ITT Inc. (ITT) Earnings Call Transcript & Summary

Welcome to ITT Inc.'s 2021 Annual Meeting of Shareholders. I will now turn the call over to Richard Lavin, Chairman of the Board of ITT. Please go ahead, Sir.

Thank you, and good morning, ladies and gentlemen. On behalf of the Board and management of ITT, welcome to ITT's 2021 Annual Meeting of Shareholders. This year's annual meeting is a virtual meeting, which allows our shareholders to attend and participate in the meeting remotely via this live audio cast. Like last year, we chose to conduct a virtual meeting 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 is now shortly after 9:00 a.m. Eastern Standard Time on May 19, 2021, and I call the meeting to order. Now we will move to the business portion of the meeting. I will turn it over to Mary Beth to address certain preliminary matters.

Thank you, Rich. Notice of today's meeting and related proxy materials or notice of Internet availability of these materials were mailed beginning April 5, 2021, to all shareholders of record as of the close of business on March 22, 2021. A proxy supplement was filed with the SEC on April 15, 2021. Doug 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 elections 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, Rich.

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 one 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, will you please review the voting procedures?

The polls for voting on matters properly presented at this meeting are now open. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the Voting button on the web portal and following 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.

Mary Beth, can you please describe each of the proposals to be voted on today?

The first item on the agenda is the election of each of the 10 nominees for director to serve until the annual meeting of shareholders in 2022 or until his or her successor is duly elected and qualified. As indicated in the proxy supplement -- the proxy statement and proxy supplement, the following individuals have been nominated by the Board of Directors for election: Orlando Ashford, Geraud Darnis, Don DeFosset, Nicholas Fanandakis, Richard Lavin, Rebecca McDonald, Timothy Powers, Luca Savi, Cheryl Shavers and Sabrina Soussan. Biographies of all the 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 2021 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 to the company's threshold to call a special meeting of shareholders. Shareholder proposal was submitted by John Chevedden. Mr. Chevedden is on the line to present his proposal. There are no other matters to be presented at this meeting.

Operator, would you please open the line to Mr. Chevedden? We have allocated 3 minutes to Mr. Chevedden to present his proposal. Please go ahead. Mr. Chevedden? For those online, we're standing by to confirm Mr. Chevedden can get online with his proposal.

We seem to be having technical difficulties. Please stand by if you're attending the meeting. We hope to have them resolved shortly.

This is John Chevedden.

Yes, Mr. Chevedden, this is Rich Lavin. I'm chairing the meeting. Can you hear me?

I can hear you.

Yes, I can hear -- we can hear you as well. Please go ahead. We've allocated you 3 minutes to present your proposal. Please go ahead.

This is proposal 4, special shareholder meeting improvement. Just as a point in order, I wanted to point out that Q&A wasn't open until after the start of the meeting. So that kind of throws the cold water on people submitting questions. Proposal 4, special shareholder meeting improvement. Shareholders ask our Board to take the steps necessary to amend the appropriate company governing documents to give the owners of a combined 10% of our outstanding common stock the power to call a special shareholder meeting. The Board of -- it is important for 10% of shares to call a special shareholder meeting because ITT shareholders firmly elect the right to act by written consent. ITT is incorporated in Indiana, and Indiana does not allow shareholders the right to act by written consent. Many non-Indiana companies allow shareholders to take action between annual meetings by calling for a special meeting and by acting through written consent. Management claims that shareholders approved our current stock ownership threshold for calling a special meeting, which is 25% stock ownership. By management failed to state whether it withheld from shareholders the important fact that we permanently lack the right to act by written consent and thus need to compensate for this lack by lowering the threshold to call a special shareholder meeting. Management promotes the fallacy that shareholders should be complacent in improving our corporate governance and less increased management accountability to shareholders with this proposal simply because we have the average governance practices that a lot of other companies have. The unfortunate attitude of management is that since ITT has averaged, the ITT management goal is to block improvement. The reported management scenario to resist the proposal does not make sense. Does not make sense that a group with a narrow interest, which is way outside the mainstream, will get an irresistible urge to call for a special meeting where nothing is accomplished and such a narrow interest suddenly flips and gets the majority vote. The calling of a special meeting can only thrive on majority support. It is important to reduce the stock ownership threshold to call a special meeting to compensate for shareholder meetings losing their impact with the onslaught of online shareholder meetings. For instance, the Kohl's annual meeting last week was 9 minutes and AT&T would not even let shareholders speak at 2 consecutive online shareholder meetings. Please vote yes, special shareholder meeting improvement, proposal 4.

