Welcome to ITT's 2024 Third Quarter Conference Call. Today is Tuesday, October 29, 2024. This call is being recorded and will be available for replay starting at 12:00 p.m. Eastern Time. All participants are in a listen-only mode, and we will open the floor for questions after the presentation. I am pleased to turn the floor over to Mark Macaluso, Vice President, Investor Relations and Global Communications. You may begin.

Thank you, Gigi, and good morning. Joining me this morning in Stanford 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 three-month period ending September 28, 2024, which we announced this morning. Before we begin, please refer to Slide 2 of today's presentation, where we note that today's comments 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 for otherwise noted, the third quarter results we presented this morning will be compared to the third quarter of 2023 and include certain non-GAAP financial measures. The reconciliation of such measures to most comparable GAAP figures is 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 3.

Thank you, Mark, and good morning. I would like to begin by thanking all ITT-iers for another exceptional performance in the third quarter. Once again, our teams delivered strong profitable growth with even more robust growth in orders. First, in our legacy business, we continue to drive value creation through outsized organic growth and margin expansion, with an operating margin above our long-term target nearly two years ahead of schedule. And while we continue to drive profitable growth in the core, we are also building the M&A muscle through strategic capital deployment. We are seeing strong results from our recent acquisitions Svanehøj, while early indications on kSARIA's value proposition are encouraging. I want to thank our teams once again for over delivering on our commitments. Let's now discuss a few highlights from Q3. We grew orders 14% on an organic basis and importantly, 6% sequentially versus Q2. Our book-to-bill of 1.1 resulted in a record ending backlog of $1.7 billion. This is even more impressive given that organic revenue grew 6% with all segments contributing. We also drove 60 basis points of margin expansion or 100 basis points excluding M&A impacts. All in, we delivered 7% adjusted EPS growth and 9% when excluding the impact of the Wolverine divestiture. Excluding the temporary acquisition amortization, we are driving to more than $6 of earnings in 2024. A truly strong performance compounded by the $1 billion of capital deployed. With kSARIA closed, we have now deployed over four times more capital than we did in the corresponding period in 2023 and more than two times our expected free cash flow. Let's get into the details on our Q3. Our orders growth in the third quarter was a standout. IP grew orders 30%, with pump project growth well above 100% for the quarter. Year-to-date, our project orders are now up 10% on top of 29% growth last year, overcoming the tough compares we experienced in the first half of 2024. We also saw orders growth in nearly every short-cycle product category in Industrial Process, led by Svanehøj and aftermarket. CCT grew orders 7%, driven by continued Defense share gains and Connectors. The CCT team has secured several important defense wins including Connectors on a transportable surveillance radar system. And in Motion Technologies, KONI rail secured multiple large orders in Europe and China, while Friction continues to conquer new platforms with all OEMs on all powertrains. On revenue, all of our businesses are contributing. CCT grew 6% on the strength of Defense, Connectors, and the Commercial Aerospace aftermarket, all of which grew 20% or more organically. Our Connectors business continues to grow profitably with new products and faster speed to market driving share gains. IP grew 6% with strength across all short-cycle product categories, including the Habonim valves business. Notably, September was Habonim's highest month of sales since the acquisition. In MT, aftermarket demand in Friction as well as share gains in KONI rail drove 5% organic growth. Additionally, Friction’s outperformance was over 700 basis points in a challenging auto OE market. In total, we grew 8% including Svanehøj and kSARIA despite the Wolverine divestiture. On margin, we grew 60 basis points to over 18% with strong volume and pricing growth, completely overcoming the dilution from acquisitions and foreign currency impact. IP remained above 20% or above 23% excluding acquisition dilution, representing an incremental margin