ITT Inc.

Welcome to ITT's 2020 Third Quarter Conference Call. Today is Friday, October 30, 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 touchtone 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 Alex Schurk, Investor Relations Manager. You may begin.

Good morning, and thank you, Lori. Welcome to ITT's third quarter 2020 earnings call. This is Alex Schurk. And on the line this morning are Luke Asabi, Chief Executive Officer and President, and Emmanuel Capre, Chief Financial Officer. Today's presentation, press release, and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com forward slash investors. Our adjusted non-GAAP results include 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 of our Q3 GAAP results compared to prior year. Q3 total revenue decreased 17% to $591 million. Segment operating income decreased 22% to $84 million. Regarding EPS, we took our net asbestos liability to a full horizon estimate, resulting in a non-cash expense equivalent to $1.20. the main driver of the $0.55 EPS loss. Free cash flow increased 77% to $271 million. 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 other risks and uncertainties that affect our business, including those disclosed in our SEC filings. Now, let's turn to slide number three, where Luca will take us through the Q3 highlights.

Thank you, Alex, and thank you all for being with us this morning. I truly hope that everyone stays safe. First things first, I'd like to thank all ITTs around the world who continue to work tirelessly during this pandemic to serve our customers and to take care of each other in challenging conditions. and to make sure we continue to operate safely, we are implementing our Ready, Safe, Go program across ITT, based on the successful containment strategy first developed by our Asia-Pacific team. Today, we will present the results of ITT's relentless efforts to drive our performance and fortify our resilience. During the last few years, we at ITT have elevated the strategic standing of execution. Q3's outstanding results are the proof of this and also a testament to our strengthening momentum towards full recovery. Last quarter, we highlighted our focus on protecting our employees and supporting our communities while providing superior service to our customers with flawless execution. We also committed to delight our shareholders with record cash flow generation and timely cost actions while playing offense for the future. This is exactly what we continued to do in Q3. We delivered record ITT operating income margin of 15.4%. We grew 92% sequentially in friction OE sales. We delivered 19% segment decremental margin and 40% segment incremental margin sequential to Q2. Lastly, we generated record free cash flow of $271 million. We are firmly on the road to recovery. ITT's execution capabilities and our unprecedented granularity delivered higher volume than expected, increased top line sequentially, and through strict fixed cost controls produced an ITT record quarterly margin performance. This is resilience. We achieved our highest ever quarterly operating income margin and our highest ever year-to-date free cash flow. This is even more remarkable given the current macro environment. This morning, we will share the highlights of our performance and the actions we are taking, as well as our outlook for the remainder of 2020. We will also provide our perspective on the markets we serve. Before going into Q3 performance, I'd like to highlight our safety record. Safety is, without a doubt, my top priority. We've made tremendous progress in all our businesses. Here today, we reduced the number of incidents by 30%. Our injury frequency rate is 0.8, and 50% of our sites have been incident-free for more than a year. I'm grateful to our teams for their accomplishments and for keeping our people safe. Now, let's turn to our Q3 results. On the road to recovery, we focused on what we control and broke some records along the way. We delivered solid EPS of 82 cents, up 44% sequentially, strong segment operating income margin of 16.2%, up 360 basis points sequentially, record operating income margin of 15.4%, and record-free cash flow of $271 million, representing a growth of 77% or $118 million versus prior year. From an operational excellence standpoint, we continued our journey of betterment. Our productivity and cost actions helped to offset the impact of materially lower volumes. In the third quarter, I was very fortunate. I was able to visit many of our sites in Europe and the US. Let me tell you, we have many opportunities, and we will go after them. I also experienced the progress made firsthand, progress that helped us to deliver 14.1% operating margin at IP. This is the highest industrial process Q3 margin ever, and we continue to confidently progress towards our long-term 15% plus margin target. The breadth of the operational improvements delivered by George and his team is impressive, not only because of the quality of execution, but also because of the care they put into structurally resetting IP for the long term. We are actively shaping our manufacturing footprint and redesigning our product portfolio to establish a lasting competitive moat and superior margin performance for IP in the years to come. This 14.1% margin performance represented 120 basis point expansion versus prior year, and 40 basis points higher than Q2 this year. Our progress was also evident when I was with the MT team in Barger. Motion Technologies delivered a strong operating margin at 18.5%, up 630 basis points versus Q2, and only 30 