ITT (ITT) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a 10% organic revenue growth, leading to the highest quarterly revenue ever, with a 21% growth in EPS and a more than $60 million improvement in free cash flow [41][10][15] - Segment margin expanded by 150 basis points, with Industrial Process (IP) margins reaching 21.3%, an increase of over 800 basis points [14][47] - The backlog grew by nearly $70 million this quarter, remaining above $1 billion despite a 10% revenue increase in Q1 [17][73] Business Line Data and Key Metrics Changes - In Industrial Process, orders grew by 22%, with project orders increasing by 54% and aftermarket orders up by 19% [41][47] - Motion Technologies (MT) saw strong performance in original equipment (OE) Friction, winning 41 electrified vehicle platform awards, while aftermarket demand faced destocking challenges [41][10] - Controls in Commercial Aerospace grew by 15%, while Connectors grew by 6%, despite a decline in the industrial market [47][101] Market Data and Key Metrics Changes - The automotive market showed varied performance, with Europe up 17%, North America nearly 10% up, and China down 8% [27][8] - The company expects low single-digit growth worldwide, with North America projected to grow in the mid-single digits, while Europe and China are expected to remain flat [27][8] Company Strategy and Development Direction - The company is focusing on growth and execution, aiming for 6% top-line growth, 20% segment margin, and over 10% EPS growth in the long term [20] - A strategic partnership with Continental was renewed, enhancing the aftermarket presence in Europe and allowing for flexibility in the Chinese market [10][68] - The acquisition of Micro-Mode for approximately $80 million is expected to enhance the company's position in the defense and space markets, with a total addressable market of around $4 billion [45][46] Management's Comments on Operating Environment and Future Outlook - Management expressed renewed confidence in delivering the midpoint of the updated 2023 EPS outlook due to a strong backlog and growth in key markets [10][16] - The company anticipates challenges in the aftermarket for automotive and industrial connectors, expecting destocking to persist throughout 2023 [17][23] - Management highlighted the importance of sustainability investments, including a $25 million investment in green energy projects [44][45] Other Important Information - The company repurchased $30 million of its shares and paid down $70 million of outstanding commercial paper, indicating strong cash generation [15][44] - The company is implementing a value-based pricing model to strengthen pricing actions across the organization [14][53] Q&A Session Summary Question: How is the company thinking about the segments differently from an organic growth standpoint for the year? - Management noted that Industrial Process is expected to perform better than initially anticipated, while aftermarket demand in Motion Technologies is likely to be slower due to ongoing destocking [22][23] Question: What makes the company think that destocking will carry through the year? - Management indicated that feedback from customers and inventory levels suggest that destocking in automotive and connectors will persist [24][25] Question: Can you provide insights on the performance of the IP business and its sustainability? - Management expressed confidence in the sustainability of IP margins, noting no customer pushback on pricing actions and strong order rates [29][30] Question: What is the current run rate revenue in the China aftermarket? - The aftermarket business in China is currently around $5 million, with plans to grow this segment through strategic partnerships [99][87] Question: Can you elaborate on the impact of the Continental agreement in China? - The agreement allows the company to explore distribution and marketing opportunities independently in China, which is still evolving [68][99]