Welcome to ITT’s 2020 First Quarter Conference Call. Today is Friday, May 1, 2020. 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. Operator provided instructions for the question-and-answer portion. It is now my pleasure to turn the floor over to Emmanuel Caprais, Group Chief Financial Officer. You may begin.

Good morning, and thank you, Maria. Welcome to ITT’s first quarter 2020 earnings call. This is Emmanuel and on the line this morning are Luca Savi, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today’s presentation, press release and reconciliation of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors. Our adjusted non-GAAP results exclude certain non-operating and non-recurring items, including but not limited to asbestos restructuring, asset impairment, acquisition-related items and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I’d like to provide a brief overview on our Q1 GAAP results compared to prior year. Q1 total revenue decreased 5% to $663 million. Segment operating income decreased 30% to $78 million and EPS of $0.95 increased 19%. Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures unless otherwise indicated. Lastly, today’s call will contain forward-looking statements that are subject to risks and uncertainties including impacts from the COVID-19 pandemic. Actual results may vary materially. All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affect our business including those disclosed in our SEC filings. Now let’s turn to slide three where Luca will kick things off.

Thank you, Emmanuel. And thank you all for being with us this morning despite the many challenges and the unique circumstances that you are dealing with at this time. I truly wish you and your families all the strength necessary to get through this crisis. This morning we will do our absolute best to describe the market forces that we are facing, and more importantly, the focused actions that we have taken and will continue to take to combat those forces and create an even more resilient ITT for the future. But first, I want to take a moment to thank all the ITTers around the world who worked tirelessly during this pandemic to take care of our customers and to take care of each other during these very challenging times. Every day during our leadership team briefing we will discuss our people’s safety and all of the local grassroots efforts that our teams championed to support their local community. As you can see in these pictures, ITT is united to provide face shields, protective masks and other critical supplies to first responders and hospital workers in our valued communities. This morning, we played Alicia Keys’ new song “Good Job” during the whole time prior to our call. We did this to further honor the first responders and essential employees around the world that provide our ITTers with the opportunity to deliver to our customers in the essential industries that we serve. Without them, this call doesn’t happen. So thank you. Let’s now turn to our 2020 priorities on slide four. This morning we will use words and phrases that we don’t often use in these investor calls like unprecedented, pandemic and essential businesses. These are truly historic times, where resilience in the face of adversity is paramount, and to me, nobody personified leadership at a time of crisis better than Winston Churchill, who reminded us all that success is not final, failure is not fatal, it is the courage to continue the count. So as ITTers all around the world mastered the courage to continue to battle these unprecedented market forces and as we go through this earnings presentation this morning, there is one word that I want you to remember that best describes today’s ITT: resilience. To strengthen our resilience in the face of the unprecedented challenges posed by the COVID-19 pandemic, ITTers all around the world are united in their focus and our top three 2020 priorities and they are the health of our people, the health of our business and the health of our financials. Our first quarter results are a testimony to this focused priority to the resilience of our diversified businesses and to the resilience of our dedicated people. While the vast majority of our businesses are being essential, COVID-19 disrupted our operations as we experienced decreased customer demand, temporary plant closures and stricter health protocols to keep our employees safe. But we stayed nimble, flexible and humble, and we went to work. And we worked harder than ever in more unusual circumstances than ever before to create value for our customers each and every day. For example, we had employees that stood in line for hours to cross European borders to get to work. We had many employees separated for weeks from their families due to various travel restrictions and all employees adapted to new PPE and social distancing requirements. But as ITTers have always done throughout our 100-year history we got the job done and produced results for our customers and our shareholders. And as it relates to the health of our business and the health of our financials in the quarter we expanded our war chest of self-help opportunities through significant incremental new actions totaling $135 million and we executed measures to boost our liquidity to approximately $1.2 billion. I am confident that these actions will power ITT through this challenging period and position us well to aggressively capture opportunities in the future. As you see our priority is to start with the health of our people and I am so proud of how hard ITTers around the world worked together to share best practices and leverage our collective ingenuity to keep each other safe. But at the highest level, I am so thankful that the detailed playbook that was implemented and observed in China, and then leveraged around the globe, has helped 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 among our employees. This is a tremendous accomplishment considering numerous operating locations in hotspots like China, South Korea, Northern Italy, New York and California. And I can assure you that we will never let our guard down when it comes to the health of our people. Now, I’d like to share with you our Q1 2020 highlights related to the health of our business and the health of our financials on slide five. Starting with the health of our business. From a customer centricity standpoint, we can see that our strong share gain momentum continued at MT Friction, as we outperformed global OEM production by more than 2,000 basis points. And on the strength of our Mexico operations we posted almost 1% growth in North America, as we ran production on our recent share gains with GM. However, I want to caution everyone not to expect this kind of outperformance in future quarters, as the cadence of phasing in 2020 will be erratic when we cycle through various customer and end market dynamics. But by the end of the year we do expect to post a 700 basis points to 1,000 basis points of outperformance versus global auto production. This will be our ninth consecutive year of outperformance. Supporting our continued outperformance, MT Friction generated yet another quarter of strong global platform wins. Q1 awards include conquering two platforms with the leading EV manufacturer that we have been pursuing for years. Our persistence to build intimacy with this customer coupled with our technological and quality leadership paid off and these wins add nicely to our already strong win rate on new global EV platforms. Finally, while we face challenges on the aerospace front our rail and IP businesses delivered a solid topline improvement from both a revenue and order standpoint. Next, from an operational excellence perspective, we continue to drive the productivity actions that have been powering our business over the last several years. We continue to focus intensely on driving efficiency actions, eliminating waste and bolstering our war chest of self-help opportunity across all our sites. In the quarter, the team at Industrial Process produced an 11.3% segment operating margin representing an improvement of 60 basis points. This margin expansion was supplemented by 180 basis points improvement in working capital. Well done George and team. Considering the sudden drop in demand across industries due to COVID-19, we are executing approximately $50 million of new entity-wide restructuring actions to recalibrate our global workforce and deliver $70 million in annualized savings. As we execute these reductions, we will also optimize the way we work as an organization. This approach was exemplified by our plant in Borgia, Italy that reduced the workforce more and faster than the declining production by devising new ways to do more with less. And across ITT, we are also drastically cutting discretionary spending by $20 million and CapEx by $35 million. Next, I provide an overview of the Q1 results and perspectives on the health of our financials. Revenue declined 5% to $663 million, segment operating income margin was 14.5% and operating income margin was 13.4%. EPS of $0.80 per share was in line with our expectations and declined 9% excluding unfavorable FX of $4 million. And lastly, we generated $31 million of free cash flow in the first quarter representing 143% improvement over the prior year. Next, let me highlight the health of our financials and particularly the strength of our liquidity. 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. When a crisis like COVID-19 hit and you have the balance sheet that we have, you know that you are entering the crisis with a strong competitive advantage. So our liquidity position of approximately $1.2 billion is just one element of our financial strength. We will also continue to drive down our net asbestos liability by generating favorable cash settlements like the $66 million settlement we executed in Q1. Many of our actions like these have contributed to a 46% reduction in our net asbestos liability and a 64% reduction in our net environmental liability since then, and as a result of this settlement, we have ample liquidity in our Qualified Settlement Fund to respond to legacy liability outflows in 2020 which will further preserve ITT’s cash during the pandemic. Lastly, the decision we made at the end of 2019 to freeze and immunize our U.S. Pension Plan at 108% funded status could not have come at a better time. So 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 these crises dissipate. Now, let me turn it over to Tom to briefly discuss Q1 results before we highlight the decisive actions that we have taken to address market conditions for the balance of 2020. Tom?