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

Mary Beth, do we have any questions or statements relevant to the 4 proposals submitted at this time?

There are no questions.

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

The preliminary results are as follows: each of the 10 nominees for director has been elected to the Board of Directors; the ratification of Deloitte & Touche LLP as the independent registered public accounting firm of the company for the 2021 fiscal year has been approved; the advisory vote on the compensation of the company's named executive officers has been approved; and the shareholder proposal to amend the company's threshold to call a special meeting of shareholders 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.

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

Thank you, Rich. Good morning. On behalf of the Board of Directors and the entire leadership team, I want to welcome you once again to ITT's 2021 Virtual Annual Shareholders' Meeting. I would like to thank everyone for their investment and -- in and support of ITT in what has been an extremely challenging year. We truly appreciate that each and every investment in an ITT share is tied to an individual or to a family desire to be the better financial future, and we'll continue to work tirelessly to deliver the future for ITT, for you and all of our stakeholders. As discussed during this investor meeting, I will start by providing brief performance highlights from 2020 and the first quarter of 2021. I will also discuss the steps we have taken to navigate the COVID-19 pandemic in 2020 and continue to take in 2021 as well as our outlook for the rest of 2021 following our first quarter earnings release on May 7. We are off to a strong start in 2021. As I will discuss in a moment, our results for the first quarter far exceeded our expectations. ITT shares outperforming the majority of our peers and all major indices, and we are slowly and safely returning to work in person, which is a testament to the efforts by all of our employees to operate in a safe and efficient manner whilst delivering for our customers. I would like to spend just a few minutes discussing how we successfully navigated the pandemic whilst delivering on our commitments to our employees, our customers and our shareholders. The health of our people has been a top priority from day 1. Early in the pandemic, we implemented Ready, Safe, Go across ITT, which allowed us to safely and effectively serve and support our customers faster than our competitors. In 2020, we improved our safety record and reduced the number of recordable incidents by 25% across all our businesses. Furthermore, at the end of 2020, more than 50% of our site had 0 recordable incidents for over 1 year. Safety is, and will continue to be, the foundation for our operational excellence progress. Health of our business. Our businesses made further progress on our strategic priorities of customer centricity and operational excellence. As I explained in our 2021 outlook call in February, Motion Technologies continues to be our stringboard for growth. In 2020, MT's Friction business continued to outperform the global automotive market, thanks to the best-in-class performance in quality, delivery and technology. Sales in Friction outpaced global auto production rates by more than 600 basis points for the full year and by an additional 1,500 basis points in the first quarter of 2021. We increased market share by significant amount in North America, China and Europe and secured content on 42 new electric vehicle platforms in 2020 and on 9 additional platforms in Q1 2021 as we position ITT for growth on emerging technologies. We also continued the journey towards operational excellence in all of our businesses. In Industrial Process, we developed and launched innovative new fund and remote monitoring technologies, which are driving market share gains across our industries, enhancing our customer intimacy and creating sustainable competitive advantages for this business. Last year, we delivered over 300 basis points of productivity, which helped to minimize headwinds from the COVID-19 pandemic, and gross segment margins year-over-year, while achieving new all-time highs for segment margin in the fourth quarter. Furthermore, in the first quarter, IP surpassed the 15% margin threshold for the second consecutive quarter despite a 12% organic revenue decline. This was a result of a multi-year journey to reduce ITT's cost structure by driving operational excellence across the enterprise. We made progress in our global footprint rationalization, including a third footprint project announced in Q1, and we continue to believe there remains a great deal of opportunity in 2021. Together with our focus on flawless execution, our businesses are healthier than ever and ready to win in the recovery. Health of our financials. 2020 was an incredibly challenging year. We have to make difficult decisions to address the significant decline in volumes stemming from the pandemic. To ensure we continue to deliver on our commitment, while positioning ITT for future profitable growth, we executed the plan to significantly lower our fixed costs. This resulted in structural cost reduction in 2020 of nearly $65 million, with an additional $50 million of savings expected in 2021. Several analysts noted that this was truly best-in-class in terms of cost takeout, which has resulted in a step-up in profitability above 2019 levels already in Q1. We also focused on strengthening our balance sheet through smart cash management while investing in growth. Our current plan for 2021 contemplates a 50% plus increase in CapEx for the full year, and we have nearly $1.5 billion of liquidity at our disposal to deploy to dividend, mergers and acquisitions and share repurchases. In the third quarter of 2020, Moody's recognized our cash performance with an upgrade to our credit rating. We also continue to effectively manage our legacy liability profile, including our U.S. pension plan, which was transferred to MassMutual and our legacy asbestos liability for which we negotiated coverage in place agreements with a set of insurers to lessen our cash contributions in the future. From a capital deployment standpoint, we increased our dividend by 30% in 2021 after a 15% increase in 2020 and repurchased ITT shares totaling $73 million in 2020 followed by an additional $50 million in the first quarter of 2021 alone. As I highlighted in our outlook call, as a result of this smart cash management, ITT is able to execute on all of its capital deployment priorities while focusing on generating long-term value for our shareholders. All the actions taken over the past year, combined with ITT's collective commitment and grit, has 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 potential acquisitions in our core markets to put our cash to work effectively and build on our strong businesses. I am invigorated by the progress across our businesses and the momentum which is accelerating. Turning now to 2021. We delivered a strong first quarter and an encouraging start to the year. We continue to drive strong organic revenue growth, primarily in Friction and the Connector business in Connect and Control Technologies. The actions in 2020 to address lower demand worldwide, coupled with our continued resilience, generated 300 basis points of adjusted margin expansion, delivering over 70% incremental margin for the quarter. Free cash flow increased 71% compared to prior year, a trading 12-month free cash flow margin of close to 16%. As I mentioned earlier, we executed half of the full year plan for repurchases to $50 million of buybacks in Q1. As a result of this and the strong operational performance, we grew adjusted EPS by 33% and surpassed 2019 in terms of sales, segment margin, EPS and free cash flow. As a result of our strong Q1 performance and our confidence in ITT's ability to outperform, we recently raised our outlook for 2021 across all facets of our guidance. We now expect adjusted EPS growth of 19% to 25%, which at the midpoint of our guidance puts ITT $0.09 above 2019 EPS. I'm very pleased with ITT's results in 2020 and the first quarter of 2021. We see signs of a recovery in our end markets, and we continue to differentiate ITT from the competition. We are leveraging and building upon the cost actions we executed in 2020 to drive solid incremental margins as sales volumes increase, and we are investing our capital effectively. With that, I'd like to open the floor up to answer questions that pertain to the company's business and our general interest to the shareholders of the company. Please note, we will attempt to answer as many questions as time allows. The only questions that are germane to the meeting will be addressed. Please keep your questions brief and limit them to 1 or 2 items. Are there any questions from shareholders?

