Joining us this morning on the third day of Citi's Global Industrial Tech and Mobility Conference. For those who don't know me, I'm Vlad Bystricky, covering multis here at Citi. We're very excited today to be joined by ITT. We've got Luca Savi, who is the President and CEO of ITT, and Mark Macaluso, VP of IR, and I believe Luca is going to kick us off with some introductory remarks, and then we'll get into Q&A.
Okay, excellent.
Yeah, sure. Good morning, everyone. Just a quick reminder on page two, our presentation and Luca and my comments are going to contain forward-looking statements, which is based on our best view of the world as we see them today. Of course, as we've all learned, that can change, and we'd encourage you to view them in that light and review our latest Form 10-K and other SEC filings. So with that, I'll turn it over to Luca.
Okay, perfect. Thanks, Mark. And good morning, everybody. ITT is an engineering manufacturing company. We are making components for harsh environments, and these components are applied in energy, in general industrial, in auto, in rail, in aero and defense. Here in this slide, you will see the way that we organize three main businesses. You have Connect & Control Technologies. This is where we're making components for aero and defense. The KC-46 valve that allowed the fuel to go and refueling the military plane is engineered and made by ITT, or we make a lot of connectors for medical, general industrial, or, as I said, aero and defense. We have Motion Technologies where we're making brake pads and shock absorbers, brake pads for auto, so cars and light commercial vehicles, or shock absorbers for rail and defense vehicles.
And then Industrial Process, where we're making pumps and valves that are working in the chemical, in the energy, in the green energy, and in general industrial. As you can see after the acquisition of kSARIA that we made towards the end of last year, our defense and aero business is roughly 18%, and we are well spread across different regions, with more than 40% being in North America. Historically, we've been able to outperform in the markets that we play, and that outperformance is due to our differentiation, differentiation both in the way that we execute in terms of for our customers and also thanks to the innovation. So if you look at the value that we have created in the last five, six years, a lot of that value comes from growth in margin and also in organic revenue.
What we've been able to do in the last couple of years is to start to add up also on the M&A. These are the three acquisitions that we were able to make in the last couple of years. It's Habonim, a highly differentiated valve company based out of Israel. They've outperformed our model. Even last year, with everything that was going on in the Middle East, they've been able to outperform the model acquisition. We purchased this company at a 12 EBITDA multiple, and when you look at the actual, it was less than eight. Then, Svanehøj, another acquisition in the flow environment. We are making cryogenic pumps for the marine industry, and they're playing a critical role in the energy transition where you think about transporting ammonia or CO2 capture, LNG, all of these fuels.
And last but not least, kSARIA, an acquisition that we made at the end of last year for Interconnect Solution, playing a lot in the defense. So, just a little bit of a couple of words on 2025. What you will see is we will see value creation through the usual play in terms of organic revenue growth and margin expansion, and you add to that the M&A as well in terms of both Svanehøj and kSARIA. If I can add one last thing, all of these will also be presented at our Capital Markets Day, which is going to be in May, and please put it on your calendar. What you will be able to see here is that differentiation in execution, in innovation, and also on the M&A and through meeting our people.
We got a lot of questions after our earnings call about an innovation that we're going to launch in Q2 this year, and that is the EMD. The EMD is the Embedded Motor Drive. There is nothing like that in the market. It is our intellectual property. It is practically able to save 50% of the energy that the motor is consuming. It's addressing a market that we're not addressing today of roughly $3 billion, and you will be able to see this in action as well at the Capital Markets Day. With that, let's get into Q&A.
Great. Thanks, Luca. That was a great overview. Lots of areas we can dig in on. Maybe we'll start with, obviously, you just reported earnings a few weeks ago, still early in the year, but maybe you can give us an update on what you're seeing in terms of order rates and especially demand in some of the shorter cycle portions of your portfolio.
Sure. Q1 started very similar to the way that last year ended in Q4. So I think that the order is staying at a good level when we look at the short cycle, and there is also a very good activity when you look at the project. So no major changes there. It's a continuation of what we've seen in Q4.
Good to hear. And then I want to dig into the segments a little bit. IP, Industrial Process, actually become your largest segment now. And I know you've talked about a shift in the backlog there going more toward project versus shorter cycle. At the same time, you're talking about pretty good margin expansion this year. So can you talk about the drivers of margin expansion in IP and how we should think about potential mixed impacts on profitability going forward as projects continue to ramp?