Thanks, Luca. On slide six, you will see that we provided the Q1 ITT results in greater detail. But for now, I’d like to focus on the segment results starting with Motion Technologies on slide seven. Despite the challenging auto market conditions, MT organic revenue declined only 3%. MT Friction declined 5% on a 4% OEM decline that outperformed the global OEM auto markets by more than 2,000 basis points, partially reflecting some favorable Q1 timing. KONI and Axtone grew 5% and rail share gains in Europe and North America partially offset a 3% decline at Wolverine. MT segment operating income declined 14% to $53 million. Comparisons to the prior year were negatively impacted by $1 million of unfavorable foreign exchange and $4 million in strategic investments, including $3 million in prior year government grants. Despite the current conditions, MT delivered solid Q1 margins of 17.8%, reflecting unfavorable volume and mix, and 150 basis points of incremental strategic investments. Partially offsetting these items were significant margin improvements at Axtone, Wolverine and MT Mexico, and the 20% operating margins MT China produced despite the direct Q1 COVID-19 impacts they faced. And on the award front there were some real bright spots. After many years of pursuit we finally conquered two strategic North American awards with the leading EV manufacturer. We advanced our global EV platform win rate, we generated a nice conquer win in China based on our execution during the COVID-19 disruptions and we delivered a 21% award improvement at Wolverine. These awards in combination with the last several years of share gains will continue to power MT’s significant outperformance compared to the global auto market we serve. In addition, our structural competitive advantages in world-class automated processes, global process standardization, and cutting-edge research and development will continue to drive MT’s outperformance as it always has during difficult market conditions in the past. Let’s now turn to Industrial Process on slide eight. IP delivered solid results across all metrics. Total revenue and total orders grew 5%. Margins expanded 60 basis points. Operating income grew to 11% and working capital improved 180 basis points. The topline is driven by benefits from the RPG acquisition and a 2% improvement in projects on improved global execution and strong activity in the Middle East. Short cycle sales were flat mainly due to valve declines that offset 4% growth in the aftermarket and 4% growth in baseline pumps. Total IP orders increased 5% including the benefit from the RPG acquisition. Organic orders were flat. The difficult project compares offset a 1% increase in short cycle orders driven by baseline pumps and parts. On a sequential basis orders improved 5% and short cycle strength improved 15%. IP segment operating income increased 11% to $26 million and margins improved 60 basis points to 11.3%. Excluding the impact of the RPG acquisition, IP margins actually grew 150 basis points. The operating income growth was driven by net productivity, improved project execution, price realization and restructuring savings, partially offset by unfavorable foreign exchange. Excluding the $3 million of unfavorable foreign exchange, IP’s operating income would have improved 24% and margins would have expanded 160 basis points. As we enter more difficult market conditions ahead, today’s IP is better equipped than ever to combat those headwinds. Our portfolio is more balanced than ever with upstream oil and gas only representing 12% of IP’s business. Our execution is at the highest level in our history, but we have reduced our cost structure by proactive restructuring actions in advance of the market dynamics that started last year and intensified in 2020. Now let’s turn to CCT Q1 results on slide nine. CCT organic revenue declined 17% on the weakness across all major end markets. Operating income declined 37% on lower volumes and margins declined to 12.6%. The primary drivers of the declines were the volume impacts from COVID-19 and production challenges at Boeing. The CCT book-to-bill ratio in Q1 was 1.0 and we expect volatile market conditions to persist into the second quarter and into the balance of the year. To combat these forces, CCT has undertaken a comprehensive operational reset that will significantly reduce headcount, recalibrate manufacturing capabilities and slash costs to better align with the current demand expectations. In Q1 prior to fully implementing these actions, CCT’s detrimental margins excluding the Matrix acquisition were approximately 35%. So we plan to improve as the year progresses and these new actions take effect. Now, I will turn it back to Luca.

