ITT Inc.

Welcome to ITT's 2021 Second Quarter Conference Call. Today is Friday, August 6, 2021. 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 0. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Mr. Mark Macaluso, Vice President, Investor Relations. You may begin. Thank you, Christelle, and good morning.

It is my pleasure to welcome you to ITT's second quarter 2021 earnings conference call. Joining me here this morning are Luca Savi, ITT's Chief Executive Officer and President, and Emmanuel Capre, Chief Financial Officer. Today's call will cover ITT's financial results for the three-month period ending July 3rd, announced yesterday evening. Today's remarks may contain forward-looking statements, including comments relating to company performance, strategic priorities, business mix, market conditions, and the effects of COVID-19 on ITT, which are subject to certain risks and uncertainties. These statements are not guarantees of future performance or events and are based on management's current expectations. Actual results may vary materially due to, among other items, the factors described in our 2020 annual report on Form 10-K and other recent SEC filings. ITD is not under any and expressly disclaims any obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise. Except where otherwise noted, the second quarter results we present this morning will be compared to the second quarter of prior year and based on non-GAAP financial measures. These adjusted 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 along with the reconciliation of such measures to the most comparable gap figures in our press release and presentation both of which are available on our website before we begin i'll provide a brief overview of our second quarter gap results revenue increased 34 percent to 692 million dollars Segment operating income increased 206% to $114 million, which equates to segment operating margin of 16.5%. Reported earnings per share decreased 15% to 45 cents, driven primarily by a $28 million after-tax loss on the divestiture of Intelco Management LLC, formerly a wholly owned subsidiary that holds legacy asbestos liabilities and related insurance assets. as well as prior year income tax benefits and increased corporate and environmental costs. With that, it's my pleasure to turn the call over to Luca, who will begin on slide number three.

