ITT Inc. (ITT) Earnings Call Transcript

All right. Good afternoon, everyone. Thank you for joining us. My name is Matt Summerville. I'm the senior research analyst with D.A. Davidson following ITT, a name I've covered now for almost 25 years. With us today, we have Luca Savi, the company's CEO and President. With that brief introduction, before I hand it over to Luca for just a couple of minutes of prepared remarks, Carleen is going to go ahead and read the safe harbor statement.

Our presentation 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. And with that, I will turn it over to Luca.

Okay. So good afternoon, everybody. In Italian, we say the dessert is at the end. So yes, we are, okay? So only a couple of minutes to tell you a little bit about ITT. So we are a diversified engineering company. So what we do, we engineer, design and manufacture components for harsh environment across different industries, across different sectors being rail and auto, air and defense, oil and gas, energy, energy transition, chemical, petrochemical, mining, general industrial. So after the acquisition of SPX FLOW, our revenue is above $5 billion. You see the geographic spread, a lot is in North America. And you see the markets we are exposed there on the chart. In the last few years, we delivered quite a considerable amount of value for our customers and for our shareholders. Those are the numbers in terms of organic revenue growth of 7% in the last 3 years, EPS of 16% in terms of CAGR. And what I would like to stress is that revenue growth has been mainly market share gains because if you look at the markets we are exposed to, that we didn't really have a lot of tailwind in the last few years. So when we look at the future value creation, the future value creation will come from organically and inorganically. So we have a couple of slides to talk about the organic value creation, revenue growth, margin expansion. So revenue growth. Finally, we have tailwinds, margin expansion. We did a lot of margin expansion in the last few years, but there is still a lot to come. In this chart, what you will see -- what you see are mainly most of the ITT sites around the world, and you see that many are still underperforming our average. That underperforming piece represents roughly 40% of the revenue. So there is still a lot of work to do. And I can tell you that there is also a good opportunity on the overperforming sites when you go granular and you split it, we still have opportunity to improve that. So organic value creation is here to stay. When it comes to the M&A, we have developed -- we are developing the master of M&A. These are 3 acquisitions that we went through. Svanehøj acquired in January 2024. These are cryogenic pumps for marine, energy transition from dirty fuels to LNG and in the future, ammonia. EBITDA multiple that purchase was a little bit above 13%. And when you look at the actual, it's actually 6%. kSARIA, cable harnesses in aero and defense, mainly defense, 80% of defense multiple as well, 13% -- between 13% and 14% is if you look at the actual 11%. And then when you look at the forecast for 2027, probably it's going to be a single-digit number as well. SPX FLOW's early to tell, but the integration is doing well. So really, what we want to share with you is that there is a lot that we are doing in terms of market share gain, and that market share gains are coming from differentiation in execution and in innovation. The strategy is clear, is grounded, good common sense, and it enables us to deliver value, and there is a bunch of ITTs that are working hard to deliver this value. So with that, over to Q&A.

Thank you, Luca. Why don't we start with the businesses. Can you maybe talk about what you're seeing from an overall demand standpoint across Flow Technologies, particularly in oil and gas, chemical, industrial, mining, energy transition and maybe add a little bit of geographic context. And then I have a few follow-ups.

Sure. So as I was saying before, the last 6, 7 years across all the markets, we didn't have a lot of tailwinds. What we are seeing today are some positive trends. So if you look -- if you start on the chemical side, chemical was in some -- was difficult for the last 3 years as a market. We kept on growing orders in the last 5 years in chemicals, but that was mainly in ITT market share gains. What we have seen in the last couple of quarters is actually positive trends in the market, specifically in the North American market. We're not talking about the European chemical, which is not great at all. When you look at the oil and gas, of course, there is a situation in the Middle East, which everybody knows. Now if you look at our business in the Middle East in the first 6, 9 months of this year, has actually grown tremendously from a revenue point of view. The reason for that is that we grew we won a lot of orders in the past because we were executing very well. And therefore, the huge backlog that we had at the beginning of the year, we delivered on the backlog and we grew revenue substantially. Now on the orders front, the orders have shifted to the right. What we see though is that Saudi Aramco start moving. So they started giving orders, for example, Jafurah 4 to L&T and EPC, and we are negotiating to get our orders for pumps with this EPC. So we are seeing things moving even though not as fast as it was going last year. Now if this is a specific situation in the Middle East has generated probably investment in other parts of the world. So if it is in North America, if it is in Latin America. And of course, we have a very positive situation in Venezuela, where we have our Bornemann pumps, huge installed base and what is going on is generating a lot of orders for refurbishment, spare parts, and we started seeing these orders since the end of last year. So not necessarily a positive trend related to the situation in the Middle East, but more positive when it comes to other parts of the world. Energy transition, Svanehøj. We play in marine with cryogenic pumps. Now great growth, 30% growth, book-to-bill of 1.3. So obviously, there is a positive market there, but there is a lot of market share gain based on the execution and the good and differentiated product that we do have. There are good opportunities also when it comes to Latin America, particularly in the mining as well as in the oil and gas.

