ITT Inc. (NYSE:ITT) Q4 2023 Earnings Call Transcript
ITT Inc. (NYSE:ITT) Q4 2023 Earnings Call Transcript February 8, 2024
ITT Inc. reports earnings inline with expectations. Reported EPS is $1.34 EPS, expectations were $1.34. ITT Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to ITT's 2023 Fourth Quarter Conference Call. Today is Thursday, February 8, 2024. Today's call is being recorded, and will be available for replay beginning at 12 PM Eastern. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.
Mark Macaluso: Thank you, Kevin, and good morning. Joining me in Stamford today are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the three and 12-month period ended December 31, 2023, which we announced this morning. Please refer to Slide 2 of the presentation available on our website, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to several risks and uncertainties, including those described in our 2023 annual report on Form 10-K and other recent SEC filings. Except where otherwise noted, the fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2022 and include certain non-GAAP financial measures.
The reconciliation of such measures to most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. Before we begin, I want to call your attention to a change in the presentation of certain measures we have previously provided in ITT's earnings materials and SEC filings. The SEC has asked ITT to no longer disclose total segment operating income or margin, and total adjusted segment operating income or margin. We are therefore transitioning to operating income and margin, and adjusted operating income and margin on a consolidated basis. This metric is comprised of our previous segment operating income and adjusted segment operating income measures, respectively, minus corporate expense, which was previously presented below the segment operating income line in our earnings materials.
Please note, this is not due to any error, correction or misstatement on ITT's behalf. We will continue to present the results for each segment individually, but because of this change, they will no longer be aggregated to disclose total segment operating income or margin. We believe that previous measures are easily derivable from our reported results. With that, it's now my pleasure to turn the call over to Luca, who'll begin on Slide 3.
Luca Savi: Thank you, Mark, and good morning. 2023 was an outstanding year for ITT. I would like to thank all ITTers for their hard work and dedication in consistently serving our customers, with quality products delivered on-time despite continued challenging supply chain conditions. And it was your efforts that allowed ITT to surpass $3 billion of revenue in 2023. Here are the highlights: 8% organic revenue growth; nearly 17% operating margin, up 100 basis points; 17% adjusted EPS growth to a new record level of earnings at $5.21; free cash flow of $430 million, up more than $250 million; and on the M&A front, we announced two strategic acquisitions in flow and connectors, while divesting two non-core businesses. On revenue growth, Industrial Process led the way with 14% organic revenue growth, including 16% in parts and service and 31% growth in projects.
The projects growth was due to significant share gains driven by flawless execution. In MT, Friction OE grew 13%, outpacing global auto production by roughly 600 basis points for the year. And in CCT, our aerospace and defense components business was up 25%. On profitability, our productivity and pricing actions drove a 100-basis-point improvement in margin expansion for the full year, bolstered by the performance in Industrial Process. IP grew margin 330 basis points, eclipsing 22%, whilst we continue to invest in product redesign, key competencies and lean. We also successfully closed the Seneca Falls foundry, which will enable the business to operate with a more efficient cost structure. There was considerable progress at Motion Technologies as well.
For the full year, MT delivered 16.2% operating margin, improving sequentially every quarter in 2023 and exiting Q4 with a run rate above 17%. The performance at Wolverine also significantly improved to a high-teens operating margin in December. With this performance and a more favorable price-cost dynamic, we remain confident in MT's ability to reach 18% during 2024. Moving to capital deployment. We strategically deployed cash across all key priorities in 2023. We invested more than $100 million towards capacity expansion in Friction to support EV share gains, productivity improvements in all businesses, and R&D to fund our next product innovations. When we were in Italy, together with the team, we reviewed the progress of our investment into the high-performance segment.
