Good morning, everyone. Thank you for being here at the UBS Global Industrials and Transportation Conference. I'm Damian Karas, one of our multi-industrial analysts, and we're very pleased to have joining us ITT. We have Emmanuel Caprais, Senior Vice President and Chief Financial Officer, and Mark Macaluso, Vice President of Investor Relations. So, gentlemen, thank you both for being here at our conference again this year.
Pleasure.
With that, I'd like to turn it over to Mark with some opening remarks.
Okay. Just a quick reminder that Emmanuel and my comments may contain forward-looking statements which are based on our best view of our world and the businesses as we see them today. These assumptions and expectations can, of course, change, and we'd 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 recent SEC filings available on our site. Thank you. And with that, I'll turn it over to Emmanuel.
Thank you, Mark, and thank you for having us here, Damian. So just a few slides before we go into the Q&A. So I just wanted to present a little bit ITT. We are, these are 2023 numbers. We are a multi-industrial, diversified manufacturer. As you can see, we have a $3.3 billion revenue. We expect to grow between 5% and 7% in 2024, so it should take us to $3.6 billion. Our end markets are pretty diversified. We are, after the divestiture of Wolverine, we're now around 30% in terms of automotive content. We have a big presence in industrial pumps with our Industrial Process business, as well as in aerospace and defense with our CCT business. And from a geography standpoint, we are pretty diversified.
As you can see, most of our revenue is outside of the U.S., with a strong presence in Asia Pacific with our Motion Technologies business. So if you look at our three businesses together, Motion Technologies, roughly $1.3 billion in terms of revenue. Obviously, the Wolverine divestiture happened in July, so Motion Technologies, as a percentage and also in value, will decline a little bit. So Motion Technologies makes brake pads for the automotive industry. This is a really premium business. The way we like to call it is an aerospace margin-like business with an automotive working capital. So that means that it's really driving a lot of the cash production that we have in ITT. So we make brake pads as well as shock absorbers and energy absorption components, mostly for the rail industry. Our Industrial Process business has seen significant growth over the past few years.
We've been gaining share a lot, especially in projects. We serve energy and markets, including decarbonization, chemical, as well as general industrial. This is a business where we've made an acquisition earlier in 2024, Svanehøj, which is a cryogenic pump manufacturer for the marine industry, and as you can see, we have a variety of pumps. We play into baseline pumps, so short-cycle type of products, including aftermarket and service. We make some valves as well, and also we have a 30% portion of the business which is linked to projects, so large projects, mostly in energy, including decarbonization, as well as in multi-industrial, and then we have our Connect and Control Technologies business. This is two types of businesses in there.
We have connectors that we make for defense, for aerospace, for general purpose in industrial applications, as well as components, mostly for the aerospace and defense industry, such as valves and other mission-critical components. We acquired earlier in September kSARIA, which is a harness and cable assembly manufacturer that fits really well with our connector business, and that is tilted towards defense and space. Talking about capital deployments, this year is going to be a record in terms of capital deployments for ITT. We're going to be deploying almost $1 billion in M&A. As I mentioned, we had two major acquisitions, Svanehøj at the beginning of this year and in the Industrial Process Segment, as well as kSARIA in the CCT segment. So significant money put to work. Despite all this, we continue to have a very strong balance sheet with a minimal level of debt.
And then, a little update on Q4. So, what are we seeing? So, we're seeing really strong orders in ITT. In fact, if you look at our project orders, we had a forecast to have a certain in terms of acquisitions for projects in Q4. And after October and November, we're almost already at the Q4 forecast. So, much stronger than what we were expecting on the project side. Short-cycle is doing as well really well with high single-digit growth versus the prior year. Friction continues to outperform. And this is even more remarkable because we know that the market is difficult, especially in Europe. So, we expect in Q4 to have a strong outperformance. So far, we have outperformed the market roughly 700 basis points, and we expect Q4 will be similar to that. And then, MT confirms the progression from a margin standpoint.
