ITT Inc.

Welcome to ITT's 2021 First Quarter Conference Call. Today is Friday, May 7, 2021. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern Time. At this time, all participants have been placed in a listening-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 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 Mark Macaluso, Vice President, Investor Relations. You may begin.

Thank you, Stephanie, and good morning. It's my pleasure to welcome you to ITT's first quarter 2021 earnings conference call. Joining me here this morning are Lucas Savi, ITT's Chief Executive Officer and President, and Emmanuel Capre, Chief Financial Officer. Today's press release presentation 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. This call contains forward-looking statements that are subject to certain risks and uncertainties including but not limited to impacts from the COVID-19 pandemic. All such statements should be evaluated together with the safe harbor disclosures and the risks and other uncertainties that affect our business, including those discussed in our Form 10-K and other SEC filings. Actual results may vary materially from the assumptions presented today. Except where otherwise noted, the information we present this morning will be based on adjusted non-GAAP figures. These results exclude certain non-operating and non-recurring items. including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items, and certain tax items. All adjustments in the quarter and expected for the full year 2021 are detailed in the reconciliations in the appendix. Before we begin, I'd like to provide a brief overview of our first quarter gap results compared to prior year. Q1 revenue increased 5.3% to $698 million. segment operating income increased 52.5% to $119 million, and reported earnings per share increased 4.2% to 99 cents. With that, let me turn the call over to Luca, who will begin on slide number three.

