Yahoo Finance ITT Inc. (NYSE:ITT) Q1 2024 Earnings Call Transcript
ITT Inc. (NYSE:ITT) Q1 2024 Earnings Call Transcript May 2, 2024
ITT Inc. misses on earnings expectations. Reported EPS is $1.34 EPS, expectations were $1.36. ITT Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to ITT's 2024 First Quarter Conference Call. Today is Thursday, May 2, 2024. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern Time. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mark Macaluso, Vice-President, Investor Relations and Global Communications. Please, you may begin.
Mark Macaluso: Thank you, Victor and good morning. Joining me this morning in Stamford today are Luca Savi, ITT's Chief Executive Officer and President, and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the three months period ending March 30, 2024, which we announced this morning. Before we begin, please refer to Slide 2 of today's presentation, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to several risks and uncertainties, including those described in our 2023 Annual report on Form 10-K and other recent SEC filings. Except for otherwise noted, the first-quarter results we present this morning will be compared to the first-quarter of 2023 and include certain non-GAAP financial measures.
The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. With that, it's now my pleasure to turn the call over to Luca, who will begin on Slide 3.
Luca Savi: Thank you, Mark, and good morning. ITT had a very good and active start to the year. We grew revenue, margin and EPS above expectations, closed this Svanehoj acquisition, invested to sustain our differentiation and continued to gain share with new profitable awards. We also reached an important milestone on our multi-year safety journey. Because of our unrelenting focus on safety, we delivered a 40% year-over-year reduction in recordable incidents, leading to an injury frequency rate of 0.5, approaching best-in-class performance. Our plans are safer and more efficient every day. So for the results you delivered and for your focus on safety, I want to thank all IT tiers, a heartfelt thank you. Now on to the results.
In Q1, we built on 2023 momentum in orders, revenue, margin and EPS. And all of our businesses contributed to this performance. Here are the highlights 7% organic orders growth or 13% in total, nearly $1 billion in order leading to a book-to-bill of 1.07, 9% organic revenue growth or 14% total, surpassing $900 million of sales in the quarter for the very first time. 120 basis-points of adjusted operating margin expansion to 17% with all businesses making significant progress on our long-term targets. And although we no longer report total segment margin, on that basis, we will be just 100 basis-points shy of our 2026 long-term target. As a result of all of this, we drove over 20% adjusted EPS growth to another new level of earnings for ITT.
Now the details. On orders, CCT led the way with 23% growth fueled by record aerospace orders and recovery in-demand in connectors. The connectors performance was encouraging after the business managed through a year of distributor destocking. MT grew 11% with strong growth in rail. Friction also won 47 new hybrid and electric vehicle awards with Tesla, Xiaomi, Geely and Mercedes, among others. And IP's short-cycle business grew 9% sequentially, whilst winning nearly $70 million of project awards, leading to a book-to-bill of 1.06. On revenue, all three segments delivered strong revenue growth, driven by 8 percentage points of volume. This was led by Industrial Process, which drove 64% growth in profitable pump projects. MT delivered 8% growth led by strong friction OE outperformance and double-digit growth in rail whilst we continue to see a recovery in the friction aftermarket.
Finally, CCT grew 7% with 13% growth in aerospace and defense. We have seen a multi-quarter ramp-in defense that we expect will continue throughout 2024 and beyond. We are driving profitable growth, resulting in a 23% increase in operating income, nearly 2.5 times our organic revenue growth rate. Looking at margin by segment, MT surpassed 18% margin in Q1 after improving sequentially every quarter in 2023, highlighted by KONI, which drove margin above the empty segment average, well done [indiscernible] KONI China. CCT also delivered more than 18% margin, driven in-part by pricing. Our new CCT President, Michael Guhde is already hard at-work leveraging his operational experience from Parker-Hannifin and ITW to drive CCT towards its 22% margin target.
Finally, on a like-for-like basis, IP's margin was up 140 basis-points even as the mix of revenues shift to projects. And including acquisitions, IP was still above 20%. Because of this performance, we are raising the low-end of our EPS guidance by $0.20 or $0.10 at the midpoint to a new range of $5.65 to $5.90. We now expect EPS growth of 11% at the midpoint above our long-term target. And given the strong top-line performance and momentum in orders, we are raising our organic growth guidance to 6% at the midpoint with a 20 basis-points increase in our margin outlook as well. Our teams deliver this performance whilst investing in the businesses. These investments will continue to drive strong returns for our shareholders and I was fortunate to see some of this firsthand last quarter.
