ITT Inc. (ITT) Earnings Call Transcript & Summary

Thank you, everyone, for sticking with us here. And we're getting late in the day. My name is Joe Giordano. I cover diversified industrials at TD. Excited to have one of our favorite companies here with us today, ITT, their first time at this conference, I believe. So Emmanuel Caprais, CFO; Mark Macaluso, IR, thank you both for being here. I think they're going to start with a couple of slides, kind of give you a frame out the overview, and then we'll take it from there.

All right. Okay. Maybe I can start and save Emmanuel hassle in doing the forward-looking statement. Just a reminder, the 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 that you view them in that light and to review the latest risks and uncertainties in our Form 10-K and other SEC filings on our website. With that, I will turn it over to Emmanuel.

Thank you, Mark. So ITT at a glance, I'm not going to spend too much time on it. But we closed 2024 with $3.6 billion in revenue. As you can see, the split between our different businesses is pretty much aligned. We have the largest segment, which is Motion Technologies. And then -- that makes components for the automotive industry as well as the rail industry. Industrial Process, making pumps and valves, with a little close to 40%. And then the rest is Connect & Control Technologies, which has a large aerospace and defense business. If you look at our end markets, what I would like to highlight here is the fact that aerospace and defense is now up to almost 20% of the total portfolio with the recent acquisition of kSARIA, which is a defense interconnect specialist, and we acquired them in September. And so we're really happy with that acquisition because it gives us an entry point into the cable assembly business, which is going to be really important for defense customers. An overview of our 2024 results. So you can see that in 2024, again, we delivered strong organic growth at plus 7%. All the different segments participated. And so we were able to outperform the -- in Motion Technologies, the automotive market. We were able to outperform also in the project world in Industrial Process, and we gained a ton of share in defense. We were able to grow our -- both our orders and our revenue in 2024 by more than 20%. Last point, just to highlight the fact that we beat our margin targets in 2024, 2 years earlier as planned, and then we were able to deliver 12% EPS growth. When we look at 2025, I want to highlight 2 things. We expect to continue to create value through growth from a revenue standpoint, margin expansion. And to support that, we have a significant backlog. As you can see, our backlog is up more than 30% in total and more than 8% organic, speaks to really the margin -- the share gains that I was talking about before and obviously, an incremental contribution from acquisitions. And here, specifically, I wanted to highlight kSARIA. KSARIA, as I mentioned, is an interconnect -- defense interconnect specialist. They are present in a lot of different platforms. They have proprietary production processes, which allows them to really deliver high-quality, high-reliability cable assembly, which allowed them over the years to build a lot of credibility with their customer base to be single sourced. And then -- so that gives us confidence that they will be able to grow in the high single digits for the next 5 years. And then the last point I wanted to highlight here is for 2025, we expect to continue to deliver from a growth and from a margin expansion standpoint, compounded by the contribution from acquisitions. And here, you can see in the second bar the contribution from Svanehøj and our aerospace and defense acquisition, kSARIA. So with that...

Great. And so I have a bunch of questions we'll go through. If anyone has any, as we go, just put up your hand. We'll keep it as interactive as you'd like it to be. We're going to start off a little bit more broad and then we'll get into some of the A&D kind of specific questions in a bit. But -- if we start, I think fourth quarter was a good like representation for you guys of how like the balance of the portfolio can help navigate -- you get problems somewhere, you do better in somewhere else. Can you talk about how that -- how your strategy is kind of shaped around this where you want to be kind of not too specific into one area and kind of stay balanced?