of 37%. CCT hit a 19% milestone with another outstanding performance in Connectors, overcoming 40 basis points of dilution from the kSARIA acquisition. MT was again above 18%, with strong productivity that more than offset significant foreign currency headwinds. And KONI was above a 20% margin for the very first time, well done Jeroen and the KONI team, especially in China. Shifting to our outlook. Today we are raising the midpoint of our full-year adjusted EPS guidance by $0.05 to $5.83, overcoming a favorable foreign currency, higher interest expense, and temporary acquisition amortization. To recap, another strong quarter for ITT with double-digit organic orders growth that will continue to power our future top-line performance. Now, let's turn to slide 4 to talk more about how we are furthering ITT's differentiation. The Friction China team has nearly reached its full-year target for total platform awards, thanks to wins with local OEMs including Geely, Chery, BYD, Zeekr, and Tesla. One of the ways we continue to differentiate in this competitive market is our world-class testing capabilities. In August, I was together with the team in China to see the testing facility that we invested in and built there. Our investment in a new state-of-the-art brake pad testing center in Huang Shan, China is already delivering strong returns. Our engineers and drivers trained in Barge, Italy, are able to deliver fast and real-time testing data to our customers that accurately predicts the braking system's performance in harsh conditions and terrains. And because of the investment we made in Huang Shan, we are also able to replicate extreme temperatures and humidity levels indoors. This unique facility enables our team to work side by side with all our customers in China, hence improving our performance. Moving to IP. First, Svanehøj secured awards for 24 new vessels, including 11 that are capable of handling ammonia. Svanehøj is leading the way for ammonia pumps on commercial vessels with over 2000 ammonia-ready marine pumps in operation or on order. Svanehøj's deepwell fuel pump can handle LNG, LPG, methanol, and ammonia. This will ensure that vessels are essentially future-proof while also securing a long-term installed base for growth at Svanehøj. As you can see, Svanehøj is indeed powering a better future. Next on Goulds Pumps. Thanks to Saudi's best-in-class quality and 100% on-time delivery in the third quarter, we have become a preferred partner to EPCs and end users in the region. Additionally, thanks to our close technical support and product localization, the team drove a near-perfect win rate with these customers. As a result, we secured close to $50 million in orders for pumps on the Amiral petrochemical complex in Saudi Arabia. Because of this and to ensure we continue to outperform in this important region, we are investing further in a larger facility in Saudi, building on our capacity investments we announced last year. Well done, Khalid, Omar, and the entire Middle East team for delivering on our commitments and driving more than 100% project awards growth this quarter. Moving to Aerospace and Defense. Our Connectors team is continuing to differentiate through the speed at which we deliver this highly-customized interconnect solution. In Q3, we won awards on leading defense platforms including the NETT Warrior Soldier-worn Communication System and the world's leading integrated Defense system. On top of this, we won developmental engineering contracts for the next-generation advanced military aircraft. These are just a few of the awards from across the portfolio that will continue to feed ITT's backlog and future growth. Let's now take a deeper dive into our record backlog on slide 5. In the last nine months, we have grown our backlog to a record $1.7 billion, a whopping 34% increase with a book-to-bill solidly above one. This is driven both by our legacy business and our strategic acquisitions. First on our legacy business. Aerospace and Defense orders were up 15% due to large program awards. Rail orders grew roughly 20% driven by Europe and China share gains. Rail continues to be a great market for ITT. A recent example is KONI China, where the team is in the final testing phase on a new high-speed train, which will operate at 400 kilometers per hour. This is a significant step to ensure KONI shocks provide the right engineering solution for when the trains begin operating in 2026. Based on all of this and the project's share gains in IP, it is clear that our legacy business is growing, and this will be enhanced