Q3 2024 ITT Inc Earnings Call
It is now my pleasure to turn the floor over to Mark Macaluso, Vice President Investor Relations and Global Communications you may begin.
Mark Macaluso: Thank you Gigi and good morning, joining me. This morning in Stanford are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel Cabre Chief Financial Officer, today's call will cover financial results for the three months period, ending September 28, 2024, which we announced this morning before we begin please refer to slide two of today's presentation, where we note.
Mark Macaluso: 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 third quarter results that we present this morning will be compared to the third quarter of 2023.
Mark Macaluso: And include certain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our earnings 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 three.
Luca Savi: Thank you Mark and good morning.
Luca Savi: I would like to begin by thanking all tiers for another exceptional performance in the third quarter.
Luca Savi: Once again, our teams delivered strong profitable growth with even more robust growth in orders.
Luca Savi: First in our legacy business, we continue to drive value creation through outsized organic growth and margin expansion.
Luca Savi: With an operating margin above our long term target nearly two years ahead of schedule.
Luca Savi: And why do we continue to drive profitable growth in the core we are also building the M&A muscle through strategic capital deployment.
Luca Savi: We're seeing strong results from out of the recent acquisitions.
Luca Savi: Early indications on the salary is about your proposition or encourage it.
Luca Savi: I want to thank our teams once again for over delivering on our commitments.
Luca Savi: Let's now discuss a few highlights from Q3.
Luca Savi: We grew orders, 14% on an organic basis, and importantly, 6% sequentially versus Q2.
Luca Savi: Our book to Bill of one one resulting in a record ending backlog of $1 $7 billion.
Luca Savi: This is even more impressive given that organic revenue grew 6% with all segments contributing.
Luca Savi: We also drove 60 basis points of margin expansion or 100 basis points, excluding M&A impacts.
Luca Savi: All in we delivered 7% adjusted EPS growth of 9% when excluding the impact of the border and divestiture.
Luca Savi: Excluding the temporary acquisition amortization, we're driving to more than $6 of earnings in 2024.
Luca Savi: It truly swamp performance compounded by the $1 billion of capital deployed.
Luca Savi: We can sorry are closed we have now deployed over four times more capital than we did in the corresponding period in 2023.
Luca Savi: And more than two times, our expected free cash flow.
Luca Savi: Let's get into the details on our Q3.
Luca Savi: Our orders growth in the third quarter was a standout.
Luca Savi: IP Group August 30%.
Luca Savi: Pump project growth well above 100% for the quarter yet.
Luca Savi: Year to date, our project orders that are now up 10% on top of 29% growth last year overcoming the tough compares we experienced in the first half of 2024.
Luca Savi: We also saw orders growth in nearly every short cycle product category in industrial process led by Bob and after market.
Luca Savi: CCT grew orders, 7% driven by continued defense share gains and connectors.
Luca Savi: The CCT team secured several important defense waste, including connectors on a transportable survey as a radar system.
Luca Savi: And the motion technologies Kony array of secured multiple large orders in Europe, and China, while friction continue to conquer new platforms with all Oems and on Ford powertrain.
Luca Savi: On revenue.
Luca Savi: All of our businesses are contributing.
CCT grew 6% on the strength of defense connectors and the commercial aerospace aftermarket.
Luca Savi: All of which grew 20% or more organically.
Luca Savi: Our connectors business continues to grow profitably with new products and faster speed to market driving share gains.
Luca Savi: IP grew 6% with strength across all short cycle product categories, including the habit and balance business.
Luca Savi: Notably September was <unk> highest month of sales since the acquisition.
Luca Savi: In empty after market demand in friction as well as share gains in Coney rail drove 5% organic growth. Additionally, strictures outperformance was August 700 basis points in a challenging auto OE market.
Luca Savi: In total we grew 8%, including Sudani oriented sorry, despite the walgreen divestiture.
Luca Savi: On margins.
Luca Savi: We grew 60 basis points to over 18% with strong volume and pricing growth completely overcoming the dilution from acquisitions and foreign currency impacts.
Luca Savi: IP remained above 20% or above 23%, excluding acquisition dilution, representing an incremental margin of 37%.
Luca Savi: CCT, the 19% milestone with another outstanding performance in connectors.
Luca Savi: 40 basis points of dilution from the cassava acquisition.
Luca Savi: Empty was again above 18% with strong productivity that more than offset significant foreign currency headwinds.
Luca Savi: And kony was above 20% margin for the very first time.
Luca Savi: <unk> team, especially in China.
Luca Savi: Shifting to our outlook today.
Luca Savi: Today, we are raising the midpoint of our full year adjusted EPS guidance by five cents.
Luca Savi: To $5.83 overcoming unfavorable foreign currency higher interest expense and temporary acquisition amortization.
Luca Savi: To recap another strong quarter for ITC with double digit organic orders growth that will continue to power our future topline performance.
Luca Savi: Now, let's turn to slide four to talk more about how we are furthering itt's differentiation.
Luca Savi: The friction China team has nearly reached its full year target for total platform awards, thanks to wins with local Oems, including Gili Cherry BYD Zika and Tesla.
Luca Savi: One of the ways, we continue to differentiate in this competitive market is a world class testing capabilities.
