ITT Inc.

Welcome to ITT's 2021 fourth quarter conference call. Today is Thursday, February 10th, 2022. Today's call is being recorded and will be available for replay beginning at 12pm ET. At this time, all participants have been placed in listen-only mode and the floor will be open for 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 star followed by two. If you should require operator assistance, please press star followed by zero. We ask that you please pick up your headset to allow optimum sound quality. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations. You may begin.

Thank you, Charlie, and good morning. It was my pleasure to welcome you to ITT's fourth quarter 2021 earnings and 2022 outlook conference call. Joining me here this morning, as always, 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- and 12-month period ending December 31st, which were announced yesterday evening. Today's remarks may contain forward-looking statements that are subject to certain risks and uncertainties, including comments related to company performance, strategic priorities, business mix, market conditions, and the effects of COVID-19 on ITT. These statements are not a guarantee 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 fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2020, and in both cases 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, and acquisition-related and certain tax items. All adjustments in the quarter and 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. It is now my pleasure to turn the call over to Luca, who will begin on slide number three. Thank you, Mark, and good morning.

2021 was a challenging year, and I would like to thank our shareholders, our customers, and our suppliers for their continued support and investment in ITT. I'm humbled by what our teams accomplished in 2021. Thanks to all our IT tiers, the shop floor employees who have been continuously working safely day in and day out while diligently following our health protocols, and our teams in the office that have been at work in person since May 2020, despite the challenges we all know. At ITT, it is our firm belief that we are all in this together. As we strive to make ESG an integral part of our business model, safety is the number one priority. Building on our progress in 2020, more than 50% of our facilities had zero incidents for the prior 12 months. We continue to improve our safety performance this year. Our injury frequency rate and our injury severity rate both declined compared to 2020, despite more output. We will continue to drive better safety performance with diligence and passion until all our sites, not just 50%, have zero incidents. Our focus will deliver a better and more sustainable operational performance over the long term. And above all, it's simply the right thing to do. Before discussing highlights from 2021, let me share some details about the environment we have been living in the past few months. Like most industrials, our operations have been significantly constrained by supply chain disruptions. During Q4, I experienced firsthand the mess the global supply chain is in today. When I was in Weinstadt, Germany, just before year end, the team there had to deal with a brand new machining center for contacts that was idle just because a semiconductor chip was missing. We were also impacted by heavy absenteeism as COVID infections hit our shop floor employees at record high numbers, especially in our sites in North America and Europe. Then, backup plans kicked in, the resilience of ITT went into high gear, and senior management joined the team on the shop floor, like in Winestead, where Ellen, our GM in Europe, packaged connectors to ship to customers over the holidays. Thank you, Ellen, and thank you, Winestead. Despite all this, ITT delivers solid first quarter results and our full year operating margin and adjusted EPS far surpassed 2019 pre-pandemic levels. This is resilience. Moving to demand. Demand is strong in all our end markets. ITT's innovative products and technologies drove a 20% increase in organic orders for the full year, with broad strength across all three segments. 10% organic revenue growth, including 21% growth in auto, with strong outperformance. This is remarkable if you think about the demand volatility created by the cheap shortage in the second half of the year. And finally, 20% organic growth in ITT's reignited connector business. On profitability, we deliver 16% operating margins, 120 basis points above 2019, and a new record for ITT. We worked hard to overcome $80 million of raw material inflation with price and productivity. We continue to invest in growth and innovation, in friction to support new automotive braking platforms, in connectors to expand our product offering, and in industrial process to redesign our pump portfolio. Notably, research and development expense was again over 3% of sales this year, as it has been the previous two years. Last but not least, on capital deployment, We deployed $600 million in 2021 on dividends, ITT share repurchases, and the strategic asbestos divestiture. These amounted to two times our annual adjusted free cash flow in 2021. All in, we delivered 27% growth in adjusted earnings per share versus 2020, and 6% growth versus 2019. In the fourth quarter, which was the worst environment we saw all year from a supply chain perspective, we continued to execute pricing actions to counter over $0.30 of raw material headwinds. We executed with an all-hands-on-deck approach like Allen's to deliver for our customers, and we generated a justic segment operating margin that exceeded 18%. A big part of the improvement came from CCT. which grew over 500 basis points at an incremental margin of 60% to 18.4% segment margin. As I look ahead, the Q4 challenges will persist in 2022. Still, we