further by our recent acquisitions on Svanehøj. Less than a year in, the results are already outstanding. With a book-to-bill of 1.4, we added $190 million to our backlog. We expect Svanehøj's leadership in the energy transition and our engineering expertise to drive stronger growth as low carbon and sustainable fuels are more widely adopted. In Q3, as an example, Svanehøj unveiled a new high-pressure ammonia fuel pump capable of safely handling highly corrosive carbon-free liquids. This and the wins we have already secured give us confidence in hitting Svanehøj's double-digit growth outlook. Finally, on kSARIA. kSARIA serves as an extension of customer engineering teams, taking high-level concepts to production in record time. 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. kSARIA cable assemblies are the connectivity that ties defense systems together. Like Svanehøj, kSARIA 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. Recently, Micro and CCT leadership were on the ground at kSARIA sites across North America to welcome the local teams to ITT, including headquarters in New Hampshire where cable assemblies are currently being built for the Virginia-class submarine. We continue to have confidence in kSARIA's value proposition and are focused on executing the commercial synergies we identified. As you can see, our value creation through strong organic growth and margin expansion continues. And now through M&A as well. Now, let me turn the call over to Emmanuel 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. In IP, we saw strong growth across baseline pumps as well as parts service and valves, while project sales were flat. Habonim was a standout this quarter, with 16% revenue growth. Svanehøj also added 14 points to IP's total growth. In CCT, Defense share gains, Connectors, and Aero aftermarket growth drove a 6% revenue increase. CCT is continuing the multi-quarter recovery in Connectors distribution at attractive margins. Additionally, we are overcoming a slowdown in order activity from Boeing given the production stoppage and elevated inventory level. In MT, revenue grew 5% driven by strength in rail and the Friction aftermarket. On the OE side, Friction outperformed global auto production by over 700 basis points. Additionally, KONI grew 16% and expects to grow roughly 15% for the full year due to share gains. On profitability, margin expansion was primarily driven by higher volume and productivity, particularly in MT, which grew more than 100 basis points despite a 160 basis point FX headwind. CCT exceeded 19% margin with 90 basis points of margin expansion, overcoming 40 basis points of dilution from kSARIA, which closed in September. And in IP, excluding the 300 basis points of dilution from Svanehøj, margin grew 60 basis points to 23.9%. For all of ITT, price, operational leverage, and productivity outpaced unfavorable impacts from foreign currency of 80 basis points. On earnings, we delivered a strong performance driven by core volume growth and margin expansion. This is ITT's DNA. Lastly, on capital deployment. Beyond Svanehøj and kSARIA, 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. We invested over $75 million in growth and productivity, mainly in Friction to support share gains and the expansion of our high-performance business. And in Q3, immediately after funding the kSARIA acquisition, we repurchased another $25 million of ITT shares, bringing the year-to-date total above $100 million. Let's quickly turn to the operating margin and EPS bridges on Slide 7. The key highlight here is the strong performance of our businesses. We overcame $0.07 of unfavorable FX, $0.06 of higher interest expense, $0.04 of dilution from the Wolverine divestiture, and a higher tax rate to deliver $1.46 of adjusted EPS. If you exclude M&A impacts and the temporary amortization, adjusted EPS will be up 9% for the quarter. Now let's move to Slide 8 to discuss our updated 2024 guidance. Today, we are raising our full-year revenue, operating margin, and EPS guidance above the previous midpoint. We're fully absorbing an incremental $0.10 impact from higher interest expense and acquisition amortization related to kSARIA while raising the midpoint of adjusted EPS to $5.83 for a growth of 12%. On the top line, we expect to see continued outperformance in Friction, as well as strong growth in IP and Connectors. The 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 or over 140 basis points excluding M&A. Our adjusted free cash flow guidance remains at approximately $450 million for the full year.