Perfect. You delivered 21% organic growth in FT in the second quarter, 45% pumps, 10% short cycle. How should we be thinking about the sustainability of at least the trajectory and the growth profiles independently as you move through '27 and then touch on your confidence in your ability to overdrive -- continue to overdrive versus the market?

Sure. So it was for sure an exceptional performance. Now I would say we will keep on growing. We will keep on having a nice growth when it comes to FLOW Technologies, probably not at this level of -- that we posted in Q2. But for sure, we will continue to grow year-over-year. Now bear in mind that we have, for sure, some tailwind when it comes to Latin America, when it comes to Venezuela, when it comes to North America, there is a headwind, which is the Middle East, exactly because the orders have shifted to the right. But for 2027, it's a little bit too early to tell, but I can tell you is that we're going to post a good growth for '26 with a book-to-bill above 1 and the backlog at the end of the year that is going to be higher than the backlog that we had at the end of December 2025. So now in terms of the ability to continue to outperform. This is really very -- this is very much who we are. So at ITT, if you are growing like the market, you don't get any pattern the shoulder, right, is the outgrowing of the market where we can really say, okay, you did something good. If you're growing because of price great, good. You get the path on the shoulder, the price is really not a real growth. So at ITT, we are really incentivizing and motivating people, a, to post real growth. This means volume growth; second, to outperform the market that you play in, and these are we're motivating and rewarding and recognizing we can't keep on doing so.

Very good. You talked about a kind of touched on this, some project delays in the Middle East, not cancellations. Are those projects still sort of progressing through the funnel, which may given the widening sort of related destruction, of course, unfortunate. How should we think about timing conversion over the next couple of quarters? And could that be maybe needle moving for you guys in '27 if things come down a bit?

Sure. It's difficult to say. I was -- it's positive. The Saudi Aramco have started moving and giving some orders to the EPC. They are talking about potential investment in pipeline and that would be great because we've got the perfect product for the pipeline that also helped us winning the Vaca Muerta project in Latin America. So -- but it's difficult to say in terms of the timing. At this point in time, it's still a little moving a little bit slowly, I would say.

Is there any sort of way to size up since you referenced the potential go-forward opportunity in Venezuela having not really been able to participate there, at least in recent years?

Sure. So is -- you will laugh at this. But in 2012, ITT bought Bornem and Parts. This was a German company making twin screw pumps. And the largest market for bone and pumps were Russia, Iran, Venezuela. So you really know now how we spend our last 8 years. resize, not getting a lot of work actually 0 were out of these 3 countries. Now in Venezuela, we had a huge installed base, also because of the heavy oil, our [indiscernible] pumps twin-screw pumps are there for that market. Huge installed base, now when Venezuela went to 0, we kept all our employees in Venezuela, and we kept them working on other Latin American project, which means that today, we are the only one that have a team well established Venezuela. We have already gone through all the different sites, make the assessment, if it is with Chevron, if it is with [indiscernible] other EPCs. So it's a very sizable opportunity. And we have already started receiving orders since October of 2025 from Chevron, PEDEVEZA and the players that are allowed to work there. So it's a good one.

Great. Let's talk about SPX FLOW for a minute. Orders up high single digits year-to-date book-to-bill above 1, integration cost synergies running ahead of plan. What's driving that relative performance, talk about sustainability and maybe what you're finding to be the biggest opportunities to accelerate further as you move into 2027, what that could hold for that business?

Yes, sure. Sure. So when you look at the revenue growth, high single digits so far, book-to-bill above 1, orders growing high single digit. First of all, , as I share with many of our investors, has got nothing to do with ITT. So is that what we saw, we saw it in the backlog. We saw the opportunities is we are executing what was already there. So there is a good thing that they build that backlog, build those opportunities, and we are executing on those. Now when it comes to the future in terms of future growth, why do we think that this business can continue to grow high single digit. When you look at Nutrition & Half, which represent roughly 50% to 60% of the SPX FLOW, is that you have a supply-demand game going on there. If you look at some of our customers, if it's the [indiscernible] they are going to improve, increase their CapEx in the next 4, 5 years, between 3% and 5%. So think about all the investment in protein that today is everywhere or medical food. So there is a lot of investment happening that will feed the future growth. And then I would say the other thing is that the way that we will run SPX FLOW, which is going to be much more entrepreneurial, much more decentralized, investing in the region in the periphery as well on the product and rejuvenation of product, all of that will help in feeding the growth. And then working very closely with the customer. I was on Friday spending -- last Friday, spending the day with the CEO of the known. And we are the only supplier of nutrition and health systems that are working together with them in building their CapEx. And we are doing research development project together with them to make them more successful and to make them more efficient in running their plan. This gives us an incredible amount of visibility and insight that some of our competitors do not have. So those kind of relationships are the ones that will have feeding that growth.

At the announcement of the FLOW acquisition, you targeted $80 million of run rate cost synergies by the end of year 3. Has anything you've seen thus far change your confidence in that target or timing and can you further drive that more so in 2027?