In India and Saudi, I saw the investments that IP is making to expand testing capacity and capabilities. Khalid and the Saudi team will be able to test larger pump packages, sustaining our ability to gain share in the Middle-East. Similarly, in India, Lala and team are installing nearly four times their current power capacity to shorten lead times to customers and improve testing availability. As we expand our in-region for region strategy, IP expects to continue to gain share in these growing markets. We are also investing in our capabilities to execute decarbonization projects. At our Bornemann site in Germany, we are upgrading our testing facility to replicate field conditions on large sum packages. ITT would be one of few companies in the world with this capability.
We're also making progress penetrating the high-performance break pad segment. We expect the new production lines in Termoli Italy to be up and running later this year as part of our EUR50 million investment for plant expansion and upgraded R&D capabilities. Notably, the Friction team has already won low-emission brake platform awards on high-performance vehicles even before the facility construction is complete. In addition, the team secured approval for over $20 million of government incentives in Europe, which will significantly reduce our cash outlay for the facility expansion. And again, in Friction in China, working closely with local OEMs, we drop 38% growth in Friction OE, a substantial outperformance in the largest automotive market in the world.
Well done Friction team. And finally, on innovation, the Embedded Motor Drive or EMD is delivering continued positive results in customer field trials. On average, EMD delivers energy savings of over 50% compared to standard motor and significant CO2 emissions reduction. We expect to start product commercialization in 2025, and we'll share more with you on EMD in the coming quarters. All of these investments will sustain ITT's differentiation over the long-term through profitable growth. A significant proportion of that growth will come from the nearly $1 billion of orders we booked this quarter. Let me tell you more about these on Slide 4. Building on our 2023 momentum, we grew orders 13% in total and 16% sequentially with strong performances in all businesses.
We are focused on growing and growing profitably. This means we look at each opportunity with the strategic lens and an opportunity level of selectivity. Here are a few examples. By leveraging our proprietary envision Valve technology, IP Engineered Valves won an award of more than $20 million to support the production of a groundbreaking weight-loss drug. This strategic award reinforces our partnership with these leading global pharmaceutical company. We're also winning on green orders, not just in AP with large decarbonization projects, but also in friction with awards with hybrid and electric vehicles and in CCT with battery connectors. With this and other awards, green applications now represent approximately 16% of ITT's revenue annually.
Moving forward, this will be bolstered by Svanehoj with its exposure to low-carbon and green fuel applications as part of the clean-energy transition. This quarter, [indiscernible] grew orders by more than 30% year-over-year, and we expect this will have delivered double-digit revenue growth for the next several years. Moving to CCT, we are seeing good orders momentum in Connectors distribution, especially in North-America. Whilst this is encouraging, we don't expect full recovery in connectors until the second-half of the year. Additionally, Aerospace and defense components recorded its highest orders quarter ever. And finally, in Rail, orders were up 37%. As you can see, ITT's growth is accelerating with organic orders growth of 7% and with a strong performance from Svanehoj, we grew orders 13% in total.
Our Q1 performance demonstrated once again that ITT is well-positioned to grow profitably. Now let me turn the call over to Emmanuel on Slide 5.
Emmanuel Caprais: Thank you, Luca, and good morning. Beginning with revenue, we generated 9% organic sales growth with all segments contributing. Volume drove most of the growth this quarter. IP projects were up 64%. CCT Aerospace and defense components were up 21% and Friction OE was up 12% with an outperformance well-above the historical 800 basis-point average. Svanehoj added 5 points to the total revenue growth and also want to reemphasize that its orders were up over 30% compared to the prior year. On profitability, margin expansion was primarily driven by MT, which grew more than 300 basis-points to surpass 18% faster than we anticipated. Excluding M&A, IP's margin was up 140 basis-points. This was driven in-part by over 200 basis-points of margin expansion on projects as we continue to improve execution.
Collectively, our businesses drove 60 basis-points of productivity, which more than offset 40 basis-points of strategic investments related to new friction product formulations and product redesigns in IP and CCT. On earnings, adjusted EPS growth of 21% was driven by volume, price and productivity. In addition, we absorbed higher interest expense and a slightly higher effective tax-rate. Finally, on cash, after generating $430 million for all of 2023, this quarter, we grew our free-cash flow by 2% versus prior year, driven by increased profit. We continue to see significant opportunities for stronger cash generation as inventory and AR improve. All-in, a strong start to 2024 that gives us confidence in delivering the midpoint of our new EPS outlook.
