ITT Inc. (ITT) Earnings Call Transcript & Summary

All right. Next up, we have ITT. ITT is a diversified manufacturer of highly engineered critical components and customized technology solutions for the transportation, industrial and energy markets. The company has 87 million shares outstanding. The stock trades around $83, $7.2 billion market cap, $740 million of net cash, $487 million asbestos liability, $6.9 billion total enterprise value. Joining us today from ITT is CFO, Mr. Emmanuel Caprais. Emmanuel was named CFO of the company last year after previously serving as President of Finance and Group Chief Financial Officer in charge of Business Unit Finance teams as well as leading Financial Planning & Analysis and Investor Relations for the company. Emmanuel first joined ITT in 2012 as segment CFO for ITT's Motion Technologies and later Industrial Process businesses. Prior to joining ITT, he held leadership roles in finance at Marelli as well as Valeo. Also joining us is Vice President of Investor Relations, Mr. Mark Macaluso. Mark joined ITT this year from Honeywell, where he spent more than 12 years in financial leadership positions, including most recently as Vice President of Financial Planning and Analysis for one of Honeywell's 4 strategic business groups. He previously also served for 5 years as Vice President of Investor Relations at Honeywell, after working at Pricewaterhouse as well as KPMG. So Mark and Emmanuel, thank you very much for joining us today.

Thank you, Brett. Thanks for having us. Brett, if you allow me, I'll get started, and I'll turn it over to Emmanuel. So good afternoon, and thank you for having ITT at this event. Before we get started, I just want to point out today's presentation, and reconciliations of non-GAAP financial measures to comparable GAAP measure can be found on our website at itt.com/investors. This presentation and our prepared remarks contain forward-looking statements that are subject to certain risks and uncertainties, including, but not limited to impacts from the COVID-19 global pandemic. Actual results may vary materially from the assumptions presented today. All statements should be evaluated together with the safe harbor disclosure and other risks and uncertainties that affect our business, including those discussed in our Form 10-K and other SEC filings. Also, except where otherwise noted, the information Emmanuel and I present this morning -- afternoon, excuse me, will be based on adjusted non-GAAP figures. These results exclude certain nonoperating and nonrecurring items. All adjustments in the quarter and for the full year 2020 are detailed in the reconciliations in the appendix. Let me turn you over to Emmanuel to recap our fourth quarter earnings release. Thanks.