Luca Savi: In August I worked together with July Sunny and the team in China to see the taxi facility will be invested in and be able to do that.
Luca Savi: Our investment in a new state of the art Graper testing center in <unk>, China is already delivering strong returns.
Luca Savi: Our engineers and drivers trained in Badger, Italy are able to deliver fast and real time testing data to our customers that accurately predicts the braking systems performance in harsh conditions and to raise.
Luca Savi: And because of the investment we made in why Sean We're also able to replicate extreme temperatures and humidity levels indoors.
Luca Savi: This unique facility enables our team to work side by side with all our customers in China.
Luca Savi: The level of our performance.
Luca Savi: Moving to IP.
Speaker Change: Danny Hollie secured awards for 24, new vessels, including 11 that are capable of handling ammonia.
Speaker Change: So Daniela is leading the way for ammonia Thompson commercial vessels with older 2000, ammonia ready marine pumps in operation or on order.
Speaker Change: So Danny Hoyle deep well fewer pumps can handle LNG LPG methanol and ammonia.
Speaker Change: This will ensure that vessels are essentially future prove while also securing a long term installed base for growth at <unk>.
Speaker Change: As you can see Vanhoy is indeed.
Speaker Change: They can get better future.
Speaker Change: Next on good stops.
Speaker Change: Thanks to Saudi is best in class quality and 100% on time delivery in the third quarter, we have become a preferred partner to EPC and end users in the region.
Speaker Change: Additionally, thanks to our close technical support and product localization the team drove a near perfect win rate with these customers.
Speaker Change: And as a result, we secured close to $50 million in orders for pumps on the Ami or a petrochemical complex in Saudi Arabia.
Speaker Change: Because of this and to ensure we continue to outperform in this important region, where investing further to a larger facility in Saudi building on our capacity investments, we announced last year.
Speaker Change: Well done highlight Omar and the entire middle East team for delivering on our commitments and driving more than 100% project Awards.
Speaker Change: Growth this quarter.
Speaker Change: Moving to aerospace and defense.
Speaker Change: Our connectors team is continuing to differentiate through the speed at which we deliver these highly customized interconnect solutions.
Speaker Change: In Q3, we won awards on leading the SaaS platforms, including the net Oreo soldier, where communication system and the world's leading integrated SaaS system.
Speaker Change: On top of these we wanted to maintain engineering contracts for the next Gen advanced military aircraft.
Speaker Change: These are just a few of the awards from across the portfolio that will continue to feed itt's backlog and future growth.
Speaker Change: Let's now take a deeper dive into our record backlog on slide five.
Speaker Change: In the last nine months, we have grown our backlog to a record $1 7 billion.
Speaker Change: A whopping, 34% increase with the book to be solidly above one <unk>.
Speaker Change: This is driven both by our legacy business and our strategic acquisitions.
Speaker Change: First on our legacy business.
Speaker Change: Aerospace <unk> defense orders were up 15% due to large program awards.
Speaker Change: <unk> orders grew roughly 20% driven by Europe, and China share gains.
Speaker Change: Rail continues to be a great market for IDT.
Speaker Change: As an example is currently China, where the team is in the final testing phase on a new high speed trains, which will operate at 400 kilometers per hour.
Speaker Change: A significant step to ensure Connie shocks at the right engineering solution for when the trains to begin operating in 2026.
Speaker Change: Based on all of these and the projects share gains in IP. It is clear that our legacy business is growing.
Speaker Change: And this will be enhanced further by our recent acquisitions.
Danny Hollie: Danny Hollie.
Danny Hollie: Less than a year in the results are already outstanding.
With a book to Bill of one four we added $190 million to add backlog.
Danny Hollie: We expect the Savannah, how its leadership in the energy transition and our engineering expertise to drive stronger growth as low carbon is sustainable for us are more widely adopted.
Danny Hollie: In Q3, as an example, because I knew I unveiled a new high pressure ammonia fewer pump capable of safely handling highly corrosive carbon free liquid.
Danny Hollie: This and the wins, we have already secured gives us confidence anything demanding high double digit growth outlook.
Danny Hollie: Finally, onkus ARIA.
<unk> serves as an extension of customer engineering teams, taking high level concept to production in record time.
Speaker Change: Revenue is highly visible with the programs, we're on including content on the F 35, F 16, and the joint strike Fighter program among others.
Speaker Change: The salary of cable assemblies are the connectivity the tight defense systems together.
Speaker Change: Danny Hollie, sorry provides good visibility to future revenue given the programmatic nature of the business, which we expect will drive high single digit growth over the near term and has already added $130 million to itt's backlog.
Speaker Change: Recently, Michael ICT leadership, we're on the ground at case salaries sites across North America to welcome the local teams to ITT, Inc.
Speaker Change: Including at quarters in New Hampshire, where cable assemblies are currently being built for the Virginia class submarine.
Speaker Change: We continue to have confidence in <unk> value proposition and our focus on executing the commercial synergies we identified.
Speaker Change: As you can see our value creation through strong organic growth and margin expansion continues.
Speaker Change: And now through M&A as well now.