The team has developed new product formulations, whilst the site construction is progressing on-time. Most importantly, we already won multiple awards that will feed the plant, slated to start production in the fourth quarter. On M&A, we acquired specialty connectors manufacturer, Micro-Mode, and in January, closed the acquisition of marine cryogenic pumps leader, Svanehøj. I was fortunate to join the Svanehøj integration kick-off together with Fernando as we begin executing our playbook. Both teams were excited, aligned, focused on the right priorities, and ready to hit the ground running on day one. And still, we have a robust and active pipeline of M&A opportunities today. In terms of returning capital to shareholders, we announced a 10% dividend increase in 2024, and as already mentioned, with a new $1 billion share repurchase program, which will provide additional flexibility and capacity.
In total, we have deployed over $2.5 billion since 2019, nearly 2 times our adjusted free cash flow over the same period. When it comes to our 2023 performance, I'm incredibly humbled by our team commitment and results. It has been a difficult few years, given all the macro challenges put in front of us, and our teams have risen to the occasion time and time again. We recognized some of their exceptional achievements at the Annual ITT Awards in December. Let me share a few. Our team from Korea has been accident-free for more than six years. Our Wolverine team from Dearborn, Michigan swiftly developed a new product formulation to replace a key raw material, whose production was discontinued. Our team in Nogales, Mexico overhauled their production planning process to significantly improve our on-time delivery.
And lastly, our IP team secured large awards with ExxonMobil and other leading oil and gas producers, placing ITT technology on groundbreaking energy projects around the world. We are proud and grateful for the efforts of all ITTers, which drove the results we are announcing today. Now to 2024. We are in a strong position to continue the progress we made last year. Our EPS outlook of $5.45 to $5.90 is up 9% at the midpoint. We expect total revenue growth of 10%. This will be driven by more than 4% organic revenue growth, compounded by the contribution from the Svanehøj acquisition. We anticipate our operating margin to be above 17% at the midpoint, and we are driving towards $450 million of free cash flow, driven by higher income and working capital improvements.
I'm encouraged by the opportunities ahead and confident in our ability to outperform. Now, let's turn to Slide 4 to talk more about growth. At ITT, our ability to outgrow the competition comes from our ability to differentiate. And our teams differentiate in both performance and innovation. Let me talk about the performance aspect first. On Monday, we announced a three-year $80 million award in our flow business with ExxonMobil. Under the agreement, IP will supply ExxonMobil with our highly-engineered API centrifugal pumps, aftermarket parts and services to their existing facilities. We displaced several incumbents by offering a superior solution that will lower the total cost of ownership for our customers by improving pump uptime, and the dedicated project management team will provide world-class customer service and flawless execution.
Well done Kelly, Juan and the entire IP team for your perseverance and the close collaboration you built with ExxonMobil. Moving to Friction. Our teams continue to gain share in the electrified vehicle market through superior quality, on-time delivery and perfect execution. In 2023, we more than doubled the number of electrified platform awards with leading OEMs, including Tesla, BMW, BYD, Great Wall and Geely. I'd like to draw your attention to our incredible growth of 49% in EV brake pad deliveries as we continue to win market share. As we've mentioned many times, electrification is good for ITT. And on top of that, we are winning on ICE too. Despite the declining ICE market, we grew our delivery 7%. As a result of all this, our global OE share rose over 100 basis points to more than 29% globally in 2023, led by Europe and China.
Continuing with China, in November, the ITT leadership team and I spent four days in China to finalize ITT's 2024 plan. During this visit, we were fortunate to spend time on the shop floor in Wuxi to see the latest improvements and new investments. The team showcased the many new electric vehicles, where we won brake pad contracts. Our penetration of the China market has been outstanding, and both local and Western OEMs recognize the value we create. Specifically, our in-region for-region strategy enabled us to design products tailored for the China market. To further support our OEM customers, we made significant investments in the testing facility at our Yellow Mountains site in Eastern China. In October at this location, the Friction team launched a best-in class testing center, where, together with our customers, will monitor the performance of their braking systems and solve their problems with speed and flexibility.
