ITT Inc.

Welcome to ITT's 2020 First Quarter Conference Call. Today is Friday, May 1, 2020. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Emmanuel Capre, Group Chief Financial Officer. You may begin.

Good morning, and thank you, Maria. Welcome to ITT's first quarter 2020 earnings call. This is Emmanuel, and on the line this morning are Lucas Savi, Chief Executive Officer and President, and Tom Scalera, Chief Financial Officer. Today's presentation, Press Release and Reconciliation of Non-Gap Financial Measures to the Most Comparable Gap Measure, can be found on our website at itt.com forward slash investors. Our adjusted non-gap results exclude certain non-operating and non-recurring items, including, but not limited to, asbestos, restructuring, asset impairment, acquisition-related items, and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I'd like to provide a brief overview on our Q1 GAAP results compared to prior year. Q1 total revenue decreased 5% to $663 million. Segment operating income decreased 30% to $78 million, and EPS of 95 cents increased 19%. Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated. Lastly, today's call will contain forward-looking statements that are subject to risk and uncertainties, including impacts from the COVID-19 pandemic. Actual results may vary materially. All such statements should be evaluated together with the safe harbor disclosures and the other risks and uncertainties that affect our business, including those disclosed in our SEC findings. Now, let's turn to slide three, where Luca will kick things off.