Thanks, Tom. So let’s start with the health of our people on slide 10 and here we saw that there was no better way to depict how we have kept our people safe than by showing pictures of them in action. As you go around these photos you will see there is a heavy emphasis on protecting our facilities by permitting disinfection and temperature checks. And on the inside we reorganized the workplace from the factory layout to the conference room to the canteen seating to apply distancing guidelines between team members. Many of the actions we have taken to protect our people were based on our successful playbook in China where we took proactive, detailed and aggressive actions early in the outbreak of this pandemic to protect the health and safety of our employees. And our team in China also led the way to define appropriate safety and PPE protocol, while they worked together on the mass mission to provide PPE to ITT around the world. In addition to this China playbook we enacted rigorous safety measures at all of our sites in accordance with WHO and CDC standards. We expect to continue these measures until we determine that COVID-19 is adequately contained and we will take any additional actions necessary to continue to keep our people safe. And as a result of all these efforts today our global confirmed cases are being contained to the single digits including no reported cases in China. Before going into details on slide 11, I’d like to highlight that as a result of the demand uncertainty in the end markets we serve, we are withdrawing our previously communicated guidance for 2020. And now let me provide some perspective on our end market and how we see the year playing out for the balance of 2020. We do expect the most pronounced year-over-year and sequential decline due to COVID-19 in the second quarter. And from there we would expect to see gradual sequential improvement as we progress through Q3 and Q4. The gradual improvements will be the result of the cost actions that we have taken combined with gradual market recovery. Next, let me share our high-level expectations by segment for 2020. At MT based on our share gains and ramping platforms, we expect to significantly outperform weaker global demand for OEM and to outpace it by 700 basis points to 1,000 basis points. At CCT, Boeing 737 MAX challenges, reduced OEM production and lower global commercial air traffic will significantly impact demand for OEM and aftermarket components, and connectors for the balance of 2020. At IP, as the year progresses, we anticipate that a decline in customer OpEx and CapEx due to the economic conditions and the decline in oil and gas prices will result in lower project orders. However, the short cycle business representing 75% of IP’s revenue is expected to improve sequentially through the end of the year as global economic output gradually resets. So, going back to the health of our business, in this time of demand stress, we are doubling down on our customer-centric approach. We have been deep diving in our EDI requests to understand the robustness of our backlog to proactively match production with demand. And in Q1, IP executed flawlessly on two major projects and proactively delivered ahead of expected lockdowns in India and Saudi. We are also taking advantage of the current environment to secure supply for our customers, while highlighting to them the benefits of working with ITT in terms of on-time delivery and superior quality. In terms of operational excellence, we are leveraging Friction’s standardized global production system to ensure flexibility in serving our customers and guaranteeing them a consistent level of performance. We also continue to optimize our manufacturing efficiency through existing automation. As we discussed earlier, our Borgia site has been able to produce more with fewer resources thanks to the well-established MT approach. Another way we optimize efficiency is by moving aggressively to close some of our facilities to respond to lower demand levels. For instance, our friction plants in Borgia and Termoli, Italy were closed for two weeks in April and might face similar reduced activity in May. We obviously have to manufacture safely, serve our customers and optimize our production costs, and so far, we have managed to successfully execute on these three goals. We are also accelerating our supply chain redesign by both implementing redundancy by main regions to ensure procurement continuity and rationalizing our supply base to achieve cost reductions through economies of scale. We have taken significant restructuring actions to adjust to reduced demand and aggressively cut costs by only allocating budgets to key expense categories. Finally, we are driving the redesign of our production organization by executing on our product line transfer plan and our footprint reduction especially at IP and CCT. We anticipate a difficult and challenging balance of the year in the markets we serve and our ITT team has been working in close collaboration with our customers and suppliers to minimize disruptions. We continue to focus on delivering value for our customers by being flexible and taking advantage of opportunities along the way. Next, let’s turn to the health of our financials on slide 12. ITT entered this pandemic with a solid investment grade balance sheet and a very favorable liquidity position. 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. The five major actions totaling $135 million that we are taking to bolster our financial position include; one, a global restructuring plan that dramatically reduces our structural cost generating annualized savings of $70 million; two, salary reductions for Board, CEO and executives and the suspension of the 401(k) match generating $10 million in savings; three, an entity-wide CapEx cut generating a $35 million reduction compared to 2019; four, significant reduction in discretionary spending and supply chain productivity generating at least $20 million in savings; and five, aggressive renegotiations with all vendors and service providers. In addition, we are reviewing our global liquidity on a daily basis to validate expected outflows and ensure that we get paid on a timely basis by our customers. We are also re-forecasting our next three-month cash flows on a weekly basis to ensure that we stay ahead of the financial curve. To really bring this sharpened focus to all of our businesses, we have effectively declared war on working capital. We are taking constant action on our accounts receivable for the past years. We have reduced credit limits to contain exposure to risk. We are restricting inventory and working to drive turnarounds as we are strictly matching production with demand and we are collaborating with our supply base to extend payment terms as we focus on the most competitive partners. Now, let me turn it over to Tom, who will describe our liquidity on slide 13.

As Luca mentioned, ITT entered this pandemic with a strong balance sheet and solid liquidity due to years of effective balance sheet management. So let me give you a detailed overview of our current liquidity position. We have approximately $1.2 billion in cash on hand and available revolver capacity. The revolving credit agreement had outstanding borrowings of $385 million at March 31st and since the end of the quarter we drew the remaining $115 million. It should be noted here that the average interest rate on the $500 million revolver draw is only 1.1%. In addition to the $500 million we secured $200 million of additional borrowing capacity through the 364-day revolving credit agreements executed on April 29th. These revolver actions were conservatively taken to stay ahead of any potential disruptions in the financial markets. With only $15 million in long-term debt we clearly do not have any material financial obligations on the horizon. We are just being prudent. In addition to our cash position, we have $106 million in assets that will be utilized to fund asbestos and environmental cash obligations in 2020. And the U.S. pension plan was immunized at December 31, 2019, and today we are 108% funded, which eliminates the need for mandated cash funding as we prepare to terminate the plan toward the end of the year. All of these actions culminate in producing ITT’s solid investment grade balance sheet; it has built a shield of safety today and a weapon of growth in the future. And lastly, as it relates to capital deployment philosophy, we did execute $73 million in discretionary share repurchases in the first quarter, but we decided to temporarily suspend share repurchases going forward. And at this point, our dividend policy remains unchanged. So, now, let me turn it back to Luca for takeaways on slide 14.