Speaker Change: Now, let me turn the call over to <unk> to discuss our results in more detail. Thank you Luca and good morning, let's begin with revenue volume once again drove most of the growth this quarter with all segments contributing.
Speaker Change: In IP, we saw strong growth across baseline pumps as well as parts service and valves, while project sales were flat.
Speaker Change: <unk> was a standout this quarter with 16% revenue growth.
Speaker Change: <unk> also added 14 points to Ip's total growth.
Speaker Change: In CCT defense share gains connectors, and Aero aftermarket growth drove a 6% revenue increase.
Speaker Change: CCT is continuing the multi quarter recovery in connectors distributions at attractive margins.
Speaker Change: Additionally, we are overcoming a slowdown in order activity from Boeing given the production stoppage and elevated inventory levels.
Speaker Change: <unk> revenue grew 5% driven by strengthening rail and friction aftermarket.
Speaker Change: OE side friction outperformed global auto production by over 700 basis points.
Speaker Change: <unk> grew 16% and expects to grow roughly 15% for the full year due to share gains.
Speaker Change: <unk> profitability margin expansion was primarily driven by higher volume and productivity, particularly in empty, which grew more than 100 basis points. Despite 160 basis points of FX headwinds.
Speaker Change: CCT exceeded 19% margin with 90 basis points of margin expansion overcoming 40 basis points of dilution from <unk>, which closed in September.
Speaker Change: And in IP, excluding the 300 basis points of dilution from Vannoy margin grew 60 basis points to 23, 9%.
Speaker Change: For all of ITT price operational leverage and productivity outpaced unfavorable impacts from foreign currency of 80 basis points.
Speaker Change: On earnings we delivered a strong performance driven by core volume growth and margin expansion.
Speaker Change: This is itt's DNA.
Speaker Change: Lastly on capital deployment beyond Savannah, Hoi anchor Saia, we continue to cultivate a rich actionable pipeline of targets in flow and connectors, while also putting the balance sheet to work on other capital deployment priorities.
Speaker Change: Adjusted over $75 million in growth and productivity, mainly in friction to support share gains and the expansion of our high performance business.
Speaker Change: And in Q3 immediately after funding the <unk> acquisition, we repurchased another $25 million of ITT shares, bringing the year to date total above $100 million.
Speaker Change: Let's quickly turn to the operating margin and EPS bridges on slide seven.
Speaker Change: The key highlight here is the strong performance of our businesses, we overcame <unk> of unfavorable FX.
Speaker Change: <unk> of higher interest expense <unk> <unk> of dilution from the Wolverine divestiture.
Speaker Change: And a higher tax rate to deliver $1 46 of adjusted EPS.
Speaker Change: If you exclude M&A impacts and the temporary amortization adjusted EPS would be up 9% for the quarter.
Now, let's move to slide eight to discuss our updated 2020 for guidance.
Speaker Change: Yes.
Speaker Change: Today, we are raising our full year revenue.
Speaker Change: Operating margin and EPS guidance above the previous midpoint.
Speaker Change: We're fully absorbing an incremental <unk> <unk> impact from higher interest expense and acquisition amortization related to <unk>, while raising the midpoint of adjusted EPS to $5 83.
Speaker Change: For a growth of 12%.
Speaker Change: On the top line, we expect to see continued outperformance in friction as well as strong growth in IP and connectors.
Speaker Change: Combination of this profitable growth and our relentless focus on productivity and pricing will drive margin expansion of over 60 basis points at the midpoint.
Speaker Change: Or over 140 basis points, excluding M&A.
Speaker Change: Our adjusted free cash flow guidance remains at approximately $450 million for the full year.
Speaker Change: Let's briefly look at the adjusted EPS outlook on slide nine.
I wanted to highlight the strong operational performance in our legacy business in 2020 for.
Speaker Change: This has allowed us to invest organically to support share gains while also overcoming significantly higher interest expense amortization related to acquisition and lost earnings from the divestiture of warfarin.
Speaker Change: As a result, we are raising the midpoint of our full year EPS guidance.
Speaker Change: This is a testament to the resilience of the ITT.
Speaker Change: For the fourth quarter total growth will be low double digits, driven by Zen Hoyt <unk> more than offsetting the divestiture impact.
Speaker Change: We expect to grow the top line in the low single digit range organically with IP delivering the strongest top line growth.
Speaker Change: This assumes that CCT will be up slightly with a strong connectors performance offset by slower aerospace demand due to the Boeing work stoppage and empty will be roughly flat year over year due to expected OEM shutdowns in December.
Speaker Change: On margin, we expect that both IP LMT will delivered margin expansion, while CCT will be in the mid teens due to temporary amortization from <unk>.
Speaker Change: However for the full year, we expect that both empty and CCT will be above 18%, while IP, we'll finish above 20% once again.
This will drive adjusted EPS growth in the high single digit range at the midpoint.
Speaker Change: Let me turn the call back to look out say 10 to wrap up.
Speaker Change: Manuel few points before Q&A.
Speaker Change: This quarter once again, we delivered value creation through organic growth and margin expansion.
Speaker Change: This is itt's DNA.
Speaker Change: Our execution and innovation are delivering share gains across all our businesses to a record backlog ahead of 2025.