Sure. So we -- I -- we are not losing sleep on the cost synergies. We will be ahead by year 3 in terms of the run rate. We are ahead in year 1 in terms of the cost synergies that we are executing that we will have as a run rate at the end of the year and also that they will be paused in the P&L of 2026. And mainly, this is due to the fact that we have executed fast on the G&A synergies that we are executing this year. Now year 2 and year 3, we come a lot of the purchasing synergies that takes a little bit longer to be able to materialize and execute. In those $80 million, there is only 10% that comes from footprint synergies, and that is a prudent approach that we are having because when you touch the footprint, you touch your customer delivery. So we want to ensure that we got everything very well organized for that, but that will be the gift the keeps on giving in terms of there would be continuous future optimization of the sites.

Got it. with the cost opportunity relatively tangible on the revenue side, where do you see the largest cross-selling or commercial opportunities between legacy ITT and SPX FLOW, and when should those become more visible in the reported growth rate of that business? Is that more -- have you seen it already? Or is that more on 2027?

Sure. It's a mix. So if you look at one of the businesses, for example, in SPX FLOW is [indiscernible]. This is our hygenic pumps based out of DelevWisconsin. Wakasa is the #1 leader in North America of these hygienic pumps. And they got almost a complete product portfolio. The only product they do not have are those twin screw pumps, and guess what? This is the only product that we have in ITT in IG. So we have nobody in [indiscernible] in ITT legacy, but we had really that product. So that is something that is happening now. Wakasha has already sold almost $0.5 billion -- no, sorry, $500,000 of twin screw pumps in North America. -- we have a quotation for roughly $4 million to $5 million of potential orders. What we have done is put inventory here in North America of these pumps. Then we will go through the localization of the assembly and then also the localization of the manufacturing. That is something that is happening, it's happening now. Now when you look at a couple of other revenue synergies, it takes a little bit more time. So for example, Latin America, -- we -- in SPX FLOW, we really do not have a base in Latin America from an operational point of view. We have a sales rep. But you can imagine, I mean, if you're thinking that you know what the heck is going on with your sales rep in North America, thinking that you're sitting here in North America, I think it's a dream. So we are going to have more our direct people manage it and supervising more locally, understanding exactly how they spend the time and where. And then we will localize all the assembly to reduce the lead time. That is a big opportunity for mixes in particular. And -- but it takes time to build that. This is also why the revenue synergies are not in the model. Another opportunity is the Middle East. When you look at the Middle East, we don't say practically anything in the Middle East from SPX perspective. So we are localizing the assembly of the Brian Lube pumps and as well as the mix. We are going through the process in terms of the bureaucratic process in terms of adding the license and all of that, it's going to take time. We have a good site. We don't need a major investment to be able to assemble those pump and dormitel in the Middle East. So that is happening. Something that is going to happen faster is some of the pumps that SPX pump that we assemble in Germany. We will localize them in China because today, we assemble in Germany, and we hope to sell those German pumps import them in China and sell them in China. Even this one is a dream that we never come through. So when I was in Xidu, in Shanghai a couple of months ago, we looked at the line, we're going to assemble those Brian Lube pumps in -- directly in China, and we will be able to sell it more in that market.

Great. Let's move on to Motion Technologies or MT. Within the friction OEM business, the company continues to materially outperform overall global auto production almost 400 basis points of outgrowth in the second quarter, guidance still assuming more than $500 million, so that must mean you're going to do better in the second half of the year, including probably Q3. So how are you feeling about the setup for that business through the remainder of the year relative to that target -- and what continues to underpin that share gain engine as I assume next year will be another year of material market outgrowth?

Sure. Is that -- listen, this is the perfect example of how ITT wins in the market differentiating in execution and in innovation. In execution, I shared with you was in China, and that our plant in Wuxi in China has performed 100% on-time delivery every single month for the last 2 years. Every other plants around the world is 9.5 100% every single month for the last 2 years. Our quality is measured in PPB, parts per billion. Our competitors are at 40, 50 PPMs. So there are 2 orders of magnitude worse than us. If the Chinese want to launch a new car in 3 months, they come to us to have a flawless execution and the flawless launch. So the way that we are executing is unmatched by any of our competitors. And that is a differentiator that help us win. Second, on the innovation side, we have roughly more than 120, 130 researches in the R&D in Italy, where we have the major R&D -- and we have another probably 40 or 50 in our R&D in China. We spent more than 5% of revenue in R&D, and we're coming with new material, spend a lot of material science and we are able to make our product more cost competitive and also to sell value to our customers. So I can give some specific examples, but I would probably go too much in the detail, but that innovation is really feeding the rest of the growth. I can tell you that we will -- we are comfortable to say that we will continue to outperform also in 2027 and 2028. And this is not an arrogant statement, it's just because of the way this market works. So the award that you won in 2025 will have the SOP, the start of production in 2027. The awards that we won this year in '26, we have the start the production in '28. So we know that we have kept all the platforms we are in and we know that we won and conquer platform that we were not in. So we know we will outperform. The question is how much, and this is why we gave [indiscernible] kind of a range.