Thanks, Tom. We will effectively navigate this crisis. Each and every one of us is rowing in the same direction with clear priorities: the health of our people, the health of our business and the health of our financials. We have a clear and effective playbook that was successfully battle-tested by our teams in China. This will ensure our effectiveness in delivering on our priorities. We have built operations that are flexible and agile to conquer opportunities as they come. We have fortified our liquidity position and we will continue to enhance it through cash flow performance, and based on the competitive advantages that we have honed over the last three years, we are uniquely positioned to play offense for the future. This year ITT is celebrating its 100th year anniversary, as we were founded just after the last major global pandemic in 1918. Today’s ITT is more resilient than ever, entering this pandemic our operations were performing at their highest level ever. Our manufacturing lines were more automated than ever and our war chest of self-help opportunities was bigger than ever, and we amassed more liquidity and balance sheet capacity than we have 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. With that, let me now turn it back to Maria to take your questions.

Thank you. Operator provided instructions: To ask a question, please press star one on your telephone. Please stand by while we compile the Q&A roster. Thank you. Our first question is coming from Jeff Hammond of KeyBanc Capital.

Hey. Good morning, guys.

Hey. Jeff.

Good morning, Jeff.

So, I guess, just to pin down 2Q a little bit better can you maybe talk about what you are seeing in terms of April sales and order trends that would help give us some frame on kind of how substantial the sequential decline or year-over-year decline would be in 2Q. And maybe just speak to Friction certainly with all the auto shutdowns that we have seen here recently? Thanks.

Okay. So, obviously, this just depends market-by-market. So let me talk about Friction first and maybe talk about what we have seen in the orders for April in IP and on the project side to give some color. So we think that Q2 will probably be the worst quarter for ITT and will be the worst quarter definitely for Motion Technologies and for Friction. This is when we will hit the trough for Friction. If you think about all the shutdowns that you have particularly in Europe as well as in North America, so I think that this is what we will experience in Q2. One relevant point that might be important for you to have and is for us to share what we have seen in China during the month of April. Now if you look at what has happened in China in Q1 and now China is reacting in April. Let me give you some numbers. The production of automotive in China worked out this way during the first quarter. It was minus 27 in January. It was minus 80 in February. It was minus 48 in March. For a Q1 of roughly minus 48. The numbers for April are not out yet. But what we are predicting is a negative high-teens. So what you see in China is a steady recovery. You see China moving in the right direction. And now I am not saying that Europe and North America will recover the same way. But definitely you have China moving in this direction without any stimulus, with few exceptions on the big cities on the license plates for electric vehicles but no major stimulus from the Chinese government. So the signs that we see in April for China are positive; the direction is positive. April I describe as going to be a very difficult month when it comes to Friction in North America and in Europe. When you look at another business like IP, for instance, IP had a very good quarter and it’s important to look at both the backlog and at the funnel when we closed the quarter. So the backlog for IP went up roughly 3% from the beginning of the year. And when we look at the funnel, the funnel is interesting, because when you look at the funnel from the beginning of the year until the end of March how it evolved in Q1, the funnel actually for active projects went up in Q1 roughly 6% from January to March. Different picture for different markets: you have oil and gas active proposals that went down roughly 7% in the quarter and all the others — chemicals, general industrial — they actually went up. Totally for us it was up at the end of March. Going back to your question in terms of what we see in April: what we see in April was oil and gas keeping coming down, the other industries staying stable. Now if you are asking me, I would expect eventually some of these opportunities in oil and gas actually to be postponed, delayed or some even cancelled knowing what is happening in that market. Did I answer your question, Jeff?

Yeah. That’s helpful color. And then, just — as we think about the war chest of opportunities coming into the year and then your incremental restructuring. How should we think about decremental margins either overall or across some of the businesses, as you start to see some of these heavier declines?

Hey. Jeff, it’s Tom. So the way we are thinking about the decrementals is it’s really targeting in this 30% range — 30% to 35%, anything below 35%. And as we gain momentum with these significant actions that we are taking, we will obviously be getting below 35% and target the low 30s and work as hard as we can to do better than that. That’s the kind of drop we are looking at in Q2 on the difficult revenue profile that Luca articulated, whether you look at it sequentially or on a year-over-year basis. We are targeting around the low 30s on the decremental side. Supporting that is these new incremental actions. So the $70 million of annualized restructuring savings that we talked about today and the other actions we are taking on supply chain, obviously, salary and 401(k) — all of those actions, $100 million of straight actions that relate to the CapEx. Those actions are all incremental to the war chest that we have amassed. So these are moves that we had contemplated at different times and that were obviously accelerated in light of the current circumstances. So, I would consider these new actions as largely incremental to the ones that we took in the past in our war chest.

So low 30s incrementals in 2Q and then to get a little bit better from there?

Yeah. You will get decrementals in Q2 and hopefully by the time we are talking about Q3 you are starting to see the recovery play get much stronger on the positive side on a sequential basis as revenue picks up sequentially in Q3 and Q4. So we will have decrementals on a year-over-year basis; we will try to keep those to 30%, but we also want to build momentum on the upside when we come out and leverage our new cost structure on a sequential basis to drive better drops as revenue starts to pick up in Q3 and Q4 compared to a tough Q2.

