ITT Inc. (ITT) Earnings Call Transcript & Summary

All right. Do we have the -- ITT is the Zoom setup?

Yes. Hi, Kevin.

Hi, Kevin.

Okay. So I'll just kick it off and then -- are we doing the slides here? Or are they sharing?

We're sharing, Kevin.

Perfect. So next up is ITT. Based in Stanford, Connecticut, ITT is a manufacturer of critical engineered components that serve fast-growing end markets in transportation, flow, energy, aerospace and defense. ITT has 86 million shares outstanding. Shares trade at about $206 for a $17.7 billion market cap, $956 million of net cash for now and a $16.8 billion total enterprise value. Joining us from ITT are Luca Savi, CEO; and Emmanuel Caprais, Senior Vice President and Chief Financial Officer. Luca and Emmanuel, I'll let you take it away to start.

Thank you, Kevin, and I'll read some forward-looking statements. 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 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.

So good afternoon, Kevin. Good afternoon, everybody. Thank you for your interest in ITT. I will just spend a few minutes on a few slides of the presentation. What you see here in the first slide is talking about the next chapter for ITT. When you look at what ITT has done in the last 7, 8 years is really we deliver a lot of value for our shareholders through organic growth and margin expansion. And this will continue. But what is happening now is that we are compounding with M&A. And these are not just some of the smaller acquisitions that we made in the last 3, 4 years, but with the addition of SPX FLOW that we're going to close very soon. So if we move to the next slide, please, and talk a little bit about the SPX FLOW acquisition, roughly is a $1.3 billion highly profitable flow platform and is helping us in terms of our leadership in core markets as well as adding some adjacency in flow technologies like mixers or nutrition and health and adding markets where we are not really playing today, has got a very good and profitable aftermarket. So it's a very good fit when you look at the business and also culturally. So all of this creates really a world-class flow platform for the growth in the future. If we move to the next slide, we will see that not only it creates a resilient business in flow, but also it takes us very much to the enterprise portfolio shift that we set as a target by 2030. We -- at the Capital Markets Day in 2025, we shared that we want to be in 2030 with roughly 20% of our portfolio be exposed to auto. And with the acquisition of SPX FLOW, really, we are already there 4 years ahead of time. So without further ado, if we can move ahead a couple of slides, please, to the takeaways. These are -- yes, this one. What I want to stress, Kevin, is that, listen, the organic value creation in ITT will continue in the core business and also in SPX FLOW. We have acquisition now that are accretive and start -- have been contributing. We will keep on winning market share and outperform the markets we play in through differentiation, differentiation in execution as well as innovation. And we started already strong towards our long-term commitments. So with that, Kevin, over to you for Q&A.

Great. Well, thank you both for that overview. Maybe diving in a little bit more on SPX FLOW to start. Your prior deals have been a little bit smaller, but I'd say in higher growth end markets like kSARIA and Svanehoj. This one is a lot bigger. I know you've got the $80 million of cost synergies that you're looking at from the deal. But can you talk a little bit more about why you're so excited about this as well as potential revenue synergies for both entities once you layer that business on top of yours?

Sure. I think that a couple of points. First of all, we are creating further platform for growth. So this is what we have been really good at ITT. If it was with rail, if it was with innovation like VIDAR, if it was with Svanehoj in cryogenic pumps in marine energy transition, kSARIA in fiber cabling in aero defense, all we've created organically or inorganically good platform for growth that has delivered last year, 5% organic growth, the 3 years before, 9% organic revenue growth. Now what we see in SPX FLOW, the opportunity to create other platforms for growth. If it is on the mixers front, that will be another good platform. If we think about hygienic pumps, where we really do not play with Waukesha, which is a leading brand in the U.S. and also with the nutrition and health systems. We believe that under our management system and with a different prioritization more on growth, we believe that this business can grow high single digit for the next few years. On top of that, I would say what we really like about in SPX FLOW are leading brands, leaders in the market they play in, a lot of engineering opportunity to differentiate, very profitable, very profitable aftermarket. And this, together with the other markets we are exposed in IP, in Industrial Process will make also Industrial Process much more resilient.

That's great. And then in terms of SPX FLOW was public itself just a few years ago. I know the business has changed a bit since then. But can you maybe walk through how the business has improved internally between then and now as you're acquiring it?

