Welcome to ITT's 2025 Second Quarter Conference Call. Today is Thursday, July 31, 2025. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. [Operator Instructions] 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, Bella, and good morning. Joining me in Stanford 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 3-month period ended June 28, 2025. Please refer to Slide 2 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 2024 annual report on Form 10-K and other recent SEC filings. Except for otherwise noted, the second quarter results we present this morning will be compared to the second quarter of 2024 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.

Thank you, Mark, and good morning. I'd like to begin, as always, with a heartfelt thank you to all our ITTers. We could not have delivered these results without each and every one of you and your hard work. I'm humbled by our team's ability to achieve such strong performance once again. In May, we were fortunate to see many of you at our Capital Markets Day in New York City. There, we showcased ITT's enterprise strategy and value creation pillars: first, organic growth and margin expansion; second, the compounding with M&A. And when you look at our second quarter results, you see all of this value creation in action. Let me share some highlights. In Q2, we delivered $1 billion of orders, up 16% total and 13% organic as all our businesses delivered a strong order intake, bolstered by the kSARIA and Svanehøj acquisitions. We generated record quarterly revenue of more than $970 million up 7% total and 4% organic, with all segments contributing. Operating income grew more than twice the organic sales growth rate and operating margin expanded over 100 basis points excluding M&A. Our profitable growth and continued operational improvements resulted in adjusted EPS growth of 10% or 16% excluding the Wolverine divestiture. Finally, we grew free cash flow to $214 million year-to-date, making significant progress, nearly $0.5 billion for the full year. Furthermore, free cash flow margin was 14% in Q2. To round out the highlights, we repurchased $500 million of ITT shares year-to-date, reaffirming our confidence in the long-term outlook of ITT and lowering our weighted average share count by 3%. As you can see, a strong performance in Q2 built on ITT's pillars of value creation, organic growth and margin expansion compounded now with M&A as we laid out at Capital Markets Day. Now…

Thank you, Luca, and good morning. As you can see, ITT delivered another strong performance in the second quarter. We saw a step- up in nearly every financial metric while also putting a significant amount of capital to work earlier in the quarter. Let's talk about some of the many highlights. On revenue, all segments contributed to the performance, growing 7% in total and 4% organically. Industrial process led the way with 5% organic growth on the strength of the project business. And from an orders perspective, we saw growth in every short-cycle product category this quarter, leading to a book-to-bill of 1.2x. CCT grew 4% organically with strength in both aerospace and defense and grew revenue over 30% in total, including kSARIA. Organic orders growth was also strong at 9% led by commercial aerospace and defense awards on coveted platforms. Finally, in Motion Technologies, our rail business grew 10% driven by share gains in KONI. Friction OE outperformed global auto production by over 500 basis points, growing 7%, led once again by our differentiation in China and strong execution in Europe and North America. Friction's performance has been remarkable in what continues to be a highly competitive global automotive market. On profitability, we grew operating margin 30 basis points to 18.4% on higher volumes, pricing actions, including related to tariffs and continued operational improvements, more than offset the unfavorable foreign currency transaction impact stemming from a weaker U.S. dollar and the impact of temporary acquisition amortization from kSARIA. At this point, the temporary amortization from Svanehøj has ceased and it will end for kSARIA in Q4. Notably, in MT, Jeroen and the KONI team delivered outstanding profitability, which is driving empty above 20% margin. The revenue growth and continued margin expansion drove adjusted EPS to $1.64, up 10% year-over-year…

Thanks, Emmanuel. A few points before Q&A. Our Q2 performance is a great first step towards our long-term commitments. We keep on driving the organic value creation through growth and margin expansion. All our businesses grew organically, and we saw strong margin expansion in many parts of the portfolio. And as I said at Capital Markets Day, this is here to stay. On the inorganic front, our acquisitions are performing well and over-delivering on their commitments. Cash continues to ramp towards an expected $0.5 billion of free cash flow this year with a 14% free cash flow margin in Q2. And lastly, as a result of all of this, we raised the midpoint of our full year EPS outlook by $0.15. It is ITT's differentiation through execution, innovation and now M&A that will ensure the value creation continues. As you can see, it was a strong quarter on all fronts, fully aligned to the value creation pillars we laid out at Capital Markets Day. Thank you for joining ITT today. As always, it has been my pleasure to speak with you. Bella, please open the line for Q&A.