Thank you, Emmanuel, and thank you all. for being with us this morning despite the many challenges and unique circumstances that you're dealing with at this time. I truly wish you and your families all the strength necessary to get through this crisis. This morning, we will do our absolute best to describe the market forces that we're facing and, more importantly, the focused actions that we have taken and will continue to take combat those forces and create an even more resilient ITT for the future. But first, I want to take a moment to thank all the ITTs around the world who worked tirelessly during this pandemic to take care of our customers and to take care of each other during these very challenging times. Every day during our leadership team briefings, we would discuss our people's safety and and all of the local grassroots efforts that our teams championed to support their local communities. As you can see in these pictures, ITTs united to provide face shields, protective masks, and other critical supplies to first responders and hospital workers in our valued communities. This morning, we played Alicia Keys' new song, Good Job, during the whole time prior to our call. We did this to further honor the first responders and essential employees around the world that provide our IT tiers with the opportunity to deliver to our customers in the essential industry that we serve. Without them, this call doesn't happen. So, thank you. Let's now turn to our 2020 priorities on slide four. This morning, we will use words and phrases that we don't often use in these investor calls. like unprecedented, pandemic, and essential businesses. These are truly historic times where resilience in the face of adversity is paramount. And to me, nobody personified leadership at a time of crisis better than Winston Churchill, who reminded us all that success is not final, failure is not fatal, it is the courage to continue that counts. So as IT tiers all around the world master the courage to continue to battle these unprecedented market forces, and as we go through this earnings presentation this morning, there is one word that I want you to remember that best describes today's ITT, resilience. To augment our resilience in the face of the unprecedented challenges posed by the COVID-19 pandemic, IT tiers all around the world are united in their focus on our top three 2020 priorities, and they are the health of our people, the health of our business, and the health of our financials. Our first quarter results are a testimony to this focus priority, to the resilience of our diversified businesses, and to the resilience of our dedicated people. While the vast majority of our businesses are deemed essential, COVID-19 disrupted our operations as we experienced decreased customer demand, temporary plant closures, and stricter health protocols to keep our employees safe. But we stayed nimble, flexible, and humble, and we went to work. And we worked harder than ever in more unusual circumstances than ever before to create value for our customers each and every day. For example, we had employees that stood in line for hours to cross European borders to get to work, We had many employees who were separated for weeks from their families due to various travel restrictions, and all employees adapted to new PPE and social distancing requirements. But, as ITTs have always done throughout our 100-year history, we got the job done and produced results for our customers and our shareholders. And as it relates to the health of our business and the health of our financials, In the quarter, we expanded our work chest of self-help opportunities through significant incremental new actions, totaling $135 million, and we executed measures to boost our liquidity to approximately $1.2 billion. I'm confident that these actions will power ITTs through this challenging period and position us well to aggressively capture opportunities in the future. As you see, our priorities start with the health of our people. And I'm so proud of how hard ITTs around the world work together to share best practices and leverage our collective ingenuity to keep each other safe. But at the highest level, I'm so thankful that the detailed playbook that was first implemented by our indomitable team in China and then leveraged around the globe has helped to contain confirmed ITT COVID-19 cases to just single digits. And to date, No manufacturing facilities shut down due to the spread of the virus amongst our employees. This is a tremendous accomplishment considering our numerous operating locations in hotspots like China, South Korea, Northern Italy, New York, and California. And I can assure you that we will never let our guard down when it comes to the health of our people. Now, I'd like to share with you our Q1 2020 highlights related to the health of our business and the health of our financials on slide five. Starting with the health of our business, from a customer centricity standpoint, we can see that our strong share gain momentum continued at empty friction as we outperformed global OEM production by more than 2,000 basis points. And on the strength of our Mexico operations, we posted almost 1% growth in North America as we run production of our recent share gains with GM. However, I want to caution everyone not to expect this kind of outperformance in the future quarters, as the quarter phasing in 2020 will be erratic, and we will cycle through various customer and end market dynamics. But by the end of the year, we do expect to post a 700 to 1,000 basis points outperformance versus global auto production. This will be our ninth consecutive year of outperformance. Supporting our continued outperformance, empty friction generated yet another quarter of strong global platform wins. Q1 awards include the conquering two platforms with the leading EV manufacturer that we are pursuing for years. Our persistence to build intimacy with this customer coupled with our technological and quality leadership paid off. And these wins add nicely to our already strong win rate on new global EV platforms. Finally, while we face challenges on the aerospace front, our rail and IP businesses delivered solid top-line improvements from both a revenue and order standpoint. Next, from an operational excellence perspective, we continue to drive the productivity actions that have been powering our business over the last several years. We continue to focus intensely on driving efficiency actions, eliminating waste, and bolstering our world chest of self-opportunity across all our sites. In the quarter, the team at Industrial Process produced an 11.3% segment operating margin, representing an improvement of 60 basis points. This margin expansion was supplemented by 180 basis points improvement in working capital. Well done, Georgian team. Considering the sudden drop in demand across industries due to COVID-19, we are executing approximately $50 million of new entity-wide restructuring actions to recalibrate our global workforce and deliver $70 million in annualized savings. As we execute these reductions, we will also optimize the way we work as an organization. This approach was exemplified by our plant in Barge, Italy, that reduced the workforce more and faster than the decline in production, devising new ways to do more with less. and across ITT were also drastically cut in discretionary spending by $20 million and CapEx by $35 million. Next, I provide an overview of the Q1 results and perspectives on the health of our financials. Revenue declined 5% to $663 million. Segment operating income margin was 14.5%, and operating income margin was 13.4%. EPS of 80 cents per share was in line with our expectations and declined 9%, excluding unfavorable effects of $4 million. And lastly, we generated $31 million of free cash flow in the first quarter, representing 143% improvement over the prior year. Next, let me highlight the health of our financials and particularly the strength of our liquidity. For the past several years, we have built a tremendous balance sheet that has been solidly fortified by many strategic decisions that preserved our investment-grade quality for times like this. When a crisis like COVID-19 hits and you have the balance sheet that we have, you know that you are entering the crisis with a strong competitive advantage. So our liquidity position of approximately $1.2 billion is just one element of our financial strength. We have also continued to drive down our net asbestos liability by generating favorable cash settlements like the $66 million settlement we executed in Q1. Many of our actions like these have contributed to a 46% reduction in our net asbestos liability and a 64% reduction in our net environmental liability since spin. And as a result of these settlements, we have ample liquidity in our qualified settlement fund to respond to legacy liability outflows in 2020, which will further preserve ITT's cash during the pandemic. Lastly, the decision we made at the end of 2019 to freeze and immunize our US pension plan at the 108% funded status could not have come at a better time. So our strong liquidity is not only a tremendous weapon to combat current conditions, but it will also enable us to seize on opportunities that will power ITT's future when this crisis dissipates. Now, let me turn it over to Tom to briefly discuss Q1 results before we highlight the decisive actions that we have taken to address market conditions for the balance of 2020. Tom?