This local approach has been a key driver of our Friction OE outperformance and organic revenue growth of over 20% for the year. It's because of this that our business in China will continue to be a growth driver for ITT over the long-term. Now, let's turn to Page 5 to discuss ITT's differentiation through innovation. When the connectors team saw an opportunity in the energy storage systems market, they acted in record time, quickly developing connectors from design concept to commercialized products, and building an automated assembly line that enables scalable production. Our connectors will be used on several applications, in commercial, industrial and residential battery storage systems. They enhance power and signal transmission in batteries used for renewable energy sources.
A year ago, ITT had no products in this space. Now, we have more than 60, and our portfolio continues to expand. Well done [Cecily] (ph) and team for decisively acting when you saw the opportunity. We are also making inroads in eVTOL applications. We recently engineered a conditioned air system and vibration isolation equipment on a zero emissions short-haul travel project together with our customer Beta. This is a large potential market for CCT with commercial and defense applications. Continuing the sustainable transport, in rail, the Axtone team has developed a highly-engineered 1G Buffer for intermodal freight transport. The team acted quickly to address a problem for our customers who were underserved by a single supplier. This product is used to protect goods and rail infrastructure, and allows for safer loading between road and rail.
It represents a $50 million addressable market expansion for Axtone, and we have already secured a multi-million dollar backlog after displacing the single-source incumbent in this segment. And still, there are further customers for us to conquer. These innovations all support sustainability. And yes, sustainability too is good for ITT. With that, let me now turn the call over to Emmanuel to discuss our Q4 results and 2024 outlook.
Emmanuel Caprais: Thank you, Luca, and good morning. Beginning with revenue, our teams delivered 4% organic growth, with price realization and higher sales volumes contributing equally to this quarter's growth. MT grew 7%, driven by double-digit growth in Friction OE, including 30% in China. Importantly, our independent aftermarket sales grew 9% this quarter. CCT grew 3% year-over-year, with strong aerospace shipments, despite continued challenges in the supply chain. Connectors declined in the high single-digit range, driven by continued destocking in Europe, in European distribution, despite a strong December. This was partially offset by growth in commercial aero OE in North America. We believe distribution destocking will most likely persist through the first half of 2024, as inventory levels remain elevated.
Finally, IP revenue ended the fourth quarter up 2% above last year, with strong parts shipments, service activity and pricing realization, partially offset by weaker baseline pumps sales due to production and supply constraints. Importantly, orders in IP were up 5%, thanks to strong short-cycle activity, while project orders were nearly flat. On profitability, operating income grew 4%. Productivity added 90 basis points, while volume, mix and price added 10 basis points, net of other cost increases. This was partially offset by 110 basis points from corporate expenses and M&A costs, and 50 basis points from strategic investments. By segment, MT and CCT's margins were 17% and 19%, respectively, aligned to our expectations and growing sequentially for the third consecutive quarter.
IP was nearly at 21% and ended the year above 22%, up 330 basis points from the year to cap an impressive 2023. Lastly, on free cash flow, our performance rebounded significantly in 2023. Our teams generated $430 million for the year. This was mainly driven by higher income and improved collections. However, we still have a sizable opportunity in inventory, especially in IP and CCT, that will benefit cash generation in 2024. Let's move to Slide 8 to look quickly at the earnings bridge for Q4. EPS growth for the quarter came from our operational performance and price realization, which outpaced labor and overhead inflation. The $0.04 of strategic investments include our design for cost improvements in pumps and connectors, investments in the high-performance vehicle segments, and productivity related to our lean initiatives.
The corporate and other costs relate to M&A expenses and higher variable compensation. With this result, we grew adjusted EPS to $5.21 for the year and exceeded the midpoint of our initial EPS guidance by more than $0.40, while also making significant investments for the future. Looking ahead, we have a positive view of 2024. There are some lingering headwinds related to destocking and muted growth in some markets, mostly in Europe. But with our backlog, which increased 13% in 2023, we are well positioned to grow again this year. Let's talk about each business briefly. Beginning with Motion Technologies, we expect global auto production to be slightly down to prior year, in line with the latest IHS forecast due to weaker demand in Europe, particularly in the first half, and a flattish market in China.