We expect in Q4 to be around 19%, and so this is very positive. As you know, MT has been improving quarter after quarter from a margin standpoint. Svanehøj performance is also improving sequentially, both from an order revenue and an income standpoint, and then finally, as we mentioned, we have a $450 million free cash flow guidance. At the end of Q3, we had produced $250 million, and so October was pretty strong. November was the double of October's, and we expect December to be also very positive, so strong movement sequentially from a cash performance standpoint.
That's great. Thank you for the update there. Before we get into the fireside Q&A here, for those in the audience, if you have any questions, feel free to scan the QR code at your table, and you can enter your question that way or just raise your hand, and we can bring a mic your way. So that was great update, Emmanuel. It sounds like after the really strong third quarter, where orders were up 14%, you're seeing a continuation of those trends. Sounded like IP orders. We're talking up double digits again, if you said aftermarket up high singles and really strong first two quarters months on the project side.
Yeah. So we're very excited about the commercial performance in IP. We continue to take share, and projects are really strong, especially in the Middle East. And that is both conventional energy as well as decarbonization. So we saw a little bit of a lull in decarbonization in the first half of this year. But this is starting in Q3. This has started again. And obviously, because we have really strong products, especially with our Bornemann Progressive Cavity pumps and Twin-Screw technology, we're able to capture a lot of those projects. And what's really interesting is that not only are we acquiring a lot of projects, but the funnel continues to be strong, and we have line of sight for some pretty big orders in Q1 also.
Wow. That's great. Now, just thinking about kind of outlook from here, so you did guide the fourth quarter a little bit slower growth, right? Year to date, you've been running up mid-single digits or higher, guided to kind of a slower low single digit, yet you have these really strong orders. So, why are you? Can you just refresh our memory? Why are you expecting a little bit slower end of the year? And how should we think about how 2025 is setting up, given the orders you've been seeing in the backlog?
So when we talk about orders, keep in mind, especially in ITT, that those are orders that are long-term. So they convert usually between 12 and 24 months, depending on the size of the project. So obviously, those orders that we've accumulated in 2024 don't convert in 2024. They'll convert probably sometime in 2025 or 2026. So that's one piece to it. I think that when you think about our Q4 revenue projections, there are a few things to keep in mind. The first one is Boeing, right? So we estimated the impact of the Boeing production stoppage at around $10 million. So it's not super material, but that contributes to the slowdown sequentially. And then automotive, as a market, even though we are outperforming, automotive as a market, especially in Europe, is declining.
Our outperformance remains the same and is super strong, but the overall number is a little bit lower. That contributes a little bit to the sequential reduction.
Got it. That makes sense. Maybe you could give us another update on kSARIA, which closed recently. So you've now had a few extra months. How's the integration going? Anything that you've unearthed that you weren't expecting?
No. So I think kSARIA continues to be a strong addition to the ITT portfolio. So we did a lot of due diligence, obviously, but we continue to discover this business and trying to really focus on implementing the synergies, the commercial synergies that we had identified. See, when you look at our connector business, we have gained a lot of share. But the truth is that some customers want to buy connectors from the different players only if they have also an offering of cable assembly. And so what we realized is that we were missing on a lot of business because we weren't able to get the connectors because we didn't have a strong offering of cable assembly. Now with kSARIA, we're able to really make sure that they introduce us to their customers that we can sell connectors to. They are stronger.
We are very complementary, so they are stronger on some customers where we're not really present, and then we can introduce them to customers that in the past needed cable assembly, and then we weren't able to supply, so this is in full swing. The salespeople are working together to implement the synergies, and for the moment, everything looks good.
Good to hear. And I guess the other, probably the most notable development since you guys last talked in third quarter, we had an election here in the U.S. So that's obviously an industrial investor focus, thinking about some of the things like potential tariffs. Could you maybe take a walk back and tell us Trump administration 1.0, what impacts you experienced from the China tariffs that were imposed?
