Welcome to ITT's 2021 Third Quarter Conference Call. Today is Thursday, November 4, 2021. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern time. 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. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President, Investor Relations. You may begin.

Thanks, Catherine, and good morning. It's my pleasure to welcome you to ITT's Third Quarter 2021 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 call will cover ITT's financial results for the three-month period ending October 2, which were announced yesterday evening. Today's remarks may contain forward-looking statements that are subject to certain risks and uncertainties, including comments relating to company performance, strategic priorities, business mix, market conditions and the effects of COVID-19 on ITT. These statements are not a guarantee of future performance or events and are based on management's current expectations. Actual results may vary materially due to, among other items, the factors described in our 2020 annual report on Form 10-K and other recent SEC filings. ITT is not under any and expressly disclaims any obligation to update these forward-looking statements, whether a result of new information, future events or otherwise. Except where otherwise noted, the third quarter results we present this morning will be compared to the third quarter of the prior year and based on non-GAAP financial measures. These adjusted results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items. All adjustments in the quarter and expected for the full year 2021 are detailed along with the reconciliation of such measures to the most comparable GAAP figures in our press release and presentation, both of which are available on our website. With that, it is now my pleasure to turn the call over to Luca, who will begin on Slide number 3.

Thank you, Mark, and good morning. I want to start by once again thanking you, our stakeholders, for your continued support and investment in ITT. I also want to thank the nearly 10,000 employees at ITT who demonstrate our core values on a daily basis and who make ITT the most reliable part of our customers and the trusted partner for the communities in which we operate. I am very pleased with the results ITT delivered in the third quarter. Once again, the resilience of our businesses and our teams has allowed ITT to execute for our customers in a tough macroeconomic environment. As a result of the revenue growth, continued margin expansion and the effective deployment of the balance sheet, ITT delivered adjusted earnings per share of $0.99, growing 21% over the prior year. During the quarter, it was paramount that we stay focused on execution while cultivating the significant growth opportunities ahead of us, and this is exactly what we did. In the third quarter, I continued to work our shop floors around the world to ensure we are taking full advantage of our opportunities. I'm encouraged by what I saw firsthand as we are not even close to being done improving our operational and business excellence. I saw the engineering expertise and prowess on display at the Friction plant and innovation center in Barge, Italy. The productivity and automation opportunities at our KONI plant in Oud-Beijerland, The Netherlands, and the energized high-performing goods pumps team I reconnected with in Dammam, Saudi Arabia. I was also fortunate to visit our industrial process team in Tizayuca, Mexico, where we have a good low-cost manufacturing setup poised for future growth. And lastly, our Friction plant in Silao, Mexico is continuing to add new production lines to support the wins in EVs and share gains on conventional vehicle platforms. There is a lot to be excited about at ITT. Let's talk about some of the key highlights from ITT's third quarter. We drove broad-based sales growth across all three segments and implemented strategic commercial actions to minimize the impact of rising inflation. We drove incremental productivity in the quarter, roughly 280 basis points through a combination of shop floor and sourcing actions, and we continue to apply strict controls over our fixed costs as growth resumes. We sought to overcome a year-over-year $0.23 or 370 basis point raw material headwind. Our ITTers delivered 60 basis points of adjusted segment operating margin expansion, an exceptional result considering the supply chain dynamics we see. We generated organic orders growth of 27% with strong demand in Friction aftermarket, rail, connectors, and industrial controls. We also continued to grow nicely in IP short-cycle and projects. Finally, we put our capital to work, repurchasing an additional $50 million of ITT shares to bring our year-to-date repurchases above $100 million, exceeding our repurchase commitment for the full year. These accomplishments and the dedication of our ITTers drove adjusted earnings per share growth of over 20% compared to prior year and 2% above 2019 pre-pandemic levels. Looking at the businesses. Despite the supply chain disruption and the restricted auto production volumes, Friction OE continued to outperform while also driving strong aftermarket growth. We continue to win on both conventional OE vehicles and on new electric vehicle platforms which will power future outperformance as they transition to hybrid and ultimately to full electric. This quarter, we won content on six new electric vehicle platforms in China, the world's largest automotive market. This year, we have been awarded content on 25 new EV platforms and our win rate is significantly above our current global OE share of over 25%. Electrification will be ITT's next springboard for long-term growth given our strategic focus on EV platforms. In Connect & Control Technologies, we drove 17% organic sales growth with strong demand in North America distribution, especially in the industrial market. This, coupled with progress on CCT's