Thanks so much for joining us. I'm Andrew Obin. I cover multi-industrials in the U.S. With us, we have the management team from ITT. We are big fans of ITT. We think this is one of the most capable managements in our coverage universe and deep operating experience and really have their hands, their fingers on the pulse of what's happening. Great operators. We have Luca Savi, company's CEO and President, and we have Emmanuel Caprais, Senior VP and CFO. I think, Emmanuel, you're going to read some disclosures, and I think we're going to go through a couple of slides, and then we're going to jump into Q&A. Thank you.
Thank you.
Thank you, Andrew. Good morning. Our presentations 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.
Good morning, and thank you, Andrew, for having us here. I'm going to spend a couple of minutes on a few slides, and then we go straight into Q&A. ITT, we are an engineering and a manufacturing company of components, components that are used in harsh environments across different industries. You're talking about automotive, rail, aero, defense, general industrial, energy. We have historically outperformed the market we are playing in, and the way we outperform is really through differentiation in execution and innovation. If you look at the last five, six years, we created a lot of value for our shareholders, and that value has really been based on organic growth and margin expansion. Only recently, we started doing more and more M&A. Now, when you look at our businesses, we have three, we call them value center, three lines of businesses.
One is Motion Technologies, where we are making brake pads for vehicles, for cars, and shock absorbers. Shock absorbers that are mainly used in rail. We have our flow business, our pumps and valves. Here we have pumps, centrifugal pumps that are used in general industrial, in pulp and paper, in mining, in energy, as well as twin screw pumps that are used also in the traditional energy, but also in the energy transition for green energy, talking about carbon capture or stopping gas flaring. CCT, our connectors and components technology value center, where we make valves and components for air and defense and connectors. These are really our three main businesses. When you look at 2024, it was a good year for us. You can see it from the numbers. We're 7% organic growth, 11% in total. We had good orders.
The long-term target at ITT level that we were supposed to reach by 2026, we eclipsed it in 2024, two years ahead of plan, and we will continue to improve the margin in the years to come. That was also important from a portfolio point of view because we shifted our portfolio. We divested Wolverine, our gasket and shims business that was purely automotive, and we invested in two companies, kSARIA Interconnect playing in defense, mainly U.S. market, and Svanehøj, a cryogenic pump in the marine industry, deploying roughly $900 million of capital. When you look at 2025, I think that the value creation through organic growth and margin expansion will continue, because we will continue differentiating from the competition always through execution and innovation, and we add to that our M&A in terms of the M&A is getting more and more momentum.
When you look at our pipeline of M&A, it is still good and active. When you look at Q1, the orders are up. I think that the sales are tracking. We continue to improve our margin, and we will have Motion Technology that will hit 20% operating margin in 2024, 2025, and in Q1. The EPS is lined with consensus, and the good cash flow that we are generating will be used to repay the debt as well as to buy back share. With that, let's move to Q&A.
Sure. Just maybe just for first quarter, you're not making any changes to the first quarter outlook, right? Okay. Okay, maybe I will jump because we're here and I've been asked this question. I'm just maybe you started talking about overview of demand trends that maybe expand. Where are you seeing particularly just give us an overview because that's at the top of everybody's mind. Where are you seeing structural tailwinds and where are you seeing structural headwinds?
Sure. As I said at the beginning, we are playing in different markets. When you look at our connectors and our components, the aero and defense market, this is definitely a tailwind. Because of everything that's happening in the world, our defense market is growing nicely. Also, aero will be, with the recovery of Boeing, that we see more for us impacting the second half of 2025. That definitely is a tailwind. When we look at our project business in IP and our short cycle in IP, the short cycle is staying at a very robust level. 2024 was good for us. We grew, and not just because of price, but it was a growth in volume. When we look at 2025, we see the short cycle staying at an elevated level. The project business is still very healthy.
We are growing on the project side as well. When we move at Motion Technologies, the rail business is healthy as well. There are structural tailwinds on that one across all the different regions. The headwind that we see in our portfolio is really in the automotive market. We see automotive still a challenging market in 2025. We expect to continue to outperform like we've done it for the last five years, but that probably is the structural headwind that we see in 2025.