Sure. If you look at a couple of years ago, the backlog was roughly 60% short cycle, 40% projects. And now it's really swapped. So from a profitability point of view, you will see this as a headwind because the project, of course, got lower profitability than the short cycle. Still, in IP, we have room to continuously improve despite the headwind of mix. So where are these improvements coming from? A lot of that comes from productivity and productivity both on the supply chain, but also in our own operations. So we got plenty of room to continuously improve that productivity. Another lever is going to be pricing. Okay.
Last but not least, let's not forget that those projects, the project backlog that we have today, if you compare it with the project backlog that we had one year ago, it's got a better margin of more than 100 basis points. So even though the mix is from project and short cycle, a headwind, all of these factors will help us actually continuously improve the margin in IP.
Okay. That's helpful. And then just thinking about IP growth for a minute, obviously, you've had quite strong growth in IP, I think both volume and pricing and share gains you've talked about, I think particularly in the Middle East. So can you talk just a little bit about what's been driving your outperformance in IP, how you're thinking about share gains, how you've really been able to take share and what you're doing differently in that business to drive these results?
Sure. Let's take the example of the Middle East where we've been extremely successful. And it's simple. We are differentiating through, when we're talking at the beginning, we're talking about differentiation through innovation and execution. The EMD is one example of innovation, but differentiation through execution is a key lever to continue to outperform and win market share gain. So you were mentioning the Middle East. I was in November in Dammam where we have our factory, our shop floor, and I was able to work together with the team. I mean, that team performs incredibly well for our customers being EPC or end users. And if you look at the last year, and this is not just one example, but has happened also the two years before, they almost executed perfectly for the entire year.
What I mean perfectly is almost 100% on-time delivery for 2024, which means that every single line on every single order was delivered on time. And I can tell you that is not something that is common in the flow industry. So I know it may not sound particularly sexy, but if you honestly perform for your customer, delivering good quality product on time in a consistent manner, they tend to reward you and they tend to be loyal. And this is what has happened. This has led us to continuously invest in the Middle East. So we were able last year to, we were lucky to be able to purchase the sites north and east of our site. And so we are expanding our operations there.
That makes a lot of sense. And then given the traction you've seen in the Middle East, how should we think about potential IP opportunities for outperformance in other regions?
I think that in other regions where we are performing, the performance, the Middle East, that will take an example, but you will have a similar story out of the Korea factory, for example. A lot of our customers in Asia and as well as in North America are seeing the Korea factory as one of the benchmarks in the flow industry. So that is another area where we are outperforming, and also in Latin America. In Latin America, we are also operations in Brazil as well as in Argentina, Chile, and Peru, and in all those four regions, we are performing extremely well for our customers.
Got it. And then, Luca, maybe shifting to your second largest segment, which gets a lot of focus and a lot of attention, Motion Tech. So Motion Technologies, maybe if you can just talk a little bit about what the business does and then specifically in your friction business, which has long outgrown auto builds, how you're thinking about the potential for outgrowth this year and sustaining outgrowth going forward.
Sure. Okay. So if you look at the Motion Technologies, we're making the brake pads for cars and light commercial vehicles. We've been able to outperform the market. And once again, this is through incredible execution and innovation. If you think about the execution, you have a company here that is delivering on time for our customers at 99.95%. And this has been true for the last few years despite the shit show of COVID or the supply chain or you name it. The on-time delivery has always been at that level. And in terms of the quality of the brake pads, we measure quality in Motion Technologies in PPBs, which means in part per bils. There is no competitors that get even closer. So this has enabled us to continue to outperform. And this has happened in every region. It's happened in Europe despite our high market share.
It happened in China where we performed incredibly well. Our outperformance was more than 1,000 basis points, and also in North America. The market share today in these regions is incredibly high. When you look at Europe, it has surpassed 31% in China last year and surpassed 29% in North America. The outperformance is not just in the different regions, but also for all the different powertrains, so we are completely agnostic when it comes to powertrain. We don't care if you want to make an EV, a hybrid, or an internal combustion engine. We will work as hard as we can to supply the best brake pad for you, so as an example, some data is that if you look at 2024, we grew our internal combustion engine brake pads by 1% on a market that was down 10%, so our performance of 1,100 basis points.