operations, generated a 17% adjusted segment margin for the quarter, putting the business closer to pre-pandemic levels. Lastly, we generated 8% organic revenue growth in industrial process, driven by short-cycle demand across parts, valves, and service. This is remarkable, given the supply chain difficulties we are experiencing. We see positive signs in our weekly order rate. And as you will hear shortly, we continue to see sequential improvement and market share gains in the long-cycle project business, which is an encouraging sign for 2022 and beyond. One of the most telling metrics for ITT this quarter was the 27% organic orders growth. Our order levels again surpassed 2019, even with many of our key end markets still early in their recovery, like commercial aerospace. In Industrial Process, we generated double-digit growth versus 2020 in short-cycle across baseline pumps, parts, and service. Q3 was also the third consecutive quarter of sequential orders growth in projects with 36% organic order growth. As a result, IP's backlog was up $28 million in the quarter. In Connect & Control, orders grew over 40% organically, including an encouraging 70% orders growth in aerospace and the strong performance in North America distribution. Finally, in Motion Technologies, we generated strong demand in the Friction aftermarket and in KONI/Axtone, which more than offset a slight decline in friction OE due to the chip shortage impact on our OEM customers. Even with these challenges, MT grew over 20% organically versus 2020 and 4% above 2019. And for the year, we now expect MT to deliver over $1.3 billion in revenue, comfortably above 2019. As we head into the fourth quarter, we are not anticipating any improvement in the global supply chain or with raw material pricing. With our teams executing relentlessly against these challenges, we are narrowing and raising our full-year adjusted EPS outlook for 2021 at the midpoint to reflect the strong performance to date and our ability to execute. We now expect adjusted earnings per share in the range of $4.01 to $4.06 at the high end, which equates to 25% to 27% growth versus the prior year. This is a $0.06 improvement at the midpoint after a $0.37 increase through the first half of the year. This puts ITT on pace to comfortably surpass 2019 adjusted EPS. Let's turn to Slide 4 to talk about sustainability, another key priority for ITT. In September, ITT released the second supplement to our 2019 sustainability report, demonstrating the Company's progress on our environmental, social and governance practices. We are continuing to integrate ESG into our business strategy and the day-to-day operations of over 10,000 ITTers. Some highlights from the report to note: we drove a 25% reduction in greenhouse gas emissions and a 23% reduction in waste sent to landfills, with 25% fewer workplace safety incidents. We are expanding investments in guarantee of origin certificates throughout our European locations to increase ITT's share of electricity from renewable sources. We are investing in more sustainable product technologies, especially in our pump business, building on the success we have achieved in ITT's copper-free brake pads. As we conduct our operating plan reviews for 2022, ESG continues to be a key element of the leadership team's mandate, and there is much more for us to do. Let's now turn to Slide 5 to highlight our capital deployment progress in 2021. Thus far, we have deployed capital in an amount nearly 3x our year-to-date free cash flow across all our capital deployment priorities. Our CapEx for the year is approximately 3% of revenue through the third quarter. We've invested in capacity in our Friction plant to support the share gains achieved with new and existing customers as it relates to the accelerated transition to electric vehicles. We also continue to execute value analysis and value engineering to reinvigorate our product offerings in Industrial Process and Connect & Control. From the inception of this initiative in 2018, we have commercialized more than 100 different pump models, representing 23% of our total product portfolio. In addition, we completed a redesign for more than 30 additional pumps ahead of their commercial release. We have only begun to scratch the surface with more than 70% of the product offerings still to be addressed. As an example of this effort, following the success of our BB2 pumps, our year-to-date order growth for our recently redesigned magnetic drive pump is 40%. The VA/VE announcements resulted in increased performance, better reliability, and shorter lead times. Regarding our other capital deployment priorities, we increased our dividend rate by 30% after 15% the year before. This represents an annual dividend yield of approximately 1%. Our share repurchases this quarter will drive a 1% reduction in our weighted-average share count for the full year. We will continue to drive repurchase activity in the future and our existing $500 million authorization. And lastly, as we discussed last quarter, we divested our legacy asbestos liability to a portfolio company of Warburg Pincus. This has reduced ITT's risk profile and allows us additional capital flexibility. To accelerate our M&A activity, we're investing in our capabilities. I'm happy to welcome Bartek Makowiecki to ITT. Bartek leads strategy development and will drive all merger and acquisition activities, including ITT's newly launched corporate venture vehicle. On this front, we made one initial venture investment in Q3 for connector-related assets. And we have a growing pipeline of leading technologies to enhance our existing product portfolio. We have stepped up our M&A pipeline and cultivation activities and are looking forward to bringing great companies into ITT in the near future. Let me now turn the call over to Emmanuel on Slide 6 to provide further color on our third quarter results and 2021 outlook. Emmanuel, over to you.