Okay. Thanks a lot. I will get back in queue.

Our next question is coming from the line of Damian Karas of UBS.

Hi. Good morning, everyone.

Hi, Damian.

Hi, Damian.

First, I am glad to hear that you guys have been able to work through this extremely challenging environment with your employees healthy and your facilities all of them still operational. So glad to hear that that’s going alright. Just a follow-up question on the margins here. So could you just talk Tom about kind of the 30%, 35% decremental that you are targeting? It seems like the majority of the actions you are taking at least on the restructuring side is going to be in CCT. So should we think of that as, perhaps, kind of where the bulk of the savings are going to come? And just thinking of the timing of that, how much of this benefit have you already realized in the first quarter, it seems like you have had these actions in place for some time now?

Okay. Maybe I will start Tom and you can complement. So we were proactive particularly in CCT and in IP, and we did originally some restructuring towards the end of Q4 beginning of Q1 in these two businesses. So you see a lot of these savings in terms of restructuring in IP, for example, and in the results of IP. You don’t necessarily see it in the margins for CCT simply because CCT is in a perfect storm today with the Boeing 737 MAX, the COVID, the general aerospace situation. Now when you look at the restructuring that is happening now in Q2 and some in Q3, it’s across all three value centers. So I would say, probably, it’s true that for CCT it’s going to be the largest, second is going to be Motion Technologies, and third is going to be IP, but it involves also corporate. So what we have done is really trying to hit the structural costs for ITT and for each value center. Tom, do you want to add something to that?

Yeah. Just to kind of underscore the structural element of these new actions, we are targeting up to about 840 heads, 70% to 75% of those actions will be structural in nature and in the value centers, and corporate we will be looking at a structural reduction around 15% to 20% and that’s pretty consistent across all three value centers. So it’s a comprehensive entity-wide set of actions more heavily weighted in the Americas and in Europe, but we have 62 locations that are being impacted by these actions. The bulk of these new items are going to be completed 55% to 60% by Q2 and then the balance as the year progresses. These are actions that are new relative to some of the ones that we took at Q3 and Q4 in IP and CCT in particular.

And the timing that Tom mentioned: the U.S. is more Q2 and Europe is more Q3 because there are regulations that you need to follow and some governments have imposed delays on restructuring until a certain date. So that explains the different timing, Damian.

Sure. No. That makes sense. And then I guess if you look at MT in the first quarter, obviously, the decrementals they are much higher than 35%. But in particular you did step up the growth investment there. Just curious is that level of investment kind of expected to hold?

Damian, when you look at Q1 for Motion Technologies we have foreign exchange and the strategic investment impact. If you took those two items out the decrementals were in the high-20s. So we certainly had a year-over-year impact where we had a strong government incentive that came in last year to the tune of the $3-plus million. So that created a little bit of a distortion in the year-over-year drop. But if you really take that out and foreign exchange you are looking at decrementals in the more classic range that we would be targeting for MT on a go-forward basis. As far as level of investment, Luca, if you want to comment on the way MT is approaching investments in the cycle. But certainly, that grant was a one-time benefit last year.

So, on the investment, we are reviewing absolutely everything. We changed our delegation of authority so that actions now require more scrutiny company-wide. We are reviewing the CapEx of every single business and as you can see, we are reducing capital expenditure by $35 million. Yesterday morning I was on a call with Carlo and the team reviewing a major investment that was planned for Motion Technologies in Friction and we found, with typical Friction ingenuity, a different way of doing it, drastically reducing $1 million of investment. So everything that’s on the table is under review; everything that’s already been approved needs to be approved again.

Okay. Understood. That’s really helpful. Good luck, gentlemen.

Thanks, Damian.

Our next question comes from the line of Brett Linzey of Vertical Research Partners.

Hey. Good morning all. I hope you are doing well.

We are doing as we are.

Good Brett.

Good. Just first a point of clarification on the decrementals, you talked about the 30% to 35%, was that pre-cost out number or did that include the actions you have already taken?

So, Brett, that’s where we were kind of starting off as we come into the year. I would say 35% is the best pre-action and the goal, as we start to drive these actions into Q2 and Q3 and into the balance of the year, is to start to see us getting to the low 30s and keep driving from there. So, that’s the progression and it will accelerate as the actions take hold in Q2 and Q3.

Okay. Great. And then, just shifting to MT and the outgrowth, you mentioned, for the year, you are looking at 700 basis points to 1,000 basis points of outgrowth. Was that an annual number or were you saying each quarter going forward?

Okay. So, that’s an annual number, Brett, between 700 basis points and 1,000 basis points. What is likely to happen in 2020 is a more erratic path just because it’s a very volatile environment. So what you have seen in Q1 is that we outperformed the market by more than 2,000 basis points but I do not expect to deliver 2,000 basis points on a yearly basis. So we will see more of an erratic outperformance as we move through the quarters, but we will expect our performance in every region: Europe, North America and China.

Okay. Got it. I will leave it there and pass it along. Thanks, guys.

Thanks, Brett.

Thanks, Brett.

Our next question comes from the line of Mike Halloran of Baird.

Hey. Good morning, everyone.

Good morning, Mike.

So, you are making a lot of actions here, obviously, moving very fast, very aggressively. How do you balance the long term and the short term here? In other words, when you guys are using those metrics to make sure you are not cutting too hard to the marrow and when you think about some of these CapEx reductions and how you are thinking about some of the growth initiatives that are going to be positive for you longer term? How do you think about that in the context of the long-term versus the short-term? And then I guess the second piece of that is just, is part of it that some of the returns and some of these investments are also getting pushed out, which enables you to push out how the dollars are getting spent; any kind of color and context on that process would be helpful?