Speaker Change: On top of this we continue to build our M&A muscle.
Speaker Change: <unk> is already delivering his salary as early signs are good.
Speaker Change: And our M&A pipeline remains active.
Speaker Change: And thanks to our team's performance were once again raising our outlook.
Speaker Change: As always it has been my pleasure. Thank you for your continued support and interest in 90 Gigi. Please open the line for Q&A.
Speaker Change: Thank you.
Speaker Change: Floor is now open for questions. At this time, if you have a question or comment. Please press star one one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by hitting star one one again, we do also while you pose your.
Speaker Change: <unk> you pick up your handset to provide optimal sound quality.
Speaker Change: These limit your questions to one question and one follow up.
Speaker Change: One moment, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Joe Giordano from TD Cowen.
Joe Giordano: Hey, good morning, guys.
Speaker Change: Good morning, Jeff.
Joe Giordano: I'm just curious.
Joe Giordano: This is a little bit more on IP, but I guess it could be broad like how reflective do you think your results are of the underlying conditions in the market that youre operating in because we're hearing some kind of mixed about push outs of projects.
Joe Giordano: Even in even in industries like process, where we think things are generally pretty good we're hearing some mixed kind of color.
Speaker Change: And clearly that's not what's happening in your in your results here. So can you maybe compare what you're seeing in your order book versus like what underlying conditions on the ground might look like.
Speaker Change: Sure I think what Youre seeing here joined the results is the differentiation of ATT and when it comes particularly on the performance side. So if you think of that.
Speaker Change: Example, that we gave of our Saudi operation set in Q3, they deliver 100% on time delivery good quality products and visa. He's the reason why we continue to win market share on the project side and this year year to date, we have 10%.
Speaker Change: This is last year there was already a very tough compares the story is the same when it comes to rail.
Speaker Change: In China or in Europe, and North America friction and also on the connector side, particularly on defense and Joe If I can add.
Joe Giordano: If you look at our orders did grow on all the different end markets. So the 30% growth from a total order center.
Joe Giordano: At any quarter standpoint is driven by really by all of the markets. So we're really outperforming with every customer and all end markets.
Speaker Change: Fair enough and then just curious on M&A red So you've done the Wolverine divestment and you've made two deals here.
Speaker Change: You've mentioned that the pipeline looks good.
Speaker Change: How.
Speaker Change: Interested are you in terms of like timing right like you have a lot going on you're executing well, but like how much is too much in the short period of time internally from a bandwidth standpoint, and if I can just tack on one Emmanuel just on the <unk>.
Speaker Change: Mid tick a tiny bit on the free cash flow like can you maybe give us the nuances there you're kind of raising the core in revenue in <unk>.
Speaker Change: On EPS, but the free cash flow guide kind of unchanged. There. So if you could just address that thanks guys.
Speaker Change: Thank you Joe So when you talk about the M&A.
Speaker Change: <unk> we are cultivating.
Speaker Change: We are active on the M&A front and the reason is because when you look at the last two acquisition for example.
Speaker Change: Joe Savant, and Osaka area, they are well performing companies with a good position in the market and a strong management team. If you think about the soaring Johnnie Morton all the teammates as Vanhoy is is really doing a great job at focusing and over delivering.
Sorry is early signs are good and we have a strong management team data with that with Mike leading casady here. So.
Speaker Change: We have room to do more acquisitions.
Speaker Change: <unk> of course.
Speaker Change: And on the on the free cash flow question, Joe So what.
Speaker Change: For sure free cash flow was a little bit first trading this quarter.
Speaker Change: We didn't hit what we wanted to do and the reason for this is because working capital and specifically.
Speaker Change: And any inventories.
Speaker Change: So I think what Youre seeing here is the fact that from a timing standpoint, it takes us a little bit more time to reduce the inventory than we were expecting.
And Thats why youre, not seeing free cash flow growing up at the same time as earnings.
Speaker Change: Thanks, guys.
Speaker Change: Thanks, Jeff.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Scott Davis from Melius.
Scott Davis: Hey, good morning, guys and congrats.
Scott Davis: Again on what's been a great year.
Scott Davis: You guys when you see numbers like 136% growth in pump projects.
Scott Davis: We've had some other companies just comment that purchasing.
Scott Davis: Patterns have changed a little bit on the project side, where things are orders are coming in a little earlier than then.
Scott Davis: And then maybe historically they have in and have you guys seen.
Again, just kind of in reference is such a big number or are folks or the EPC is kind of racing to get ahead of each other on making sure. They get orders in or there are some concerns about shortages of a product out there.
Scott Davis: Am I.
Scott Davis: That not relevant for you guys.
Speaker Change: No I wouldn't say, so Scott I think that.
Speaker Change: Because of the projects, sometimes that you add a little bit absent in Dallas that is the reason why for example, we emphasize a 10% projected growth year to date.
Speaker Change: On what was already an exceptional year last year, because probably that is ready to be more relevant what we have seen in the in the in the way to the EPC are working is that if you are delivering well if you're working well with the EPC. They tend to work now probably a little bit more impact in the ship with you and this is what is.
Speaker Change: Differentiate is differentiating now there in the market, so maybe a little bit more working closely together, particularly if you are working well and delivering if youre delivering web for them.