Thank you, Luca, and good morning, everyone. As mentioned, Motion Technologies once again achieved solid performance, largely thanks to the strength in the Friction aftermarket. In our OE business, Friction's market outperformance surpassed 1,000 basis points this quarter, notably above our historical average, despite significant declines in global auto production. For the entirety of ITT, we estimate that supply chain disruptions reduced our sales growth by approximately 350 basis points this quarter. However, we anticipate recovering most of the delayed sales in the upcoming quarters. We also experienced double-digit organic sales growth in IP short-cycle and sustained strong demand for industrial connectors. Similar to Q2, we are noticing increased demand in commercial aerospace, illustrated by a 70% growth in aerospace orders. Regarding segment margin, CCT increased its margin by 300 basis points, while IP saw an increase of 150 basis points, although MT's margin declined by 110 basis points, primarily due to raw material inflation. We managed to overcome a 470 basis point inflation headwind to achieve a 60 basis point adjusted segment margin expansion. On adjusted EPS, despite the difficulties highlighted by Luca in his introduction, we achieved a $0.42 operational improvement year-over-year, driven by higher sales volumes, strategic pricing actions, and overall productivity. We continue to benefit from earlier restructuring, including our 2020 cost action plan, while also carefully managing the unwinding of temporary cost actions from 2020 to align with the pace of ITT's recovery. Turning to cash, we achieved an adjusted trailing 12-month free cash flow margin of over 11% this quarter, attributed to higher segment operating income. On a year-to-date basis, excluding the asbestos payment in Q2, our adjusted free cash flow saw a decline due to strategic investments in working capital. As I mentioned previously, our operational performance this quarter was largely operationally driven. Our year-over-year growth was significantly affected by a $0.23 headwind linked to raw material inflation and a $0.09 headwind from prior year environmental settlements and temporary cost actions. Partially counteracting these factors was about a $0.04 benefit from foreign currency. We also noted a slightly lower effective tax rate compared to the previous year, resulting in over a $0.02 benefit, thanks to effective tax planning strategies related to our patent portfolio internationally. We now anticipate our full-year effective tax rate to be approximately 20.75%. Moving on, Motion Technologies achieved 20% organic revenue growth in Q3, mainly driven by the aftermarket, as the Friction OE business saw a slight decline due to supply chain headwinds affecting OEMs. This and raw material inflation also negatively impacted our operating margin, as we had anticipated last quarter. The Friction team is actively working with our customers to implement equitable price recovery initiatives, considering the significant inflation we are currently facing. We successfully passed price increases to our customers this quarter while managing the effects of contractual price concessions. However, there is still much to be accomplished to offset the inflation we are observing. Our Motion Technologies team will continue to systematically implement incremental pricing actions in Q4 and throughout 2022. We also faced notable production inefficiencies due to significant variations in customer order patterns. Nevertheless, similar to last quarter, our Friction OE business maintained over 99% on-time performance across all Friction plants. In this challenging economic environment, Friction continues to be recognized as the highest quality and most dependable supplier in the market. In KONI, we are making strides in improving our quality performance and are committed to serving our customers amid supply chain disruptions. Furthermore, we are continually assessing strategic footprint actions and announced an additional plant closure in Europe this quarter, aimed at enhancing cost competitiveness within our rail business. In the Industrial Process division, we achieved an 8% organic revenue increase, primarily driven by strong short-cycle demand for parts, valves, and services. This quarter required intense coordination and effort from the IP team to navigate through supply chain disruptions. Our all-hands-on-deck approach proved effective. As previously mentioned, the project funnel is