ITT Inc. (ITT) Earnings Call Transcript & Summary

Good day, and welcome to ITT Inc.'s 2020 Annual Meeting of Shareholders. I will now turn the call over to Frank MacInnis, Chairman of the Board of ITT. Please go ahead, sir.

Thank you, Melinda, and good morning, ladies and gentlemen. On behalf of the Board and management of ITT, welcome to ITT's 2020 Annual Meeting of Shareholders. This is our first virtual meeting, which allows our shareholders to attend and participate in the meeting remotely via this live audio cast. We chose to conduct a virtual meeting this year to protect the health and safety of our shareholders and employees during the ongoing COVID-19 pandemic and to comply with the social distancing protocols, established here in New York, to contain the spread of the virus. Joining us today are all of our nominees for director, several members of the management team and representatives of Deloitte & Touche LLP, our independent public accounting firm. As Chairman of the Board, I will preside over the meeting, and Mary Beth Gustafsson, our General Counsel and Corporate Secretary, will act as Secretary. The agenda and rules for today's meeting are available on our virtual annual meeting portal. Please review these rules, as they are now in effect. It's now shortly after 9:00 a.m. Eastern Standard Time on May 15, 2020, and I call the meeting to order. Now we'll move to the business portion of the meeting. I will turn it over to Mary Beth to address certain preliminary matters. Mary Beth?

Thank you, Frank. Notice of today's meeting and related proxy materials or notice of internet availability of these materials, were mailed beginning March 31, 2020 to all shareholders of record as of the close of business on March 18, 2020. A supplemental notice regarding today's virtual meeting was issued in a press release and filed with the SEC on May 1, 2020. Joe Czarnecki of American Election Services and Derek McKinney, an attorney in the ITT legal department, have been appointed to act as our 2 inspectors of election, and they are participating in today's audio cast. Mr. Czarnecki reports that over a majority of the outstanding shares of common stock that are eligible to vote are represented either in person or by proxy at this meeting, which constitutes a quorum. I'll now turn it back over to you, Frank.

Thanks, Mary Beth. I declare this meeting to be properly convened. We are meeting today to vote on the 3 proposals submitted by the Board of Directors and 1 shareholder proposal, each of which is described in the company's proxy statement. Mary Beth, before we turn to the items to be voted on, would you please review the voting procedures?

Thank you, Frank. The polls for voting on matters properly presented at this meeting are now open. Any stockholder who hasn't voted yet or who wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. If you previously submitted a valid proxy by mail, internet or phone, your votes will be cast as indicated in your submission. You do not need to vote again now unless you wish to change your prior vote.

Thank you, Mary Beth. Now will you please describe each of the proposals to be voted on today.

First item on the agenda is the election of each of the 11 nominees for director to serve until the Annual Meeting of Shareholders in 2020 or until his or her successor is duly elected and qualified. As indicated in the proxy statement, following individuals have been nominated by the Board of Directors for election: Orlando Ashford, Geraud Darnis, Donald DeFosset, Nicholas Fanandakis, Richard Lavin, Mario Longhi, Rebecca McDonald, Timothy Powers, Luca Savi, Cheryl Shavers and Sabrina Soussan. Biographies of all directors are included in the proxy statement. The second item on the agenda is the ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the company for the 2020 fiscal year. The third item on the agenda is a proposal to approve on an advisory basis, the compensation of the company's named executive officers. The final item on the agenda is a shareholder proposal, requesting a modification of the company's proxy access bylaw. The shareholder proposal was submitted by John Chevedden. Mr. Chevedden is on the line to present his proposals. There are no other matters to be presented at this meeting, and I turn it back over to you, Frank.

Thanks, Mary Beth. Operator, please open the line to Mr. Chevedden. We have allocated 3 minutes to Mr. Chevedden to present his proposal. Please go ahead.

Hello. This is John Chevedden. Can you hear me okay?

Yes.