Just want to dig in on that a bit, Luca. I know over the past few years, you have talked about EV as contributing to outgrowth and EV penetration really as a long-term opportunity for ITT. And obviously, we've seen EV adoption slow a bit, particularly in the U.S. So can you just talk about how a slower ramp in EV as a share of builds could impact outperformance overall versus the market?
Sure. So what we have seen with a lot of EVs and hybrids, they were requiring a different level of performance, different level of material science, et cetera. So because of that and the importance of R&D in that we were able to differentiate ourselves a lot from the competition. So you saw a lot of outperformance on the EV and the hybrids. And that continues. But as I gave you the example of the internal combustion engine, that outperformance of 1,100 basis points is still there for the internal combustion engine. So I think that, as I said before, we are completely agnostic. And because of our performance and our innovation, we think that we will continue to outperform the market no matter what. And this is why we gave the outlook of roughly 400-500 basis points when it comes to 2025.
We still think that the hybrid and the EV will continue to grow and potentially surpass the 50% of all the vehicles produced in the world by 2027, probably, but as I said before, fully agnostic.
Helpful. And then you mentioned the performance you've had in friction in China. So can you just talk a little bit about how we should be thinking about potential tariff impacts either on friction specifically or on ITT overall, any concerns related to tariffs, and then how we should be thinking about potential price cost impacts if we do see increased tariffs globally?
Sure. Our approach in terms of operation has been to be in the market for the market. For example, if you speak specifically about friction, all the brake pads that we make in China, more than 95% of those are actually made for the Chinese market. We are in that market for that market. I would say one good move that we did in 2024 was actually to, while we made the acquisition of Svanehøj and kSARIA, is also to divest our Wolverine business. Our Wolverine business had manufacturing only in the U.S., but we were importing a lot of steel and aluminum, good quality steel and aluminum from outside of the U.S. and then exporting from the U.S. to the rest of the world, our shims and gaskets.
We divested the business, and that was a good move not only from an enterprise portfolio point of view, but also as exposure to tariffs because they would have been hit hard by the tariffs today. When you look at the tariffs in the current setup, I would say that we are prepared to take operations and also commercial actions, so we've already discussed with many of our customers in terms of exactly what could that mean, and from an operational point of view, you can work a lot with our supplier base in the supply chain, but when you have programs either in the military or aero or rail or auto, it's not that you can really move from one factory to the other, so you're pretty much stuck in there.
You have to go contract- by- contract and be very granular to understand, okay, what are the actions and what are the discussions you need to have with your customers. We are doing that, and we are ready.
Okay. Helpful. I did want to stick to MT for maybe another question. KONI, your rail business, can you talk about, one, what KONI does for people who are less familiar? And then I know it's a smaller piece of the portfolio, but you did have very high growth there in 2024 at plus 20%, I think, year- over- year. So can you just talk about what drove that growth in 2024 and then how you're thinking about the rail business going forward?
Yeah, sure. Maybe I can take this one. After the divestiture of Wolverine, we think about KONI and Axtone sort of as one. That's about 20% of the portfolio. As you mentioned, the growth was really strong in 2024. And I think in terms of the visibility, also very good because these tend to be much longer-term contracts. So double-digit growth, and I think a lot of that was driven by not just the execution, but also more of share gains, particularly in rail. And in terms of visibility, we think as the continued investments in infrastructure and rail continue that KONI and Axtone should both do very well.
To think in this business, what really we're making is the shock absorber, the yaw damper. So if you think about the train and those shock absorbers that keep the train on the track, we make those shock absorbers. The shock absorbers that make that ride comfortable and no vibration and all this kind of stuff, we made those vertical shock absorbers, as well as the buffers in front of the train that would be a safety component to absorb the kinetic energy in the case there is an accident. All of those are the kind of things that we are making in the rail business.
Thanks. Maybe shifting to CCT. CCT, I think, has had quite good performance. It is still your smallest segment. So I know if we look back at 4Q, I think CCT grew high single digits, which I think was certainly better than we were modeling. I think maybe a little better than you were expecting. Can you talk about what drove that outperformance in CCT in 4Q particularly, and then how you're thinking about the growth outlook for CCT into 2025?