Luca, the first question is, which is more important, share buybacks or increasing the dividend?

Thank you for the question. Effective capital deployment is one of our top priorities. And when it comes to deploying capital, the first thing goes to organic investment. And this is also why you're seeing this increasing CapEx for 2021. Second, it goes into inorganic investment, which is M&A, and this is why you're seeing more focus in cultivation for inorganic growth for ITT. And third is really the return to the shareholders through dividends and share repurchases. I think ITT is in a fortunate position where we can do all of the above, and this is exactly what you have seen we have done in 2020 as well as in 2021 as I said during my remarks just before.

Next question. What type of business might ITT acquire?

Across our businesses that we are cultivating in Motion Technologies, we have a good -- great platform that we can build on, not only organically but inorganically. We believe in terms of -- in the rail industry we've got good secular growth and also good aftermarket business. We are also looking at acquisition in IP, in our pumps and valves, where we are not necessarily looking to be a big consolidator, but looking at acquisitions of small, medium companies that have a niche position and where we're able to differentiate the size of anything between $20 million to $150 million and also in CCT in the business of aerospace and connectors.

There are no further questions.

Okay. Thank you again for being here and for your ongoing support of ITT.

That concludes the meeting. Operator?

Thank you, the ITT Inc.'s meeting has now come to an end. Thank you for attending. You may now disconnect.