Okay. So, let me address the first part, and Tom, I will leave you for the second maybe. So, it’s a good point, Mike, in terms of what we are trying to do is of course to play defense but we are playing offense for the future at the same time. So, let me give you a couple of examples here. When we think particularly about Motion Technologies, if you think about the Friction side, we are playing defense by really going granular in the analysis and critical analysis of the backlog and the order book in order to ensure that we match supply with demand. We need to understand really what is the real demand here and how much is just the Tier 1 telling you to produce just to have a safe inventory. Because we need to understand really how much labor we need and how much raw materials so that we do not pump up the raw materials inventory to finish with an inventory of finished goods. So that is defense on the reduction of the workforce. We have our strategy in the past, which was quite right and it’s been effective, and yes we did have quite a sizable amount of temporary workers for instance working in our plants and that has been an immediate flexibility that we had at our disposal. But because of the size of the crisis that we are facing, the uncertainty and the volatility, we had to go down deeper, and we went down on the structural cost. Some of the reductions that Tom was talking about in terms of the restructuring are structural and there to stay. We will be a better, stronger company when we come out of that. The CapEx reduction: we are really looking at every single investment to ensure that we apply all our ingenuity to come up with the best solution for that and reduce CapEx that at this point in time we don’t need. But at the same time, I want to give you examples where we play offense for the future. For example, in China, we developed a product and conquered during the middle of COVID-19 in China a sizable platform with a customer because the competitor was not able to supply at that time. This will be temporary over the next six to nine months, but it’s an opportunity and opens up the ability to bid for that platform when it comes to market next year and score points with the customer. When we closed our plants in Italy during the month of April for a couple of weeks, our design teams that were working on new products, smarter products or green products kept on running and they were open. We kept investing in the new programs. So we are balancing defense and offense. Tom, do you want to add?

Yeah. And I will just add on balance the investments are still going up year-over-year. Some of the actions that we are taking are really pulling back from budget and, as Luca described, the logic is to focus where we have the customer’s attention, where we have the opportunity to go conquer something now and put our efforts there. That has been our winning formula for downturns in the past. And when we have more mindshare and focus from some of our customers on certain initiatives, we will take those back up. But I think we are still looking at a year-over-year increase in investments but just not at the level that we initially planned.

And let me give a couple more examples where we kept investing in other businesses. We have been successful on the order intake for IP with the new BB2 pumps where we reduced metal, improved hydraulic performance and added intellectual property. This brought very good results in order intake. We kept investing in new VAVE activity for new pump families and we approved some of those investments just last month. And on the CCT front, to reward the ingenuity of one of our engineers, he came up with a new low-cost respirator. We filed the patents, we got the prototype working. I don’t know if this will turn out to be a commercial success, but those investments are ongoing and we are trying to take advantage of opportunities arising from what is happening around the world.

That’s very helpful. And then the second question is just how to think structurally about where the IP margins are today. Obviously, a lot better mix in the business from previous actions, from better pricing mechanics. But also as project activity comes down your mix of business gets a little bit better. So, in any context, I know, kind of two-fold here. How do you guys think about what the bottom end of that new structural range could look like? And then also what kind of ability do you have to really mitigate what the downside looks like?

Okay. So, let me start. When you look at the margins for IP, they keep improving despite negative mix. So if you think about last year we improved quarter-after-quarter despite negative mix because project revenue was increasing. In Q1 our negative mix impacted margins by roughly 30 basis points and despite that we were able to improve 60 basis points. The result of that is better execution. Let me give you examples. We executed two major projects: one in Saudi and one in India for the Dangote Refinery in Africa. The team in Saudi worked closely with the customer to adapt previous orders to what they needed. They were able to deliver ahead of time. The same happened for the Dangote project. We delivered ahead of schedule before India went into lockdown. This is the new ITT and new management delivering. Also, SFO delivered in Q1 an on-time delivery on the large line of more than 90%; mid-range was in the high-80s and they got it back in April. I think we closed last week in April and the on-time delivery of mid-range was actually 88%. We don’t often see those numbers in Seneca Falls — those execution improvements drive better margins. It’s not just margins, it’s also working capital: IP generated $29 million of cash in Q1 and all of that came from working capital improvements. That’s a 108 basis points year-over-year improvement, 300 basis points improvement since the end of 2019 and all of that is coming from inventory.

Appreciate it, gentlemen. Thank you.

Thanks, Mike.

Thanks Mike.

Our next question comes from the line of Joe Ritchie of Goldman Sachs.

Thanks. Good morning, everybody I hope you are all well.

Hi, Joe.

Yeah. Hi, Joe.

Hey. So, maybe, Luca, if you just comment a little bit on the supply chain particularly in Europe — U.S. and Europe, you have made some comments around how you guys managed through China. But I am just wondering how are we set up to manage during this downturn in both of those regions and then also are there any additional costs that you got to take on as well whether it's freight or logistics so any comments around that would be helpful?

So the management of this situation has been a daily management and what has been clear is that you have to be hands on all the time. This is the case where you really need to have your leaders be the shepherds and they need to be down there with the team. You need to manage logistics continually because it got more and more difficult in terms of finding transportation when Italy was locking down, when borders were locking down. That was tricky. But we didn’t face any major hiccup and we were able to deliver everything that we were supposed to deliver, but it required daily, hourly management. When we developed our supply chain contingency plan as COVID-19 hit China, the backup scenario ensured that if some of our suppliers were not getting through COVID-19 and there were a couple of critical ones that needed help from our resources, we had developed backups from Europe. Fortunately, we never had to use it. We also had backup plans among our own plants just in case we faced difficulties in our plant in China. The fact that we have the same processes, the same machines, the same manufacturing helped us make these redundancies work. We didn’t have to use them though. When the reverse happened and Italy was locking down, our backup plan considered whether China could support Europe, and it didn’t come to that because it was not necessary. But once again it was daily management. To give you an idea: when Italy locked down, there were people waiting hours at borders. Think about a plant in Ostrava making brake pads and shock absorbers where a lot of Polish workers cross the border to come to our factories. There were days where they had to wait in line for hours and then borders were closed. So think about being a plant manager and finding labor, temporary workers to ensure you supply customers and make the pads — all of that required daily management, 24x7. Sorry for the long answer.