Yeah. So, China and European tariffs, by the way. In the first round, we were impacted by the fact that we were importing a lot of components into China or into Europe with our Wolverine business. And so as a result, because there were those retaliatory tariffs, we were getting hit. At the same time, the Wolverine business was importing into the U.S. some materials to then export to Europe and China. So we were hit twice. Fortunately, and that was the majority of our impact. Fortunately, as you know, we've divested the Wolverine business, so we no longer have that exposure. I can't say that we don't have any exposure because we do. We continue to buy castings, for instance, from India, from China. And so depending on what's happening when the new administrations come in, we'll see.
But for the moment, we expect that the second round will be lower impact. If we consider same percentages, let's say, same type of percentages, will be a lower impact on ITT than in the first round.
Makes sense. Timely divestiture of Wolverine. Now, I guess kind of sort of the curveball this time around is the potential tariffs imposed on Mexico into the U.S. or Canada into the U.S. imports. It's no secret that you do have production capacity in Nogales, Mexico. Could you maybe just talk through what you're expecting there and your game plan?
Sure. So we have production capacity for our North American connectors, but also for our friction business in Mexico. Fortunately, for our friction business, we're selling a lot of that production to Tier 1s that are then exporting to the U.S. or that are selling to Mexican operations that are then exporting to the U.S. So we think here also the exposure is limited by the fact that we're not the exporter. In some cases, we do export from Mexico to the U.S., but I think that there's a large component of production in Mexico, either for the local market or to an indirect export to the U.S. And then from a connector standpoint, I think that this is a business where, keep in mind, that there's a large portion of it that is distribution. So our ability to price that to our distribution channel is pretty high.
And then I think that now that we, in general, now that we've experienced this type of change in the world economy, I think that we have built in our contracts the ability to push those increasing costs due to tariffs to our customers. So I'm not saying it's going to be easy, but I think that we are relatively better positioned than we were when they first came out.
Got it. And in theory, if some of your large North America auto customers, for example, needed to start changing their footprint, would you have to adapt and sort of rethink your supply chain?
So, in general, we try to be really close to our customers, so in region for the region. That being said, the automotive industry is very capital intensive. And so I think that we're seeing mostly in Europe some footprint changes, but I think that I'm not sure that what's happening right now is going to result in significant massive footprint changes, especially in the US.
We'll see how it plays out.
At least for our customers.
Yeah. No, makes sense. Maybe we can kind of talk about the portfolio composition today because obviously it's evolved a lot. I mean, thinking over the last decade since I've been involved with ITT, the recent divestiture of Wolverine, obviously. Tariffs didn't inspire that or the potential for them. Could you just talk about the Wolverine divestiture, the acquisition of kSARIA, what led to these strategic decisions, and kind of how you're thinking about the ITT portfolio and what that might look like five years from now?
Yeah. So we stepped up really well our M&A activity. As I mentioned, we deployed this year. We're on track to deploy almost $1 billion to M&A, and mostly because of Svanehøj and kSARIA. And so those are really strategic because if you look at Svanehøj, they make cryogenic pumps, which is a very hot commodity, and for the marine industry. And so here, there are a few things that are really interesting. The first one is that because of the long-term visibility of the ship or the vessel-making industry, we had, from the beginning, we could understand where this business would be in the next few years. And so we expect low double-digit growth for Svanehøj over the next five years. And that's very clear.
And I'm not saying it's all done because there's a short-cycle piece of the business, but as we mentioned, orders are up almost 30% year to date for Svanehøj. So this is coming in, at least for the first year, even better than what we were expecting. And so the second piece to this, to the organic growth of Svanehøj, is the fact that the cryogenic technology, we hope to be able to use it for our Goulds pumps also, and then to develop over the long term, because this is not something that we can do tomorrow, a cryogenic pump offering as well. And as you know, with LNG, with the development of LNG, with the development of hydrogen, all those gases that are requiring very, very low temperature cryogenic technology is really a plus.
If you think about kSARIA, so kSARIA, cable assembly, they use a lot of connectors. They make very low connectors, but they do a lot of high-tech, high-precision cable assembly, mostly for the defense industry. They do both fiber cabling, which is used for data and imaging, as well as electric cabling. We expect them to be able to continue to grow significantly. They've grown 15% on average organically over the past five years. They've been taking share, and we expect that to continue. Our forecast is that over the next five years, they're going to grow high single digits from a revenue standpoint. We do have a lot of opportunities from a commercial standpoint, so that means that we hope also that our connector business is going to benefit from that growth.