Speaker Change: Okay.
Speaker Change: That's helpful and then when you think about the <unk>.
Speaker Change: Absent flows of what's going on at Boeing right now I mean not.
Speaker Change: Not just as a customer you have to manage this.
Speaker Change: This disruption, but also I know you guys are in the middle of renegotiating or negotiating a contract moving forward what how do you manage your production around this uncertainty and does this does this push back that negotiation.
Speaker Change: It all just a little update on Boeing would be helpful.
Speaker Change: I see thanks. Thanks, Scott first of all we are working closely to ensure that we support them when they are going to restart the production.
Speaker Change: And that is not going to be a smooth restart because every single time you got one of these events. It takes a little bit of time. So we have to stay super close with them. So that when they started we will be able to support them when it comes to that.
Speaker Change: Not shipping anything today, just to give you an idea and these will have probably.
Speaker Change: The impact in Q4 of roughly $10 million for CCT and when it comes to the negotiation.
Speaker Change: That negotiation as to App because some of these contracts have an expiry date at the end of the year and at the end of Q1 2025. So the negotiations are happening.
Speaker Change: Year to date.
Speaker Change: Okay. That's helpful. All right I'll pass it on thank you guys best of luck.
Speaker Change: Thanks Scott.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Andrew <unk> from Bank of America.
Andrew: Hey, guys good morning drew.
Speaker Change: Yes, just a question on pricing.
Speaker Change: It's been a large focus in recent years.
Speaker Change: And it seems that it's really improved can you talk about structurally what you've done.
Speaker Change: What other workers to do going forward and early thoughts on pricing.
Speaker Change: 25.
Speaker Change: Sure.
Speaker Change: The pricing is different for the different businesses I would say when you look specifically at.
Speaker Change: 2024, and in Q3, we are price cost positive both when it comes to dollars at when he comes also to margin the.
Speaker Change: Situation is particularly positive on the CCT front and here he's at working strategically looking at both at the pricing into the distribution, but also in the renegotiation of the long term agreements.
Speaker Change: On the MTO side, what we've done structurally is ensuring that all the contracts now we've got commodities index and so that we this is covering both set for us as well as the giving some security for the customers as well and then on the IP side on the short cycle distribution, we have been very.
Speaker Change: <unk> active in terms of looking at our at.
Speaker Change: At discount rates and our leakage to ensure that we do not have any leakage of data when it comes to pricing in the future. The second part of your question, we probably need to be even more strategic so being even more analytical looking at the okay. If you look at this time for this application in this region for this distributor what is the value.
Speaker Change: Today, we are delivering and the price that we can get some more analytics to be able to get a little bit more pricing that is more normalized.
Speaker Change: Alright Gotcha. Thank you and just a follow up you sort of noted short cycle business.
Speaker Change: Same as yours continues to hold up well.
Speaker Change: Just whats the balance between share and could you just give us some color as to what are you seeing on the distributors are they turning more positive on the short cycle.
Speaker Change: Yes, so thanks.
Speaker Change: Thanks, Andrew So if you look at.
Speaker Change: So if you split it if you look at valves. This is clearly an area, where we're gaining share and our orders in Q3 were up 16% at the majority was volume.
Speaker Change: And we're gaining share both on large projects.
Speaker Change: The medication projects in our engineered valves.
Speaker Change: As well as on the on the short cycle short cycle, including the aftermarket for valves has been pretty strong.
Speaker Change: Service for <unk>.
Speaker Change: Service. So repairs is also doing really really well and I think here because we're focused on.
Speaker Change: Reducing as much as possible the machine downtime at our customers.
Speaker Change: Total outlook I mean, obviously choppy trends, depending on the region, how you're thinking about it for the remainder of the year, but more importantly, what's the best guess at this point for wind industry demand looks like as we head into 2025.
Speaker Change: Sure sure the market is challenging, particularly when you look at that the European market, but what is interesting to see here is that we continue to outperform in every single market diesels in Europe is in China, where the outperformance was almost 1000 basis points and in North America, where we perform there.
Speaker Change: Incredibly well as well so despite the fact that the market we'd be down in 2024, we are supposed to grow and our outperformance for the full year, it's probably going to be around 700 basis points.
Speaker Change: Now when you look at 2025.
Speaker Change: Right.
Speaker Change: A little bit early but we expect the market to be flat to up low single digit and because of the awards that we won in the past and awards that we continue to win in 2024, we expect an outperformance in 2025 as well the outperformance Mike is not only.
Speaker Change: <unk> in every single region that is also in every single power trade. Despite the fact, the internal combustion engine production would come is coming down we are growing that and our market share will be above 30% in total worldwide for the very first time this year.
Speaker Change: Makes sense and then just on the guide can you just help me understand the impact of the sorry in the fourth quarter, specifically on a net basis.
Speaker Change: Both the operational piece as well as obviously you've got some.
Speaker Change: Step up amortization type things in the numbers. So just maybe not that off from you. So I understand how that's impacting you guys.
Sure. So if you look at our fourth quarter.
Speaker Change: Definitely the orders momentum the positive momentum will continue.