expanding, with IP capturing a significant share, evidenced by a 36% organic order growth in projects this quarter. We foresee this positive momentum continuing, with expectations of similar year-over-year growth in Q4. IP margin improved by 150 basis points to 15.6%, with an incremental margin of 33%, due to increased sales volume, a favorable mix from higher short-cycle sales, productivity gains, and pricing, although partially offset by labor and material inflation and elevated freight charges due to shipping delays. Like MT, we are progressing in footprint optimization, having executed one plant closure during the quarter, with another plant closure in Brazil planned for Q4. In Connect & Control Technologies, we are continuing to see improvements in both sales and margin. With an incremental margin of 35%, CCT achieved a segment margin above 17%, marking a 300 basis point increase year-over-year. The margin growth resulted from consistent volume leverage and strong productivity, including restructuring savings, despite facing inflationary pressures. This margin performance is nearing pre-pandemic levels, albeit with roughly $20 million less in revenue. While there remains work to solidify this performance, we are encouraged by the team's efforts thus far, which boosts our confidence in CCT's future prospects. Now, let’s highlight the growth in orders in the third quarter. Our teams have effectively captured demand, leading to strong order growth in Q2 and Q3. Noteworthy highlights include our continued success in winning new awards for conventional OE, hybrid, and new electric vehicle platforms in MT. Our ability to dominate EV competitions we enter is crucial for establishing the long-term growth platform Luca referenced. In Industrial Process, we anticipated strength in short-cycle demand, which is materializing. More promising is the order growth and ongoing recovery in long-cycle pump projects. We are seeing increases in both the number and size of orders in our funnel, along with consistent sequential order growth throughout 2021. This is the result of our unrelenting focus on being customer-centric and achieving operational excellence, which is increasingly acknowledged by our OE customers. Furthermore, CCT orders increased by 40% organically, driven by our connector portfolio's strength, particularly in North America. The strong commercial connector performance, especially with our distribution partners, is encouraging, and we are working to replicate this positive momentum across all our customers. We are also witnessing a gradual recovery in commercial aerospace, which will further enhance CCT’s sales growth in the coming years. CCT's backlog has risen 17% organically, amounting to $40 million since year-end, with a book-to-bill ratio of 1.06. This marks a significant improvement for CCT compared to the previous quarter. With this context, we now turn to our full-year outlook. Over two quarters, we have adjusted our organic sales outlook upwards by 600 basis points and raised our adjusted EPS estimate by $0.37 against the midpoint of our initial guidance. Given our strong performance, we are raising the midpoint of our adjusted EPS range again by an additional $0.06 to reflect better-than-expected results and a lower tax rate. We do not foresee any immediate relief from market headwinds. Nevertheless, in 2021, we expect to confidently exceed pre-pandemic adjusted EPS levels. Looking ahead to Q4, we anticipate it will generate the strongest revenue of the year, driven by IP and CCT. IP is projected to grow revenue in the low single-digit range, while CCT is expected to achieve mid-teen percentage revenue growth. Facing a difficult comparison after last year's strong Q4 and the ongoing effects of constrained OEM demand, MT revenue is expected to decline by mid-single digits in Q4. However, we expect to outperform the global auto market significantly. Collectively, this is expected to lead to organic revenue growth that is approximately flat to slightly up in Q4. In terms of segment margin, we forecast all businesses to expand sequentially, with CCT projected to grow triple digits and IP to build upon its strong Q3 performance. Year-over-year, we expect segment margin to increase by approximately 50 to 75 basis points. Due to an exceptionally strong Q4 last year, Q4 adjusted EPS is anticipated to grow in the low single-digit range year-over-year, contributing to a full-year adjusted EPS above 2019 levels. With that, let me pass it back to Luca.