Sure. I think if you look at just the different verticals in CCT, the majority of the growth has come from defense, which I'm sure is not surprising to most of us. So defense is growing double digits both in the fourth quarter and in the full year. And so the high single-digit growth you mentioned, Vlad, that's even on top of declines in aerospace because, as well documented, obviously, a lot of us are still on pause with regards to Boeing. So defense is far outpacing the slowdown in both aero and also a little bit in general industrial. And then again, I think that's largely on share gains.
And if you look at it by market, right? And then if you look at in terms of the different businesses within CCT, I think that connector probably was the largest share of the growth. And we've been able to outperform in the connector business in 2024. That's happened also in Q4. A good thing that we saw in Q4 was also the level of activity in our distribution. Distribution was very healthy. And this is a good sign in a way because when you look at distribution, it tends to be the general industrial, I would say. And it's fair to say that you're right. Probably it surprised us a little bit as well.
Do you have any sense of on that distribution side, the tailwinds you saw there, whether that was really end market demand or restocking?
I don't see the restocking. When you look at what's happened in 2024, when we look at, we have a lot of data from our distributors, if it is the POS, the level of inventory, our orders, our sales, et cetera. What we have seen in 2024, the inventory for our distributors stayed at a high level. The beauty is that we enlarged the number of SKU, the number of parts that we are putting on their shelves. So in a way, it means that their inventory turn has improved, right? But the inventory stayed pretty much at the same level across 2024.
That's good to hear. And then, Mark, you touched on some of the Boeing headwinds given the challenges at Boeing. Can you talk about how big of an impact that is for you in 2024? And then also, I know you've got a commercial renegotiation underway with Boeing. If you could give us any update on how that's progressing.
Yeah, sure. So maybe I'll start. It was about a $10 million headwind in Q4. So you should think about it about $10 million a quarter. Nevertheless, CCT is still going to grow strong in 2025. There's, let's say, nothing dialed in for Q1. And then we'd expect to start shipping sort of the middle to end of Q2. So you should start to see people asked a little bit about some of the slower 1Q. Boeing's a big part of that. And CCT growth should continue to improve sequentially beginning in Q2 and after that. And do you want to talk about Boeing price renegotiation?
Yeah. I think that, as you can imagine, the renegotiation probably slowed down because of that many priorities that they're dealing with. But I would say it's progressing, and what makes us comfortable is that, A, we are a good supplier. We are performing for Boeing. And we have also been able to successfully renegotiate in the last 12-18 months good important contracts also for the tier one. So we are confident that we will be able to find our way there.
Helpful, and then just on aerospace and defense in general, I'm not sure that people realize how material it is to ITT now. I think in combination, aerospace and defense are almost 20% of your business now. As you think about the portfolio going forward and capital deployment, can you talk about whether those markets in particular are areas that you want to continue to lean into for sure?
When you look at capital deployment, where the money goes first is on the organic side, right? And because this is where we've got the best return, this is where we can continue to improve our margin and push our organic growth. Second goes on the M&A. And when you look on the M&A, really we're focusing in two areas. One is flow, which is our IP business, and the other one is connectors. And now when you look within connectors, where is our strength is really on the aero and defense. We are not a big player on the connector side. So our profitability in connectors is incredibly good and nothing to envy to our competitors. And the way that we differentiate that is our speed to respond to the customer demand. So we are able to customize our connectors. We meet with the customer.
They have a specific need. We designed, we co-designed the connector with them on the back of the envelope, come back home, prototype in the next 24-48 hours, ship it out, and we'll be able to get specified in the next program with this speed of response. And this is very valuable in the aero and defense. So when you're talking about that specific market, aero and defense, I would say when we look at the connectors side, this is really where we are focusing and where we're looking for opportunities.
Got it. Any questions from the audience? I should open it up. If not, I'll continue. Okay. I'll stick to it then. You mentioned the profitability in connectors, Luca, but really across the portfolio, you've driven strong upside margin improvement over the past few years, I think averaging close to 100 bips of margin expansion, and you had some long-term targets out there that you've essentially hit two years ahead of schedule, so can you talk about how we should think about upside margin runway here into 2025 and your ability to continue to sustain these, I would say, high levels of profitability improvement year in and year out?
