ITT Inc.

Welcome to ITT's 2023 fourth quarter conference call. Today is Thursday, February 8th, 2024. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 1 1 again. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.

Thank you, Kevin, and good morning. Joining me in Stanford today are Lucas Savi, ITT's Chief Executive Officer and President, and Emmanuel Capre, Chief Financial Officer. Today's call will cover ITT's financial results for the three and 12-month period and to December 31, 2023, which we announced this morning. Please refer to slide two of the presentation available on our website, 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 where otherwise noted, the fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2022 and include certain non-GAAP financial measures. The reconciliation of such measures to 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. Before we begin, I want to call your attention to a change in the presentation of certain measures we have previously provided in ITT's earnings materials and SEC filings. The SEC has asked ITT to no longer disclose total segment operating income or margin and total adjusted segment operating income or margin. We are therefore transitioning to operating income and margin and adjusted operating income and margin on a consolidated basis. This metric is comprised of our previous segment operating income and adjusted segment and operating income measures, respectively, minus corporate expense, which was previously presented below the segment operating income line in our earnings materials. Please note, this is not due to any error, correction, or misstatement on ITT's behalf. We will continue to present the results for each segment individually, but because of this change, they will no longer be aggregated to disclose total segment operating income or margin. we believe the previous measures are easily derivable from our reported results. With that, it's now my pleasure to turn the call over to Luca, who will begin on slide three.