Thanks, Emmanuel. Let me wrap it up. First, ITT has performed extremely well in a challenging climate. We fought through adversity, and we're winning in the market. Second, we have a resilient set of businesses that have demonstrated repeatedly the ability to effectively manage multiple external factors while investing in long-term growth. We delivered strong growth in revenue and margin while not all of our markets have fully recovered yet. Third, while we are continuing to invest for long-term growth and sustainability, our funnel of opportunities is increasing, and the growth in orders throughout 2021 will pave the way for continued outperformance. Lastly, we have deployed over 2.8x our year-to-date adjusted free cash flow through our asbestos divestiture, dividends and share repurchases. And we are increasing our focus on M&A, we are in a favorable position to execute acquisitions given our balance sheet strength, and we are growing our pipeline and expanding our target cultivation activity. As I said earlier, there is a lot to be excited about at ITT. As ever, it has been my pleasure speaking with you all this morning, and we will happily take your questions now. Catherine, please open the line for Q&A.

Our first question comes from Scott Davis with Melius Research.

A lot of great detail in the comments, but maybe I'll start with Bartek since he's brand new. What's the mandate? I mean, you have such a broad product portfolio. How do you kind of focus it in and narrow down to what you most care about or whatever you're willing to publicly talk about as far as what you'd like to see Bartek accomplish in his first year or so?

Sure. So Scott, let me get this straight. On M&A, we have been slower than we anticipated. We have not been sitting and we deployed our capital with a very strategic deal like asbestos in the last quarter. But now with this behind us, the addition of Bartek Makowiecki, we are accelerating our actions on cultivation and on target. So we are active on rail in the pumps and valves, and we have few things on the CCT front as well. Bartek is also responsible for our venture capital initiative that we initiated in Q1 2021. And the main game on that front is really to boost innovation, to accelerate the growth opportunities to innovation, and invest in some specific technology very adjacent to what we do.

Okay. That's super helpful, actually. And then just switching to the EV awards, perhaps just a little bit of color. There's six platforms. Is that six different OEs or some number less than that? And then just give us a sense of the competitive landscape, is it the same competitors as in non-EV, or is everybody really racing to try to get on these things for obvious reasons?

Okay. I think on the EV, the level of competition that we are facing, Scott, is very similar to the one that we had in the traditional internal combustion engine and on the hybrid. I think that on the customer side, it's different in terms of that, you have different customers because there are some new players. When it comes to the specific six EV awards, these are six different OEMs and they're all in China. If I may elaborate a little bit more on the EV front and not just on the EV, Scott, but also the hybrid is important because we need to consider the hybrid as we are managing the transition to fully electric. In 2021, we probably see 20% of production in hybrid and EV. This will probably go above 30% in two years, probably above 40% by 2025. And now if you look at our percentage of market share win in the awards, which is much higher than our current market share, and you see the acceleration in EV, then you can see that this is almost like a compounding effect in our outperformance in the medium and long term.

The next question comes from Andrew Obin with Bank of America.

This is Emily Shu on for Andrew Obin. Just a question on price cost. What was price cost in the quarter for the total company? And can you talk about the pricing dynamics for each of the segments as well as how you'd expect price cost to play out next quarter?

Emily, so price cost for the overall company, this is obviously a negative impact. We made a lot of good progress in obtaining price compensation from our customers, especially in Motion Technologies, where we were net positive from a pricing recovery standpoint. This is very different from the past, and it's also different from Q2 where we were price neutral. In Q4, we expect this to accelerate also. The price/cost equation for ITT was around between 200 to 300 basis points negative impact year-over-year. We expect this to continue in Q4 and then to slowly reduce in 2022 as we are able to get compensation from our OE customers.

And Emily, building on that one, going back by different businesses. If you look at the business in IP and in CCT, these are businesses where ITT has pricing power. When you look in Motion Technologies, automotive, as Emmanuel was saying, is a different story, but it's very encouraging as we see the pictures Emmanuel described, improving quarter after quarter.

And just as a final point, Emily, just to add a little bit more detail on what Luca was saying in terms of pricing power. In IP, for instance, we already passed three price increases this year, one in January, one in July, and one in November, just recently. And they've been pretty substantial, and the last one includes also surcharges for increased freight costs. Same thing for CCT where we're passing several price increases this year.

Okay, great. And then maybe you can go sort of region by region on MT performance versus the global auto market, and then sort of I'm curious in which regions were OEM supply chains most stressed? And that will be it.