Thank you, Mark, and thank you all for being here with us this afternoon. As you may have seen last week, ITT delivered a strong fourth quarter. We generated adjusted segment operating income growth of 8%, with margin expansion of 150 basis points on a 4% organic sales decline. We improved our decremental margins every quarter in 2020, driven in part by the swift actions taken early in 2020 to respond to the pandemic. This helped ensure that ITT continued to outperform in 2020 and will emerge stronger in 2021 as the economic environment recovers. We delivered adjusted earnings per share of $1.01, a sequential as well as a year-over-year increase. Cash was also strong. We generated free cash flow of $372 million for the full year, which drove a free cash flow margin of 15%. On capital deployment, in 2020, we increased our dividend by 15%. We repurchased ITT shares totaling $73 million, and we increased our majority stake in a joint venture in China as we continue to expand our market share in Asia. On the commercial front, we continue to make good progress, driven by our focus on customers. In Motion Technologies, our friction brake pad business outpaced global auto production rates by more than 600 basis points for the full year. We increased market share by almost 400 basis points in North America, more than 200 basis points in China and almost 100 basis points in Europe. And when it comes to electric vehicles, we secured positions in -- on 42 new EV platforms during the year. In industrial process, we continue to execute on our footprint rationalization projects. We're making progress in sourcing efficiency through aggressive negotiation and supplier rationalization. As our CEO, Luca Savi, has noted before, we believe that there are still many opportunities to improve our purchasing performance as well as further lean out our operations. We also reinstated full year guidance for 2021. We anticipate full year organic sales growth of 2% to 4%, driven by continued share gains in Motion Technologies as well as the broader auto market recovery. We plan to expand adjusted segments margins by over 150 basis points at the midpoint. And this will all add up to adjusted earnings per share growth of 8% to 17% versus the prior year. We also provided a framework for how we'll invest in our businesses and deploy capital in 2021. This will consist of approximately $100 million of capital expenditures, up over 55% versus 2020. We focus on acquisitions in our core markets to effectively put our cash to work and build on our strong businesses and a 30% increase in our dividend. Share repurchases of $50 million to $100 million, which will reduce our share count by approximately 1%. Let's turn quickly to Slide 4 to talk further about the fourth quarter and full year results. From a top line perspective, Motion Technologies delivered a strong performance, growing over 10% organically, driven by continued share gains and double-digit growth in auto and North America and China. Motion Technologies expanded margins over 400 basis points to 19.5%, and industrial process grew margins by 90 basis points to 15.1% despite a 10% organic sales decline. For the full year, we achieved cost reduction savings in excess of $100 million, including $40 million in the fourth quarter. For the full year, some additional takeaways to mention. First, working capital as a percent of sales continues to decline, and we saw 70 basis points of improvement in 2020, excluding the impact of FX. Second, we continue to effectively manage our legacy liability profile. Early in Q4, we successfully transferred our U.S. pension liability to a third party. This will reduce our administrative costs and end all future funding requirements for the U.S. plan. We also continued to successfully negotiate asbestos-related insurance elements with our carriers, and we drove an increase in our insurance assets of $52 million in the fourth quarter and $100 million for the full year. Let's quickly turn to Slide 5 to discuss a few wins and awards in our businesses that will shape 2021 and beyond. In 2020, we continued to win content on new electric vehicle platforms, including several platform wins with the EV manufacturer. This is the result of a strategy that -- strategy to penetrate the growing EV segment while continuing to gain share on both conventional and hybrid vehicle platforms. We focused on our technical expertise in addressing tighter noise and vibration requirements while continuing to deliver a frictionless customer experience. In industrial process, our redesigned between-bearing API pump has seen new orders increase over 50% this year. Furthermore, our new i-Alert remote monitoring solution offers diagnostics capabilities and tailored solutions that predict customer equipment failure and improve asset uptime. In Connect and Control Technologies, our Enidine business is teaming with Bell Textron to produce passive vibration control technology for the 360 Invictus. The Invictus is Bell's competitive prototype to the U.S. Future Attack Reconnaissance Aircraft, or the FARA program. As we embark on 2021, we remain laser-focused on operational excellence and customer centricity. This has been the ITT playbook for the last 4 years. We continue to make progress, and we, again, saw benefits of these commitments in the results we delivered in Q4. The outperformance in our auto business continues and the MT machine continues to win in the marketplace. We generated over 300 basis points of productivity for the year, which is the result of a multiyear approach to reduce ITT's cost structure by driving operational excellence across the enterprise and moving towards a leaner ITT. We have successfully executed this playbook at Motion Technologies, and we are in the early stages of the journey with Industrial Process [ and CCT ]. Finally, our effective and comprehensive capital deployment strategy with clear priorities on organic investments, first and foremost, followed by close-to-core acquisitions and then return to shareholders will ensure that our cash is effectively and efficiently put to work. We expect to return over 50% of our free cash flow to shareholders in 2021 after roughly 35% in 2020. In 2020, we focused on what we could control, acted quickly and continue to invest in our businesses. We are progressing on our transformation at both Industrial Process and Connect and Control Technologies with a lot of runway. And our financial health is strong entering 2021, with ample capacity to deploy capital. The organization has clear priorities centered around operational excellence, customer centricity and effective capital deployment, and we're seeing the benefits of our rigor in our results. With that, I'd like to thank you for the opportunity, and I'm happy to address any question to the group that the group may have.

Terrific. Thank you, Emmanuel. Very thorough overview. I'll kick off with some questions, and then we'll take them from the audience as they come in. I want to start with last year, obviously, a very difficult environment, run a manufacturing plant. I want to talk about how you and your teams responded to that in safety, staffing, government mandates around the world as well as the opportunities you found to stay close to and deepen intimacy with customers simultaneously.

Yes. So early on, we were impacted significantly in China. Our China business represents more or less 20% of our total revenue. And we were very lucky to have a strong leadership team in place that we acted really quickly and developed a playbook. And our playbook was really successful because it allowed us, for instance, in China, to gain business and to reopen right away after the new year when our competition wasn't able to open. And then as a result, customers came to us and they asked us, for instance, to produce some products, namely, some brake pads because the competition wasn't able to. And so what we did as a result of this success in China and as, unfortunately, the virus evolved everywhere in the world, is we replicated that success and made it an actual formalized playbook. And our playbook, we call it the ready, safe, go! playbook, developed in China, and focused on really tight safety protocols. We implemented, obviously -- and then as we were able to further strengthen that approach, we implemented other new technologies, so -- such as auto temperature checks, on-site rapid testing. We reorganized also the shop floor and the workplace organization in order to be effective and to be safe. So safety was clearly our #1 priority, and that's what allowed us, what enabled us to be very strong from an operational standpoint. We also made a really strong point of reaching out to the families of our ITTers, ensuring that they were safe. We also set up a fund in order to help some of our ITTers with unfortunate events that happen within their family, in order to -- for everybody really to have a good approach to work and try to minimize the impact that the virus had on them and their families. We took swift action to our cost structure because of the market downturn. And we really tried to flex where appropriate. And then as a result of all these actions, it became pretty clear that it was going to be there for a while. And so we focused on cash. There was a time in March, I remember, my team and I were actually working on understanding how many months ITT could survive with 0 sales. And so obviously, now, we all know that it was -- those risks were overblown, but I don't -- but it wasn't clear at the time. So we really made -- implemented daily cash reviews. We implemented weekly reviews with Luca Savi, our CEO, and we made sure that all the AR and all the customers were paying on time. And we achieved really a strong success because that was one of the stories why we were able to reduce our working capital as a percent of sales. From a manufacturing standpoint, we also -- in the case of our friction business, we also leverage our automation production equipment -- automated production equipment. And we really made sure that we would push this as much as possible so that we could bring in as little people as possible at the height of the pandemic and still, at the same time, achieving a production goal and demand from the customers. Other examples, there are countless examples of our people going above and beyond with our customers. There's one that is kind of a legend within the company, which is in Industrial Process, we had one of our techs, driving more than 1,000 miles in a car because the customer was down and he went there to fix their pumps. And I think that it's a testament to the dedication and to -- the dedication of our ITTers in making sure that our customers are satisfied. We also -- a little bit later in the year, we also implemented our second version of i-Alert, which is our remote monitoring tool, which allowed us to provide customers the capability to supervise their assets and their equipment from a distance and being able to monitor that and making sure that if they would only come in physically when there was an actual physical problem with the asset. So overall, we were -- I think, we were very dedicated to the health of our people that enabled us to be very productive from an operational standpoint, and we scored some decent wins with our customers.