Let's briefly look at the adjusted EPS outlook on Slide 9. I wanted to highlight the strong operational performance in our legacy business in 2024. 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 Wolverine. As a result, we are raising the midpoint of our full-year EPS guidance. This is a testament to the resilience of the ITT team. For the fourth quarter, total growth will be low double digits driven by Svanehøj and kSARIA, more than offsetting the divestiture impact. We expect to grow the top line in the low single-digit range organically with IP delivering the strongest top-line growth. This assumes that CCT will be up slightly with strong connector performance offset by slower aerospace demand due to the Boeing work stoppage, and MT will be roughly flat year-over-year due to expected OEM shutdowns in December. On margin, we expect that both IP and MT will deliver margin expansion, while CCT will be in the mid-teens due to temporary amortization from kSARIA. However, for the full year, we expect that both MT and CCT will be above 18%, while IP will finish above 20% once again. This will drive adjusted EPS growth in the high single-digit range at the midpoint.

Thank you, Emmanuel. A few points before Q&A. This quarter once again we delivered value creation through organic growth and margin expansion. This is ITT's DNA. Our execution and innovation are delivering share gains across all our businesses to a record backlog ahead of 2025. On top of this, we continue to build our M&A muscle. Svanehøj is already delivering, kSARIA's early signs are good, and our M&A pipeline remains active. And thanks to our team's performance, we're once again raising our outlook. As always, it has been my pleasure. Thank you for your continued support and interest in ITT. Gigi, please open the line for Q&A.

Thank you. The floor is now open for questions. Our first question comes from Joe Giordano from TD Cowen.

Hey, good morning, guys.

Good morning, Joe.

Good morning, Joe.

Hey, I'm just curious maybe 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 you're operating in? Because we're hearing some kind of mix about push outs of projects and even in industries like process, where we think things are generally pretty good, we're hearing some mixed color and clearly that's not what's happening 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?

Sure. I think that what you're seeing here, Joe, in the results is the differentiation of ITT, particularly on the performance side. So if you think of IP, the example that we gave of our Saudi operations. In Q3, they delivered 100% on-time delivery of good quality products. And this is the reason why we continue to win market share on the project side. And this year, year-to-date, we are 10% up versus last year, which was already a very tough compare. The story is the same when it comes to rail in China or in Europe and North America, Friction, and also on the Connector side, particularly on Defense.

And Joe, if I can add, if you look at our orders, they grew in all the different end markets. So the 30% growth from a total order – from an organic order standpoint is driven by really all the markets. So we're really outperforming with every customer in all end markets.

Fair enough. And then just curious on M&A, right? So you've done the Wolverine divestment, you've made two deals here. You've mentioned that the pipeline looks good. How interested are you in terms of timing, right? Like you have a lot going on, you're executing well but like how much is too much in a short period of time internally from a bandwidth standpoint? And if I can just tack on one, Emmanuel, just on the – I'll nitpick 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 and EPS but the free cash flow guide is kind of unchanged there. So if you could just address that. Thanks, guys.

Thank you, Joe. So when we talk about the M&A, the pipeline is active; we are cultivating. We are active on the M&A front. And the reason is because when you look at the last two acquisitions, for example, Joe, Svanehøj and also kSARIA, they are well-performing companies with a good position in the market and a strong management team. If you look at Søren and Johnny Morten and all the team at Svanehøj, they are really doing a great job and focusing and over delivering. kSARIA early signs are good, and we have a strong management team there with Mike leading kSARIA. So we have room to do more acquisitions, but it depends, of course.

And on the free cash flow question, Joe. So for sure, free cash flow was a little bit frustrating this quarter. We didn't hit what we wanted to do. And the reason for this is because of working capital, specifically AR and inventory. What you're 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 that's why you're not seeing free cash flow going up at the same time as earnings.

Thanks, guys.

Thanks, Joe.

Thanks, Joe.

Thank you. One moment for our next question. Our next question comes from the line of Scott Davis from Melius.

Hi. Good morning, guys.

Good morning.

Congratulations again on a fantastic year. When you see growth of 136% in pump projects, it's noticeable that other companies have mentioned a shift in purchasing patterns on the project side, with orders coming in earlier than usual. Have you observed that EPCs are trying to get ahead of each other to secure orders? Are there concerns regarding product shortages, or is that not applicable to your situation?

No, I wouldn't say so, Scott. I think that because of the project sometimes you have a little bit of ups and downs. This is the reason why, for example, we emphasized a 10% project growth year-to-date on what was already an exceptional year last year because that is a little bit more relevant. What we have seen in the way that the EPCs 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 in partnership with you. And this is what is differentiating now in the market. So maybe a little bit more working closely together, particularly if you're working well and if you're delivering well for them.

That's helpful. Considering the current situation at Boeing, you need to manage the disruptions as a customer. Additionally, I understand you are in the process of negotiating your contract for the future. How do you adapt your production in light of this uncertainty? Does this impact the timing of your negotiations? An update on Boeing would be appreciated.