Yes. So I think the game plan for us is to continue to gain a lot of share organically in our Motion Technologies business. And this is such a differentiated business. This is an automotive business with 20% margin with an average outperformance of the global automotive production by 800 basis points every year since 2012. And so we want to continue that. And we don't want to dilute that business with acquisitions that are going to be underperforming. And so for Motion Technologies, the road is continue to outperform markets, both on automotive and rail, right? When we think about Industrial Process that makes pumps and valves and as well, Connect & Control Technologies, making connectors and aerospace components, we want to continue to gain share. So in Industrial Process, for instance, as I mentioned, we gained a lot of share on our projects in 2024. We did that also in 2023. And so that's going to continue. What we want to do is to add business that are complementary to Industrial Process through M&A and -- so that we can accelerate a little bit the growth and the earning power. And then in Connect & Control Technologies, really our connector business has been performing super well. This is a business that today is around $0.5 billion. It has a profitability that is above 20%. And so we identified aerospace and defense as the main market that's going to deliver us the growth organically. We also identify aerospace and defense, and more likely, defense, as an opportunity for M&A to really accelerate that growth. And so when we bought kSARIA, this is a company that is going to add -- is adding $200 million more or less of revenue every year that has high teens type of EBITDA margin profitability and that generates a significant amount of cash. We think that this is going to be really complementary to our connector business because the reality is that today, because we didn't have that cable assembly expertise, we were not able to quote all the connector business that we would have been entitled to. And so with this and additional sales synergies that we're going to be able to deploy, we think that this is going to really strengthen our aerospace and defense portfolio.

So which markets are you most excited about right now?

So I would say that we're excited about -- if we look at our internal performance, we're excited about all our markets because even if automotive is down, we're going to outperform again this year. I would say in terms of growth markets, we see that energy is a really good market. Specifically here, clean energy is driving a lot of the growth. So if you look at our clean energy orders, they were -- we started -- when this journey started, we had $20 million green energy orders. We now are more than $100 million. And so this has been a super dynamic additional leg to our energy portfolio. And what's really interesting about this is that it's not as cyclical or volatile as oil and gas because it's driven by the cost of regulation. And so you don't need to have high oil prices to have demand for our clean energy pumps. And so we were able to really recycle our pump portfolio to serve green energy type of applications. So that's really exciting for us. And the reason also why we're growing is because we really make tremendous progress in managing those complex projects so that we can deliver our product on time to the customer. And that has been, I would say, the approach and the strategy for all our businesses: fix the fundamentals, so we can please our customers and we can outperform our markets. And then in the case of -- I would say the last market we're excited about is aerospace and defense, and more defense than aerospace. The reason for this is because I think that even if aerospace has a lot of potential to grow with the recovery at Boeing, for instance, it's going to take time. And so in the immediate, we don't see 2025 that's going to be super strong. But over the medium term, we think that we are well positioned, especially because we are more present on the wide-bodies than on the narrow-bodies. And the wide-bodies, if you think about it, we haven't seen a lot of growth compared to the 737 MAX, for instance. Defense, I think, is really an interesting market. As I mentioned, we were up in terms of orders 20% and in terms of revenue, 20% also. Next year, we expect to have a book-to-bill that's going to be way above 1 in defense and continue to grow the top line. And with the addition of kSARIA, I think that it's going to -- we are going to really be able to take advantage of all that increased funding that is impacting defense.

Have you seen like changes post election in customer behavior? I know there was a little bit of uncertainty going in. Has that kind of gone away? Or has it been replaced with now a new uncertainty around policy and things like that?

Not really any change for the moment that has been noticeable. We always thought that because of all the different conflicts and all the -- and the sense of urgency that is around defense that contracts would be awarded quicker. And the reality is that it takes time. So we were expecting some large contracts, for instance, in Q4. They're going to happen in Q1. It's a little bit puzzling for us to know -- to understand that there's a real need, but I think there is still a bureaucracy that needs to do its work. And so that's why it's not as fast as we were expecting. But we have a lot of opportunities on nuclear. We have a lot of opportunities on radar. So we feel good about defense.

Cool. I'll ask the prerequisite tariffs question. So how should we think about a global organization with manufacturing in a lot of spots? So how do we think about the implications of now we have metal tariffs or if it's China, Canada, Mexico? How should we think about that?

So when you think about the China tariffs, which are really, right now, the ones that have been in place for the longest, for a week, if you think about it, for us, our Motion Technologies business is completely insulated from that because we're not importing any China -- any products from China into the U.S. for Motion Technologies. We are importing some of the stuff from China in Mexico, but then we export to the U.S. So I think for that, there's no impact for the moment. When you think about Industrial Process and CCT, we import -- we definitely import components from China into the U.S. So in Industrial Process, we import castings. And then in China, we import other components for -- mostly for our controls business. And so we're running through the calculation, but I think the impact is manageable. We import -- and by the way, those imports that we do from China, it's not like specific to us. Everybody in the pump world imports castings from China. So we'll come up with a number, and we'll share it when we need to. And then when you think about Mexico and Canada -- so Canada doesn't really apply to us. We produce in Mexico, and we export some of it to the U.S. So it's a really complex situation. Let me give you an example. So today, we sell on a platform where we have both the front and the rear axle. We sell the front axle to a Tier 1 in Mexico that then sells to an OEM in Mexico and then in the U.S. because the same vehicle is produced both in the U.S. and Mexico.