Speaker Change: And a lot of a lot of growth will be driven by IP, which still be into double digits.
Speaker Change: From a revenue standpoint think about it as the highest quarter of 2024 from a dollar revenue standpoint.
Speaker Change: And that is pretty typical.
Speaker Change: So really good really good performance and the teams are getting ready to ramp up those shipments.
IP will be will.
Speaker Change: We will be driving a lot of that organic growth. Thanks to projects in total with Vannoy and Khazar yacht revenue will be up 12%.
Speaker Change: And then CCT as we said will be.
Speaker Change: Flat as we're trying to overcome the impact from Boeing we expect you know our guidance that our.
Speaker Change: Volumes will not restart meaningfully in Q4, and so that represents $10 million that was included in our guidance.
Speaker Change: From a revenue standpoint.
Speaker Change: And then from a margin Yeah go ahead.
Speaker Change: No no. Please continue.
Speaker Change: I was just going to say from a margin standpoint really quickly.
Speaker Change: In line with Q3.
Speaker Change: The FX impacts that we saw namely in empty.
Speaker Change: Really impacted our margins by 160 basis points in Q3, we don't expect that in Q4.
Speaker Change: We expect a sequential improvement in empty as a result.
Speaker Change: And then CCT will step down because we'll be impacted roughly 400 basis points by the kiss ARIA dilution.
Speaker Change: A lot of benefits from a from a bottom line standpoint.
Speaker Change: We will start shipping some of those large projects that we've been developing and that are really profitable.
Speaker Change: Again, our backlog for project the margin in that backlog was up several hundred basis points versus the prior year.
Speaker Change: And then think.
Speaker Change: Think about also the Boeing price renegotiations potentially the restart of some of the volumes.
Speaker Change: Real share gains that's a really positive topline environment that will drive also bottom line improvement.
Speaker Change: Okay. That's.
Speaker Change: That's helpful color Emmanuel appreciate it and maybe just following up on that comment around the.
Project margins and the margin in backlog can you just talk about the $50 million in awards for AMR Al can you talk about sort of the visibility of the timing on.
Speaker Change: On the delivery of those and would you say that's that particular win as is consistent with that commentary around you know higher margins and backlog.
Speaker Change: Sure Vlad this is real kind of eye I.
Speaker Change: That said these are these 50 million does he said working across differing to E. P. CS and the reason for these.
Speaker Change: Good wins is exactly the performance of the Saudi team because of the performance that we've been able to work very closely with the EPC and supporting them and I've seen that because of the localization because of the way that we perform.
Speaker Change: The projects will be good profitable projects. When you look at the timeline a project of this size you're looking at that you know for the next two years.
Speaker Change: Two three years. This is when you will be able to recognize the revenue.
Speaker Change: Okay.
Speaker Change: Great Thats, all we know for sure.
Speaker Change: Another example of that so for instance, the businesses. The D card business that we won in Q1 and Q2 of last year, we will start shipping them in the first half of 2025, so those large projects take a little bit of time between.
Speaker Change: The definition of specification development delivery and then documentation.
Yes that makes sense I appreciate it guys I'll get back in queue.
Speaker Change: Thanks, a lot thanks a lot.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Damian Karas from UBS.
Speaker Change: Good morning Damian.
Damian Karas: Hey, good morning, nice work on the quarter.
Thank you. Thank you Luca.
Damian Karas: I wanted to ask you guys a follow up on friction.
Damian Karas: <unk> continued share gains.
Damian Karas: And strength, there, particularly in China.
Damian Karas: But kind of under the Hood, just curious how things are progressing with the high performance pads kind of a newer area of the business.
Damian Karas: And how are you thinking about the potential to expand your aftermarket presence in other regions like China I know, that's something you've been looking into <unk> testing.
Damian Karas: Sure.
Damian Karas: So.
Speaker Change: The market share gains are across the board and we set across all the different regions. So the teams around the world are really working very closely with the customer.
Speaker Change: And on top of that their performance in terms of on time delivery and quality in the in the ppb is in hundreds of parts per billion.
Speaker Change: It makes the difference. So this is for across the board for high performance specifically.
Speaker Change: Finally, you asked because in October this month at the beginning of October.
Speaker Change: We were there together with Itt's board of directors. They approve this investment so it was only natural to take the board of directors there to see.
Speaker Change: What we have done.
Speaker Change: About the speed Damian we broke ground or as we say in Italian we've put the first stone down in the summer of 2023.
Speaker Change: And in less than 15 months, we got the permit the building is completed is up and running the machines that are being delivered in the store right now.
Speaker Change: Charting or operation to S&P in Q1 of 2025.
Speaker Change: We have one there right and targeted platform. So the team internally has done an outstanding job at an incredible speed and I'd say, we also received a lot of support from the from the lockup local authorities and institutions. So that is for outperformance. So good picture of that for the aftermarket.
Speaker Change: It is true that we are testing a little bit of the aftermarket in China, but I would say as we stand today, we've got opportunity to growth on the OE side and grow profitably around the world. So for the aftermarket that right now we are sticking with that with <unk>.
Speaker Change: European.
Speaker Change: Geography only.
Speaker Change: Got it that makes sense. Thank you.
