Itt Inc. Q4 FY2020 Earnings Call

Welcome to ITT's 2020 Fourth Quarter Conference Call. Today is Friday, February 19, 2021. This call is being recorded and will be available for replay starting at 12:00 PM Eastern. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations. You may begin.

Thank you, Maria, and good morning. It is my pleasure to welcome you to ITT's fourth quarter 2020 earnings conference call. Joining me here this morning are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's press release, presentation and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website. This call contains forward-looking statements that are subject to certain risks and uncertainties including, but not limited to, impacts from the COVID-19 pandemic. Actual results may vary materially from the assumptions presented today. All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affect our business. Except where otherwise noted, the information we present this morning will be based on adjusted non-GAAP figures. We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on a 4% organic sales decline. And we improved our decremental margin every quarter in 2020. For the full-year, our decremental margin was 22% at the low end of our range.

Thank you, Mark, and thank you all for being with us this morning. I truly hope that everyone is healthy and safe. Before I begin, I'd like to again thank all the ITTers around the world who continue to work tirelessly during this pandemic to serve our customers and to take care of each other in these challenging times. I'm humbled by the way this team continues to respond to the crisis and want to express my sincere gratitude for all you have done. Your efforts to serve our customers and drive exceptional performance in a safe, fast, and productive manner are a testament to the commitment, perseverance, and hard work. I would also like to welcome to ITT our new Vice President of Investor Relations, Mark Macaluso. Mark joined ITT in January of this year after a successful 13-year career at Honeywell and has hit the ground running. I'm happy and excited to have Mark on the ITT team to drive our global investor relations strategy. As a result of our focus on the health of our people and our efforts, we delivered another strong performance in the fourth quarter. Early last year, we took some difficult and swift actions to respond to the pandemic. These actions ensured that ITT continued to outperform in 2020 and will emerge stronger in 2021 as the economic environment recovers. Let me now highlight some key financial achievements for the quarter. We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on a 4% organic sales decline. We generated free cash flow of $102 million for Q4 and $372 million for full-year. Throughout the year, we drove cash collections and optimized inventory, whilst applying strict control over capital investments. These drove a free cash flow margin of 15% at the higher end of our guidance that we increased just last quarter. 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 our Wolverine China joint venture as we continued to expand our market share in Asia. In 2020, we reduced the number of recordable incidents by 25% and implemented safer workplace protocols globally. This is an important element in ensuring the health of our people. And it also contributed to a significant reduction in workers’ compensation expense in the U.S. Safety is foundational for our operational excellence and all of us should expect a continued reduction in incidents in the future. From a commercial perspective, sales in Friction 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 EVs, we secured a position on 42 new electric vehicle platforms during the year. In Industrial Process, we continue to execute on our footprint rationalization projects. We finalized our first consolidation in Europe this quarter and are progressing according to plan on our second project; this one in North America. We are making progress in sourcing efficiencies through aggressive negotiation and supplier rationalization. Today, I’m also pleased to provide our outlook for 2021 that reflects all that we have done to strengthen our operations, our people, and our potential. 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 expect the rest of our markets to be flat to slightly down. We plan to expand adjusted segment margins by 130 to 180 basis points. As a result, we delivered adjusted earnings per share of $1.01, a sequential and year-over-year increase. Because of our strong free cash flow performance in 2020, we're well-positioned to deploy capital in 2021. First, we would invest in our businesses with approximately $100 million of capital expenditures, up over 55% versus 2020. Second, we will aggressively and diligently pursue acquisitions in our core markets to effectively put our cash to work and build on our strong businesses. Third, we increased our dividend by 30% as announced this morning. This is our ninth consecutive dividend increase. And finally, we are planning to repurchase ITT shares totaling $50 million to $100 million reducing the full year weighted average share count by approximately 1%. Let's turn 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 in North America and China. This was offset by lower short-cycle demand in Industrial Process as we anticipated and the impact of commercial aerospace dynamics in CCT. Our focus on operational excellence is producing strong results.