So it's not your problem.

It's not our problem. And that's -- I would say the large majority is us producing in Mexico to sell to Tier 1s in Mexico. So it's indirect importation. On the rear axle...

Ultimately, it's my problem at the end of the day.

Exactly. And on the rear axle, what happens is that we ship to -- everything to the U.S., to a Tier 1 that then ships to an OEM in the U.S. and to the same OEM in Mexico also. So it's...

So there can be some movement on that [ at the end of the day ].

Yes. So it's going to be very complex. The thing that we are looking at is could there be a benefit, for instance, if you do what they call a temporary importation, right? So you import your product, but then it gets exported through a transformed product. So in the past, that has been a cause for exemption of tariffs. I don't know if that will be the case here. We'll see.

I'm sure it's been pretty well thought out at the top level. So we'll figure that out. I think we're all trying to deal with it. You mentioned M&A a bunch of times. This is kind of a new muscle for you guys, to some extent. So maybe we could talk about how the internal capability has developed over the last several years and how -- you've been opportunistic in the past, but I think now it's starting to show more consistency, more consistent deployment. So maybe talk us through the developments there.

Yes. So we have really an ambitious target. We deployed over $800 million in 2024, and our target is to deploy between $500 million and $700 million every year. We have very limited debt and so a lot of dry powder to deploy. But I just want to make sure that everybody understands that money is not burning our pockets. We intend to be very disciplined and very rigorous. And I think that's the key to success. We -- so the way we think about it is we look for specialty niche applications that are going to be able to complement our existing portfolio and make us stronger and reinforce our competitive advantages. If those companies -- so in order for this to happen, we need those companies to be leaders in their market. And so that was the case for Svanehøj, and that's the case also for kSARIA. We're looking also for really competent management team. And then by establishing early contact, by really understanding the potential of those businesses, we're able to, I would say, get a better deal than, I would say, everybody else. And if you look at our -- the multiples we're paying for Svanehøj, we paid something between 12 and 13x, for kSARIA, around 12x. I think those are really good multiples. So...

You just need to find companies that are easier to say.

So I think that our model is to make sure that we really study the fundamentals and to engage early and to cultivate the management team and the owner so that we can come on top and with reasonable valuations. Internally, when we look at those opportunities in terms of returns, we like those transactions to be able to return 15% from an IRR standpoint. And our ROIC, that is a little bit above 10%. And so if we have that, then I think that we are confident that we can make it work. One last thing that I would say is that there is a volume also consideration to take into account, which is that -- one of the reasons why we want competent management team is because we can spread our internal resources more easily, and they don't need to be running those businesses. So -- but even if you find targets with really competent management team, at some point in time, there's only so much that you can absorb with your internal resources. So another consideration that we pay attention to is the fact that how stretched are our teams internally to the point that if we think they are too stretched, then we walk away. And so we thought -- so for instance in 2024, we did Svanehøj and kSARIA, which were 2 big acquisitions. We passed on several of them. And...

For no other reason that you just thought it was too much to do.

And -- yes, compared to -- too much to do. And they were not as well run as, for instance, kSARIA and Svanehøj.

Got it. Yes, that makes sense. All right. So we sit here, we're halfway through the quarter. You're guiding full year 3% to 5% organic, 80 bps margin. Where do you see potential for upside to that? And what is like the parts of it that you have the most uncertainty around?

So today, when we look at our backlog, we have $1.6 billion of backlog. That is mostly for IP and CCT. And for us, when we look at that, we are pretty confident in our sales projections. And for us, this is not a demand concern. It's a focus on execution that needs to happen. So I would say that right now, we built the conversion of our backlog based on historical execution.

Which you're probably running ahead of.

