Ralliant Corporation Morgan Stanley's 14th Annual Laguna Conference

My name is Brandon Knudsen. I'm on the Multi-Industrials research team here at Morgan Stanley. This afternoon, I have the pleasure of speaking with Tami Newcombe, President and CEO of Ralliant, and Nathan McCurren, Vice President of Investor Relations. Tami's going to kick it off with some opening remarks for us.

Thanks for having us. Welcome, everyone. Thanks for being here. We did post the presentation after market close today. We'll spend a few minutes introducing Ralliant. We are a relatively new public company. This is our fifth quarter that we're in today. If you haven't heard of us, I'll catch you up pretty quick on what we do. We are a premier player in precision technologies. That means we make highly precise test and measurement instruments, industrial sensors, and safety systems for the defense and space industry. Our businesses design, develop, manufacture, sell, and service these precision technologies. Our customers are engineers and scientists and innovators around the globe that are working in a number of different end markets, end markets where we're seeing terrific growth opportunities today.

In the utility space, we work with the grid operators to ensure our Sensors and Safety Systems help them keep the lights on. In our industrial space, in the data center for liquid and air cooling, our industrial sensors are being used for pressure, flow, and temperature. In the defense space, we are a critical supplier in a number of the programs that are going through significant replenishment or surge demand. In our test and measurement space, the energy here around data center and AI is exciting. We're enabling those engineers with the instruments they need for those electronics. As that moves to the edge, and you see the AI edge and electronics show up in our wearables, our humanoids, robotics, medical devices, all of that electronics innovation is where our test and measurement instruments play a very critical role.

As Brandon said, we were a new company, and it was September of 2024 that the spin was announced. At that time, we put forth a strategy where we could drive additional growth in the business. There's really three pillars to our growth strategy. The first being around aligning more of the portfolio to high-growth vectors. The second is creating recurring value for our customers in what we call stronghold positions. These are often niche applications where we have technical expertise or long-standing relationships, and we're embedded in an OEM's product. The third is our Ralliant Business System, and that's how we execute our strategy. That's the operating rigor that you will see in these businesses, how we deliver the fantastic free cash flow that we do. On the high-growth vectors, two places that we play across the portfolio, that's electrification and defense.

In electrification, it's from the grid, as I mentioned, into the data center and the AI edge. In defense, it's both legacy programs, where we are embedded, as well as defense modernization. Our capital allocation strategy has been very disciplined, and we started with giving oxygen to these businesses at spin. By that, I mean investing in organic growth. This year, it's been around capacity expansion, where we've seen strong demand. We've also fueled some areas of supply chain to ensure that we can continue to deliver. I'll probably stop there and kind of bring it home to questions that you have for us.

Great. Well, thank you for that intro. You're now, as you said, almost a year into your life as an independent company. What are some things that you can do as a standalone company today that you couldn't do under your previous parent?

I think the word is focus. We're a business of products and services. Very similar go-to markets across the portfolio. Very focused on precision, and precision from an engineering standpoint, and also manufacturing precision products. I think the focus in the company allows us to invest where we have the biggest growth opportunities.

Great. How much of the recent performance would you say is really a function of you seeing a return on those investments versus a real inflection in the cycle?

Well, we're certainly going to take advantage of a good market, but we're also very focused on making our own luck. When I talk about making our own luck, that's about moves we've made to expand manufacturing capacity, investments that we're making in our innovation roadmaps. Then we do have some places where we're increasing our commercial focus and putting salespeople on the ground to fuel increased demand.

Great. You talked about the Ralliant Business System. I want to highlight a little bit in there. What are the AI implementations you're using in order to facilitate the productivity cost savings that you've outlined already? How are you seeing those returns on that AI enablement internally?

Yeah, a couple places. As the Ralliant Business System, which was born back in Danaher, we were able to refine that to be very focused on our manufacturing, our innovation in a products company. We also have modernized it, and with that, we've infused AI. A lot of the problem-solving is about data collection to get to root cause. So there's a real opportunity there for AI. We've also focused on a couple platforms. One platform is for our software developers, and I call it a platform because it gives us the ability to monitor costs, to be able to have a marketplace, so if somebody were to change jobs, we wouldn't lose some of the AI development that we're doing, and to have good governance and cyber control. We've done that both on the software development side as a platform, as well as on the commercial side.

Sort of early on metrics, we're looking more at adoption, utilization, and sort of optimization of costs so that we're using the right model for the right solution. Then on the commercial side, it's about how we scale as we grow by enabling our sales teams without having to continuously add people.

And in terms of where you can improve the business, how does the opportunity set look now a year into it, versus six months ago when you initially kind of gave a level setting of expectations for cost savings for the next few years?

Well, I think there's two pieces there. If you go back to our preparation for Investor Day, it's almost 18 months ago that we were preparing for our Investor Day. As we thought about setting expectations for growth at that point in time, we did an analysis looking backwards. We looked from 2019 to 2024, and we said through that five-year period, we'd had a growth CAGR of just over 3%. So we came out talking about 3%-5% being our new three-cycle growth rate. 18 months later, as I sit here today, we've got parts of the business that are growing high single to double digit. I believe that mid-single, even without tuck-in M&A, is possible. Some of our shorter cycle business that, our test and measurement and some of our industrial sensing businesses, we had strong Q2.