Sure. The SPX FLOW that we have -- that we are purchasing today is quite different from the SPX FLOW of a few years ago. First of all, before Lone Star bought SPX FLOW, SPX FLOW already spin off some of their business that was more linked to the oil and gas business. And under the Lone Star leadership, they already sold another couple of businesses to other companies. And they went through a journey of profitability improvement, and they were able to deliver a good gross margin, around 42% and EBITDA around 22%, applying their tools. If it is 80-20, if it is more cost reduction. So a business that has been quite transformed from what it was quite a few years ago. And I believe that this is leaner, but maybe not as lean as ITT. And under our leadership with more focus on growth, maybe less 80-20, we can return that business to high single-digit growth.

Okay. And maybe moving then to your Industrial Process business. You've really seen very strong growth. You've been ahead of the market, and you've got a lot of new products or project wins, and you've got over $1 billion in backlog now. What would you say has been the differentiator for ITT in all those wins, whether it's just technical engineering and product development, customer service, speed and efficiency. What's been the secret sauce in terms of your success there?

Yes, Kevin, I think the secret sauce is execution. We -- this is a business that we completely revamped since 2017. We really worked on improving project management performance. And as a result, we've been able to grow. Now I think that in addition to this, we really worked on reducing the cost base, improving the metrics that are fundamental for the customers, such as quality and delivery. And as a result, we've been really able to differentiate ourselves from the rest of the competition.

If I can build on what Emmanuel said, when we're talking about the execution, for example, let me share some of the -- some numbers on how we're performing on the projects. These are the large projects from a few million dollars to $50 million. Those projects many years ago, they were not profitable. We turned it around the way that we acquire orders, in the way that we run these projects, they start having good profitability, and then we gave a target of 15% profitability on this project and then more than 20%. I can tell you today that the backlog, the project backlog that we have today sits at a project margin in the high 20s. And on top of that, when we close the project and we ship our pumps and our systems, the project margin that we shipped at is regularly higher than the project margin when we win the project, which is a testament of the good execution, good project management, good change management. That execution, if it's financial, if it's on-time delivery for the customer, bring loyalty with the customers that we serve, and that is almost like a reinforcing loop and a self-fulfilling prophecy.

Great. And then maybe one area of your business. Could you highlight your Middle East business? I know you've talked about the Saudi Arabia facility quite a bit. What are some of the projects that you're supporting there as well as some of the products that you're selling in that's getting the growth there?

So yes, Saudi is a great example because if -- Luca, I was talking about the metrics that are really mattering for the customers and Saudi is a great example of that. They have an incredible quality record. They have more than 90% on-time delivery. And as a result, they were able to build a very effective partnership with big players in the region such as Saudi Aramco. And so when you look at our commercial performance for everything that is an open bid, we win more than 90% of what we quote. And so -- and this is because we're delivering such a differentiated performance for our customers. And Saudi -- our Saudi site, which a few years ago was around $20 million in terms of revenue is now more than $100 million with a significant backlog, significant order growth that are going to fuel the growth of the future -- the profitable growth of the future because as well, it's one of our most profitable sites in all IP.

And when it comes to the products, Kevin, is Goulds Pumps, right, and the Goulds Pumps systems. So centrifugal pumps that are used in the oil and gas, in the petrochemical in the future, also maybe on the mining side. But it's very interesting, the question you're asking, which product, because the fact that we are in the Kingdom, we expanded the site and 3x. Now we are able to localize in Dammam in Saudi Arabia, also some of the products that we acquired with SPX FLOW, if it has mixers or if it is other metering pump. So it's one of those revenue synergies that we are working hard to bring home with the deal.

Absolutely. No doubt you will. Maybe one more on IP. GMP-1 valves, I know that, that's been an area you've highlighted and you're expecting a lot of growth in this year. Can you just frame your position in that market? And also what happens to that business as that goes to pill form?

So let me say, this is one area where Emmanuel and I always talk about differentiation through execution, the Saudi example and differentiation through innovation. And here is we have an amazing product, which is our EnviZion valve, fully patented, which delivers a lot of value to our customers because it allows a quick changeover and therefore, more run time for their systems and their plants. Now one of the major player in this market has really bought into this product, has benefit from the value because reducing the downtime, augmenting the production of a product that is really in high demand creates a lot of value for them. So we are working with other potential customers to ensure that they buy into this product because, to be honest with you, it's really a no-brainer. And -- but this product for this customer started as a platform of a few million dollars, went up to $20 million, went up to $50 million. It's probably -- it will probably be a platform of $70 million just with this one account.