[Operator Instructions]. Our first question comes from the line of Mike Halloran with Baird.

So first, maybe just get some thoughts on what you're seeing on the capital side of things, capital equipment, larger projects, and not specifically to any segment. Did you see any pause in the second quarter? Obviously, the orders are pretty good. I know the short cycle piece was up across all segments. Any signs of hesitancy or pushouts or any change in the forward thought process from your customers anywhere?

Mike, thanks for the question. Yes, when you look at our performance in terms of orders has been remarkable. And of course, there is a lot of market share gains in there. When you look at the projects, even on the legacy business going up 22% year-over-year and was not an easy compare when you look at 2024. So -- and then you look at the Svanehøj performance of the orders year-to-date for the 6 months, which is equivalent to their 2024 full year revenue. So definitely a great performance on the orders front. Now when we look at the funnel, the funnel is still elevated is down year-over-year, but this is because of really a tough compare. So we haven't seen any major shift. And we have seen probably just a couple of orders that shifted to the right, but no major change that will make us concerned right now. So when we look at the orders, very strong, you were talking about market, very strong on the oil and gas, very strong also on the general industrial.

That's helpful. And then maybe you could just give your latest view on what you see the auto landscape developing is and obviously, the outperformance in this quarter and as long as our share of stock really has been incredible. So maybe talk about what you're assuming on that side as well?

Sure. So let me start with the market first. So the market in Q2, the production was up 2.6%. So that was a nice figure. And if you look at the forecast for the full year, it's a little bit better than what we thought 3 months ago. So we think that the full year production will be roughly flat or slightly positive to 90 million vehicles produced that will be produced in 2025. Granted, the story here is mainly a China story. Both Europe and North America will be down, but this is the market. Now when you look at our outperformance, the outperformance was spread across all the 3 different regions. You're talking about outperforming in Europe, outperforming in China by a lot, and outperforming in North America, and also outperforming across all the 3 different type of powertrain: internal combustion engine, hybrid, and EV. So the outperformance, I'm happy to see is continuing.

Operator, I think we can go to the next question.

Your next question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. So maybe starting on CCT orders, really strong orders growth. I know you're getting a lot of price. Maybe you could help us think about how the differences in share gains versus just overall market growth?

Yes. So yes, you're right. We saw a significant growth, 9% from an order standpoint in the quarter. And a lot of that growth was fueled by aerospace and defense, specifically defense, where both our legacy business and our kSARIA business continues to do really well. Our legacy business was up 25%, kSARIA was up 36%. So on the defense, we are pretty confident that we continue to make the difference and differentiate for our customers. And as a result, we're gaining share on some really good platforms. We talked about in Q1 about the large award that kSARIA had on the F-35. And then we have more awards this quarter on coveted platforms. Aerospace is doing well as well at plus 12%. And here, frankly, we are doing the best we can to support Boeing in their ramp-up plans, especially on the 737 MAX.

All right. Then shifting gears a little bit to Motion Technologies margins. The FX impact on margins kind of stood out. What is the FX relationship there that's causing the margin compression?

Sure. So we've seen during the first half, a depreciation of the dollar compared to the euro. And so while this helps from a translation standpoint, it hurts us from a transaction standpoint. And so what we're seeing here is the transaction impact that has an outsized impact on Motion Tech's margins.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Can we double-click on Svanehøj for a second, growing greater than 40% this quarter. I can't imagine that the end market is growing that quickly. Like maybe just give us a little bit more color what's happening there? What's -- where are you really seeing the strength in that business?