Proposal 4, improved shareholder proxy access. Shareholders request that our Board of Directors take the steps necessary to enable as many shareholders as may be needed to combine their shares to equal 3% of our stock owned, continuously for 3 years in order to enable shareholder proxy access. Currently, proxy access at ITT is limited to 20 shareholders, who together must own $180 million of ITT stock continuously for 3 years at a time when many shares are held for less than 1 year. The requirement of owning stock for 3 continuous years may exclude the vast majority of ITT stock from participation. Under this proposal, it is likely that the number of shareholders to participate in the aggregation process would still be a modest number due to the administrative burden on shareholders to qualify as one of the aggregation participants, plus it is a swift process for management to reject potential aggregating shareholders because the administrative burden on shareholders leads to a number of technical errors by shareholders that management can then swiftly reject. The largest shareholders of a company can be the least likely shareholders to use shareholder proxy access. It can be more complicated for large shareholders to use shareholder proxy access. There is a growing awareness of this reality. Aggregating shareholders should be able to select the ownership structure of a group that request proxy access. Shareholders are in the best position to know whether it will be more practical to have a few big shareholders or a greater number of smaller shareholders and should not be settled with inflexible rules. The directors of many companies promote one size does not fit all in their proxies, and this principle should apply here. Indeed, the ITT directors should be open to this proposal to be consistent with their opposition to a rigid one-size-fits-all policy in the ITT 2019 proxy. The shareholders who ask for proxy access must do administrative work to initiate proxy access. Management said, in effect that it's too much to expect of management to do a proportional amount of administrative work when that is their day job. So as much of the administrative work can be outsourced to a low-cost provider. Please vote, yes and prove shareholder proxy access, Proposal 4.

Thank you, Mr. Chevedden, for your perspective. Operator, would you close Mr. Chevedden's line, please? All of the proposals have now been presented. If any shareholder has a question regarding any of the proposals, we invite him or her to submit the question in writing through the portal. If you have not completed your voting session, please do so now. We will pause briefly to give shareholders a moment to finish voting and to submit any questions or statements. [Voting]

Mary Beth, have any questions or statements relevant to the 4 proposals been submitted at this time? Operator, I'm not hearing a response.

Operator? Operator can you hear me?

Mary Beth, your line is open.

Okay. Frank, there are no questions related to the proposals. Frank?

Thanks, Mary Beth. There being no further discussion on any of the matters presented, the polls are now closed, and the business portion of this meeting is ended. Mary Beth, please report the preliminary voting results.

11 Directors. Each of the 11 nominees for Director has been elected to the Board. The ratification of Deloitte & Touche LLP, as the independent registered public accounting firm of the company for the 2020 fiscal year has been approved. The advisory vote on the compensation of the company's named executive officers has been approved. And shareholder proposal to amend the company's proxy access bylaw did not receive majority support. Final tally on each proposal will be available on our Form 8-K, which we will file with the SEC. Back to you, Frank.

Thanks very much, Mary Beth. That concludes the formal business for this meeting. It's now my pleasure to introduce Luca Savi, President and CEO of ITT, who's going to give a brief presentation regarding the state of the business. Luca?