That's a big number. So good to hear. Maybe moving to Motion then. At a high level, in what's been kind of a stagnant market in auto, you've outperformed by 400 to 500 basis points the last few years, and you said you expect to continue to do so. What's the main driver of that? And how are you able to achieve such growth in an otherwise flattish market?

Sure. There is not one silver bullet, Kevin. It's many points getting altogether. First of all, cost advantage. Our manufacturing footprint is highly concentrated versus our customers that got many more plants. So we can run the five plants at a good scale and very efficiently. Second, differentiation in execution in terms of quality. Because we are highly automated, there are very few people in the plant, there are plenty of robots handling the process, we are able to deliver a quality, which is measured in PPBs, in parts per billion. Our competitors are 2 orders of magnitude worse than us. Then a superior R&D and speed of development of the new products. And the fact that from a strategic point of view, we also applied good common sense. If you think about China, for example, when we opened our plant in China 2014, thank God, we didn't use the 80-20. We are more kind of 100% people. And in 2014, we just went for every single Chinese OEM and Chinese Tier 1, which means everything that we're producing today, 70% is for the Chinese OEMs is we are winning with the winners. Think about if we were using 80-20 when we opened in 2014 and spent all our time with the Ford, the Volkswagen or General Motors. We will not be growing. We will not be in the position of today. So when you look at all of this, this entrepreneurship, the superior R&D, the automation, the quality, the performance as well as the cost advantage, this is what allow us to keep on winning in the market. And that will happen also in the next few years.

Now I've heard how impressive that plant is, and I'll definitely need to see it someday. Maybe on the Geo-Pad business, could you talk a little bit about that product and your potential OEM launch in 2028? And any thoughts on what the ultimate addressable market might be for that product?

Which product are you talking about? Sorry, I didn't hear it.

Geo-Pad. The brake.

The Geo-Pad?

Yes.

The Geo-Pad. Okay. So the Geo-Pad is a revolutionary product, fully patented. We invented an inorganic binder. Now this is what allows us to really simplify the product in terms there are less components making the brake pads, which makes it also more cost effective. In addition to that, it's also reducing our CapEx expenditure in the manufacturing process because you will not need an oven. The oven is roughly $2 million on a manufacturing line that cost between $12 million and $15 million. So you reduce your CapEx, you reduce your OpEx because you're not consuming energy in the oven. The cost of the material is lower. So this will allow us to continue to win in the market with a more cost competitive product and also better performing. Obviously, it's completely revolutionary. And therefore, we -- it takes some time to penetrate in the market. But we have tested this product for the last 3 years in China in the aftermarket to ensure that it works well. And we are going to launch it in a platform -- in an OE platform in Q1 of 2028. We already have the customer, we already have the platform. And since -- and from that, then we will see it taking more and more market share as more platform will become available to win.

Great. I'm going to pause here and see if we have any questions here in the room. If anyone wants to jump in. While we're waiting, maybe I'll move to Connect & Control. I know we've got -- we've had a Boeing price renegotiation on what you supply to them. Can you just help investors, how should we expect that to flow through both this year and over the next few years, whether it's a onetime step-up or if it's progressive and as well as margin impacts as well?

Yes, Kevin. So we are very happy to be able to have finalized the renegotiation with Boeing. It was a long negotiation, and as you can imagine, also very strategic. So we were able to secure high double-digit price increases for a 5-year contract. Most of that price increase is going to happen in year 1 and year 2, and it's going to be effective as of January of this year. So really good impact for us from a revenue standpoint, obviously, and from a margin standpoint.

Great. And then on the KONI defense business, obviously, that's -- most of KONI is your rail business, but can you talk about that, that's been seeing nice growth lately as well.