And so they're very much focused on defense, space, aerospace, so really strong markets, at least in the medium term. What else? Yeah. So almost $1 billion deployed on those two acquisitions. Then the Wolverine divestiture. So Wolverine, a couple of things to think about. The reason why we divested is we don't want to continue to invest in automotive. Wolverine would have required, because of the geopolitical environment, would have required a significant investment in capacity outside of the U.S. And we weren't ready to make that increased investment for prospects from a growth standpoint that weren't as compelling as a pump business or a connector business. We foresee also in our Svanehøj and kSARIA business a margin expansion opportunity that we didn't see in Wolverine, and that's why we decided to let it go.
That's great. So it sounds like we should be thinking about continued, I guess, increasing concentration in energy, energy transition, and aerospace and defense, and maybe kind of a diminishing of your auto exposure over time.
Yeah. So when you think about it, the two areas of focus are flow, so pumps, but as well valves. We made an acquisition in 2022 of Habonim for cryogenic valves also that has been doing really, really well. And then connectors, right? And then as we execute a lot of M&A in those fields, mechanically, the weighting of the automotive business is going to decline. So we were at 40%. We're now around 30%, and we expect this to continuously decline, not because we sell automotive, but because we grow faster through acquisition. The other businesses, our friction business will continue to outperform the markets, will continue to have strong organic growth. It's just that the power of organic growth in the other segments, plus compounded by the M&A, will provide faster growth.
Yeah, that makes sense. Maybe that's a good segue to thinking about some of this M&A muscle that you've been building and kind of the flurry of activity that you opened up with. Is there a good framework for thinking about the augmentation of your financial profile via M&A on top of the underlying growth that you expect for your three segments?
So I think one thing to think about is so far, when you look at Svanehøj and kSARIA, Habonim, we've been really focusing on well-run companies. And there's a reason to this. They're a little bit more expensive, even though I would say when you look at the multiples we paid, I think they're pretty competitive. They're a little bit more expensive, but you get less involvement from the current, from the existing management. And I think that's a key piece because, as you know, we have very ambitious margin expansion goals. And so as a result, we need our teams to be really focused on driving the existing business. And the additional company, the M&A that we make cannot be a distraction. So obviously, there's a lot of collaboration. There's a lot of work together, but it cannot be a distraction.
And so when we look at an M&A opportunity at a target, we're very focused on making sure that we have the internal capacity to integrate those businesses. And that means that it needs to be light touch from an oversight standpoint. Those teams, they need to be able to operate on their own with an added focus on synergy execution. So when you think about that, that's why we won't go for all the universal targets that we see. I think we're going to continue to focus on high-quality businesses. And so that should provide that have long-term growth aspirations that are above GDP type of growth. And then also, despite the fact that they're well-run, significant also margin expansion opportunity.
Sure. So are there examples of some deals that you were looking into having discussions and then they just didn't end up panning out for one reason or another?
Yeah, sure. Sure. I can think about already two or three deals that we walked away from this year, not because they were bad companies, but because the amount of effort that we realized was necessary in order for this to be a good acquisition was superior to the resources that we had, and so we didn't feel good. Think about, for instance, if you have footprint moves to make. We know how to do that because we've done it with previous acquisitions with Axtone, but it would be highly disruptive in this environment to have to manage our business, oversee the acquisition of good companies, and in addition to this, drive pretty hard footprint rationalization actions. For those reasons, despite the fact that strategically some of those targets were a fit, we decided to walk away.
Makes sense, and then just given the faster pace, the larger size of the acquisitions that you've done the last few years versus the longer ITT history, the integration, right? Is there a need to kind of slow down, maybe take a little bit of a pause as you absorb and integrate these assets that you've acquired, or do you feel like you can kind of keep the pace at its current rate?