Sure. Probably you remember that when we communicated this acquisition, we always expected this business to grow substantially in the years to come. I think that what is driving this outperformance of the market is really a flawless execution by our team when it comes to project and also service as well as the differentiation on the product side. Differentiation on the product side that they keep on feeding with R&D investment and with new products like the one that I shared in the prepared remarks, the new high-pressure fuel pumps. And it is across the board when you think about LNG, LPG, ammonia and also large carriers.

And Joe, if I can complement what Luca was saying with some numbers. So in the first half, Svanehøj grew orders by more than 80%. We expect for the full year for them to be a little bit above 20%. And this is because we have anticipated a lot of the orders that we were expecting in the second half in the first half. So really strong performance even for the full year. And from a revenue standpoint, also for the full year, we expect them to be up 30%, because we are converting all those orders that we got in 2024, we're now converting them in terms of revenue. So obviously, from a book-to-bill standpoint, the picture is really strong. For the first half, we are over 2x and then we'll be largely over 1x for the full year.

And Joe, it's not just a question of orders and growth. I mean if I can credit, store, and Joe, the entire team, they generated year-to- date in terms of cash, almost the same amount of cash that they generated in full year 2024 and the working capital is a single digit. So great performance across the board.

Yes. That's amazing. That's great color. And congrats so far on that acquisition. Maybe just my second question, really focusing on the pumps business. Clearly, really good order growth this quarter. You did mention a couple of project delays. There's been other peers that have also been mentioning some things kind of slipping to the side. And at the same time, Luca, you had some comments around aggressive pricing as well. So just maybe just give a -- it's hard to kind of like totally square the fact that your orders have been really good. You guys are executing really well. But at the same time, there's some gyrations in the market. So we're just trying to understand that a little bit better.

Sure. So I would say when you look at the funnel, the funnel is down year-over-year, but was exceptionally high last year. So it's still a very healthy funnel, what we see. And really, the move that we saw to the right were just a couple of examples. I think that the story here is really a story of shared gains, Joe. And even when you look at the Bornemann, I mean, we were able to win those orders because the service that the team has provided, the project execution with the customer. And therefore, in one case, the customer came straight to us, no competition at all. In the second case, despite incredible competition from a price point of view, they stayed loyal because of the performance and the service. So it's really a market share gain story.

Next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So I think you said third quarter low single-digit organic. I'm just trying to understand the cadence in the fourth quarter. It seems like you'd have to have a step up. And just as you look at this order strength, how much is kind of giving you the visibility for second half versus giving you longer-dated visibility into'26?

Yes. So I would say that for the projects that we're getting today, those are going to be delivered in 2026. So from a project standpoint, our backlog is full, and we are secured in terms of delivering the revenue. It's a little bit different for the short cycle that we still need to get mostly in pumps and also in connectors. But other than this, I think from an order standpoint, when it relates to projects, we are covered. We expect in Q4 similar growth rate, organic growth rate from a revenue standpoint than in Q3. And yes, so in the low to the mid-single digit.

Okay. Great. I think you called out a healthy funnel, some acquisitions of size. I think you called out a step-up in corporate around M&A. Just speak to, I guess, maybe put a frame around what you consider an acquisition of size and just a little more color on that on the funnel.

Sure. When we look at the funnel, the majority of the company that we are cultivating and that we see in the funnel have a revenue between $200 million and $400 million. So this is the bulk of the opportunity that we have in the funnel. And if you look, this is also the last couple of acquisitions that we made, Svanehøj and kSARIA that are executing and overdelivering have approximately that size. So the majority are around that size.

Your next question comes from the line of Brad Hewitt with Wolfe Research.

So you mentioned Svanehøj and kSARIA trending ahead of expectations, and I think that's pretty visible in the order numbers. But as we think about next year, is there any help you can give us in terms of thinking about the building blocks of the incremental year-over- year accretion from the 2 deals in 2026?

Yes. So thank you, Brad, for the question. So when you look at -- from a profitability standpoint, both Svanehøj and kSARIA are progressing well compared to our plans. So when Luca is saying they're outperforming, they're outperforming from an orders, sales profitability and cash. And so we saw some really strong year-over-year EBITDA margin improvement in Svanehøj as well as in kSARIA. So we're very pleased with that. I think that as to have in mind kind of a guideline for what we expect out of acquisitions, we probably expect around 100 basis points of margin improvement every year. Maybe in some years, it will be a little bit more, maybe in others, it will be a little less, but that's the average we expect.