No. That was super helpful. I really appreciate it. And maybe my one follow-up and this question is for Tom. In just thinking about the cost action, the $100 million or so non-CapEx related actions. I guess, if I am thinking about how much that actually benefits 2020, it sounds like because of some of the actions, particularly in Europe, happening in Q3, is it fair to say that less — you will see less than half of the savings in 2020? I am just trying to make sure that I think about it right from a borrowing standpoint.

Sure. We will definitely jump on and already have, as you can imagine, discretionary costs, vendor renegotiations, the 401(k), the salary related items — which is part of the $30 million — so we will get good realization on that portion very quickly and a lot of that has already been implemented, executed or negotiated. So we will start rolling benefits there. On the headcount side, really 55% of those actions should be done through Q2. So we will get good run-rate momentum and some of those actions have already taken place. Hard to give an exact spacing of it, but we are on track to get 55% of the actions in Q2. So we should see a good chunk of that savings coming through in 2020 as the year progresses.

Okay. Perfect. Thanks, guys.

Thanks, Joe.

Thanks, Joe.

Our next question comes from the line of Nathan Jones of Stifel.

Good morning, everyone.

Hi, Nathan.

Hi, Nathan.

I’d like a little bit of a finer point on the MT outlook. Luca, you shared some of the order builds that you saw in China down 48% in the first quarter. As the virus has rolled from east to west, are those the kind of auto OEM build patterns that you are expecting to see in 2Q in Europe, in 2Q in the U.S. or is that a reason why they would be better or worse than that?

Thanks, Nathan. I believe that North America and Europe will probably be worse than China. That’s my personal belief. We have taken a more conservative approach in our scenario planning worldwide and in each region. But going back to your original question, I think that North America and Europe Q2 will be worse than Q1 China, looking at how lockdowns have been implemented and how our customers’ customers have reacted.

Okay. And then you also have a big chunk in MT that’s off the market — it’s replacement brake pads, which will typically slow down in a recession as well. Maybe if you could comment on how you think the lockdown in Europe affects that business in 2Q? And then if you just have any thoughts on a general recession impact that that might have in 3Q and 4Q as we are getting back open?

When it comes to aftermarket, of course, the aftermarket will slow down. For example, our aftermarket with OES and pent-up demand — when everybody is locked down and not traveling, aftermarket demand declines. Many of our customers see the aftermarket going down as well. There is a belief that the aftermarket will be nearly as negative as OEMs. Some of our customers see Q2 as the trough for the aftermarket as well. For recovery, I see a nice direction in China but I do not necessarily know if Europe and North America will recover the same way or more slowly. China is recovering without much stimulus and Europe and North America will likely use stimulus; we will see how that impacts recovery. We are watching leading indicators to ensure our actions stay ahead of the curve.

Okay. Just one final one on the balance sheet for Tom here maybe. You guys have essentially no long-term debt on the balance sheet, interest rates are about as low as they are going to get. We may look at inflation on the back side of this as we recover and higher interest rates. Can you talk about how you are thinking about the potential to place some medium to longer term debt on the business here trading off the short-term increase in interest expense for potentially lower long-term interest expense?

Nathan, I would say that in the current environment we are looking at all options and keeping them available. There are government programs that are medium and longer term with attractive interest rates. Our plan is to explore every option and keep rebalancing our liquidity profile in the most optimal way. So everything is on the table and being constantly evaluated. We have had success with our current strategies, but we will determine the best path forward if and when the timing is right. Nothing on the immediate horizon other than the liquidity that we currently maintain.

Okay. Fair enough. Thanks for taking my questions and stay safe.

Thanks Nathan.

You too.

Our next question comes from the line of John Inch of Gordon Haskett.

Thanks. Good morning everyone and thanks for letting the call run a little bit longer. Can I just go back to decremental just for a sec. On the surface, Tom and Luca, so the headline decremental if you look at the total number was 50%, but then Tom you actually called out, you said MT was high-20s if you look at the core, right? What was the core for the other two businesses if you want to think about it that way?

Correct. The way to view it: IP is probably pretty consistent without pulling it apart in the 23% range for Q1. And CCT, we said core was about 35% — published was 39% because Matrix was in this year but not in last year, creating some distortion. So I wouldn’t read too much into the 50% ITT level other than a couple of anomalies at MT and CCT and the lack of new actions playing through. We are thinking on a core basis in the low 30s and trying to break through that. Each business will have different dynamics: CCT will start at the higher end and come down; IP is at the lower end because of where they are starting. But on balance, 30% plus or minus is our target and we hope to get below it.

I want to go to the project business of IP. Coming out of the ’15, ’16 oil heavy industry downturn, pricing didn’t come back all the way. Now we are facing oil and gas challenges that could be significant. You have been spearheading redesigning pump products with lower structural cost to deal with that challenge. Could you talk about that and if some of that is already running through your numbers and how those opportunities may blunt long-term pricing headwinds in the projects business for IP?

John, I’ll jump in first with portfolio weighting and then Luca will address the strategic perspective. From a portfolio view: chemical and industrial pumps are about 25% of the portfolio. Oil and gas is less than 10% of ITT today; when you break that down it’s roughly 4% upstream and 6% downstream. Rail and auto are about 45% combined, aero is around 8%, defense 5% and general industrial/connectors/medical around 6%. So some of the areas with headwinds are below 10% of ITT. With that frame, Luca can speak to the strategic intent.