Yeah. So may I touch on the first part of that? So you're right, Vlad. We had 2026 targets that at the consolidated ITT level, we essentially hit two years ahead of plan. So you'll remember IP, which ironically in 2022 was probably the area of the most pushback when we issued the 20% target. We blew through those targets in a year and a half, two years. If you take out the M&A dilution from Svanehøj, IP is approaching 24% at this point. So great outcome for IP and obviously a lot faster than we had planned. MT, as everyone hopefully heard, will hit the 20% mark in 2025, which is quite an accomplishment. As you know, over 80% of that business is in automotive too. And part of the improvement there is not just in friction, but also in KONI and Axtone businesses as well.
Last year, we divested the Wolverine business. So MT and IP, well on their way, and surpassed the target. CCT, you'll remember we set a 22% target. We have some near-term dilution from kSARIA, but if you take that out, they're right around 21%. So two of the three segments, the third one's on its way, and we're essentially at or above the targets. Then, as Luca alluded to earlier, we'll likely have new targets on May 15th to talk about. So do you want to add to that?
Yeah. And as I said, there are plenty of opportunities to continue to improve that profitability. If you look at across the businesses, the story is similar in a way. If you look at productivity in our operations, in our supply chain, it's true across the board. So this is a big lever in our shop floor for making pumps and valves, in the shop floor making shock absorbers and brake pads, and also in our connector business. I would say when you look at pricing as a lever for that help you in terms of margin improvement, that is probably more true in IP and CCT. And you will see pricing be more of a player in the CCT business in 2025. But even in Motion Technologies, when you look at the price-cost equation, that would be positive. So it was positive in 2024.
It will be positive also in 2025, so that margin expansion and organic revenue growth, that value creation will continue in the years to come.
Looking forward to seeing it. Luca, I wanted to go back to the capital allocation topic. I know you mentioned IP and connectors are focus areas. You highlighted the recent acquisitions that you've done over the past couple of years. It's been good to see M&A step up pretty meaningfully here. You still have a very under-levered balance sheet, I think we would all agree. Can you just talk about how you're thinking about ITT's capacity for M&A, the potential to do larger deals or more accelerated M&A continuing going forward, and then what you see in the M&A landscape today in terms of opportunities?
Sure. When you look on the M&A front, I mean, the goal is really to deploy $500 million-$700 million a year in M&A in terms of acquisition. I think that what is important here is to maintain a rigorous process. Rigorous from a strategic point of view, that the acquisition that we make really fit the strategy of ITT. And I think that when you look at Habonim, kSARIA, and Svanehøj , they all tick the boxes, but also needs to tick the box from a financial point of view. So we need to maintain that process rigorous and be very granular in the way that we analyze the deal, and also to ensure that our value creation, so that we're able to create value for our shareholders. So when it comes to the landscape, we are active.
I mean, there are good opportunities out there when we look at both the flow and our connector business. So it's just to ensure that we stay rigorous and we create value at the end of the day for the shareholders.
Got it. I wanted to go back, Luca. You mentioned the Embedded Motor Drive, the EMD product that you mentioned on 4Q call, and you highlighted here. And I'm sure we're going to hear a lot more about it at the Capital Markets Day. But maybe you could just give us some color on what are some of the applications this could go into, how it actually came into being, because this is, if I'm not mistaken, kind of a new product area for ITT completely. And then just how you're thinking about ramping and when maybe we could see financial impacts.
So this is opening a new addressable market for ITT, a roughly $3 billion market for ITT that we actually today do not play in. So we do not make motors, and this is a motor. We will not make this motor because it's contract manufactured. So there is somebody manufacturing this motor for us. But we invented this motor working together with the university. And what you have here is that you all know probably variable speed drives. Variable speed drives are installations, is equipment that you install in a plant to ensure that your motor doesn't always run 100% because your motor sometimes doesn't require to run 100%. So you put the variable speed drive that have been in existence for the last 30- 35 years. This is a variable speed drive in the motor.