However, our revenue will be significantly boosted by our anticipated outperformance of more than 400 basis points globally in 2024. On rail, after a rebound in demand last year, we expect our current backlog to drive top line growth in 2024. This continues to be an area of growth for ITT due to public mass-transit investments in the US, Europe and China. Moving to Industrial Process, we are entering 2024 with a record backlog at nearly $700 million, which increased 16% in 2023, powered by large awards on energy, mining and decarbonization projects. Our project share gains should continue to ramp as we saw with the ExxonMobil award that will start delivering in 2024, and we expect continued robust demand for parts and service. We also expect to generate around $160 million of revenue from Svanehøj.
In total, IP revenue will grow more than 20%, while organic growth will be up mid to high single-digits. Lastly on Connect and Control Technologies, defense demand continues to be strong and we expect commercial aero growth to continue as supply chain constraints ease further. On industrial connectors, we expect that surplus in inventory will carry over into the first half, which will weigh on CCT's growth. We are deploying plans to capture original equipment opportunities in Europe and China as we did successfully in North America last year. Let's turn to Slide 10 to discuss our 2024 guidance further. With the dynamics just discussed, we expect total ITT revenue growth of 9% to 12%, and organic revenue growth of 3% to 6% for the year. Higher volumes and pricing actions will continue to aid our growth in 2024.
We expect that volume, productivity and pricing will drive margin expansion of 80 to 140 basis points, excluding the dilutive impact at Svanehøj. At the segment level, Motion Technologies margin should expand over 100 basis points and hit 18% at some point in 2024. We expect CCT margin will be roughly flat to 2023, with the strong aerospace profitability weighed down by the impact of continued destocking in connectors. Finally, we expect Industrial Process will be slightly below 21% due to year one dilutive impact of the Svanehøj acquisition. However, over the long-term, we expect Svanehøj to be in line or accretive to IP's segment margin. As a reminder, our adjusted segment margin includes M&A cost and intangible amortization. Excluding the impact of these items related to the Svanehøj acquisition, IP's margin will likely be almost 23% in 2024, all else equal.
This revenue growth and operating margin expansion is expected to drive adjusted EPS growth of 9% at the midpoint. This includes the impact of the Svanehøj acquisition funding. In January, we entered into a $275 million term loan to fund a large portion of the purchase, with the rest being funded with commercial paper in the US. At today's interest rates, that amounts to roughly $0.20 headwind. Finally, on cash, after a record year, where we increased free cash flow by $250 million compared to the prior year and more than doubled our free cash flow margin, we expect to grow our free cash flow again to more than $450 million. Let's move to Slide 11 to review our 2024 EPS bridge. As you can see, once again, most of our earnings growth is expected to come from operations and, to a lesser degree, our pricing actions.
We will continue to invest in high-return projects to support growth, new product development and disruptive innovations. In terms of the first quarter performance, we anticipate driving mid-teens EPS growth to begin the year. We expect mid-single-digit organic revenue growth at the ITT level and in each segment. Margin is expected to be up 100 basis points, led by MT, and IP margin will likely decline roughly 100 basis points, due primarily to the year one impact of the Svanehøj acquisition. So, as you can see, we are in a good position to execute and outperform again in 2024. Let me now turn the call over to Luca to wrap up.
Luca Savi: Thanks, Emmanuel. Before moving to Q&A, few key points. We executed in 2023 across all businesses with strong orders, strong revenue growth, 100 basis points of margin expansion and 17% EPS growth. Friction continued to outperform, whilst IP won considerable share, including its largest single award ever. We completed the largest acquisition to-date at ITT. We are proud of what our team accomplished all over the world, and we entered 2024 with a record backlog and our M&A pipeline remains rich and active. I look forward to sharing our progress with you throughout the year. Thank you for your continued support of ITT. It has been my pleasure speaking with you all this morning. Kevin, please open the line for Q&A.
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