Maybe just a little bit more detail on short cycle trends across pump and short cycle industrial. Specifically, if you look at the latest PMI data and lots of debate about it, people did not like the order number. If you sort of look at it, right, you can see construction is a headwind, maybe consumer-driven business is a headwind, as you have alluded. Auto is a headwind, but within industrials, there is a number of fairly broad-based positive activity. How would you characterize what you are seeing versus the latest PMI data? Does it surprise you? What trends have you seen in the first quarter? Just maybe unpack the industrial verticals a little bit more.
When we look at our distribution, because for us, short cycle is closely aligned with our distribution business, both in industrial process and also in Connect & Control Technologies. When we look at our distribution business, we see pretty strong, not showing tremendous growth, but remaining pretty strong and remaining at elevated levels. We do not see particularly high level of inventory at our distributors. Demand, so point of sale information from our distributors is showing pretty strong trends. Keep in mind, Andrew, that we have been focused over the past few years in gaining market share.
This has been happening in Connect & C ontrol Technologies with our connector business, where we've been expanding our SKU offering as well, and so putting more product on the shelves of distributors, as well as in the IP and the spare parts, where we've been drastically reducing our lead times in order to be able to be there for our customers with spare parts faster than anybody else. As a result, we're maintaining 95%+ on-time delivery metrics with our customers for spare parts, which is allowing us to gain a lot of market share.
I gotcha. Do you think just, you've asked my question already, but in terms of your distributor business, any sense if there was a pre-buy because that's another big debate, pre-buy ahead of the tariffs? What's your view of what your channel has done?
We did not see any of that. Nor did distributors talk to us about that.
Yep. No, that's. Maybe, obviously, you're going to get this question, but just maybe size your exposure to the announced tariffs. Is there a tariff impact embedded 25 guide? The usual stuff, how much of it is covered by USMCA? What's the action plan? I know you and I had this debate.
Sure. When you look at tariffs, I would say our first thing, our strategy has always been to be in the market for the market. For instance, our plants in Europe are serving the European plants. Our plants in China are serving China and Asia, and our plant in North America is serving North America. That is overall our strategy. On top of that, last year in 2024, we divested our Wolverine business, which was the one that was impacted the most from tariffs in the past. That was a portfolio strategy, but that was also good, I think, because when you think about what's happening with the strategy, that would have impacted us heavily in 2025. With the portfolio that we have today, how have we been impacted? Different for the different businesses.
If we start with IP, for example, IP will be exposed mainly to the tariffs from China because what is happening in the flow is you tend to import castings from China or India. These are the best quality castings and machine, the best quality supplier, and the best service that you can have. That will continue to be the way. Now, there will be a tariff, and the action to ensure that we mitigate the impact is really a commercial action. That will, this is, it will be a pass through on that front. We have already taken action, and we already communicated with our customers and with our distributors. It is not going to modify our supply chain strategies because those are the best supplier and the best service.
When you look at Motion Technologies, the impact could be on the Mexico plant because we have a plant in Mexico that serves in North America. Now, the majority of our contracts are ex-works. The customer will pick up at our shipping, so we will not be exposed to that. The few contracts that are not ex-works, we are certified USMCA. With the tariff that are the way that they're structured today, no impact there. In order to be ahead of the game, we've already talked to some of our customers just in case that will change in terms of this will be a pass through as well. CCT, when you look at CCT, we have our connector business, and our major plant is in Nogales, Mexico, just across the border, and together with many of the other connectors company.
In these cases as well, we got the majority of our product USMCA approved, and we've already spoke to all our customers in terms of if the regulations will change, there will be commercial actions to take place. I think that when you look at overall the impact of tariff, we have action in place to cover and to mitigate if things deteriorate from what they are today.
Thank you. You know, I think capital allocation is an important skill for multi-industrials. You have been ramping your M&A in recent years, Svanehøj and kSARIA. A, what are the big lessons learned from getting more active in M&A? The follow-up, should we expect the company to continue doing more M&A, or do you just need to take a pause to integrate the announced acquisitions?