have been capturing the strong demand and more in all our businesses to power ITT's revenue growth in 2022. These will support the expected 10% organic sales growth, while continued productivity and pricing actions will drive nearly 100 basis points of segment margin expansion. Together, our performance will drive earnings per share growth of 11% at the midpoint of our 2022 guidance. Our adjusted free cash flow margin will be approximately 11%. as the strong income generation is tempered by increased working capital requirements taken to support our customers. As already mentioned, our guidance assumes that supply chain challenges and high raw materials prices are with us through at least the first half of 2022, modestly abating in the second half of the year. If the market conditions improve sooner than we anticipate, there is a path towards the upper end of our guidance, which Emmanuel will discuss further in a few minutes. About 2022, I want to highlight three main points related to ITT's priorities. First, our products are winning in the marketplace, and we see that in the order rates and in the backlog today. Organic orders growth for the past three quarters was 47%, 27%, and 10% respectively. This drives an 18% increase in backlog that will convert in 2022 and beyond. We are seeing broad-based demand across industrial processes in our long-cycle pumps business and across our short-cycle offerings. The project funnel continues to increase, and we are seeing larger opportunities emerge. Orders in Connect and Control increased with a gradual recovery in commercial aerospace, with strong organic growth for the second straight quarter. Our connectors continue to grow in the marketplace alongside the EV infrastructure built out, helping our CCT backlog to grow 16% organically for the year. In Motion Technologies, we continue to position ITT as the D brake pad supplier of choice to OEMs, including electric vehicle manufacturers around the world. We want content on 33 electric vehicle platforms in 2021, with Ford, Rivian, NIO, and Tesla, among others. This and our leadership in EV platforms will drive long-term sustainable growth as the transition to electrification gains momentum. Second, we are accelerating innovation across ITT. We see the benefits of these in our EV wins as well as in IP and CCT, where we are advancing the VAV activities across our portfolio. We are increasing our growth capex to support customer demand and wins, and are ramping green capex investments to further our sustainability initiatives globally. Finally, we are carving out and cultivating certain disruptive technologies where we see outsized returns to ensure these initiatives receive the investment and attention they need over the long term. Third and finally, ITT is poised to execute strategic and accretive M&A in 2022. We have a revamped M&A team, a solid strategic focus, and plenty of firepower to deploy. With asbestos out of the way, the number and size of deals we are looking at is increasing, and the team is ready. This is on top of our share repurchases plan and a 20% increase in our dividend. Capital deployment continues to be a top priority for 2022. Let's turn to slide five to produce some of the most exciting wins across ITT in 2021. ITT operates in end markets which are poised to grow over the next several years. Rail, supported by our shock absorbers and couplers, will become even more important as public investments increase to support a greener and more sustainable world. Similarly, the rapid rise of electrified vehicles will further bolster global automotive production and the demand for our breaking products. Our aerospace business is at the forefront of a long-term recovery as people resume travel domestically and internationally. Our connectors business is actively participating in a world where electrification and digitalization are taking over. and our pumps and valves are already playing a significant role in energy markets to build a greener future. Regarding future growth platforms at ITT, our global OE market share for our friction business is up considerably compared to 2020. Electrified vehicles in 2021 represented more than 20% of friction sales. We will grow this to over 30% over the next two years. Corning won its first award for our new hydro-ride product for the defense sector. This solution offers better handling capability for military vehicles as the vehicle travels over rough terrain. Wolverine launched a groundbreaking new development tool that simulates SHIM performance. This is a great example of customer centricity that will improve R&D efficiency for our customers and internally in ITT. In industrial process, our ILR platform was selected to monitor 270 pumps over 5,000 miles of pipeline in the U.S., The algorithm-driven asset intelligence solution will enable, through more than 10,000 rules, the predictive monitoring of customer pipeline pumps and the identification of issues and potential failures, whilst providing recurring revenue for IP in-service subscription, pump repairs, and upgrades. We also had notable wins related to the new semiconductor plant projects in the U.S., while green projects added more than 200 basis points of growth to IP's orders in 2021. Finally, in Connect and Control, we were awarded a contract to provide actuators for the A321neo. This is a multi-year agreement beginning in 2022 on a growth platform used by leading airlines around the world. In summary, We positioned the company for a strong performance with the backlog and shared gains generated in 2021. We are driving innovation across the portfolio. And we are accelerating our capital deployment plan with a smart and strategic approach across our businesses and plenty of firepower to deploy. I'm really excited about the year ahead. And siamo pronti. Emmanuel, over to you.