Yeah. So one thing that is interesting is that if you look at this year, Svanehøj was the largest acquisition that ITT ever made for close to $400 million. And then when we did kSARIA, kSARIA became the largest acquisition that ITT ever made. So we've been significantly accelerating our capital deployment to M&A. I think that when you look at other opportunities, as long as they fit the criteria of long-term growth and outperformance, so we need leadership positions, good margin profile, and margin expansion opportunities, and that at the same time, we're able to internally be able to manage this added workload and this added scope, I think we feel good about continuing to expand in M&A. So we had a record year for an M&A, but that doesn't mean that this is going to slow down. I think we are very cautious about not overwhelming our teams.
I think so far we've been managing that balance, I would say, pretty well.
Maybe we can switch gears and take it to the segment level, beginning with MT. So it's something that we've discussed quite a bit in the past, but for investors that might not be as up to speed with the ITT story, decade-plus of consistent share gains outperformance in the friction business. What is ITT's secret sauce?
Yeah. So when you think about an automotive business, the last thing you think about probably is a high-quality, high-margin business. But our business is very different. And as I mentioned in my remarks, this is an aerospace-like margin business, and then with a working capital at a little bit more than 15% of sales. So it's a cash machine. And this is a business with strong growth, so market share gains year after year, and then also a strong margin and margin expansion opportunities. So this is really a business where we've been working on developing competitive advantages for years. And every year, we are focused on making sure that we increase the gap between the competition and us. We're probably the only player that is as profitable as we are compared to the rest of the players.
And I think that the focus is really to make sure that we increase that gap because we want to make sure that we continue to be the best from an on-time delivery standpoint. We continue to be the best from a quality standpoint. So this is really the secret of gaining share. When you think about the way the friction business is organized, we have five plants, a concentration in Europe, obviously, but then a plant in China and a plant in Mexico. The technology is exactly the same. So whether you have a high cost of labor like in Europe or a low cost of labor, relatively lower cost of labor like in China, the production process is exactly the same. And that guarantees the same high level of quality performance, the same high level of on-time delivery. And that's super, super important.
It's also easier when we have innovations to be able to carry those innovations that are usually born out of Europe to carry out those innovations in China and Mexico. There's such a continuous improvement mentality in our friction business that our teams come up with a lot of innovations from a process standpoint to gain half a second here, half a second there. It's really important to be able to deploy and replicate these production systems. The fact that we're also profitable allows us to reinvest significantly in R&D. Here, the name of the game is materials science. Materials science makes the difference between an okay braking performance or braking performance that generates noise, vibration, and what we're able to provide.
What we're able to provide is, regardless of the type of car, and I mean here conventional internal combustion engine, hybrid, or EV, we're able to provide a performance that satisfies the customers from a vibration standpoint, from a noise standpoint, from a braking standpoint and all this while actually braking effectively and efficiently the vehicle, so we've been able to, with our materials science, go in front of all the technological changes. In 2015, we had the copper-free change where we had to remove copper from all our formulations, and that was a big change, then a little bit later, we had the EV change, the brake pad is exactly the same. It's produced on exactly the same machines, but it operates at completely different conditions, much lower temperatures. The engine doesn't cover for vibration and for noise, so a lot of added complexities.
And then now, with the Euro 7 change, which is very focused on reducing emissions, particulate emissions for braking, we are also at the forefront of this. So we're able to be in front of all those technological changes and help our customers benefit from this change in technology and address the change in regulation.
So in Europe, you've kind of held about half of the market share, I think, for some time now. I mean, is it kind of just about making sure you maintain that, or do you think that there's even more opportunity to take some advantage?
I think there's a physical limit to what you can do. For us, what's really important is to defend all the business that we have in Europe. We've been successfully doing that and also continuing to gain share. When you look at the share gains in Europe, it is smaller than what we're able to do in China and in North America, but we still continue to grow, which tells you about the health of this business and how central it is to our customers from a performance standpoint. Europe continues to do well, obviously a high level of market share, but still many opportunities. If you think overall, this year, 2024, we're going to be above 30% from a global market share standpoint. We're going to be approaching 30% as well in China as well as in North America.