Thank you, Mark, and good morning. 2023 was an outstanding year for ITT. I would like to thank all ITTers for their hard work and dedication in consistently serving our customers with quality products delivered on time despite continued challenging supply chain conditions. And it was your efforts that allowed ITT to surpass $3 billion of revenue in 2023. Here are the highlights. 8% organic revenue growth. Nearly 17% operating margin, up 100 basis points. 17% adjusted EPS growth to a new record level of earnings at $5.21. free cash flow of $430 million, up more than $250 million. And on the M&A front, we announced two strategic acquisitions in flow and connectors while divesting to non-core businesses. On revenue growth, industrial process led the way with 14% organic revenue growth, including 16% in parts and service and 31% growth in projects. The project's growth was due to significant share gains driven by flawless execution. In MT, friction OE grew 13%, outpacing global auto production by roughly 600 basis points for the year. And in CCT, our aerospace and defense components business was up 25%. On profitability. Our productivity and pricing actions drove a 100 basis point improvement in margin expansion for the full year, bolstered by the performance in industrial process. IP grew margin 330 basis points, eclipsing 22%, whilst we continue to invest in product redesign, key competencies, and lean. We also successfully closed the Seneca Falls foundry, which will enable the business to operate with a more efficient cost structure. There was considerable progress at Motion Technologies as well. For the full year, MT delivered 16.2% operating margin, improving sequentially every quarter in 2023, and exiting Q4 with a run rate above 17%. The performance at Wolverine also significantly improved to a high teens operating margin in December. With this performance and the more favorable price-cost dynamic, we remain confident in MT's ability to reach 18% during 2024. Moving to capital deployment, we strategically deployed cash across all key priorities in 2023. We invested more than $100 million towards capacity expansion in friction to support EV share gains, productivity improvements in all businesses, and R&D to fund our next product innovations. When we were in Italy, together with the team, we reviewed the progress of our investment into the high-performance segment. The team has developed new product formulations whilst the site construction is progressing on time. Most importantly, we already won multiple awards that will feed the plant, slated to start production in the fourth quarter. On M&A, We acquired specialty connectors manufacturer Micromode and in January closed the acquisition of marine cryogenic pumps leaders Vanehoy. I was fortunate to join this Vanehoy integration kickoff together with Fernando as we begin executing our playbook. Both teams were excited, aligned, focused on the right priorities and ready to hit the ground running on day one. And still, We have a robust and active pipeline of M&A opportunities today. In terms of returning capital to shareholders, we announced a 10% dividend increase in 2024, and as already mentioned, we have a new $1 billion share repurchase program, which will provide additional flexibility and capacity. In total, we have deployed over $2.5 billion since 2019, nearly two times our adjusted free cash flow over the same period. When it comes to our 2023 performance, I'm incredibly humbled by our team commitment and results. It has been a difficult few years given all the macro challenges put in front of us, and our teams have risen to the occasion time and time again. We recognize some of their exceptional achievements at the annual ITT Awards in December. Let me share a few. Our team from Korea has been accident-free for more than six years. Our Wolverine team for Dearborn, Michigan, swiftly developed a new product formulation to replace a key raw material whose production was discontinued. Our team in Nogales, Mexico, overhauled their production planning process to significantly improve our on-time delivery. And lastly, our IP team secured large awards with ExxonMobil and other leading oil and gas producers, placing ITT technology on groundbreaking energy projects around the world. We are proud and grateful for the efforts of all IT tiers which drove the results we are announcing today. Now to 2024. We are in a strong position to continue the progress we made last year. Our EPS outlook of 545 to 590 is up 9% at the midpoint. We expect total revenue growth of 10%. This will be driven by more than 4% organic revenue growth compounded by the contribution from this Vanehoy acquisition. We anticipate our operating margin to be above 17% at the midpoint, and we're driving towards $450 million of free cash flow, driven by higher income and working capital improvements. I'm encouraged by the opportunities ahead and confident in our ability to outperform. Now let's turn to slide four to talk more about growth. At ITT, Our ability to outgrow the competition comes from our ability to differentiate. And our teams differentiate in both performance and innovation. Let me talk about the performance aspect first. On Monday, we announced a three-year $80 million award in our flow business with ExxonMobil. Under the agreement, IP will supply ExxonMobil with our highly engineered API centrifugal pumps aftermarket parts and services to their existing facilities. We displaced several incumbents by offering a superior solution that will lower the total cost of ownership for our customer by improving pub uptime. And the dedicated project management team will provide world-class customer service and flawless execution. Well done, Kelly, Juan, and the entire IP team for your perseverance and the close collaboration you built with ExxonMobil. Moving to friction, our teams continue to gain share in the electrified vehicle market through superior quality, on-time delivery, and perfect execution. In 2023, we more than doubled the number of electrified platform awards with leading OEMs, including Tesla, BMW, BYD, Great Wall, and Geely. I'd like to draw your attention to our incredible growth of 49% in EV brake pad deliveries, as we continue to win market share. As we have mentioned many times, electrification is good for ITT. And on top of that, we're winning on ICE too. Despite the declining ICE market, we grew our delivery 7%. As a result of all this, our global OE share rose over 100 basis points to more than 29% globally in 2023, led by Europe and China. Continuing with China, in November, the ITT leadership team and I spent four days in China to finalize ITT's 2024 plan. During this visit, we were fortunate to spend time on the shop floor in Wuxi to see the latest improvements and new investments. The team showcased the many new electric vehicles where we won breakback contracts. Our penetration of the China market has been outstanding, and both local and and Western OEMs recognize the value we create. Specifically, our in-region-for-region strategy enabled us to design products tailored for the China market. To further support our OEM customers, we made significant investments in the testing facility at our Yellow Mountain site in eastern China. In October, at this location, the Friction team launched a best-in-class testing center where, together with our customers, We monitor the performance of their braking systems and solve their problems with speed and flexibility. This local approach has been a key driver of our friction OER performance and organic revenue growth of over 20% for the year. It's because of this that our business in China will continue to be a growth driver for ITT over the long term. Now let's turn to page five to discuss ITT's differentiation through innovation. When the connectors team saw an opportunity in the energy storage systems market, they acted in record time, quickly developing connectors from design concept to commercialized products and building an automated assembly line that enables scalable production. Our connectors will be used on several applications in commercial, industrial, and residential battery storage systems. They enhance power and signal transmission in batteries used for renewable energy sources. A year ago, ITT had no products in this space. Now, we have more than 60, and our portfolio continues to expand. Well done, Cecily and team, for decisively acting when you saw the opportunity. We are also making inroads in EV toll applications. We recently engineered a conditioned air system and vibration isolation equipment on a zero emissions short haul travel project together with our customer Beta. This is a large potential market for CCT with commercial and defense applications. Continually sustainable transport in rail the Axon team has developed a highly engineered 1G buffer for intermodal freight transport. The team acted quickly to address a problem for our customers who were underserved by a single supplier. This product is used to protect goods and rail infrastructure and allows for safer loading between road and rail. It represents a $15 million addressable market expansion for Axon, And we have already secured a multi-million dollar backlog after displacing the single source incumbent in this segment. And still, there are further customers for us to conquer. These innovations all support sustainability. And yes, sustainability too is good for ITT. With that, let me now turn the call over to Emmanuel to discuss our Q4 results and 2024 outlook.