Thank you, Frank. Good morning. On behalf of the 10,000 hard-working ITT-ers all around the world, I want to welcome you to ITT's 2020 Virtual Annual Shareholders' Meeting. I also want to thank you personally for your interest and your investment in ITT. We truly appreciate that each and every investment in an ITT share is tied to an individual or to a family desire to build a better financial future. And we will continue to work tirelessly to deliver that future for ITT, for you and all of our stakeholders. So thank you all for joining this morning despite the many challenges and unique circumstances that you are all dealing with at this time. I truly wish you and your families all the strength necessary to get through this crisis. As it's customary during these investor meetings, I will start by providing a brief performance highlights from 2019. Also, in light of the uniquely challenging circumstances created by COVID-19 pandemic, I will highlight how our actions and accomplishments in 2019 and over the last several years have prepared ITT to effectively combat COVID-related challenges in 2020 to be the stronger ITT. I'm honored and humbled to share the results of the hard work our ITT-ers delivered in 2019, a year that marked the third year of ITT's transformation journey. A journey that started in January 2017 and that elevated the strategic standing of execution at ITT and produced record results in multiple financial categories, including revenue, adjusted margins and earnings per share. At the start of 2019, we established 3 very clear priorities: customer centricity; operational excellence; effective capital deployment. Let me give some examples of the progress we made in each category. In customer centricity, our focus on creating value for our customers and on helping them to win, drove organic growth across our businesses. In Motion Technologies, friction OEM platform awards increased nearly 30% through our focus on quality delivery and customer engagement. The superior customer experience delivered by friction enabled ITT to outgrow the market by 1,100 basis points in 2019. At Industrial Process, we enhanced our service to customers and distributors. We improved project execution. And we delivered on our commitment with on-time delivery for Goulds Pumps ANSI line above 90% in the last 4 months of 2019, enabling us to produce 10% organic revenue growth. Operational excellence. In 2019, we rolled up our sleeves and maintained a laser focus on execution. We improved adjusted operating margins in every segment by at least 90 basis points, while creating value for our customers by becoming more cost competitive. In Connect and Control Technologies, we successfully executed 14 product line transfers from high-cost regions to our facilities in Nogales, Mexico, and Shenzhen, China. Additionally, CCT in-sourced critical trading processes to enhance our competitiveness and to improve our lead time to our customers. At IP, our relentless focus on operational excellence delivered improvement in shop floor efficiency, reductions in production bottlenecks and increases in our equipment utilization. To further cost savings actions across ITT, we took a harder look at our corporate expenses, and we're able to generate efficiency and eliminate waste that helped us deliver savings of 24% on an adjusted basis over the previous year. Lastly, effective capital deployment. In 2019, we deployed capital with discipline and precision. Long-term value creation has been and will continue to be the mantra for each and every investment decision we make. We invested in core capabilities, equipment improvement and technologies across all of our businesses, focusing on productivity, process modernization and innovation, always with the goal of improving support to our customers. We also executed 2 close-to-core acquisition: Matrix Composites in CCT and Rheinhütte Pumpen Group in IP. In addition to organic and inorganic capital deployment in 2019, we immunized our U.S. pension plan at over 107% funded status level. And as it relates to returns of capital to our shareholders, in 2019, we returned $94 million in dividends and share repurchases and we launched a new $500 million indefinite term share repurchase program. Before I conclude my 2019 remarks, I'd also like to highlight some of the key actions we took to further improve our alignment with all of you, our valued shareholders. In 2019, we increased our executive leadership team's long-term incentive performance unit weighting to 60% from 50%. Increased stock ownership requirements for the CFO from 3 to 4x salary, increased stock ownership requirements for SVPs from 2 to 3x salary, increased investor outreach activities and published our first ever sustainability report. So to summarize, in 2019, ITT proved and improved its resilience. The journey of betterment continues into a uniquely challenging 2020. And with hard work and a laser focus on our priorities, we will strive to continue to create value for all our stakeholders. Turning now to 2020. In order to augment our resilience in the face of the unprecedented challenges posed by the COVID-19 pandemic, we define 3 clear priorities for ITT: the health of our people; the health of our business; and the health of our financials. Our first quarter results are a testimony of these focused priorities, the resilience of our diversified businesses and the resilience of our dedicated people. While the vast majority of our businesses are deemed essential, COVID-19 disrupted and will continue to disrupt our operations as we experience decreased customer demand, temporary plant closures and stricter health protocols to keep our employees safe. But I can assure you that we will work harder than ever to create value each and every day. Let me start with the health of our people, and I'm so proud of how hard ITT-ers 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 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. As it relates to the health of our business, in 2020, we will leverage the strong operational foundation we have been systematically building, since 2017. We will continue on this journey of operational excellence by further improving on-time delivery, eliminating inefficiencies, declaring a war on working capital and expanding our massive world check of self-help opportunities. And we were able to implement significant incremental new action, totaling $135 million in Q1 2020. As it relates to the health of our financials, for the past several years, we have built a tremendous balance sheet that has been solidly fortified by many strategic decisions that preserve our investment-grade quality for times like these. This strong balance sheet provides a significant competitive advantage while we combat the COVID-19 crisis. But at today's ITT, we are never satisfied and never complacent. Every day, we are actively monitoring market developments and taking aggressive measures to stay ahead of the curve. We executed measures to boost our liquidity to approximately $1.2 billion, and we implemented new cash forecasting and monitoring capabilities. I'm confident that 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. So to summarize our approach to 2020, we implemented a clear and effective playbook that was successfully battle-tested by our teams in China. We built operations that are flexible and agile to counter opportunities as they come. We fortified our liquidity position and we will continue to enhance it through cash flow performance. And based on the competitive advantages that we forged over the last 3 years, we're uniquely positioned to play upfront for the future. This year, ITT is celebrating its 100-year anniversary, and I can assure you that today's ITT is more resilient than ever. Entering this pandemic, our operations were performing at their highest levels ever. Our world check of staff opportunities was bigger than ever, and we amassed more liquidity and balance sheet capacity that we've ever had. So with these weapons, we will combat this pandemic by being aggressive on cost, aggressive on execution, aggressive on share capture and aggressive on preserving liquidity because today, we are courageously creating the ITT for the next 100 years. Before we conclude this morning, I would like to thank Frank MacInnis and Christina Gold, both personally and on behalf of all ITT's shareholders for their years of tireless dedication to ITT's Board of Directors. For a decade, Frank and Christina have imparted their wisdom and their experiences to skillfully help ITT navigate various market dynamics and create significant value for our shareholders. I appreciate you both and I value all the constructive dialogue that we have shared over the years. And I'm looking forward to working closely with Richard Lavin as ITT's new independent Chairman and the entire ITT Board of Directors to continue ITT's 100-year journey of value creation. With that, I'd like to open the floor to answer questions that pertain to the company's business and of general interest to the shareholders of the company. Please note that we will attempt to answer as many questions as time allows. The only questions that are germane to the meeting will be addressed. [Operator Instructions] Mary Beth, are there any questions from shareholders?