Thank you, Mark, and good morning. I continue to be extremely proud of the way our teams have responded to the crisis. Your hard work is the reason why ITT has been able to effectively serve our customers throughout the pandemic. Earlier this week, I spoke to our colleagues in India. As you know, India is dealing with a surge in COVID cases across the country, and I want to thank our IT tiers in Vadadora for continuing to take care of each other, of our customers, and our business in this difficult time. Before we discuss our quarterly results, let's spend a minute recapping how we got where we are today. This is important. as it sets the foundation on which Q1 results are based. The health of our people has been our top priority from day one. Early in the pandemic, we implemented Ready, Safe, Go across ITT. This allowed us to safely and effectively serve and support our customers faster than our competitors. We further strengthened our balance sheet through smart cash management, Today, we have nearly $1.5 billion of liquidity at our disposal. Moody's recognized our cash performance with an upgrade to our credit rating in the third quarter. Early on, we executed a plan to significantly lower our fixed costs. These resulted in structural reductions in 2020 of nearly $65 million. Our productivity and cost actions helped to offset the impact of materially lower volumes in 2020. Today, we continue to drive footprint optimization and sourcing excellence at both industrial process and connect and control technologies while remaining diligent on cost controls. This has resulted in a step up in profitability above 2019 levels. All the actions taken over the past year combined with ITTO's collective commitment and grit, have positioned us well to win in the recovery. We will continue to invest in innovation and growth, including important green projects to become a more sustainable ITT. We are aggressively and diligently pursuing acquisitions in our core markets to put our cash to work effectively and build on our strong businesses. I am invigorated by by the progress across our businesses, and the momentum which is accelerating. Now, moving to Q1, we delivered a strong quarter and an encouraging start to 2021. Let's get into it. ITT's first quarter sales were higher than 2019. Organic sales in motion technologies were up 17%, after 10% organic sales growth in the fourth quarter of 2020. The new auto platforms that we won and Friction's ability to deliver for our customers drove 1,500 basis points of outperformance versus global auto production. And we secured positions on nine new platforms with EV content during the quarter, eight of which are in China, the largest automotive market in the world. This is building on the 42 EV platforms' wins in 2020. Connectors grew sales in all regions, and orders were up 20% organically, with strength primarily in the distribution channel. This is encouraging for connect and control technologies heading into Q2. From a profitability perspective, ITT generated adjusted segment operating income growth of 27%, and margin expansion of 300 basis points on 2% organic sales growth. Incremental margin was above 70% for the quarter. IP's margin was nearly 16%, driven by net productivity as we continue to drive supply chain improvement and better manufacturing performance. This follows a 15% plus margin performance in Q4 of 2020. As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $1.06, a sequential and year-over-year increase. Even more telling is the fact that EPS was $0.15 above the first quarter of 2019. Free cash flow was up 70%, representing a margin of nearly 16%. On capital deployment, we repurchased ITT shares totaling $50 million early in Q1, executing on our repurchase plan and achieving half of our full-year plan of $100 million. As a result of our strong Q1 performance and our confidence in ITT's ability to outperform, we are raising our outlook for 2021 across all facets of our guidance. On organic sales, we now anticipate growth of 5% to 7%, a 300 basis point increase on both the low and high end of our original guidance. This is driven by continued share gains in motion technologies amidst the broader auto market recovery, stronger growth in connectors, and demand in the industrial process short cycle. On adjusted earnings per share, the increased sales volume and the strong productivity expected in 2021, combined with the carryover impact of our 2020 cost actions, will generate EPS in a range of $3.80 to $4 at the high end, which equates to 19% to 25% growth versus prior year. This is a 30-cent improvement at the midpoint from our prior guidance and puts ITT on pace to surpass 2019 EPS. Let's turn to slide four to talk further about the first quarter results. From a top-line perspective, Motion Technologies delivered a solid performance, driven by strong auto growth and continued share gains in our three main regions. Our friction OE business grew nearly 30% organically, with impressive 42% growth in North America. We drove high single-digit organic growth in connectors, mainly through distribution. Together with Ryan Flynn, our CCT president, in April I visited our U.S. distributors and sales representatives in the Northeast and on the West Coast to work on our ongoing initiatives. We saw clearly that we have many opportunities to grow this business from a product and customer service standpoint. And while some of the Q1 growth may have been due to pent-up demand, especially in North America, our dedicated teams continue to work on the optimal commercial actions to gain market share. Our focus on operational excellence produced 280 basis points of net productivity in Q1. These included $50 million of savings from our 2020 cost actions. Industrial process drew margin 450 basis points to 15.8%, despite a 12% organic sales decline. and Motion Technologies expanded margin nearly 300 basis points to 20.6%. This included triple-digit margin expansion at both Kony and Wolverine. This quarter, I was fortunate to visit a world-class friction plant in Barger, Italy. I saw firsthand the continuous improvement in plant productivity. Our team there has improved its processes to increase machine utilization and to respond more quickly to ever-changing order patterns from customers impacted by supply chain challenges. The strong NT and IP performances offset Connect and Control Technologies' margin decline driven by the pandemic's impact on aerospace. Rising raw material costs partially offset the strong productivity. The impact was 100 basis points this quarter, substantially higher than what we were expecting. We believe this trend will continue to affect our results for the remainder of 2021. Emmanuel will speak further about this in a moment. We continue to reinvest in our businesses to drive future organic growth. We are funding the most promising growth initiatives in key markets, including EVs, to ensure we keep winning in the marketplace. When I was in Barger, I also saw the expansion of our state-of-the-art friction R&D center, including the testing and fast prototyping capabilities, which will be powered by solar panels later this year. These smart growth investments drove roughly 50 basis point impact this quarter. Rounding out the story of the quarter with free cash flow, we saw a substantial improvement in Q1. This was mainly driven by higher operating income generation in the segments and slightly lower capex. Our plan for the year still assumes approximately $100 million of capex, an increase of over 50% relative to 2020. In summary, IT tiers around the world delivered a strong performance. We drove positive organic growth at an incremental margin of over 70%. We generated nearly 300 basis points of productivity and invested in ITT's future. We repurchased ITT shares worth $50 million and raised our dividend 30%, the ninth consecutive dividend increase. And we surpassed 2019 first quarter results in revenue, segment margin, EPS, and free cash flow. Let me now turn the call over to Emmanuel on slide 5 to discuss the segment performance in more detail.