Okay. First of all, when we look at the value creation, as I said at the beginning, a lot of the value creation that you've seen in the last five years has been organic, organic growth and margin expansion. We have just started building the muscle on the M&A with the acquisition of Habonim, which is a valve company based out in Israel, Svanehøj, cryogenic pumps based in Denmark, and kSARIA Interconnect, mainly defense business out of the U.S. All these acquisitions have been successful. Just to give you an example of Habonim, we purchased Habonim at an EBITDA multiple of 12. When you look at the actual, it's something less than 8. A great success.
I mean, the lesson learned across all these three is that when you buy a company that has got a strong position in the market and all three had that, had a strong management team and you're able to retain the management team, and we haven't lost any member of the management team in these three companies, I would say the chances of success are much higher. All three, granted kSARIA is just early, but have been a success today. I would say on the other side, lesson learned, I would say probably in some area on some key KPI, probably we should align with our ITT of looking at things earlier. To give you an example, we are very focused on safety. Our framework is SQDC, Safety, Quality, Delivery, and Cost.
I would say that, for example, the safety performance of Svanehøj was not up to the standard that we were used to. Therefore, earlier alignment when it comes to some important indicators was a lesson learned that we had in that case. Now, on the second part of the question, do we need to pause? No, I think that just because these, exactly because these companies are successful, they got a good market leadership position, strong management team, I would say that we are able to go and make more acquisitions. Financially, we do not have any constraint, but also from a managerial point of view, no constraint as well.
Who integrates the deal? Is it the business unit team or is it the corporate team that sort of goes in and does?
It's the business unit. It's the business unit team. At the same time, I would say it's an integration that goes both ways. Just to give you an example, I mean, Svanehøj, working capital of Svanehøj is.
7%, 8%?
7%, 8%. We must learn from Svanehøj, right? Because if you look at our working capital in IP, it is around 23, 24. We need to learn from Svanehøj how to do it. It is the business unit that goes through the integration process.
Thank you. Maybe, as you've pointed out, I think you're really good at bringing your capabilities to your customers and clearly a terrific track record of organic growth. Can you maybe talk about the key R&D projects that ITT is excited about to keep driving this organic outperformance?
Sure. Let me talk about two. One is the EMD, the embedded motor drive in IP. The other one is the geopolymer on the brake pad business. If you look at the EMDs, the embedded motor drive, I mean, when you look at the pumps and you have the motor with the pumps, the motor always, always run. If you want to save energy, what has happened in the last 20, 30 years is you put a variable speed drive so that you run the motor at 50% of the speed, 80% of the speed, depending on what you need. When you look at these variable speed drive applications, you always need a clean room. You always need space.
Therefore, the variable speed drive that are used only in 20% of the cases when instead of the 100% where you will save energy, et cetera, because you do not have the space or because it is incredibly dirty. If you go into a pulp and paper environment, God, it is dirty. You cannot have a variable speed drive there. What we have done at ITT, we have invented a motor called the embedded motor drive together with the university here in the U.K. We own the patents. Practically, you can swap a normal motor with a new motor, a little bit bigger, but with this variable speed drive practically in it. We will launch this product. We already have the prototype. We have the industrial prototype that has been tested in the market with our customers for more than a year and a half.
We will launch this product in Q2 of this year. We're already producing the product. There is a contract manufacturer, a motor manufacturer that is producing this motor for us. We will go to the market with this, as I said, in Q2. I'm extremely excited about it because, first of all, it increases our addressable market. We are not in the motor manufacturing. Now we are opening the markets we are addressing. This is going to be a huge opportunity. Think about it not just as a motor for everything that rotates, like pump or fan or a mixer, but also think about the synergy that you have. I mean, if you want one of these motors, maybe you need to buy a Goulds Pumps as well. Extremely excited about that. Then the geopolymer on the brake pad.
You know, when you make a brake pad, you prepare the mix, you go through a line, there is a press, and then there is an oven, an oven where practically you bake these brake pads. This oven consumes a lot of energy, but makes the brake pad perform the way it's supposed to be. You have this oven because the mix that you have in the brake pad has an organic binder, something organic that keeps all the mix together. We have invented a mix with an inorganic binder, which allows us to eliminate the oven in the production line. This means that in a line that usually is a CapEx of $12-$15 million, you eliminate the oven, $1.5-$2 million of CapEx out of the way. It is not just a CapEx thing.