Okay. Great. That's helpful. And then maybe switching over to the short-cycle side of IP. So you mentioned that orders inflected from negative in Q1 to positive in Q2. I'm curious if you saw any change in order activity on the short-cycle side as you progress through the quarter or maybe even into July?

Not through the quarter, Brad. I think that Q2 was a very good quarter across the board, both the baseline parts, service and valves with service and valves growing double digit when you look at the orders. As a matter of fact, Q2 was probably the second highest quarterly orders performance in short cycle when you look at the weekly rate. Now July was a little bit softer, but that tends to be the thing. If July is -- the first week is always a little bit softer. So that happened last year and happened again this year. So no different trend, I would say, in the quarter.

Your next question comes from the line from Vlad Bystricky from Citigroup.

So I just wanted to ask you about the IP projects a little more. You mentioned the price competition you saw in Bornemann, it sounds like you were able to hold margins despite that. But can you talk in general about margins you're booking into backlog on project wins in IP today versus segment margin and how we should think about mix going forward?

Sure. So a very good point because when you look at our mix in the backlog, you go back 2 years, and the mix was 60% short cycle, 40% projects. Now you look at the backlog today, is the reverse. 58% project, 42% short cycle. So this makes the improvement that you see in the margin of IP even more remarkable when you see that this big headwind that they have in terms of mix. And the reason for that is because the team is able, a, to improve the margin in the project when we are booking, when we are winning, thanks to the execution, thanks to the performance that we have with those customers. And the second point, Vlad, very important, is that when we look at these projects, when we close the project, when we ship everything, the margin of the project tends to be higher than the margin of when we book the project, when we won the order, which is a testimony to the great execution of the team, of the project manager. So well done, Max and the project management team. So mix is a headwind, but we're able to compensate through the continuous improvement in execution.

And so if you look at the year-over-year margin progression on all the projects that we shipped, we're in the neighborhood of 400 basis points improvement versus the prior year.

That's really helpful color. I appreciate that. And then just shifting to CCT. Can you just talk about shorter cycle visibility at CCT, and how you're thinking about the durability of growth momentum there?

Sure. When we look at the show cycle and CCT, we're mainly talking about connectors. And I would say connectors orders in Q2 was the second highest quarter order performance ever. And after a growth in orders in Q1 of 11%, the orders grew 12%. I'm just talking about connectors without kSARIA here. So the -- without the acquisition. And so very good performance on the orders front. And granted, a lot of that comes from aero and defense. And -- but we will expect for the full year also continue to grow double digit.

Your next question comes from the line of Sabrina Abrams with Bank of America.

So I just want to be clear, I think you trimmed -- so I'll ask this as a two-parter. So I guess you trimmed the high end of margin guide. Just want to understand what the driver of that is. And then I think because of the cadence of the 3Q year-over-year comments, you need to have a bigger year-over-year margin expansion in 4Q. So I just want to understand that dynamic a little bit better.

Sure. So I mean, it's really a small adjustment, and we like to be precise. So I would say that the headwinds we're facing is a little bit of higher M&A cost than what we were expecting. And then from a mix standpoint, those numbers that we talked about for Svanehøj, them growing really fast their margin, even though it's improving, it's still dilutive to the overall ITT margin. And so as a result, we take a little bit of a hedge there. And then from a 4Q performance, yes, I mean, we're expecting not a big difference between third Q and 4Q from a margin standpoint. So we are pretty confident that our outlook from a margin standpoint is achievable and realistic.

And I think looking at the CCT, I guess, if I take the core earnings, excluding the temporary amortization, you have really strong incrementals. I think the core incrementals are over 80%. And I think in the slides, there was some mention about pricing actions. I know this has been a big focus for you, particularly on the aero side. Just can you talk about what's going so well here, like the strong execution in CCT? And yes, I would just love to know what's driving the really strong incrementals, whether it's more aero or short- cycle side.