Sure. I would say the strong performance is continuing. When we look at the third quarter, the strong performance was even more significant. This is thanks to the gains in market share. We exceeded our 2019 levels in MT Friction this year, which is ahead of the market expected to recover in the next couple of years. Regionally, Europe saw a significant decline, but we outperformed by more than 1,000 basis points. In China and North America, despite the market dropping approximately 17% and 25% respectively, we actually experienced growth. As you can see, our strong performance has been notable across all regions.

The next question comes from Mike Halloran with Baird.

So I just want to continue on that line of questioning. So obviously, the outperformance has been substantial. Maybe talk about how you feel like this is going to cadence out over the next few quarters here? Where do inventory levels stand? Is the chip shortage starts normalizing over the next one year, one-and-a-half years, or whatever it is? Do you see that consistent outperformance? Maybe not what you saw the last couple of quarters, but maybe that legacy normal historical type consistent outperformance versus what the market does. Is there some sort of variance that's going to happen? I guess I'm just trying to understand how you think this plays out over the next period of time here, given the outperformance has been so stark lately? And does that have any implications moving forward? I hope that question makes sense.

We are very optimistic about our commercial performance in both MT and Friction. We have secured several new platforms in electric vehicles, hybrids, and conventional original equipment. We believe we can continue this strong performance for the next few years, as there is no indication that our situation will change from what we have experienced so far. As Luca mentioned, our strength in electric vehicles and the recognition we are receiving will have a compounding effect in the future. It's important to note that when we talk about awards, the actual production volumes typically occur two to three years after the awards are given. We are also very optimistic about demand, as there is significant pent-up demand in the automotive market because production is not keeping pace with actual demand. Consequently, inventories, especially in North America, are decreasing. By the end of the third quarter, there were about 30 days of inventory, down from more than 40 days in the second quarter. In Europe, the situation is relatively stable. We believe this bodes well for us and presents a strong opportunity for MT.

Just to clarify the inventory comment, was that the inventory for autos on a global basis? Or is that more pertaining to your inventory levels at the customer level?

Yes. So those are the inventories at dealership from OEMs.

And how would you characterize your inventory levels?

Our inventory levels have been impacted by changing order patterns, which required us to accumulate more inventory. This situation is affecting our working capital. However, there are no signs from our customers that they are building inventory that would influence future demand.

The next question comes from Vlad Bystricky with Citigroup.

Could you provide some insight on the Friction and platform wins you are experiencing? You mentioned that production ramp-up typically occurs two to three years after these platform wins. How should we think about pricing and margins for these wins, especially considering the volatile input costs in the market? Do you have strategies in place for these new wins to safeguard your margins as production volumes increase over time?

I think this is not a significant challenge at the moment, Vlad. When we quote on the new platforms, we are currently using the existing prices, which indicates that we may benefit when inflation decreases in one or two years. We are in the process of negotiating with all our customers due to an unprecedented level of inflation, which goes beyond the usual terms and conditions. The real challenge lies in shifting the mindset, culture, and skills of our organization. In the automotive sector, there has been a long-standing practice of providing fixed pricing for 20 years, and now we face a different situation. Therefore, we need to train our team and equip them with the right tools to engage customers in negotiating price increases. This is likely our biggest challenge.

That's helpful. Could you discuss the current status of distributor inventory and the industrial process? Are we still seeing a relatively balanced sell-in and sell-out, or do you believe there are benefits from any restocking trends?

We're very pleased with our orders in industrial process, which increased by 26%, showing broad-based growth. This was also higher than what we experienced in Q2, and we anticipate this trend to continue into Q4. So far, there are no signs that this growth will halt in 2022. We're particularly satisfied as this success comes from both short cycle and project orders. While your question pertains to the project aspect, regarding short cycle orders for our baseline pumps, we have not observed any signs of our distributor partners building stock. Instead, we are finding it challenging to meet the rising demand, which has made the supply chain quite tense.

Yes. And if we can add to that, Vlad, I'm going to meet all the distributors next week in California of the GDPWW. And the discussion on the agenda is really how we can respond faster, how we can increase our throughput because of the demand that they're seeing. So no problem on the inventory level.

The next question comes from Damian Karas with UBS.