There are some regions in the world where we're not present. That's why it all comes up to a little bit more than 30%. But definitely strong performance. And there's no reason why our Chinese business and our North American business shouldn't be able to be at market share levels over time that are similar to what we have in Europe.
Okay. Interesting. So you think you can get closer to half the market in China and North America. There's no reason why you maybe start stepping on some of your customers' feet in terms of supplier risk or maybe kind of degrading the margin and moving to lower value paths?
So that's why the performance is central to the promise that we have in terms of share gains. We are very focused on making sure that we're the best in class in quality. When you think about quality, I just want to make sure that everybody understands. For every million parts that we deliver, less than one is defective. And usually, it's defective because of a labeling issue. It's not even from a performance issue. So no one is coming close to the level of performance that we have from a quality standpoint. And that's why customers keep on coming back to us, and they keep on giving us the most demanding applications. And the reality is that it's going to be even more demanding over the years because you have all these regulations that are aimed at reducing emissions.
So yeah, so we are keenly aware that we have to be the best in class in order to be able to provide that growth that we've been providing. And that's why we're so focused on it. We're focused on our approach is SQDC, so Safety, Quality, Delivery, Cost, in that order. And that has been making the success of our friction business. We've been deploying this in IP and CCT. And that's why you're starting to see some nice share gains in those businesses as well.
Makes sense. And one last question on MT. So one of your key customers, in fact, your largest customer, is splitting up. Does that have any impact on your relationship or kind of business as usual?
No, for us, we are providing to Continental both on the aftermarket as well as on the OE. And our relationship is not at the corporate level. It's with the business. And so those businesses are going to continue to exist, and we're going to continue to make as much of a to provide and serve them as best as we can to make sure that whatever they're facing, they're satisfied with our performance. On the aftermarket business, we have a 10-year agreement that just started at the beginning of this year. The aftermarket is doing well. It's growing low double digits so far. And so we have 90% plus guaranteed demand from them. So I think that we're going to continue to develop new part numbers for them so they can continue to gain market share.
And on the OE side, what we have to keep in mind is that roughly half of our business is decided by OEMs. So the OEMs actually impose on the Tier 1, the brake pack supplier they want. So that's why it's very important for us to maintain strong relationships with both Tier 1s and OEMs. And so that has been working well, and we are able to provide the service to both of them. It's really important. And then the second half of our business is not directed, and it's decided by the Tier 1s. And here, we have to be super attentive to service requirements. We have to be super attentive to, obviously, to price. And we try to make sure that not only we have the best offering from a technical standpoint, but also we are super competitive from a price standpoint.
Great. And switching gears to IP, maybe you could just help investors sharpen up their models a little bit. So you did have notable headwind to margin in 2024 from amortization that you didn't back out of the Svanehøj acquisition. Could you just remind us how much of a headwind that was? Is that still going to roll off at some point in the first half of 2025? And so how much benefit should you see in your?
So roughly on IP, it's a little less than 300 basis points of margin of impact due to Svanehøj. And so we should be able to. This temporary amortization will roll off in the second quarter of 2025.
Terrific. Terrific. Maybe just squeeze in one last question here. Topical in investor conversations is 80/20 with a lot of companies bringing it up that they're just embarking on the 80/20. I think that's something that you haven't spoken a lot in the past, and I think there's reasons for that. Could you just maybe talk about?
Yeah, so I think in general, we're a little wary of big corporate programs. We're very practical, so we want to make sure that we focus on is this going to help us or not in the goals that we have, and so I don't think you're going to hear us proclaim that we have adopted 80/20, but I think a lot of the approach is probably similar, focusing on really what makes the difference and understanding what is the portion of the products that contribute less and also that carry the same amount of cost as everybody else, and so when we think about our pricing strategy, that's the approach we adopt, so on the tail, we try to maximize pricing, especially because we provide a lot of value on those products.
And then from a cost standpoint, making sure that as we implement lean, as we continue to implement lean in all our factories, we get that benefit as well.
Terrific. We're looking forward to see what's ahead for ITT. Thanks so much, Emmanuel and Mark, for joining us.
Thanks, Damian.