ITT Corp Earnings Call Insights: Industrial Process, Motion Tech

On Friday, ITT Corp (NYSE:ITT) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Industrial Process

James Lucas – Janney: Couple of questions here, first one to start on Industrial Process. Could you, one, bring us up to-date housekeeping question what percent of the segment has aftermarket today and could you expand a little bit more about the growing aftermarket capabilities and investments you’re making there is that specifically for your installed base or are you finding opportunities to take advantage of other products out there?

Denise L. Ramos – CEO and President: Let me talk about our aftermarket opportunities and then I’ll turn it over to Tom to talk about the numbers there. In terms of the aftermarket we’re encouraged with the aftermarket in our IP business and you know that’s critical when you think about value creation for that business, because you see the project so that you then get the strong aftermarket content associated with that. So, a couple of things that we’re doing in that arena is, one thing remember we bought Blakers, which was that company that we bought in Australia at the end of last year, they are in distribution and they also do servicing for the mining industry. So, that was one of our opportunities to get more into the aftermarket. We’re also building aftermarket facilities globally, so we know that when we big on some of these projects particularly in oil and gas and mining, that our customers look to make sure that we’ve got sufficient capabilities, so that we can service these highly complex products that we sell them out into the future. So, we’re making sure that we’re coupling that with these sales that we’re getting into these markets. In fact some of the strategic agreements that we put into place, we’ve incorporated aftermarket as part of the agreement that we have there. In terms of others and going after servicing others, obviously, we’ll take that opportunity when it comes and we’ll be happy to do that. But our focus right now is really on our products and making sure that we deliver the service that’s needed for our customers.

Thomas Scalera – CFO: Just to follow-up on some of the numbers, Jim. The aftermarket content and Industrial Process ranges between 30% and 40% of our revenue. What we’re seeing certainly in Q1 is significant growth in our project business, which actually grew 76% year-over-year in Q1. So as we really grow globally with these larger projects, it’s changing our waiting fairly rapidly, but as Denise articulated, we have a number of strategies overtime to capture that aftermarket when it arrives. The impact of that growth actually tilts our weighing about seven points towards the project content, compared to what we’ve historically seen and again this is where we’ve chosen to make our investments for long-term growth. But those are some of the numbers and some of the impacts that they’re having. As the year progresses through, what we’re going to see in the second half is some favorable project margin performance, but the waiting is going to generally stay fairly consistent throughout the year, given this project expansion.

James Lucas – Janney: With regards to some of these projects, the larger projects that you’re bidding on today what is the overall pricing environment that you are seeing out there?

Denise L. Ramos – CEO and President: Unfortunately, the pricing environment is not like what it was back in 2007 and 2008 we have seen prices that have come down, but I would say that it is pretty much stabilized at this point. We haven’t seen pricing up, we haven’t seen pricing down I’d say it is pretty stable. In terms of how we are approaching it, now that we are a global player and we’ve established ourselves as such and the validation of that is through the strategic agreements that we have in place, we are becoming much more selective in the projects in which we are going after and we can do that when you think about the kind of growth that we’re having in these projects. So, we’ve ceded the business, we’ve ceded our capabilities, people understand us better now, we are more mature and we are looking at these projects and making sure that we are just being more selective as we go forward to make sure that we’re going to have the most profitable projects for us.

James Lucas – Janney: Then just one final question here on the Motion side. Obviously, the auto business things seem to be going very well, could you talk a little bit about the shock absorber business in terms of that being the volume down short-term and any particular markets that are weaker and what the outlook the rest of year looks like?

Denise L. Ramos – CEO and President: First just let me say that we are extremely pleased with the automotive market and the performance of our Friction business and Motion Technologies. The fact that they are able to grow slightly in Europe when we’ve seen Europe in decline just again indicates and supports the fact that we have this very strong position in that business. In terms of the shock absorber business, we’ve had some lower orders there on the rail side of the business. It’s been particularly impacted by China and the delays that we’ve seen in China. We’ve also seen some slowdowns in Europe, and that’s because of the economic conditions in Europe. So, those are things that are impacting that business, but we’re seeing strong orders that came through in Q1, which is an indication that the business is there, the demand is there, and now, we just have to deliver against it.

Thomas Scalera – CFO: Jim, in that space, we also serve bus, truck and trailer markets and we’re seeing some global pressures in that part of the shock absorber product line.

Motion Tech

Mike Halloran – Robert W. Baird: So, staying on the Motion Tech side there, the really strong orders in the first quarter. Could you just talk a little bit about timing of when those orders start pushing through and then what that means, where you’re seeing the strength specifically, if there’s been any sort of sequential or changes as you work through the first quarter?