Yes, Luca. Our first question is as follows: do we plan 2020 share buybacks?

Okay. Thanks for the question. As you know, one of our priority has always been effective capital deployment. So when you look at the effective capital deployment in 2019, just to give context, we invested organically. We invested $122 million in the 2 acquisitions that I mentioned before, and we repurchased share in the region of roughly $40 million. When it comes to 2020, in Q1, we repurchased share in the region of $73 million and we also launched the new $500 million indefinite term share repurchase program. So we have done this in Q1. Now obviously, the context is different today. The context that is showing because of COVID-19, a lot of uncertainty, high volatility and this has made liquidity more important than ever. On top of that, the cost of getting liquidity wrong is asymmetric. The cost of too little liquidity is going to be much higher than the cost of having too much. So as of today, we're going to ensure that we are going to keep our balance sheet strong, and we're going to reinforce it with a laser focus on our operating cash flow generation in operation.

Thank you, Luca. And there's one other question. What is the greatest impact of COVID-19 on the company?

Thanks for the question. When we look at COVID-19, the biggest impact that is, of course, on customer demand in some of the market that we are facing. Let me give you just one example. One of our businesses, CCT, is working on the industrial side, in oil and gas, but also in aerospace and defense. And so as COVID-19 has practically stopped all our travel, nationally, internationally, the aerospace business has been very impacted. Our customers being airlines or Boeing or Airbus have reduced their production level and therefore, impacted our demand. So to summarize, is the demand in some of the markets that we're playing.

Thank you, Luca. There are no further questions.

Thank you, again, for being here and for your ongoing support. Bye-bye, ITT.

Operator, we're concluded.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.