Speaker Change: And then I have a mattress business sounded like order strength was pretty broad base, maybe you could just elaborate on what you're seeing across connectors.
Speaker Change: And your sense for how much of that that growth you're experiencing is underlying market versus ITT share gains.
Speaker Change: Sure connect has been a great story to be honest with you I would say that connect was has been a great story for the last couple of years. So that's showing good resilience. Despite the challenges that that was out there in the market I think that.
Speaker Change: You know I was in August I was in China. So I was able to two visits since then which is our factor we have the connectivity we have the factory for connectors that we're small in China, but the team's surge and the team are really localizing, our engineering development and we are winning market share there across the board with the moc.
Speaker Change: So we are more and more in China for China, and we've got a very good position, particularly on the medical side.
Speaker Change: We have a good performance on the on the industrial side, our connect with industrial were up 21% in the quarter and also defense in defense that we hadn't really winning market share. Thanks to a our product expansion, but also the work that Dan.
Speaker Change: Art and the team are doing in terms of speed to market.
Speaker Change: We are able to come up with the right solution for that program and be specified for that program. So very strong interface as well.
Speaker Change: Glad to hear thanks again, good luck guys.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joe Ritchie from Goldman Sachs.
Speaker Change: Morning, Joe.
Joe Giordano: Hey, Good morning, guys, Hey, good morning, guys Hi, Joe.
Joe Ritchie: And we've we've we've long talked about the market share story for the friction business you guys went into some detail on the pumps business earlier. It just seems like Youre, just seeing share gains really kind of across the portfolio and I was hoping that maybe you can dive in a little bit further on the rail.
Business and the aerospace and defense business, what Youre doing there.
And maybe if there's a way to describe what the opportunity is across the businesses that would be helpful as well.
Joe Ritchie: Sure.
When you look at when you look at rail.
Joe Ritchie: Connie is performing exceptionally well.
Joe Ritchie: In rates for our customers.
Joe Ritchie: Their on time delivery is that similar to friction is in the nineties.
Joe Ritchie: Very good very good quality, providing surveys that engineering very close to the customers. We are in China for China, and so as an example, and DS enables us to work very closely with the customer.
Joe Ritchie: I remember.
Joe Ritchie: Davita went to China. The very first time, we had zero market share in high speed train Youre talking about 10 years ago today we.
We are one of the leaders in high speed train and our shock absorbers tested on their new 400, 450 kilometer per hour high speed train for the future. So all of that is feeding our growth there.
Joe Ritchie: There is plenty of opportunity in the market because of the investment in Europe as well as the investment in North America.
Joe Ritchie: Rail we benefit from the Green a trend of the future so good market and outperformance on top of it.
Joe Ritchie: When it comes to defense defense has been a very good story.
Both from a revenue perspective and orders our revenue for the full year, probably will grow 20% in defense and the orders 25.
Joe Ritchie: Here, we have been working very closely with the customer from an engineering point of view in customized in this solution and this brought results our speed and our engineering.
Joe Ritchie: For the connectors as well as for the <unk> side.
Joe Ritchie: Yeah.
Speaker Change: Super Super helpful. Luca I appreciate all the color and then I guess just more near term question Emmanuel just talking about empty margin. You said you had a very big headwind this quarter from FX still expecting 18 plus percent margins for the year I guess, maybe isn't as we head into.
Speaker Change: 2025, and any any initial comments on where margins could go if we if we kind of like cut cut the line today on FX and say that's potentially not as much of a headwind next year how are we looking for.
Speaker Change: For empty margins next year.
Speaker Change: Yeah, Joe so.
Speaker Change: We expect FX to be an impact already in Q4 and really when you think about the 160 basis points of margin impact on in Q3 that was due to our hedge our.
Speaker Change: FX hedge that we have a balance sheet position that we've got to unwind because the dollar became a stronger compared to the euro.
Speaker Change: So this is a one off impact and we don't think it's going to repeat.
Speaker Change: In that.
Speaker Change: That magnitude into future.
Speaker Change: So when you think about Q4, we expect already empty to be sequentially up versus Q.
Speaker Change: Q3.
Speaker Change: And contributing to empty being for the full year above 18%.
Speaker Change: When you think about 2025, obviously, we continue to drive a lot of productivity a lot of cost reduction and so I think it's logical to assume that's M. T will grow margins.
Speaker Change: In 2025 compared to this year.
Speaker Change:
Speaker Change: For us what's really important is the long term targets and you know that the long term target is 20% our commitment is to achieve it by 2026, which implies that there's going to be significant progress also in 2025, because we are we will be a little bit above 18%.
Speaker Change: <unk> at the end of 2024.
Speaker Change: So we feel good about empty, we feel good of our opportunity to expand margins.
Speaker Change: And and Yep.
Speaker Change: Perfect. Thank you guys.
Joe: Thanks, Joe Thanks, Joe.
Joe: Thank you.
Speaker Change: Our next question comes from the line of Nathan Jones from Stifel.
Good morning, Nathan Good morning, Ed Good morning, everyone.
Speaker Change: Yes.
Nathan Jones: Firstly, a follow up question on <unk>.
<unk> ability of large IP projects that Emmanuel I think you mentioned.