Thank you, Luca, and good morning everyone. Let me begin with Motion Technologies. Our Q4 organic growth of 10% was primarily driven by strong performance in our Friction OE business. We delivered 640 basis points of outperformance in 2020 on a global basis; further evidence that the MT machine continues to win in the marketplace. For the quarter, Friction sales in North America were up 43% and sales in China, up 19%, while growth in our Wolverine business was over 12% with strength in Europe and Asia-Pacific as we gained market share in both brake shims and sealing. Segment margins were incredibly strong again expanding 410 basis points on incremental margins of 46%. This was mainly driven by higher volume and productivity that allowed us to continue to fund growth investments. We are very pleased with the pace and the strength of the recovery in MT as we head into 2021. For Industrial Process, sales were down, as we anticipated, with declines in short-cycle due to pandemic-related impacts that affected our previous two quarters' bookings. However, our short-cycle orders in the quarter were up 1%, driven by aftermarket demand. Lastly, in Connect and Control Technologies, we continued to see weak demand across all major end markets. Sales in aerospace and defense were down over 30%, driven by lower passenger traffic and lower build rates from airframers. The de-bookings we saw in aerospace in the second and third quarters declined sequentially in the fourth quarter to minimal levels. We expect that the sales weakness we saw this quarter in commercial aerospace will likely persist into the first half of 2021. We expect to reach pre-COVID margin levels at CCT in the next two to three years. In 2021, we expect incremental margins north of 35% as volumes recover and we leverage our optimized cost structure. Keep in mind, this will vary from quarter to quarter based on our quarterly performance in 2020 and the mix among our businesses. We expect adjusted segment margins to expand by 150 basis points at the midpoint, driven by higher volumes, continued productivity and the incremental benefits from structural reductions to our cost structure in 2020.

Our first question comes from Jeff Hammond of KeyBanc Capital.

So I guess on Friction, can you just talk about what you see for outgrowth, specifically versus the long-term trend and what your kind of - IHS expectations underline that as well, which - or I guess your production versus IHS?

Sure. So as you have seen, we outperformed very well in Q4 and our outperformance for the full year was 640 basis points. So we expect to continue to outperform the market in 2021. When you're talking about the IHS forecast for 2021, they are forecasting a growth of roughly 14%. So this means production that grows from 74 million vehicles this year to roughly 85 million. We are forecasting a 10% growth in 2021 and our outperformance on top of that. We think we will get there this year.

Absolutely Jeff. So we expect that there is going to be a significant carryover impact in 2021, roughly something like $40 million. And then obviously, there is going to be some reversal of temporary cost cuts such as executive compensation and other discretionary costs that are going to come back in the amount of $25 million to $30 million. Yes absolutely. We expect to execute on our natural and normal productivity that we get every year and we're pretty strong on this. So yes, the pipeline of cost reduction and efficiencies for 2021 is pretty full.

I think you mentioned 42 EV platforms that you got on. What's the hit rate? Is that something you can put in percentage terms for us?

Yes, it's very high Scott, and it's higher than our current market share in executed production. So, this is very positive because these will feed us continuous market share gains in the year to come. We are pursuing acquisitions, close-to-core, and this goes across all three value centers.

Can you just talk about inflation and price cost as we're seeing steel prices go up pretty steeply?

In MT, we are in a situation where every year, we have to give price to our customers. We expect similar pressure than we had in 2020, but we're going to have significant improvements coming from both, net productivity.

The footprint - we keep on progressing with the footprint across all three businesses. There's runway there and our team is doing an excellent job on that front.

How should we think about your capital allocation going forward and the dividend policy?

When it comes to capital deployment, the priorities are very clear. The money goes to organic investment first and foremost. To maintain our yield of 1%, we can still put up a really good increase in terms of dividend while also committing to share repurchases and doing our acquisitions. We have clear priorities, we are aligned and purposely committed and accountable and we are seeing the benefits of our rigor in our results. Just a couple of last words during 2020, we had clear priorities, we focused on the health of our people, which enabled us to execute and deliver for our shareholders with outstanding cash generation and to deliver for our customers.

And thank you ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time and have a wonderful day.