Terrific. And you touched on it a bit earlier, but on the friction platform, could you discuss really the quantity as well as the breadth of your recent wins in the EV market as well as how you are anticipating managing some of the broader supply chain challenges that are facing the industry and production levels and how you are thinking about that internally?

So yes, yes. 2020 was a really strong year in terms of electric vehicle warrants. We won on 42 platforms. So this is really a strong number. And what was really good about it is that those platforms are everywhere around the globe. They're in North America, they're in Europe, and they're also in China, which is the biggest EV market in the world. In China, we had -- 3 or 4 years ago, we had established that R&D center that is dedicated to electric vehicles. And the intent here is really to answer customers' demand, but also establishing a standard for electric vehicles is that hopefully, OEMs and brake manufacturers will adopt in the future, which will further cement our leadership in this area. And when you think about the wins, I think that not only they're really well distributed geographically, but also with a lot of very different customers. We won with legacy automakers, and we won with -- we highlighted in Q4 the win we had with one of the Detroit 3 automakers on their newest crossover vehicle. We also won with the leading EV manufacturer. And we won here not only the legacy platform, as we had announced in the past, but we won also the new platforms with higher volume. And so we hope that by establishing that relationship with that customer, which is fairly recent, we're going to be able to show them the difference it is to deal with ITT rather than a competitor and further expand and reach the mass volume that we have in the U.S. as well. So I would say, in terms of EV, we're extremely happy. I would say one last point. So obviously, we have a strategy that is very focused on EV wins and it shows, right, 42 platforms. But we're also very attentive to the electric vehicle transition. And while there's a lot of growth in EV, the base that we start with is so small that it's going to take a while to change over from the previous vehicles to the -- from the legacy conventional vehicles to the new -- to the new energy vehicles. And so at this -- so that's why we're really focused on not only winning in EV, but also winning with the hybrid vehicles, which are going to represent in the near term, the highest volume that we have that we're going to be able to benefit from. So we're really trying to look at this holistically and make sure that we defend our market share in the internal combustion engines, but also are following and leading in the transition with hybrid onto electric -- for electric vehicles.

Okay. Terrific. And can you just touch on how you are managing some of the production disruptions that are flowing through the industry?

Yes, absolutely. So as Luca said, this is -- we're in a tough environment because, I think, a lot of people adjusted to lower level of demand and production. And now in auto and other industries, demand is spiking up. And so that puts a lot of strain on, for instance, the auto supply chain. And so we're seeing that, obviously, indirectly with the electronics shortage. And we see that for the moment, we have a pretty good line of sight on what's going on. We still see a really strong order book in terms of auto production in Q1. And monitoring really closely what's going to -- what's happening and how it's going to resolve -- it's going to get resolved. Where -- just to give you an idea, Brett, we're looking at plant by plant and platform by platform, what are the changes in terms of the production volumes that we're seeing right now for March and that we see for Q2 as well. So we're really attentive to this. For the moment, we think it's manageable. We're seeing -- we're facing a lot of pressure also from the commodity -- on the commodity side, especially on steel. And we're -- right now, our teams are doing a really good job in securing steel and making sure that this doesn't impact our customers. Obviously, we've seen, as a result, an increase in the price of steel, but because we were able to book early on for the first 6 months of the year, this has had a limited financial impact for us.

Great. And then maybe just closing the loop on this subject of question in -- just on, I guess, the broader impact to your friction platform as that transition takes place that we discussed in the overall vehicle fleet for your OE as well as aftermarket business there.