Thanks, Scott. First of all, we are working closely to ensure that we support them when they restart production. It won’t be a smooth restart as it always takes time after such events. We need to stay closely connected with them so we can provide the necessary support. Currently, we aren't shipping anything, and this will likely impact Q4 by approximately $10 million for CCT. As for the negotiations, they are necessary because some of these contracts are set to expire at the end of the year and at the end of Q1 2025. The negotiations are still ongoing.

Okay. That’s helpful. I will pass it on. Thank you guys. Best of luck.

Thanks, Scott.

Thanks, Scott.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Obin from Bank of America.

Hi, guys. Good morning. Just a question on pricing. It's been a large focus in recent years, and it seems that it's really improved. Can you talk about structurally what you've done, what other workers to do going forward? And early thoughts on pricing into 2025?

Sure. The pricing is different for the different businesses. I would say when you look specifically at 2024 and in Q3 where price cost the positive both in dollars and in margin. The situation is particularly positive on the CCT front and here is working strategically looking at pricing, both in the distribution but also in the renegotiation of the long-term agreements. On the MT side, what we have done structurally is ensuring that all the contracts now have commodities indexed. This is covering both for us as well as giving some security for the customers. And then on the IP side, on the short cycle in the distribution, we have been very active in terms of looking at our discount rates and our leakage to ensure that we do not have any leakage there when it comes to pricing. In the future, regarding the second part of your question, we probably need to be even more strategic, being more analytical looking at this pump, this application in this region for this distributor, what is the value that we're delivering and the price that we can get. So more analytics to be able to get a little bit more pricing, but it's looking more normalized.

All right. Got you. Thank you. And just to follow-up, you sort of noted short-cycle business. It seems yours continues to hold up well. Just what's the balance between share? And could you just give us some color as to what you're seeing on the distributors? Are they turning more positive on the short cycle?

Yes, thanks, Andrew. If you look at valves, this is clearly an area where we're gaining market share. Our orders in Q3 increased by 16%. Most of this growth came from volume, and we are gaining share on both large projects, like the medication projects involving our engineering valves, as well as in the short cycle market. The short cycle, which includes the aftermarket for valves, has performed strongly. Our pump service, particularly repairs, is also doing very well. By focusing on minimizing machine downtime for our customers, we have been able to reduce lead times and expedite pump repairs back to them. This increases the volume of work in our facilities. In terms of aftermarket parts, we've aimed to enhance turnaround times. Our U.S. distribution center for aftermarket parts is currently delivering about 50% of orders within one day and 95% within two days. Ultimately, success in the aftermarket hinges on having the necessary parts available for customers when they need them.

And just in terms of destock, are we done? What's the message? Sorry, if I missed it.

So in IP, we are not seeing any signs of destocking. Inventories are not also historically higher than they used to be. I think it's hard to say on the Connector side because inventories are higher than what they were historically, and we haven't seen any type of decline. What we saw, though, that is interesting is that point of sale continues to increase. So there may be a rerating of the inventory levels at our distributors.

Thanks very much.

Thanks, Andrew.

Thank you. One moment for our next question. Our next question comes from the line of Mike Halloran from Baird.

Hey, good morning, everyone.

Hi, Mike.

Why don't we just start with the auto 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 what industry demand looks like as we head into 2025?

Sure. Sure. The market is challenging, particularly when you look at the end market, but what is interesting to see here is that we continue to outperform in every single market. This is in Europe, in China where the outperformance was almost 1,000 basis points and in North America, where we performed incredibly well as well. So despite the fact that the market will be down in 2024, we expect to grow. Our outperformance for the full year is probably going to be around 700 basis points. Now when you look at 2025, it's a little bit early, but probably, we expect the market to be flat to up low single digits and because of the awards that we won in the past and the awards that we continue to win in 2024, we expect an outperformance in 2025 as well. The outperformance, Mike, is not only in every single region, but it's also in every single powertrain. Despite the fact that internal combustion engine production is coming down, we are growing there. Our market share will be above 30% in total worldwide for the very first time this year.