Speaker Change: I think you called them highly profitable and historically the larger projects that are being less profitable.
Speaker Change: Maybe just some more color some more commentary on.
Speaker Change: Whats, leading those larger projects to have much higher profitability than they may have historically.
Speaker Change: Yes.
Speaker Change: So keep them over I call them highly profitable because when you think about all our legacy IP business.
Speaker Change: This quarter, we were at $23 nine and so sure that after market is super profitable, but at some point in time.
Speaker Change: Projects need to contribute as well and so that's what you're seeing also you're seeing that.
Speaker Change: As we've taking projects at a certain margin level, we worked through the development cycle in the production process to improve that margin. So that the margin when we deliver it is higher than the margin. When we were awarded and so that's what that's what's happening. So here specifically what we're doing is that we're working in really close collaboration with our customer in order to really define.
Specification, so that there's no room for error.
Speaker Change: Once we do this.
Speaker Change: We are focused on making sure that we develop flawlessly. Those project. We also include the engineering changes that our customers are requesting and this is a big difference from the past because in the past because and I'm talking 2015, because our performance in directing project wasn't great. We were in a lot of cases eating those engineering changes.
Speaker Change: Now we are pricing those engineering changes changes in making sure that we recover margin on this as well and then when you think about the delivery. It's all about customer service, making sure that we provide the documentation also because.
Speaker Change: When you deliver a pump without the documentation the customer can do anything with it and so it's really a positive cycle that we've been able to implement with our customers that is resulting in growth feeding growth.
Speaker Change: But it's fair to say that.
Speaker Change: I'd say that the projects tend to be a little bit more challenging so unique always to maintain the rigor in order acquisition, so that youre really bring in and the orders at the right profitability and then the rigor in execution.
Speaker Change: Makes sense and then I guess my follow up question's around strategic pricing Luca you talked earlier about earlier on the call about <unk>.
Speaker Change: <unk>.
Elevate your game, even further on strategic pricing can you talk about where you think the biggest areas.
Speaker Change: To implement more value based pricing.
Speaker Change: To target those pricing increases come from and what impact that could have to margins.
Luca Savi: Yeah, I think that that probably is on the CCT side and specifically on the on error on the component side.
Luca Savi: That this is the area, where probably we can we can be even more strategic and we can have even bigger impacts and I'm not just talking about a day long term agreement that we discussed already in the past, but in general I think that there are opportunities there when it comes to the aftermarket and when.
Luca Savi: Contrary to some of the components in our in the ECT.
Luca Savi: The repairs for example, so does this is the area, where we've got more opportunities.
Luca Savi: And here in Austin.
Luca Savi: Nathan I think the team has been doing a really good job had reducing the lead times for those repairs and so that's why we've been getting much more volume and we've been also able to extract pricing because every day. That's when you get a repair everyday that passes it's an airplane that's on the ground.
Luca Savi: Not a not flying and so sure. This is a really different differentiation that we've been really focused on developing so that we can we can grow this business even more.
Speaker Change: Awesome, Thanks, very much for taking my questions.
Speaker Change: Thanks Nathan.
Speaker Change: Thank you.
Speaker Change: Our last question comes from the line of Matt Summerville from D. A Davidson com.
Matt Summerville: Good morning, Mike.
Matt Summerville: Morning, just a couple of quick ones, obviously friction aftermarket has had some pretty nice growth in particular this last quarter up high single digits. How do you view kind of the growth trajectory of that business kind of going forward and into 2005 and what's your assessment on customer inventory levels. There and then I have another quick follow up.
Speaker Change: So when we when you look at the aftermarket.
Speaker Change: Say on a year to date basis is growing 6% I would say the oes. These are practically flat and that the independent aftermarket is in the high teens, So I would say in a.
Speaker Change: When it comes to the 2025 over the near term.
Speaker Change: We will expect a more normalized growth when it comes to independent after market and probably more opportunities on the Oes side.
Speaker Change: When it comes to the inventory I think that you know.
Speaker Change: The Destocking I think it's being completely.
Speaker Change: Overcome so we are beyond that.
Speaker Change: And then just lastly.
Speaker Change: On the project side of the business can you talk about you've referenced in the past Luca funnel metrics that you track in that business can you sort of maybe provide an update as to the go forward funnel as you see it shift for IP projects, and maybe add a little bit of end market and geographic color to that funnel.
Speaker Change: They they finally staying at very high level Matt.
Speaker Change: The final lease up despite the fact that that we have a K a.
Speaker Change: Good growth in revenue and on top of that a book to Bill which is above one the funnel is up 9% year over year, So pretty pretty outstanding which tells you a little bit the outreach the opportunities are out there when you look at the region specifically.
Speaker Change: And the market is fair to say that there are good opportunities on the on the green side a lot of opportunities in the on the on the traditional oil and gas and then from a geographic point of view the regions that continue to present a good growth.
Speaker Change: Middle East and Asia Pacific and we expect those areas to continue to provide good opportunities and good orders in the future.
Speaker Change: Thanks Luca.
Matt Summerville: Thank you Matt.
Matt Summerville: Thank you.
Speaker Change: This does conclude today's conference. Please disconnect your lines at this time and have a wonderful day.
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