Denise L. Ramos – CEO and President: The orders that we’ve got for Motion Technologies, the strategy we’ve had in that business, it’s been primarily a European business. So, we recognized that we wanted to become more global and take the strong capabilities that we have with material science and with our production efficiency. We wanted to take it into China, where we see that many of our customers have gone. So we’ve been servicing our customers in China through our Barge facility in Italy, and the volume is so strong in China now with it being the number one automotive market, that we’re now investing and building this brake pad facility in Wuxi, China along with an R&D center to service our customers better in that market. So, China has been a strong growth area for us. We’ve also been penetrating into North America. So, Ford has been someone that we’ve partnered with, we’re on some of their global platforms. So, we’ve been happy with the business that we’ve built over there. We’re planning on expanding our relationship with some of the North American suppliers with GM and with Chrysler. We’re going to leverage some of those via strong customers that we have in Europe with Fiat and Peugeot into those relationships.

Mike Halloran – Robert W. Baird: But from a timing perspective what are lead times on those I mean is it pretty much booked and ship at this point or are you…

Thomas Scalera – CFO: Yes, Mike, the lead times are typically on the automotive side. It’s usually about a two month book, book to ship cycle on average. We get longer term visibility through the auto production rates and close relationships with our customers so we have visibility into their production rates. But the orders typically ship pretty quickly in the following quarter typically. Q1 for us is a strong revenue quarter and you saw that coming through in Q1 and that’s usually when we see the most aftermarket activity on the automotive side, it frontloads through the channel which is the way the European markets are typically populated. So, you see the book-to-bill strong at 1.03 which we’re very encouraged by when you consider that Q1 revenue is at the highest point for the year. So, we’re seeing some good indications. We’re performing extremely well in Europe. The order visibility again is about a month or two and the longer-term visibility comes from of the strength of our relationships and really getting to know our customers production schedule.

Mike Halloran – Robert W. Baird: Then on the guidance side, you maintained full year guidance even though you guys are talking about seeing upside to your expectations in the first quarter here. You talked a little bit about some sequential improvement, really early signs in some of your weaker markets. Could you just talk a little bit about why the guidance was maintained, if there’s any area of weakness, or if it’s just really – there’s enough uncertainty that you don’t feel like – you feel like it’s a little early in the year to be moving things around aggressively one way or another?

Denise L. Ramos – CEO and President: We left a range out there. So we the range of $1.62 to $1.72 and the reason we did that is because it is early in the year. There is uncertainty in Europe, there is uncertainty in the connectors business. So the range is designed to accommodate those uncertainties that we have. As we get into the year, we’re going to get more certainty and more clarity around where we see those trends. Some of those trends are in our shorter lead time businesses. So it makes it difficult to really project out into the future. We’re seeing good signs right now. We’re seeing good order trends. So we’re encouraged by that. But we just wanted to see a little bit more data to be able to be more certain.

Mike Halloran – Robert W. Baird: Then on capital deployment side, specifically for acquisitions, could you talk a little bit about what you’re seeing in the environment from a valuation perspective? What the activity looks like for you guys? What the pipeline looks like and how aggressively you’re pursuing and what types of things you’re pursuing at this point?

Denise L. Ramos – CEO and President: Acquisitions are an important part of our growth out into the future. We are looking at a very balanced capital deployment strategy. We’ve indicated in the first quarter, what we’ve done associated with that, with share repurchases and dividends and pension funding. We’ve also indicated the large investments that we’re making organically. Couple of those large ones being the Wuxi investment in China and then we’re building a new facility in Korea for our IP business. We are also spending some dollars associated with the front end of these businesses and making sure that we deliver the right customer experiences with that. So, we are investing organically, but acquisitions is important to us. So, we are six-month as a company, we have been hard at work in building the pipeline and looking at the various opportunities that we have in the spaces within which we play, we have four business, we are building pipelines across all four of these businesses some further along than others. But internally, we do have some nice momentum and looking at these acquisitions recognizing that a way to create value for this company is not only organically but through acquisitions. So, we are actively looking at things, we will always stay very balanced and very disciplined in this process.

Thomas Scalera – CFO: I think our focus will be close to core, so what we like about these markets is we have a very strong strategic roadmap that we’ve been pursuing and I think we have really good visibility into where we can add some technologies, some geographic expansion and which end markets we really are focusing on. So, we are going to remain disciplined and close to the core. We’ve articulated a couple areas that we would focus from a size perspective, which we think are in the right valuation sweet spot when we stay close to core I think that gives us the best chance to realize some good valuation. So, we are going to be disciplined, but we like the roadmap that we are pursuing and we are continuing to build out the pipeline.

Denise L. Ramos – CEO and President: The nice thing is having the poor businesses gives us a lot of opportunities and so we got a lot different spaces that we can evaluate and that we can look at and make sure that we are making the right investments. So, we like the fact that we’ve got a pretty big group of field ahead of us here.