Makes sense. And then just on the guide, could you just help me understand the impact of kSARIA in the fourth quarter, specifically on a net basis, both the operational piece as well as, obviously, you've got some step-up amortization type things in the numbers. So just maybe net that out for me so I understand how that's impacting the guide?

Sure. If you look at our fourth quarter, the positive momentum in orders will continue. Much of the growth will come from IP, which will remain in the double digits. In terms of revenue, expect it to be the highest quarter of 2024 in dollar terms, which is typical. The performance is strong, and our teams are preparing to increase shipments. IP will significantly contribute to organic growth due to various projects. Overall, with Svanehøj and kSARIA, revenue is projected to rise by 12%, while CCT will be flat as we work to mitigate the impact from Boeing. We anticipate that volumes will not significantly ramp up in Q4, which accounts for $10 million included in our revenue guidance. Regarding margin details, feel free to ask.

No, no, please continue.

I was just going to say from a margin standpoint really quickly, in line with Q3, the FX impacts that we saw, namely in MT, which impacted our margins by 160 basis points in Q3. We don't expect that in Q4. We expect a sequential improvement in MT as a result. CCT will step down because we will be impacted roughly 400 basis points by the kSARIA dilution.

So that was a far more interesting answer than the question I asked. I was just looking for kSARIA impact, but that was a lot of really great detail. So could you just net out the kSARIA piece because I know that was included this time around.

So kSARIA, you're right, was accretive in Q3. I think when you think about Q4, we expect kSARIA to modestly contribute from an income standpoint. Revenue for kSARIA in Q4 will be around $50 million.

Thank you. Appreciate it.

Thanks, Mike.

Thank you. Our next question comes from the line of Vlad Bystricky from Citigroup.

Good morning, guys. Thanks for taking my call, and congrats on another nice quarter. I guess just stepping back, given the margin performance you're putting up across the portfolio, and you mentioned you're essentially performing at or above your longer-term targets on the legacy businesses. So can you just talk about how you're thinking about the path for margins going forward into 2025 and as we think out beyond 2025 at this point?

First of all, I want to mention that we will likely announce new margin targets for all our businesses in the first half of 2025. Looking at the margin for our legacy businesses, we anticipate continuous improvement in 2025. As Luca mentioned, Friction is expected to continue outperforming. We will begin delivering some of the large, profitable projects we have been developing. Our project backlog has seen a margin increase of several hundred basis points compared to the previous year. Additionally, we are considering price renegotiations with Boeing, a possible restart of some volumes, and actual market share gains. All of these factors contribute to a positive top-line environment that will enhance our bottom-line performance.

Okay, 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 Amiral? Can you talk about sort of the visibility to timing on the delivery of those? And would you say that particular win is consistent with that commentary around higher margins in backlog?

Sure. Vlad, this is Luca. I think that this $50 million is working across different EPCs. The reason for these good wins is exactly the performance of the Saudi team. Because of the performance, we've been able to work very closely with the EPCs and support them. The localization and the way we perform these projects will be good profitable projects. When you look at the timeline of projects of this size, you are looking at the next two to three years. This is when you will be able to recognize the revenue.

Great. That’s all. I appreciate it.

Another example of that. So, for instance, the businesses in decarb that we won in Q1 and Q2 of last year, we will start shipping them in the first half of 2025. Those large projects take a little bit of time between definition of specification, development, delivery, and then documentation.

Yes, that makes sense. Appreciate it, guys. I'll be back in the queue.

Thanks, Vlad.

Thanks, Vlad.

Thank you. Our next question comes from the line of Damian Karas from UBS.

Hey, good morning. Nice work in the quarter.

Thank you.

Thank you.

I wanted to ask you guys a follow-up on Friction seeing continued share gains and strength there, particularly in China. 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? 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 and testing.

