the outperformance. So good on that front. Rail -- no, and you stop on the IP, you asked on the IP? Yes.

If you want to go to rail, we can -- so if you think then about the competitive landscape and your ability to put price through, it feels not easy necessarily, but it feels like the dynamic is a little bit more conducive today than it was maybe pre-COVID, is that a fair statement?

You're talking about IP?

Just IP, right? Is that a fair statement? How do you think about the industry capacity, the competitiveness...

Yes, and no. I would say, sure, you had the opportunity to put pricing through and at the beginning was an easy task. You just put it through because that was easy and accepted. Now becomes a little more difficult. So you need to be much more analytical. You need to understand, okay, this pumps for this application in this region with this distributor can I really charge more or not? So you need to be more analytical. And when it comes to projects, listen, it's very competitive, and there is always somebody that is putting a stupid price out there. So you need to be very rigorous in your order acquisition to ensure that you do not make that mistake because everything starts there, been very rigorous in order acquisitions.

What does the pipeline look like? What does the opportunity set look like? I mean, does next year look like a normal year based on what you're seeing in the short cycle versus long cycle project activity versus customers commentary versus what your backlog is saying.

Well, the project is rich. So when we look at also, not just in terms of the funnel, but if you look at the backlog today, I would say probably 55% of the backlog we have today is project, and 45% of the backlog is short cycle. It was exactly the opposite, if you think about it 2 or 3 years ago. So that's good. When it comes to the short cycle, you got less visibility. But to be honest, I mean, the last year for us, the short cycle has been at a very good level and at a high level and robust.

Yes, makes sense. Moving to the Motion side of the business. Maybe some thoughts on the auto backdrop as you move into next year. Certainly, Emmanuel, you talked about the level of outperformance. I'm assuming that's still going to be there as we move to next year. Maybe not that exact level, but still pretty healthy. But how do we think about the auto backdrop into next year? And then you can cite into some rail comments, too, maybe.

Sure. So when you look at auto, listen, auto is down compared to the peak that you had in 2017. In 2017, they were producing 95 million vehicles and they are going to produce 88.5 million now. So you have a market that is down 5%. In the same time, we grew 3,300 basis points, okay? So it's a nice chart to project. So I think that when you look at the future, the automotive market probably will go back to that peak level in 2027, 2028. Next year, probably is going to be flat, positive, maybe 90 million vehicles. We will see, there are experts that are much more knowledgeable than me. But one thing I can tell you is that for the last few years, we count to outperform between 400 and 600 basis points in the market. So we count to keep on growing. And that is true in every region North America, Europe and China, and it's true whatever powertrain you want to apply. We're outperforming in internal combustion engine as well as EV and hybrid. And if you're concerned about China and the Chinese OEM, 65% is what we're making in China are for the Chinese OEMs. So they are a big customer of ours. We started working with them in 2014 when we opened the plant, and we are a good supplier.

On the rail side?

On the rail side is orders were up 22%. They're going to be up 22%, 25% for the full year. So that's not obviously the market growth. But the market is good because think about the macro trend, the market will keep on growing, right? If it is in China, if it is in Europe, if it is in North America. And on top of that, we are outperforming. Today, we are the only company that has the yaw dumper, the shock absorber that keeps the train on the track for the next high-speed train more than 400 kilometers an hour, that will come out in China in 2026 or 2027. But we have a big market share in Europe and a great market share also here in North America, where it's mainly local.

What about the Connector side of things, maybe we'll just kind of run through the rest of it, the Connectors and how you think about A&D? Maybe just start first with the Connectors piece.

Sure. The connectors. So we are small on the connector side. So it's a tough compare with some of the big guys that are performing well as well in the connectors world. We are $400 million, $500 million. So we are small but pretty in terms of there is nothing that we can envy in terms of profitability. Our profitability is at par, if not higher, of our largest competitors. Now here, we're not competing with the largest one, with the big one. We cannot compete against them when you got the large programs, et cetera, right? So -- but where can we win, is a highly customized, so if you have a program where you really want to eliminate those three standard connectors and you want to put that miniature very small connector on that drone that is able to get more data, higher speed and higher density, this is the customization, this is where we differentiate ourselves, and the speed at which we are doing it. So because of that, we are able to keep on growing and win market share. So will we ever be the huge size? No. But if you think about it, maybe in 4, 5 years' time to be a $1 billion Connector business through organic and M&A, why not?

And then the A&D piece, finally, any impact from the Boeing piece? And how do you think about wide-body versus narrow-body trends for you all?

So we clearly said that Boeing had an impact of $10 million, more or less from a revenue standpoint. From an operating income standpoint, it was immaterial in Q4. Obviously, we're glad that the strike is over now. I think for the future, for 2025, when you think about it, it's probably going to take a long time for Boeing to go back into production. And then also, it is our understanding that they have a lot of inventory. So before we start seeing some orders and some deliveries to Boeing, it's going to be a while in 2025.

Yes. Next year. Narrow versus wide, quick.

So we're mostly on the wide-body. We do have a presence, a significant presence on 737 MAX, but we are more on the wide-body. So I think that as you have seen the recovery has gone mostly on the narrow-bodies with the wide-body expanding, it's going to provide us future growth.

Great. Please join me in thanking the ITT team for the time today.

Thank you.

Thank you.