From an operational point of view, there is a lot of energy and a lot of cost and consumption of energy. You are making this product also more cost competitive. We own the patent. We are the only one that have this. This product has been tested for the last couple of years as an aftermarket in China. You test in the aftermarket before putting on the OE because you want to show, you want to know exactly how it works before putting on a project, on a platform. We're already talking to two OEMs in Europe to test these as an OE platform in a couple of pilots. This will be a game changer in the braking as well as like the MD is in flow.
Yeah, thank you. I remember sort of you explaining to me the importance of the material science within your sort of product strategy. I think it was one of the first things you taught me when you started. I actually really appreciate it. Maybe Asia Pacific previously had been highlighted as a platform for growth back in 2022. Can you describe what the formula is here for growth? I think where are you expanding? Now, it's a little bit tricky because 80% of your Asia business is in Motion Technologies. And it's just been a machine, part of my pun.
You know, I think one of the topics that we're supposed to highlight at this conference is the potential for China exposure, and maybe explain to investors why you have been able to deliver what you have been able to deliver in Motion Tech in China, but also what are the plans to scale up IP and CCT there?
Sure.
I guess three questions. What's happening in China macro?
Yeah.
You know, what has enabled you to outperform in motion tech?
Sure.
You know what happens to the rest of the company in China?
When you look at our Asia Pacific business, we are exposed across all the three value centers. We have a plant in Shenzhen for the connector business. We have a motion technologies plant, brake pads and shock absorbers in Wuxi, China. We have a pumps factory in Korea. All these three plants are top-notch, are some of the best plants that we have in the world. When you're talking about the performance, the fundamentals is safety in terms of quality, in terms of the delivery, in terms of cost. Top performance. As you said, 80% of our business in Asia is motion technologies, is automotive and rail. Think about it. China is the largest automotive market in the world, but also the largest rail market in the world.
We got a great market share in terms of when you talk about high-speed train and rail in China, as well as good market share in the vehicles, in cars for the brake pads. Last year, we closed the market share in brake pads above 30%, around 31% when we opened the plant in 2014. Until 2014, our market share was zero. Incredible success. I mean, what we have been differentiating ourselves there is the same rule is we differentiate it through execution and through innovation. The management team there was quite enlightened in 2014 when we opened because they started working with the Chinese OEMs. This must be obvious today. When you were in 2014, working with the Chinese OEM was not an obvious choice. That working with the Chinese OEMs proved a very good strategic move.
Today, 65% of what we are making in China are for the Chinese OEMs. We are winning with the winners. The reason why we keep on winning is simply execution. Think about it. More than 99.9% of on-time delivery. This has been consistent every single month, every single quarter for the last five, six years, despite COVID, despite the supply chain and shit show, despite everything that has happened in the last five, six years, we delivered with that on-time delivery. In terms of quality, we measure quality in PPBs, in parts per billion. It is a few hundreds PPBs, which means that none of our competitors is able to match the level of performance. They are in up to 20-50 PPMs in parts per million.
That differentiation, those flawless launches that the team is able to execute, enable us to keep on winning market share there and to outperform the market.
Maybe what is happening? I mean, I think automotive market in China, but maybe comment, what are you seeing about just recovery in China and the ability to scale up your other platforms in China outside of motion tech?
Sure. When you look at our performance in China, it has been incredibly good. If you look at automotive and rail, those markets.
It's unbelievable.
They're very resilient. If you look at, if you get rail, rail keeps on expanding. I mean, if you go to Shanghai and you take the train out of Shanghai going to Wuxi and you get out of Kunshan train station, you will see the high-speed train depot on your right and all these incredible high-speed trains and plenty of them. In 2026, they will come out with the 450 kilometers an hour high-speed train. We're the only shock absorber that today is certified to go on the train. I'm sure there will be another one at least, but as of today, we're the only one. The investment will keep on happening. That is good for us. On auto, auto was a very resilient market.
When you look at production in China in 2024, that was thanks to the incentive scheme that were put in place by the Chinese government in terms of you scrap your old car and get the new, as well as the export. Very resilient market and continue to be in that way. It looks also for 2025. Now, when it comes to expanding our skill from motion technology to the other plants, our Shenzhen plant in connectors is performing incredibly well as well, as well as our pump factory in Korea, according to many of our customers in the U.S., is one of the best pumps factory that they've seen in their lives. More and more to come on those businesses too.