Yes. Thank you, Sabrina. So yes, I think we're really happy with the way CCT is performing, even the legacy CCT. We are at 21.5% margin if you exclude kSARIA, which is a really, really strong number. And so the incrementals are around 70%, as you mentioned. So really strong performance. We have a really good contribution from pricing. And here, pricing is on 2 aspects. One is to make sure that we get compensated for inflation on some of the old contracts we had. And as we mentioned, we closed another 2 contracts this quarter. And the second one is strategic pricing, and that's more around the aftermarket and the repair and overhaul. And so that is generating 450 basis points of margin improvement just due to pricing. Some of that is offset by inflation, but it's a net positive. I would say the last point I would make about CCT is that we talked for a long time about automation, and we're getting those projects in action right now. So we have implemented automation projects in our Orchard Park facility, and they're now up and running, especially in the machining area, which is causing a lot of productivity. And then we are about to kick off automation also in our Valencia plant for valves and switches, which should continue to help us expand margins.

Your next question comes from the line of Damian Karas with UBS.

Sorry if I missed this earlier, but I was wondering if you could maybe talk to us a little bit about the pricing actions that you've taken since last quarter? And is there any additional price that you think you'll need to take in the second half, just thinking about some of the updated tariffs and maybe just fill us in on what your updated assessment is of your tariff exposure as well.

Sure. When you look at the tariffs, the exposure for 2025 today is half of what we thought a quarter ago, so roughly $25 million. And this is mainly for some of the things that we're importing from Asia, some exposure on product that -- for KONI shock absorbers from Europe to North America and a small portion of non-USMCA compliant products in CCT. But when you look at that 25% -- $25 million impact, we are able to mitigate it through price and actions together with the supplier and productivity actions also ourselves. So 0 impact when it comes to income. Now, if you look at the pricing, I would say price/cost has been positive for Q2 for ITT, both from an income point of view and also margin. We expect that to be the same for the full year and across all the 3 different businesses. And I would say no major difference in terms of our pricing actions from Q2 to Q3, strategic pricing and pricing to cover for inflation and tariffs.

Okay. That's helpful. And Luca, there's been a lot of deal activity in industrial process out there. It seems, for example, Baker Hughes has been involved in a couple of transactions. From your perspective, are you starting to see a riper deal environment in IP space? And I'd be curious to hear your thoughts on where you think some of these deals are pricing.

Sure. So when we look at our funnel, the majority of the opportunity -- you know that we are going after in terms of the funnel in the connectors, specifically on the aero and defense and inflow. And therefore, when we are looking at the funnel, those are the areas where we are focusing. And it's fair to say that the majority of opportunities are actually in the flow area. So we are actively working the funnel. We are cultivating. And as you can see, our M&A costs are probably ramping up. So 2 of the past acquisitions that we made, Habonim and Svanehøj are inflow. So it's still very fragmented market. So for sure, more acquisitions there will happen.

Sounds good. Looking forward to see what that ends up looking like. Good luck.

Me too. Thank you.

Our final question comes from the line of Joe Giordano with TD Cowen.

This is Chris on for Joe. Most of my questions have been addressed, but maybe when you look at the strength in -- on pumps, what types of applications are driving that strength? Is it greenfields versus expansions of existing sites? And how would you characterize customer urgency versus a normal level?

Yes. Thanks, Chris. So yes, we got some fantastic orders in IP in Q2, up 23%. And we saw some real strength in oil and gas, so energy, as well as in general industrial. And then on the green type of projects, we are also very happy with that because if you look at our year-to-date green orders, they're almost in line with what we got for the full year in 2024. So that's very positive, obviously. Luca mentioned an order for Australia that we got. And this is a decarbonization order with a major oil company. And we got the first project in 2023, which was for more than $20 million, and we got a follow-on order as we executed perfectly from a project management standpoint with that same customer for that same field. So we're happy with the way the green projects are developing and the market share we're able to make.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.