So if we are able to execute better, maybe there could be an upside. But for the moment, we felt comfortable to commit to such a level. For instance, in IP, the growth is expected to be at 6% roughly. We grew revenue in IP last year 8%. So first, there's no way the markets are growing 8% and 6%.

No, they're not.

First. And second, to grow 6% on top of 8% is -- still requires a lot of work. So that's what we felt comfortable with.

When you say execute on the backlog, do you -- does that translate -- does executing better than historical translate to revenue being higher because you're burning through it faster? Or does it translate to better margins because you're doing it...

Both.

Yes. Okay.

So I think we feel good about our IP -- the IP outlook for 2025. In terms of CCT, I think the big headwind for CCT is the Boeing recovery. For us, Boeing represents $10 million of revenue per quarter. And so we're not going to have any revenue in Q1. We're going to have very limited revenue in Q2. So that takes -- that's a hit for us. And then from a connector standpoint, we think that we grew -- if you look at our distribution, connector distribution, in 2024, we grew 20%. So we're expecting to still grow in 2025, but not by 20%. And so here, we're really watching the level of inventories because the distributor inventories are still pretty high. The distributors are not complaining, and they're not signaling that they want to reduce those inventories, but they're higher than the historical levels. And so we're watching with this because things can change really quickly in distribution. And then as I mentioned, defense. Defense, I think we were expecting 3 or 4 large contracts in Q4. Hopefully, we'll get them in Q1 because if we get them in Q1, then we have a chance to ship them in 2025. So I would say, overall, we feel really good about our capability to execute. We feel relatively good about most of the market we're in. I think a little bit of the question mark is auto, but I think given the outperformance that we have, we're still going to grow.

So I'm glad you mentioned execution. So Luca and you came up through MT, and that's always kind of been the driving force behind efficiency at the whole company. So can you talk about how you're obviously making very different things and different types of technologies? But how are you taking like the process and the thoughts of MT and applying them to IP and CCT?

Yes. And that's a question that we get a lot because people ask us where are the synergies. And the synergies are in the operating system. The synergies are not in the product. They're not in the customers. They're not in the end markets. And so the operating system, it's about identifying the performance drivers that are different by business and pushing on them as much as you can. So the foundation for this is SQDC, so safety, quality, delivery and cost. On safety, we made incredible progress. On safety, we're now at the best-in-class performance of 0.4 injury frequency rate. And so that's tremendous because all our businesses, I mean, have done tremendous progress, and the number of incidents year-over-year in 2024 were down 30%. So -- and severity is also improving. So safety is really the basis for you to operate efficiently because you don't have any delta. Quality. We're -- our Motion Technologies business is able to deliver 1 defective part per million. The other businesses are nowhere near that. But we'll be making gradual progress. And so if you're able to have a quality promise to your customer, then the customer is going to come back to you. And we see that happening with our projects in IP because if the -- the reason why the customer is coming back to us is because we're able to deliver quality products on time. And so the third category is on-time delivery. Our Motion Technologies business, our Friction business delivers 99% on time on a regular basis. And so -- we're also in IP and CCT nowhere near. We're around 70% or lower than 70%. And so we want to get to that 90%. We've been making significant progress. So for instance, our Saudi operations in Industrial Process deliver 90% plus on average in 2024. Our Nogales facility delivers 80% plus. So we're making progress. But we won't stop until we really are able to deliver the same type of performance regardless of the business. So -- then once you have the SQD, so safety, quality and delivery, then you're able to really optimize your cost. And so that's why we've been also expanding our margins. And so that's really the foundation. And once we're able to really optimize our cost and grow our margin, we can reinvest some of that in R&D, and that's when the innovation comes on board. And the innovation is another differentiation. We talked during last earnings call about all the work that we've done in creating new products, including the EMD, which is the Embedded Motor Drive, which is a smart motor that you can put on a pump or any rotating equipment that's going to save you, in terms of energy efficiency, 50% to 80%. And so we'll show it during Investor Day in May, but we're really excited with this additional stream of revenue that's going to complement the pump business in Industrial Process.

And sitting in your seat, how do you kind of balance the capital allocation between these businesses? Like if you're saying -- is there a business that we need to invest more to make it more efficient or businesses that are running more efficient deserve more capital because they're earning it? Like how do you kind of balance that?