Good. I know you're going to host your 25th anniversary in May. Mark is not here. Maybe you could give us a little bit preview what you're going to talk going into the event.
Yeah, sure. It's going to be a great event. What we intend to showcase is obviously show how we differentiate, as Luca mentioned, through execution, through innovation, through M&A, but also through our people. Specifically on our people, we intend to expose people of the ITT management team to the broader public because it's important that they know who are there to deliver their numbers, right? We have another exciting event where we're going to showcase all the innovation that we have. Luca talked about the EMD, which is going to be branded as ViDAR. Everybody's going to be able to see and touch this device, this motor. We're going to talk about geopolymer also. It's going to be a great way for everyone to understand what's in the hopper in order to fuel further future growth.
We're going to release new targets, new long-term targets. Because as we mentioned, we already have achieved two years ahead of schedule our targets that we set in 2022. It is important for each of our business to come up with new ambitious targets for the next few years.
Maybe in remaining time, talk a little bit more about the businesses. In the industrial process business, right? Your core margins, ex-Svanehøj, have showed material expansion. XA24 was legacy margins north of 24%. What sort of productivity investments have you made? What's been driving this strong performance? How much opportunity is there in the core business?
If you look at industrial process, as you mentioned, we were able to maintain our IP margins largely above 20% despite the dilutive impact of Svanehøj. Here, there was a lot of work that has been done. Obviously, the share gains that we've been having both in projects and short cycles are converting into revenue. This is driving a lot of revenue increase, but also margin expansion because this is a very profitable business. We've been working also on driving lean through the rest of our factories. Luca mentioned that Korea is one of the best-in-class factories. We're trying to really replicate that. We have Saudi also, which is extremely, extremely good with 99% on-time delivery, almost perfect quality. We're moving all those IP plants to that type of standard. This is resulting, obviously, in efficiencies.
We've been working also in addressing cost structure items. We've been looking for efficiencies where we can to reduce our fixed costs while we're expanding our revenue. Lastly, I would say for us, because we have leadership in several of our product lines, we're trying to understand, we're trying to test how much we can push price also. Price in IP has been a meaningful contributor of margin expansion. I think it will continue to be one.
I know you sort of commented on it, but what are you seeing in terms of IP orders and specifically breakout projects and short-cycle activity?
When we look at short cycle, as I mentioned a little bit earlier, the distribution piece is doing pretty well. It looks like the inventory at distributors are under control. We continue to see good activity on the baseline pumps. Spare parts are maintained at a high level of activity. Short cycle looks like it's healthy for us. We don't see any reason for this to not continue. When you look at projects, a few things. For projects, we continue to see expansion from an order standpoint. We continue to see a really healthy funnel of projects. When we look at the different projects that have passed the budget phase, this is not growing by 20% as it used to be, but it's staying really at a high level of activity.
It gives us a lot of work in terms of quotation and also a lot of opportunity to continue to gain share.
Thank you. Maybe just a little bit more market detail. Any markets that are accelerating and any markets that are slowing?
We talked about automotive.
Yeah, yeah.
Automotive. The only thing I would add to what Luca said is that it's true that it's declining mainly in Europe and in North America. Inventories are not super high. For us, the demand is not good, for sure. We are not running further risk by having a destocking event that's imminent. For the automotive, we'll see how it plays out. We continue to outperform, which is, I think, the bottom line here. The markets are going to do what the markets do. For us, it's important to continue to outperform. I would say defense, as we discussed, has been strong and it will continue to be strong. Aerospace for the moment is not driving growth. This is something that we think will be addressed probably in the second half of this year.
We are on Boeing, for instance, we're not seeing orders. The teams are telling us that we should start seeing orders in the second quarter and then start to deliver in the third and the fourth quarter. For us, the Boeing exposure is around $10 million a quarter. It is a meaningful piece. For the moment, we have other tailwinds that we can compensate that headwind with.
Excellent. Maybe on Motion Tech in more detail, starting to ramp up high-performance facility in Termoli. Is it Termoli or Termoli?
Termoli.
Termoli. It is an entirely new market. When does production start to accelerate? When does it start to become margin accretive?