Sure. The market share gains are across the board. We said across all the different regions. The teams around the world are really working very well closely with customers with R&D. Their performance in terms of on-time delivery and quality with defects measured in hundreds of parts per billion makes the difference. This is across the board. For high-performance, specifically, funny you asked because in October this month at the beginning of October we were there together with ITT's Board of Directors. They approved this investment. It was only natural to take the Board of Directors there to see what we have done. Think about this speed, Damian. We broke ground, or I will say in Italian, we put the first stone down in the summer of 2023. In less than 15 months, we got the permit. The building is completed, is up and running. The machines are being delivered and installed right now, starting our operation in Q1 of 2025. We have won the right and the targeted platform. The team internally has done an outstanding job at an incredible speed. I'd say we also received a lot of support from the local authorities and institutions. That is for high performance. So, good picture there. For the aftermarket, it's true that we are testing a bit of the aftermarket in China. As we stand today, we got opportunities to grow on the OE side and grow profitably around the world. For the aftermarket, right now, we are sticking with the European geography only.

Got it. That makes sense. Thank you. And then on the Connectors business, it sounded like order strength was pretty broad-based. Maybe you could just elaborate on what you're seeing across Connectors and your sense for how much of that growth you're experiencing is underlying market versus ITT share gains?

Connectors have been a strong story for the past few years, demonstrating good resilience despite market challenges. In August, during my visit to Shenzhen, where we have our connectors factory, I saw that although we are a small player in China, our team is effectively localizing engineering and development, allowing us to gain market share. We are increasingly focused on the Chinese market and have a solid position, especially in the medical sector, with strong performance in the industrial sector as well. Our industrial connectors saw a 21% increase in the quarter, and we are also performing well in defense. We are effectively gaining market share in defense due to our product expansion and the efforts of Dan Arthur and the team in speeding our market responses and providing the right solutions for specific programs. Overall, we are seeing significant strength in the defense sector as well.

Glad to hear. Thanks again. Good luck, guys.

Thank you.

Thank you. Our last question comes from the line of Joe Ritchie from Goldman Sachs.

Hey, good morning, guys. So 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 you're just seeing share gains really across the portfolio. I was hoping that maybe you could dive in a little bit further on the rail business and the aerospace and defense business. What you're doing there? And maybe if there's a way to describe what the opportunity is across those businesses that would be helpful as well.

Sure. When you look at rail, KONI is performing exceptionally well in rail for our customers. Their on-time delivery is similar to Friction, in the 90s, with very good quality providing good service engineering very close to the customers. We are in China for China. As an example, I remember when Davide went to China for the very first time we had zero market share on high-speed trains about ten years ago. Today, we are one of the leaders in high-speed trains, and our shock absorbers are tested on their new 400-450 kilometers per hour high-speed train for the future, so all of that is feeding growth. There is plenty of opportunity in the market because of the investment in Europe as well as the investment in North America. Rail, we benefit from the green trend of the future, so good market and outperformance on top of it. When it comes to defense, defense has been a very good story both from a revenue perspective and orders. Other revenue for the full year probably will grow 20% in defense and the orders 25%. Here we have been working very closely with the customer from an engineering point of view in customized solutions and have brought results. Our speed and our engineering, both for the connectors as well as for the CT side.

Super helpful, Luca. I appreciate all the color. And then I guess just a more near-term question, Emmanuel, just talking about MT margins. You said you had a very big headwind this quarter from FX, still expecting 18-plus percent margins for the year. I guess maybe as we head into 2025, any initial comments on where margins could go if we cut the line today on FX and say that's potentially not as much of a headwind next year? How are we looking for MT margins next year?

Yeah, Joe. So we expect FX not to be an impact already in Q4. When you think about the 160 basis points margin impact in Q3, that was due to our FX hedge, that we had to unwind because the dollar became stronger compared to the euro. This is a one-off impact, and we don't think it's going to repeat in that magnitude in the future. When you think about Q4, we expect already MT to be sequentially up versus Q3 and contributing to MT being for the full year above 18%. When you think about 2025, obviously, we continue to drive a lot of productivity, a lot of cost reduction, and I think it's logical to assume that MT will grow margins in 2025 compared to this year. For us, what's really important is the long-term target. You know that the long-term target is 20%. Our commitment is to achieve it by 2026, which implies that there are going to be significant progress also in 2025 because we will be a little bit above 18% at the end of 2024. So we feel good about MT. We feel good about our opportunity to expand margins.