John, this goes back to our strategic review process. We still see opportunity across the markets we serve. We are focused on outperforming the markets and reconsidering portfolio decisions. We continue to evaluate where to allocate attention and capital. Medical, for example, is a smaller business at $130 million to $180 million in revenue, but it has drawn attention given the current pandemic. We will continue to assess portfolio balance as part of our strategy process.

So in other words a share-of-focus orientation versus a diversification focus, is that fair? The diversification seems to be happening naturally based on Tom’s commentary?

Yes, that’s fair. We are focused on share and focus orientation while monitoring diversification. Medical may get some more attention given recent developments, but our overarching approach is to focus on where we can win and create value.

Perfect. Thanks very much everyone.

Thanks, John.

Thanks, John.

Our next question comes from the line of Brian Blair of Oppenheimer.

Good morning, everyone. I have been hearing you are doing well…

Hi, Brian.

Thanks. And then thank you for fitting me in here. I have a question to help us think about Friction intermediate term trajectory. Is there any update you can offer on the five-year average OEM revenue and how that’s trended relative to the prior $3 billion level? Now understanding there are a lot of moving parts here, I am just wondering if you can somehow quantify the net effect of Friction strong win rate versus legacy production declines potentially smaller size of new platforms, etc.?

So Brian, the way to look at that is you have two dynamics: the market size is resizing as global vehicle production decreased from more than 90 million in 2018 to less than 90 million in 2019 and will be considerably less in 2020. That is a headwind reducing production. On the other side, our market share gains are improving due to the awards and wins we have described. So the net effect depends on production recovery and timing. A lot will depend on how production recovers later in 2020 and into 2021.

Okay. That is fair. And then another longer-term one: as we think about the margin potential of your segments over time and the entitlement margins that you have cited previously — is there any change to that outlook? Mid-teens plus for IP, high-teens plus for CCT? Is that simply pushed back a bit or are there other factors that may pressure the post-COVID outlook?

No. I do not see any change to those long-term medium-term targets, aside from the fact that timing might be pushed back due to the global reset from the current environment. That’s the main dynamic I see.

Got it. Okay. Thank you for all the color today.

Thank you.

Thanks, Brian.

Our next question comes from the line of Andrew Obin of Bank of America.

Yes. Good morning.

Hi, Andrew.

Hi, Andrew.

Just a question about free cash flow this year. You have these longer cycle businesses like oil and gas and aerospace. So as you think about releasing working capital, can you just talk about both challenges of getting paid in aerospace and oil and gas, and also sort of the long-term nature of orders? How long would it take for you guys to sort of take working capital out? Thank you.

Okay. Let me start and Tom can add color. One thing we have improved is cash management — we are paying more attention than ever. We have a system where the treasurer monitors cash movements in every legal entity daily and on a weekly basis I chair a cash call to review cash flow for the next three months. We review top receivables and past-due accounts. For example, in last week’s call our top 20 accounts receivable past due amounted to roughly $8 million and out of this $8 million $6 million were in the 30- to 90- or 130-day range. We haven’t seen major shifts in customer payments so far. Improvement in IP cash came from inventory reduction: IP generated $29 million of cash in Q1 and all of that came from working capital improvements. So far I haven’t seen material issues related to long-cycle businesses and payments. Our project execution in Saudi and for Dangote was on time and supported cash inflows.

So basically no specific challenges related to the long-cycle nature of these businesses so far?

Not so far at this moment in time I haven’t seen them.

And a little more color on Europe is not necessarily the same as China. As European autos start reopening, logistics and visibility can differ. Can you just talk about what’s happening in the European auto supply chain as a more relevant experience to the U.S. than China?

Sure. The situation in Europe has been different than China overall. In parts of Europe — Italy, France, Spain, U.K. — they went into a heavy lockdown similar to Wuhan/Hubei, while other countries like Germany, Poland, the Netherlands and Nordic countries experienced lighter restrictions, more like the rest of China outside Hubei. For example, in Germany our rail plants never shut down and we saw almost zero absenteeism. In Holland, plants never shut down making shock absorbers but had some absenteeism. In Poland, plants never shut down and worked on rail. Countries like Italy, France and Spain had heavier lockdowns and will likely have a longer recovery. So you can’t treat Europe as a single experience; it’s regional and varies by country.

Thank you very much. I appreciate the detailed answer.

Thanks, Andrew.

Our next question comes from the line of Joe Giordano of Cowen.

Hi, guys. Good morning. I will keep it quick, I know we are running super late here. So just Tom if you can just clarify what the write-down in the quarter was? And then just on the balance sheet, I appreciate the moves you guys made to keep liquidity, but like zero net debt and negative net debt. How — what are your thoughts on being more aggressive here? I mean, you suspended buyback and is that more kind of liquidity reasons and when are you thinking about being aggressive in M&A here? Thanks.

Thanks, Joe. The $16 million write-down within Industrial Process was an impairment, primarily related to our upstream business getting recalibrated to the longer-term demand environment. The upstream business is only 4% of ITT at this point, but we thought it prudent given global upstream dynamics to take that action. On liquidity, we were conservative and proactive obtaining additional liquidity as a low-cost insurance policy. We will continue to monitor options. On capital deployment, we were aggressive on repurchases in Q1 with $73 million executed, and the dividend remains in place. It may be premature to deploy more capital until we get through Q2 and see how customer payments and other dynamics play out. On M&A, we are not currently active on new transactions, but we are continuing to cultivate and engage with targets identified over the years. We are not planning any transactions in the short-term.

Thanks.

Thanks, Joe.

And thank you, ladies and gentlemen. This concludes the question-and-answer session and today’s teleconference. Please disconnect your lines at this time and have a wonderful day.