So the way we think about it is that for our established platforms like Motion Technologies, we're going to give them the capital that they need because we know that over the years, we've taken all the platforms, and that -- those platforms, they need to be industrialized and put to market. So we have a commitment with the customer. We got those awards 2 to 3 years before. And so it's just a matter of industrializing them. So we allocate the capital that is needed. One thing that we are doing that is a little bit different now is that we're trying to make sure that we optimize the usage of our equipment, which means that Europe today has been down and is going to be down again this year. And so we're reallocating some of those production equipment to China, for instance, in order to optimize the utilization, right? So Motion Technologies -- like if you say we spend $130 million of CapEx a year, motion Technologies takes a big part of it. It takes like $70 million, okay? A little more than half. In IP, there's a lot of work that we're doing today to increase our capabilities. So we are -- we have invested last year in testing equipment. We put high-power testing equipment in India, in Germany. And now we're looking in Latin America for mining applications. So increasing our capabilities in region -- for the regions in order to really expand our market share. We're also expanding our site in Saudi Arabia because we've been getting so much business in that region and gaining market share that our plant is no longer big enough. And so we are doubling the size of our facility in Saudi Arabia. We have implemented a new test stand and also a new service operation. So this is really going well. And so in IP, I would say increasing testing capabilities, making sure that we have enough infrastructure to deliver on the plans to expand the revenue there. And then in CCT, it's -- there's a significant portion that is around automation. Think about -- so when you think about the aerospace industry, a lot of people think about high-tech industry. But then when you look into the manufacturing of the components for the aerospace industry, it looks like it hasn't changed since the '90s. And so we are -- we have embarked in a journey to automate as much as we can our production. And so here, we found out that there was -- we analyzed that there was a lot of -- there were a lot of bottlenecks in the end-of-line testing. So you produce a switch, you produce a valve and then you have a cycle time that is much shorter than the testing time. And the testing time is manual and you test one piece. And so we're automating this so that you can test instead of -- for our switches, for instance, instead of testing one piece, you take -- you test 3 at the same time. And instead of dialing manually to change the level of pressure on the test -- on the switch, you do it automatically. Same thing for our valves. We're going to be testing more valves at the same time. And so that's going to increase really the output of our factories. And so automation of the end-of-line tester, automation in machining also where we're implementing cobots so that we can get more of our equipment and we can get our equipment running lights out. So a big, ambitious automation plan that we have in CCT.

Interesting. So we'll take the last couple of minutes here. We'll dig into the A&D portfolio a little bit more. Maybe -- can you just kind of give us a bit of an overview of like what you're actually -- what kind of niches you're in there? And how has it evolved over the years? I know you've -- kSARIA is a big one and Micro-Mode. And how has the portfolio kind of changed a bit?

Yes. So our Connect & Control Technologies business produces components for the aerospace industry, and they produce connectors as well as control motion and flow components. So if you look at A&D, that represents a little bit more than 60% of our CCT business. And that does not include kSARIA. So kSARIA is on top of that. So you have a business that is roughly around $500 million. And then you add $200 million of kSARIA that -- of newly acquired revenue. So it's a sizable business. We are -- so we produce niche applications, so niche connectors. Our defense business in connectors is stronger than in our aerospace business. And we are competing with the big guys, Amphenol and TE, but we're competing on -- we're more focused on niche applications, applications that we can customize. We can literally design with the customer at their site and then come back to them maybe a week later with a functional prototype. And so that really makes a difference because the customer is able to see the product right away to fit it in. And we need to -- if we need to make adjustments, we can do it really quickly. So our industrialization lead is really fast, which has allowed us to really develop really intimate relationship with those customers, which means that they talk to us ahead so that they can be ready because they know they have a trusted partner. And this has been working really well, which allows us to be single-sourced. And so -- which allows us consequently to capture a lot of value. And so we produce those connectors, those defense connectors for prime subcontractors. And so those guys, if they're satisfied, they come back to us. In a lot of cases, the object is not really the price, even though it's really important for everyone. But the object is, can we have something that works? And can we have it in the lead times [indiscernible]? We -- also, another point that I wanted to make is that we've been -- we issued a press release a while back where we were -- where we qualified one of our connectors, Cannon MKJ, for the Nett Warrior platform. So the Nett Warrior platform is for -- is a connectivity platform for soldiers in the battlefield. And basically, it allows you to bring power and data in the form of a really ruggedized connector, which really -- I mean, you've seen in Ukraine, it's really useful when you have operators of drones, when you have a lot of communication that need to happen on the battlefield. And so we are a really preferred partner with a lot of those prime subcontractors to develop products that will fit in their radio system, in their drone system or this type of thing. So this has been a strong area of growth to us. We've been able also to offer creative solutions where, because we're able to stuff a lot of different lines into our connectors, we're able also to eliminate connectors from a footprint by putting all the lines in one single connector. So that's been a good value proposition also for our customers. In terms of the motion flow and components, we manufacture valves, actuators, so mechanic and mechatronic components, that are used in aircraft. They are used also in weaponry, and they're used in radar. We have a large business where we provide energy absorption devices for all the materials that is going around the world. So you know that a lot of U.S. manufacturers are also exporting their products to Saudi Arabia, to Ukraine, to Korea, to Japan. And so we provide all the safety, energy absorption devices in order to transport and then -- transport those products. And with what's happening right now geopolitically, you've seen a lot of those transport going up. And then so a lot of...