Thank you, Mark, and good morning. I want to first thank you, our stakeholders, for your continued support and investment in ITT. I also want to thank the nearly 10,000 employees at ITT that continue to demonstrate the resilience that makes ITT a trusted partner for our customers and the communities in which we operate. We are all focused on ensuring ITT delivers on its commitments hour after hour, whilst taking care of each other, our families, and our customers. This has been a pivotal quarter for ITT. On July 1st, we divested the subsidiary that holds all of our legacy asbestos liabilities to a portfolio company of Warburg Pincus. Importantly, ITT is indemnified from any further responsibility for all pending and future legacy asbestos claims. This transaction follows the successful transfer of our U.S. pension liability in October 2020 and will allow us to focus more on growing the core business organically and through acquisitions. We are now beginning the next chapter in ITT's history. On the operational front, over the past few months, I've had the privilege of meeting our teams in person at our sites in Italy, California, the Netherlands, and the Northeast. I continue to be encouraged by the progress we are making, by the opportunities that remain, and by the commitment and the passion I see from our workforce. Before reviewing our results, let me talk a little bit about ITT's sustainability efforts. In the coming weeks, we will be releasing our 2021 sustainability report supplement, which will show our commitment to environmental, social, and governance initiatives. It is clear that while we've made significant progress in 2020, despite the impact of the pandemic, there is still more that we can do. Our employees' efforts during the pandemic to take care of each other and our customers have strengthened our resolve to continually improve our ESG practices, and this is what we will do. Some of our accomplishments, which you can soon read about it in the supplement, include a 25% reduction in greenhouse gas emissions and a 25% reduction in workplace incidents. Further, we maintain an A rating for our ESG profile as measured by MSCI, a recognized leader in global ESG assessment. Now, let's review our results for the second quarter, beginning with sales. Friction continued to outperform global auto production growth. In fact, the outperformance we drove this quarter was significantly above our historical average. The auto businesses in MT grew organic revenue nearly 80%, and MT's revenue exceeded pre-COVID levels from 2019 once again this quarter. More importantly, we continue to win key awards in both conventional vehicles and on new electric vehicle platforms, which will fuel future auto performance. This quarter, we were awarded content on 10 new electric vehicle platforms, seven of which were in China, and two on key strategic platforms in the growing North American market. We also continue to differentiate ourselves from the competition. In July, frictions at a ceramic prepet sold in the aftermarket were ranked the highest among five competitors according to EDAC, Europe's largest motoring association based in Germany. Our brake pads have been acknowledged for their outstanding safety and durability and received best-in-class ratings for wear resistance and braking distance. This is a testament to the supplier excellence and innovation of the friction team. Let's get back to the quarter. Building on the first quarter momentum, our connectors business in connect and control technologies grew sales by 17% organically. after 8% organic in Q1. We saw continued strength in the North American distribution channel, and sequentially, industrial connectors in Q2 grew 6% versus Q1 due to distribution strength worldwide. We also drove 8% organic revenue growth in industrial process, driven by strong pump project deliveries, which were up 52% organically in the quarter due to strength in the chemical and oil and gas markets. We achieved this by remaining focused on serving our customers and ensuring we commission their projects on time, despite significant supply chain disruptions. Turning to orders, I am energized by the growth our commercial teams generated this quarter across all three segments. In total, we drove 47% organic orders growth across ITT, with order levels surpassing 2019, positioning as well for the second half of the year and for 2022. First, Motion Technologies grew orders by 76% organically, driven mainly by auto. And we also saw a strong performance in rail, which grew over 20% organically. Second, in industrial process, orders were up 18% organically and up 7% sequentially, driven by continued recovery in our short cycle business, where orders grew 24% across parts, valves, and service. Our pump project orders were relatively flat year over year. However, we are increasingly confident that project activity in the funnel is strengthening. and we expect to successfully leverage this momentum in the second half. Finally, in CCT, orders were up 47% organically, driven largely by industrial connectors and aerospace components. As we mentioned last quarter, we saw some positive signs in commercial aerospace, which we expected would start to pick up in Q2, and we are seeing that momentum in orders today. From a profitability perspective, despite increasing pressure from commodity costs and supply chain disruptions, we delivered nearly 400 basis points of adjusted segment margin expansion, with triple-digit margin expansion in each segment. This was a result of the incredible growth in volumes I mentioned earlier and the team's ability to generate productivity net of inflation while successfully navigating challenging market conditions. This was aided in part by the actions we took in 2020 to reduce our structural costs. As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of 94 cents, growing 65% and surpassing our pre-COVID adjusted EPS levels in Q2 2019. Given the strong first outperformance, and our confidence in ITT's ability to outperform, we are again raising our outlook for 2021. We now anticipate organic revenue growth will be 8% to 10% for the year, a 300 basis point increase on both the low and high end of our already increased guidance from the first quarter. This will be driven by the strength in friction and short cycle orders growth in both IP and CCT. The increased sales volume and strong productivity expected in 2021 will generate adjusted earnings per share in the range of $3.90 to $4.05 at the high end, which equates to 22% to 27% growth versus prior year. This is an $0.08 improvement at the midpoint after a $0.30 increase after the first quarter, and this puts ITT on pace to comfortably surpass 2019 adjusted EPS despite significant inflationary pressure. Let's turn to slide four to talk further about the second quarter results. From a top-line perspective, motion technologies delivered a solid performance driven by strong growth in the OE business and continued share gains despite the global chip shortage and supply chain disruptions. our friction and Wolverine OE businesses grew over 60% organically. As I always do, this quarter I traveled to a number of our facilities, including our world-class friction plant in Bargia, Italy. Here, I saw the team's engineering expertise on full display, which will enable us to continue winning an outsized share of global EV platforms. Our continued investment in automation in all our plants and hour-by-hour management allows us to continually meet customer demand despite constantly changing production schedules. And we continue to invest in and develop new technologies to address the needs of a new and more environmentally friendly automotive braking system. In CCT, we drove nearly 19% organic revenue growth in industrial connectors, mainly through distribution, continuing the momentum we saw in the first quarter. Demand in commercial aerospace is increasing, exhibited by the nearly 70% growth in aerospace orders. The book to bill in CCT was an impressive 1.18 for the quarter, which positions us well for the future. Now, moving to operating margins. Our focus on operational excellence produced 250 basis points of expansion in Q2 at the ITT level and 390 basis points at the segment level. By segment, MT grew margin 660 basis points, connecting control 230 basis points with an incremental margin of 37%, and industrial process grew margin 100 basis points to nearly 15% once again. The strong performance was a combination of higher sales volume, commercial actions and productivity, offset by raw material inflation, an unfavorable mix given the growth in pump projects, and continued investments for growth, which are critical to sustain ITT's outperformance. Regarding raw materials inflation, the impact this quarter was approximately 240 basis points, which was higher than what we expected. And whilst we are deploying pricing actions with our customers based on current prices for material purchases for the remainder of 2021, we expect this phenomenon will have a significant impact in the second half. Free cash flow for the quarter, was impacted by the sale of our legacy asbestos liabilities. Excluding this one-time non-recurring item, adjusted free cash flow was $131 million. The decline compared to prior year was the result of higher operating income generation in the segment that was more than offset by strategic investments in working capital to support growing customer demand. Wrapping up, our ITTs around the world deliver another outstanding performance in Q2. Organic growth was strong across all three segments, and we converted the higher sales at good margins. We generated over 400 basis points of productivity while investing for future growth and successfully navigated challenging market conditions. And our nearly 50% organic growth in orders positioned ITT for a strong second half. Let me now turn the call over to Emmanuel on slide 5 to discuss the segment performance in more detail.