Let's move to Slide 6 to review the EPS bridge for Q1. Adjusted EPS grew 21% for the quarter to a record $1.42. Strong volume growth and higher price drove $0.23 of operating leverage, while net productivity contributed another $0.05. And the investments Luca described earlier had an impact of $0.03 this quarter. Included in the net M&A bar is roughly $7 million of intangible amortization coming from both Svanehoj and Micro-Mode of the $7 million, approximately $4 million is related to amortization of backlog that will be recognized over the next 12 months to 18 months and then tail-off. Once we finalize the purchase price allocation for Svanehoj, we will provide more color. Wrapping up the bridge, interest on the term-loan and commercial paper drove a $0.03 headwind this quarter.
As cash generation picks up, we anticipate paying down our outstanding debt further. Let's turn to Slide 7 to discuss our 2024 guidance. Today, we are raising our guidance for organic revenue, operating margin and EPS given our strong first-quarter performance. To begin, we are increasing the midpoint of our organic revenue guide to approximately 6% due to friction outperformance, improvement in connector orders and the backlog we accumulated at the end of Q1, which is up 11% organically year-over-year. On operating margin, we expect 17.4% at the midpoint. Both MT and CCT eclipsed 18% this quarter and IP is driving higher-margin in the core business, mitigating M&A dilution. The higher revenue growth and operating margin is expected to drive adjusted EPS growth of 11% at the midpoint, $0.10 improvement from the previous guidance.
Before I move on, I also wanted to provide some color on what we expect in the second-quarter. Organic revenue should grow in the mid-single digits, led by CCT and MP, while IP will navigate a tough prior year compare on revenue and orders growth. We expect total margin expansion of 50 basis-points to 80 basis-points, which will drive EPS growth in the high single-digit range compared to the prior year. Let's turn to Slide 8 to discuss capital allocation. Let me start by saying that we will always invest organically given the proven returns and organic growth we can generate. And now we're intensifying our focus on M&A. We expect this will be a significant value-creation driver for ITT, and so we thought it would be beneficial to shed more light on our capital deployment framework.
In M&A, our primary targets are close to core acquisitions in flow and connectors. We focus on companies with leading market positions that manufacture highly-engineered components and have strong management teams. These targets may also present margin expansion potential, but the deal rationale always starts with a strategic fit. We have significant dry powder and we intend to effectively deploy capital in order to strengthen further our existing businesses. Along with acquisitions, we also regularly review our portfolio to ensure the businesses that we own align to our longer-term strategy. After M&A, we focus on returning capital to shareholders through dividends and share repurchases. If we don't find the right targets for M&A, we intend to ramp-up the pace of share buybacks, allowing shareholders to benefit from ITT's strong financial position and our $1 billion share repurchase program.
With that, let me turn the call-back to Luca.
Luca Savi: Thank you, Emmanuel. Before I wrap-up, I want to reemphasize a few points Emmanuel made on M&A. Historically, we created value through growing organically and expanding our margins. And whilst this will continue, now we also expect to drive further value inorganically as we continue to build the M&A muscle. In the past few years, we added experienced deal makers to our leadership team and strengthen our M&A teams in the business. As a result, we have stronger capabilities and our success in this area is growing as evidenced by the three acquisitions in the last two years. Among these, with Habonim which expanded our valves business by more than 50%, generated more than 100% cash conversion in 2023 and exceeded our expectations in all metrics, adding $0.08 of EPS in year-one.
And while it's too early for Svanehoj the initial signs are encouraging. We continue investing in our capabilities and expect to accelerate the pace of M&A in a disciplined manner. And as Emmanuel said, it all starts with a strategic fit. Now let me wrap-up with a few points before Q&A. Q1 was another milestone quarter for ITT. And as a result, we raised our sales, margin and EPS guidance. Our businesses are outperforming their end-markets, be it energy, transportation or air and defense, generating nearly $1 billion of orders and a book-to-bill above one, leading to a record $1.5 billion backlog. We have many opportunities still to create value organically and with our strong financial position, we are working to compound this growth with enhanced M&A performance.
As always, it has been a pleasure speaking with you today. Thank you for joining. Victor, please open the line for Q&A.
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