Enidine, that stuff.

Enidine, yes. And that's a lot of -- provides a lot of growth for us.

Yes. How should we think about like the growth in -- within A&D? Like what's the growth most tied to? Is it build rates? Is it -- how much is like more of replacement and services? Or is it defense budgets? Like what are the key drivers to that?

Yes. So I think that -- so for us, we've been trying to target the platforms that have the highest growth. So for instance, weaponry has been one platform that has seen really important growth. And so we are present with this. We've been present historically. And also, we develop new products. In terms of radar also, we -- especially with connectors, this is something that -- there is a lot of upgrades that are ongoing. So you get a lot of OE and also aftermarket revenue. I would say, historically, when you think about aerospace, the platform where -- that show the biggest growth was the narrow-bodies. And on the narrow-bodies, we also have been less present. But as I said, because we have a strong presence in wide-bodies and now with production ramping up, I would say, faster than what's happening on the 737, we expect to benefit from that in the future. So -- and then the last point I would say is that we're driving a lot of innovation. New connectors, for instance, for defense, we came up with the HDx, which is a nanoconnector that has a lot of different applications from radio to soldier [indiscernible]. So we try also to make sure that we understand where things are going and then to be there with a product, either by reengineering an existing product or creating a new product.

Is there a content story there as well? Or is it more like -- if we make the same amount of whatever missiles or planes or whatever, is there more and more of your stuff going to be on these things in the future? Or is it about taking connectors out and driving a value proposition from that?

Yes. So I think that -- for us, what's really important is to identify the platform of growth. And so we see a lot of new applications. And so we want to be there. For instance, our team -- we've always been on those F-16 and F-35. But our team recently has identified the opportunity to [ quote ] on a box where you have 20 connectors. And so this is brand new. This is to modernize one of those fighter jets. And so what we're doing is that we decided to -- for this application, to provide the box as well. So you have...

You will insource some content from others.

Exactly. And so that gives us an opportunity, instead of selling one connector, maybe that will be assembled in a box by somebody else, to provide the box and put 20 connectors of ours. So we try to be nimble, to engage with our customers, to be intimate with them so that we can be ahead of everybody else when there's a new opportunity that requires a higher level of customization.

Maybe just last, what about the space market? What's your -- where are you playing there? Is that an area that you think you can get more into?

Yes. So if we look at one of our acquisitions, Micro-Mode has a pretty decent -- it's a small acquisition. This is a $25 million to $30 million business. But as -- but it has products, connectors for the space market. So we -- I'm not going to say that this is a large business for us. It's not. But this is something that we look at and, for sure, try to understand if we have products that we can also use for space. One example for that was we have an actuator that we use for aerospace. And then we thought that there was a space application, but it needed to be much sturdier. So we worked on it, and we were able to get a small space business because of that.

Interesting. Anyone in the audience? Any last questions here? Perfect. All right. I think we'll leave it there, 30 seconds to spare. Thank you, guys. It's great to talk to you.

Thank you, Joe.

Thank you.

Great to talk to you.