Perfect. Thank you, guys.

Thank you. Our next question comes from the line of Nathan Jones from Stifel.

Good morning, everyone. Firstly, a follow-up question on the profitability of large IP projects that Emmanuel, I think you mentioned. I think you called them highly profitable. Historically, the larger projects have been less profitable. Maybe just some more colors and more commentary on what's leading those larger projects to have much higher profitability than they may have historically?

Yes. So keep in mind why I call them highly profitable is because when you think about our legacy IP business, this quarter, we were at 23.9%. It's true that aftermarket is super profitable, but at some point in time, projects need to contribute as well. That's what you're seeing also. We're taking projects at a certain margin level. We work through the development cycle and the production process to improve that margin so that the margin, when we deliver, is higher than the margin when we were awarded. What we're doing is that we work closely with our customers to really define specifications with no room for error. Once we do this, we are focused on making sure that we develop flawlessly those projects. We also include engineering changes that our customers are requesting, and this is a big difference from the past because in the past, I'm talking 2015, our performance in developing projects wasn't great; we were in a lot of cases eating those engineering changes. Now we are pricing those engineering changes and making sure that we recover margin on this as well. When you think about the delivery, it's all about customer service, making sure that we provide the documentation also because, when you deliver a pump without the documentation, the customer can't do anything with it. It's really a positive cycle that we've been able to implement with our customers that is resulting in growth feeding growth.

It's early to say that the projects tend to be a little bit more challenging. You need always to maintain the rigor in other acquisitions, so you really bring in the orders at the right profitability and then the rigor in execution.

Makes sense. And then I guess my follow-up question is around strategic pricing. Luca, you talked earlier about needing to elevate your game even further on strategic pricing. Can you talk about where you think the biggest areas to implement more value-based pricing to target those increases come from? And what impact that could have on margins?

Yes. I think that probably is on the CCT side and specifically, on Aero on the component side. This is the area where probably we can be even more strategic, and we can have even bigger impacts. I'm not just talking about the long-term agreements that we discussed already but in general, I think that there are opportunities there when it comes to the aftermarket and some of the components in CCT, the repairs, for example. So, this is the area where we've got more opportunities.

Awesome. Thanks a lot.

I want to add that the team has been doing an excellent job of reducing lead times for repairs. This improvement has led to increased volume and has allowed us to raise pricing. Each day a repair is delayed means an airplane is grounded instead of flying. We are focusing on this differentiation to further grow the business.

Awesome. Thanks very much for taking my questions.

Thanks, Nathan.

Thank you. Our last question comes from the line of Matt Summerville from D.A. Davidson Co.

Good morning, Matt.

Good 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 the growth trajectory of that business going forward into 2025? And what's your assessment on customer inventory levels there?

When you look at the aftermarket, I would say on a year-to-date basis, it's growing 6%. I would say the OES is practically flat and the independent aftermarket is in the high teens. In the near term, we will expect a more normalized growth, especially for the independent aftermarket and probably more opportunities on the OES side. Regarding inventory, I think that the destocking has been completely overcome. So, we are beyond that.

Lastly, can you discuss the project side of the business? You've previously mentioned the funnel metrics that you monitor. Could you provide an update on the funnel for IP projects and include some details about the end market and geographic aspects? Thank you.

Sure. The funnel is staying at a very high level, Matt. The funnel is up despite the fact that we have a good growth in revenue. On top of that, a book-to-bill which is above 1, the funnel is up 9% year-over-year. So, pretty outstanding, which tells you how rich the opportunities are out there. When you look at the region specifically and the market, it's fair to say that there are good opportunities on the green side, a lot of opportunities on the traditional oil and gas. Based on a geographic point of view, the regions that continue to present good growth are the Middle East and Asia Pacific, and we expect those areas to continue to provide good opportunities and good orders in the future.

Thanks, Luca.

Thank you, Matt.

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