Sure. When we talk about high performance, historically, we never addressed this market. We're talking about the high-performance vehicles. The top of the range, we're talking about BMW, Daimler, Porsche, Audi. The reason why we never addressed this is because usually this is a low-volume, high mix. When you look at one of our strengths, our differentiation was being a standardized process that worked very well with the high-volume, low mix. What the team has been able to do here is to use the same machines. We did not change, we did not jeopardize the standardization, but they came up with a different solution from Material Flow that was able to produce with the same machines a low-volume, high-mix batches. We took the board to the site in October. The site was completed. The machines are installed.
We have started producing already the brake pads for our customer. We are launching platform now in Q1. Now, this is ramping up. You will see in 2025 will be practically immaterial. When it comes to 2026 and 2027, you will start seeing an impact. The impact is not so much on the volume side as much on the margin. Because as you can expect in these low-volume, high-performance brake pads, you're talking about brake pads that from a price point of view are a multiple of a normal brake pad. Margin are expected to be higher, but the volume in terms of revenue is going to be shorter. I will expect the second half of 2026 and in 2027, you will start seeing the impact of that.
Just going a little bit more, you have over 50% market share in Europe. China and North American business have been scaled up very nicely. I think over 30% global market share in friction at year end 2024. Yeah. What's the plan to continue taking market share globally? You've been relentless.
Yeah. Listen, I think that there is still room to grow. If you talk about the high performance, that was a market where our market share was zero, right? Now we start addressing. There is no reason why in the next, I would say, probably five years, we can get to a similar market share of what we have in Europe today. China is 31% in 2024. North America was between 28% and 29% market share in 2024. There is still room to grow. The recipe, I know it might sound boring, but it's still the same. To continue to perform, to have a perfect execution, perfect flawless launches for our customers, quality in PPBs that differentiate from our competition, on-time delivery 99.95% or higher, that differentiate ourselves from the competition.
If we keep on performing this way, we will keep to outperform the market like we have done it for the last 10 years.
Excellent. What's the attach rate for aftermarket? Do you have any plans to accelerate growth in the aftermarket business?
When you look at automotive, we are mainly OE players. Seventy-five percent of our market is OE, 25% is aftermarket. When you talk about the aftermarket, we mainly play in the European market. I think that as it stands today, we are sticking with this plan. We are looking at China as a potential aftermarket business. We are exploring different ways of working on that front there. No major plans there as of today.
Maybe going to CCT, I think European defense is a big topic, particularly today. Do you have enough European defense exposure to move the needle the next 24 months?
I would say, yes, there is a lot of talking about European defense growing. It will happen, of course. It has to happen. Now, having said that, if you really want to be substantial, have an impact, it is U.S. defense where you can really have the focus. We are working to increase our defense business in Europe. I would say the U.S. portion is really what is material and makes the difference.
Thank you.
When you look at Europe, the play will be with the connector business and use some of our product from North America also here in Europe, as well as with our shock absorbers. The shock absorbers that we are making in Holland are used for military vehicles here in Europe. The most successful platforms of European vehicles tend to use our KONI shock absorbers.
Gotcha. Maybe in the remaining minute, maybe a little bit talk about kSARIA acquisition. What kind of revenue synergies are there?
When you look at kSARIA, kSARIA is, when you look at our M&A, M&A focus is in flow, pumps, and valves and connectors. This is why we bought Habonim, Svanehøj, and kSARIA. kSARIA is an interconnect solution, mainly defense, mainly North American business. When you look at the synergies, in many cases, the customer were coming to us, our connector business, asking us for solutions with fiber cable, et cetera. We were not able to address that. We were not able to answer our customer because we did not have a solution. Now with kSARIA, we do. That is an opportunity. Second, if you walk on the shop floor of kSARIA, you will see this fiber cabling and this cabling with different connectors at the very end. Not always our ITT Cannon connectors.
There is a synergy there in terms of the programs where we're already qualified. It will be an easy swap. For the program that we are not qualified, we can qualify if it makes sense. Therefore, we have a synergy in terms of putting more of our ITT Cannon connectors in kSARIA.
Excellent. We are out of time. This has been fantastic. Thanks so much.
Thank you very much. Thank you, Andrew.