ITT INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Orders and Backlog: Organic orders grew 14% with a 6% sequential increase vs Q2. Book-to-bill of 1.1 led to a record ending backlog of $1.7 billion.
• Acquisitions: Svanehøj is delivering strong results with awards for 24 new vessels, including 11 ammonia-handling ones. kSARIA provides visibility to future revenue with programs like F-35 and F-16.
• Margin Expansion: Drove 60 basis points of margin expansion (100 basis points excluding M&A impacts). IP had margin of 23.9% excluding Svanehøj dilution, CCT over 19% margin, MT above 18% despite 160 basis points of FX headwinds.
• Capital Deployment: Deployed over $1 billion in capital, including $75 million in growth and productivity, and repurchased over $100 million of shares year-to-date.

Segment Performance

• Industrial Process (IP): Organic orders grew 30%, with pump project growth over 100% in Q3. Year-to-date project orders up 10% on top of 29% growth in 2023. Revenue grew 6%, with Svanehøj adding 14 points to growth and Habonim achieving its highest sales month since acquisition in September. Revenue contribution: Significant, with strength across short-cycle product categories.
• Communications, Control, and Transportation (CCT): Orders grew 7%, revenue grew 6% driven by Defense share gains, Connectors, and Commercial Aerospace aftermarket. Connectors business grew profitably with new products and faster speed to market.
• Motion Technologies (MT): Revenue grew 5% driven by rail and Friction aftermarket. KONI rail secured large orders in Europe and China, Friction outperformed in the auto OE market by over 700 basis points.

Guidance

• Raised full-year adjusted EPS guidance midpoint to $5.83, up $0.05, overcoming unfavorable FX, higher interest expense, and dilution from Wolverine divestiture.
• Revenue expected to continue outperformance in Friction, IP, and Connectors. Adjusted free cash flow guidance remains at approximately $450 million for the full year.
• Fourth quarter expected to have low double-digit total growth driven by Svanehøj and kSARIA, with IP delivering strongest top-line growth.

Risks

• Unfavorable foreign currency impacts, which had an 80 basis point impact in Q3.
• Higher interest expense and dilution from the Wolverine divestiture.
• Potential disruptions from events like Boeing production stoppage, which impacted CCT revenue by ~$10 million in Q4.

Question and Answer

Q: How reflective are your results of the underlying market conditions?

A: ITT is differentiating, outperforming in all end markets. For example, IP's Saudi operations have 100% on-time delivery and are winning market share. Orders grow across all end markets.

Q: About M&A pipeline and free cash flow?

A: M&A pipeline is active. Free cash flow was impacted by working capital and inventory timing; it takes more time to reduce inventory than expected.

Q: Thoughts on pricing going forward?

A: More strategic pricing needed. On CCT, strategic pricing in distribution and long-term agreements; on MT, contracts indexed to commodities; on IP, active in reducing discount rates and leakage. More analytics for value-based pricing.

Q: Auto outlook and 2025 industry demand?

A: Market is challenging, but ITT outperforms. Expected market to be flat to up low single digits in 2025, with ITT continuing to outperform due to awards won in 2024.

Q: Impact of kSARIA in Q4?

A: kSARIA will modestly contribute to income. Revenue in Q4 expected to be up 12% with Svanehøj and kSARIA, CCT flat due to Boeing impact, MT expected to improve sequentially, CCT impacted by kSARIA dilution.