So what you have is that the variable speed drive is very helpful because it helps you to save energy, but is used only 20% of the time where it could be used. Why? Because many times it's dirty the plant, and you cannot put a variable speed drive in a dirty environment. You don't have the space to create a clean room because you don't have the space. So in 80% of the cases where the variable speed drive is needed, you cannot put it in. So here is simply a little bit of a longer motor with a lot of electronics in it. There is no such a thing in the industrial world today. We are coming out with a good range in terms of different horsepower for this motor. We already had the prototype, the industrial prototype.
We have installed the industrial prototype for more than a year at different customer sites. We have launched the manufacturing of the product already. We are going to launch this in the market commercially in Q2 this year. We already have orders from some of the end users as well as from the distributors. It's very exciting because it's good for ITT, it's good for our customer, it's good for the world, and it's opening for us in an addressable market where we have the zero today.
That's interesting. And as you ramp production in 2Q and going forward, how should we think about EMD impacting segment margin, I'm assuming in IP?
Yeah. You will see the impact of this. Of course, it's a launch in Q2, so you will probably not see a lot of this impact, if you can imagine, in the first 12 months. But this is a very good, profitable product also because the value that you're creating for the end user is incredible and is very competitive and very healthy margin as well.
Look forward to learning more about it at the Capital Markets Day, and maybe just in that context, without asking for sort of specific long-term targets, which I'm sure you'll give at the CMD, just given the performance we've seen and having exceeded all your targets, can you talk about beyond the EMD, what are some of the key growth opportunities that you see ahead for ITT and what you're most excited about for the company?
Sure. I would say when we were talking about why are we able to outperform the market and outperform our competitors across the board, the recipe is very simple. It's through differentiation in execution and innovation. So I think that we will continue to maintain the focus on the execution side to ensure that none of our competitors will perform the way that we perform for our customers. And that will keep on happening. And on the innovation side, we will keep on investing in innovation. The EMD is one example with other things in the pipeline. But another example that I'm very excited about is a new material that will be part of our brake pad business. And this is called a geopolymer. We are using a different binder in the recipe of the brake pads. And we have already this product. We already patented.
This product is tested today. We are testing it today in the aftermarket in China. The reason why you tend to test the product in the aftermarket before putting in the OE is because it's safer. You put it in the aftermarket, you see what the market answer is giving you, and we tested it in China because of the size of the country, different weather, different pollution in different parts of the country, so we are getting a lot of positive momentum out of that. What is revolutionary of this product is that when you make the brake pad today, you have a line of different equipment. You have a press, and you've got an oven, a grinding machine, painting, finishing line, and you have this oven. When you look at this line, it's roughly probably as a CapEx investment, anything between $12 million-$15 million.
And that oven costs $1.5 million roughly. This product, this material that we came up with, will eliminate the need of the oven in the line, which means that not only the material is more cost competitive and it's cheaper material, the one that we designed and we invented, but also we will not need the CapEx. And when you're running the line, you don't need the oven and the energy to get the oven. So it's definitely a very good product in terms of competitiveness, but in terms of green. We are already approaching two different OEMs. And we are doing all the tests as well with the OEMs. And that will be a kind of game-changer as well in the friction world.
Looking forward to it. Yeah. Luca, as we're wrapping up on time here, I want to ask you one question that I've asked you before and that we're asking all of our companies at the conference, which is, what are the top two or three innovations and structural changes affecting your company over the next five years? And are there any emerging industry trends that are maybe being overlooked in the current discourse?
I would say that, first of all, the world is changing. You can say it's more dynamic, it's more chaotic these days, et cetera. So I would say this is something that we need to stay alert. I think that the fact that we tend to be in the market for the market is going to help us out. So this is important. The investment in defense, I think, is key, and this will be around the different parts of the world, and therefore, us being an American company with a strong base in Europe and having air and defense that today is now 18% of the ITT portfolio is something to bear in mind, and it's true for connectors. It's true for our components, but also our shock absorbers. Many of our shock absorbers are for defense vehicles made either in the U.S. or also in Europe.
So defense is one area. Then the new material science that will continue probably to bring innovation on the friction side. And then the energy transition. The energy transition will happen. It might go towards lower speed or so. But I think in that energy transition, we're winning many projects with Svanehøj and with the legacy IP business. So all of these will be good for ITT.
Great. I think that's a good place for us to wrap. Thanks again for joining us.
Thank you very much, Vlad. Thank you.