basis points below prior year. We continue to drive productivity through our factories, and China and Mexico in particular keep on impressing with margins near all-time highs. At CCT, I was encouraged by the many Kaizen events running in our Valencia site and all across ITT, we drove high levels of productivity that produced significant segment margin expansion compared to Q2. This operational excellence combined with our speed in execution enabled us to accelerate working capital reduction and post a year-over-year 180 basis points improvement. Lastly, I want to thank our leaders who helped to keep our people safe and advance ITT's operational excellence. On the customer front, our teams continue to focus on serving our customers with utmost dedication, showing through their actions that our customer-centric approach is a way of life at today's ITT. Our friction or e-sales grew 92% sequentially, and the momentum in share gains continued with each one of our main regions outperforming global production year-to-date. including over 1,000 basis points of outperformance in North America and China. While we still experience inventory adjustment issues in Europe with certain customers in the first half of Q3, we saw encouraging signs in auto OE production, particularly in September and October. We now expect friction OE outperformance for the full year, at the lower end of our expectations based on the timing of new platform ramps in the fourth quarter. IP grew organic short cycle pump orders by 14% sequentially, on the back of strong parts which improved gradually during the quarter, and showed year-over-year growth in September. IP delivered a book-to-bill of one, and as a result, our backlog at the end of Q3, was up 6% excluding foreign exchange compared to the beginning of 2020. IP continues to lead in on-time delivery performance. Today, our customers know they can rely on us to deliver top-quality goods pumps on time, at a competitive price, and consistently. This is a key differentiator. We've been talking a lot about Seneca Falls' 95% plus baseline pumps delivery performance for the last 12 months. And I want you to know that today, the rest of our facilities have been performing at an industry-leading level as well. Finally, at CCT, we've been busy playing offense and finding new ways to partner with our customers. Our elastomeric rotorcraft business has been nominated on the next U.S. military reconnaissance helicopter, codenamed FARA. This is a major recognition for our rotorcraft business, which we created organically just a few years ago. And our composites business is finalizing a strategic partnership with a large aircraft engine manufacturer that will propel our matrix business to new top-line heights. The team at CCT has been working hard to adjust our cost structure to the new aero market conditions, and at the same time, looking for growth opportunities by showcasing our engineering prowess. I was at our Valencia facility last week, and I was impressed by our new state-of-the-art sound chamber capabilities, as well as our new product pipeline. Lastly, on capital deployment. We continue to drive cash generation through working capital efficiency and strict capital expenditure focus, further strengthening our liquidity. As a result, we are raising our free cash flow margin target to a range of 13% to 15% for the full year. Today, we have $1.5 billion of available liquidity, and we have ample capital to fund all of our operational needs and investments. and position us to take advantage of other strategic opportunities. Our strong liquidity position prepares us well for what's ahead, whether it is facing headwinds or surfing tailwinds. Finally, in October, we successfully terminated and transferred our U.S. pension plan. This will not only provide our pension-eligible employees great service, but also reduce ITT's administrative costs and eliminate any future funding requirements. Let's now look at our Q3 financial results provided on slide four. We produced 16.2% segment operating income margin. We delivered these margins through productivity and aggressive cost actions that produced segment decremental margin of 19%. We continued to drive down corporate costs and delivered an approximately 20% structural run rate reduction versus prior year. EPS of $0.82 per share declined 15% and was ahead of our expectations. And on cash, we generated $271 million of free cash flow year-to-date, up 77% versus prior year. Our trading 12-month free cash flow margin now stands at a record 15.4%, a sequential improvement of 80 basis points. IT tiers deliver strong Q3 results versus 2019, and these results are even stronger when we look sequentially. Switching to our sequential performance on slide 5, our segment operating income jumped 48%, an impressive growth compared to an organic revenue increase of 12%. This is the result of our business stepping up efficiency and cost actions, as we continue to focus on what we control and benefit from operational leverage from a permanently lower fixed cost base. Our revenue growth was driven by a 92% increase in friction sales OE, mainly coming from outperformance in China and North America. Similarly, earnings per share grew 44% sequentially, despite a one-time environmental benefit realized last quarter. Whilst recovery remains uneven across markets, whichever way you choose to look at our financials, ITT's businesses delivered outstanding third quarter results. Now, let me turn it over to Emmanuel, my co-pilot and new CFO, who will discuss the Q3 results by segment.