Sure. This is another great differentiation in terms of execution and innovation because in 2015, we developed a product, the hydro product, the Hydroride for big vehicles that we are selling in the military now. So now the military has always been a small business within KONI, roughly a few million dollars a year. But I would say because of our speed in terms of engineering, designing a new product and because also we had the right product for the market, we've been able to win up to roughly $17 million of orders in defense in 2025 in Europe. We -- one of our major customers is Patria, which is a Finnish company developing vehicle -- military vehicles that are very successful in Europe. And their 6x6 is actually 100% sourced to KONI. So we think that, listen, it's not a huge market, but coming from a few million dollars to $17 million of orders, it's a nice area of growth in the future for KONI so -- and a focus area for us.

And well positioned in the U.S. with major platforms as well as in Europe, as Luca was just saying.

Yes, that was actually going to take me to my next question. On defense, we've, for years, seen steadily rising defense budgets in the U.S. Now it's happening in Europe as well pretty rapidly. How are you participating in the defense buildup in Europe?

Sure. We are participating in a couple of areas. One is, as we said, on the KONI on the vehicles -- military vehicles. And the other areas are really on the connector side. We have a very good factory in Germany in Weinstadt, close to Stuttgart, where we are producing connectors and we are quite well integrated from the machining, the molding, the plating as well as the assembly, fully -- very highly automated assembly. And so we are seeing very good orders coming in through the funnel, if it is with Rheinmetall, if it is with Leonardo. Or -- and also we are working with some military in the Middle East as well. So connectors and KONI are really well positioned for growth. Now this is Europe and Europe being Europe is probably not the fastest-moving continent or geographic region. So you see it in the order, you see in -- the opportunity is that we do not see it as yet translating in a high growth in revenue, but it will come.

Terrific. Maybe then on the cost side of your business, last year, we had the whole tariff situation, which you wisely bought back a lot of stock at a good price during. But could you walk through maybe as you see tariffs currently as well as other costs into your business and how that compares to your pricing power?

So right now, in terms of tariffs, we have been able to completely offset the tariff costs with price with our customers. This is mostly coming from IP and CCT. Motion Technologies is, I would say, self-insulated from tariffs because we sell, I would say, more than 90% of our products from -- directly as a pickup from our factory in Mexico. So customers bear the cost of the tariffs and not us. And so when you think about IP, we have been able to push those tariffs to our customers through the distribution channel as well as to some strategic accounts. and really no impact there. And then in terms of CCT, we have -- most of the product that we make are in North America, so in Mexico. And so as a result, we have a large portion of them that are USMCA compliant, so not subject to tariffs. And for the rest, working with our distribution partners as well as our -- some of the OEMs, we have been able to completely offset. We did have a little bit of a margin impact, but it was completely immaterial.

Understood. Usually, at this point, we're talking about cash flow allocation -- capital allocation and uses of cash flow. Obviously, we know a big one that's pending for you. So maybe could you walk through for us just how quickly you expect to delever following the closing of SPX FLOW? And at what point we can expect ITT to get back on that M&A trend, which has been driving so much growth for the last few years?

So maybe I'll take the first part. So first of all, at the close of the SPX FLOW acquisition, we'll be less than 3x levered. And so I think it's still very much manageable. You heard Luca, we're going to be focusing on synergies. We're going to be focusing on generating cash. By the way, generating -- cash generation is the only metric that really we look at once we buy a company because this is really what's going to drive our decision-making. And here, we expect to delever pretty quickly so that we should be below 2 in a couple of years. And then obviously, we're going to -- as we continue to grow this business as well, we should have a significant benefit from a return standpoint. Can you talk about...

Yes, sure. As always, Emmanuel is spot on, on what he's saying. And then -- so what we say, if we end up with a net leverage of 2.7, 2.75, we have a little bit of flexibility for any small bolt-ons that might come up. Now don't expect any large acquisition for the next 12, 18 months because of the focus, but there might be some small bolt-ons that we do not want to lose because they're going to be strategic for platforms that are not touched by the SPX acquisition. So there is cultivation that is happening today for those small bolt-ons, but we will see. We do not want to lose them if they are coming up, and we have the flexibility to do it.

Understood. I'll check back. Any questions here in the room? Well, if not, thank you again so much for participating. It's great to see the market starting to recognize the benefits of XPS FLOW (sic) [ SPX FLOW ] in addition to the continued strong performance of ITT. So thank you for coming virtually.

Thank you, Kevin.

Thank you.

Thank you.

Bye-bye.