I wanted to ask you about IP projects. You mentioned you're seeing positive signs and gaining some market share on some of these long-cycle project awards. Obviously, back in the project, heide, that was an area that became a little bit challenging with respect to profitability. So I'm curious what the framework is through which you're looking at these projects, Luca? And how should we think about the impact that they'll have on your margin profile as you deliver on them over time?

Sure. Thanks, Damian. Firstly, regarding project orders, we have experienced an increase for the third consecutive quarter. As we mentioned last quarter, we are picking up momentum, and we are currently seeing a 36% rise in projects compared to last year. This growth is also linked to our success with engineering-only orders that we discussed last year, and now those efforts are coming to fruition. Our pipeline of opportunities is expanding, meaning that projects will play a larger role moving forward. While there may be some pressure on profitability due to a less favorable mix, we have established a framework to execute these projects profitably. This involves the way we win and manage them, including project reviews. Additionally, our initiatives in value analysis, value engineering, and footprint consolidation are aimed at enhancing the profitability of these projects. Our cost management strategies and diligence in executing them will help ensure improved profitability compared to the past.

Okay. Great. That's helpful. And Emmanuel, I believe you made a comment earlier on the 40% organic growth in Connectors orders and how you're looking to replicate some of the distribution partner successes you've had. Could you just elaborate on that comment and what you mean by that?

Today, much of our success is attributed to our distribution efforts in North America. Our goal is to replicate that success in Europe and Asia Pacific. We have recently appointed a new General Manager for our European Connector business who will focus on driving this initiative. We've seen some positive developments in this area recently. Our priority is to revitalize our relationships and improve execution with our distribution partners outside of North America. In addition, we aim to enhance our customer relationships and replicate our success with OEMs. Over the years, these relationships have weakened slightly, and maintaining close contact with them is crucial for ensuring our Connectors are selected for future applications. To support this, we are collaborating with them to refine and enhance our product designs, and as mentioned, we are also implementing value analysis and value engineering initiatives within our Connector business.

And Damian, I want to elaborate on what Emmanuel mentioned. It's not just about bringing Ellen on board, as she is indeed a tremendous asset to the organization. Ryan and the team have reorganized the Connector business globally. Previously, it was managed in the U.S. from California, which didn't allow for a close understanding of customers in Germany, Europe, or China. Now, Ryan and the team have established a regional organization with offices in Europe, the U.S., and China. This structure allows them to work closely with customers while still collaborating interdependently. This represents a significant transformation.

The next question comes from Bryan Blair with Oppenheimer.

You mentioned the rail facility consolidation and some other footprint works that's underway, how should we think about the timing and level of cost savings going forward?

In terms of consolidation, we have just announced that it will take some time to realize the full benefits. I would expect this process to take approximately four to six months before we start seeing savings from this facility. The same applies to the IP facility. You can anticipate the impact to begin in the second quarter of next year, with a full ramp-up in the latter half of 2022. This is a structural and long-term strategy, but it will significantly benefit us in 2022.

Okay. Understood. And maybe offer a little more color on the M&A environment and specifically seller expectations and valuation. And Emmanuel, with asbestos off your balance sheet and a cleaner perspective on leverage calculations, what do you think of as current or near-term dry powder, however you would frame that?

So when it comes to the different areas, we are, as I said, very active today in the cultivation, in the target and in analyzing some companies. The main areas where we are active right now is rail and is a worldwide effort. We believe, in the rail business, think about the possible positive impact coming our way from the infrastructure spending here in the U.S., but also from the focus on the environment; this will have a positive impact on our rail business, both for passengers as well as for freight. Then we see the valves business is an interesting space for us and also on the pumps, but bear in mind, not playing the consolidation game in the pump. And then there are also areas in CCT that will be interesting to us. If you think about it, our first investment in venture has been actually in the connector space in an area where they're really differentiating, enhancing our products, differentiating our products together with theirs in the Defense and Aerospace business.

Yes. This is a highly competitive market, but we believe there are many strong companies we can add to our portfolio without paying excessively. As Luca mentioned, we are actively pursuing opportunities, and this has intensified with Bartek's arrival. The advantage we have is that we don’t have to prioritize where to invest our capital. This year, we have invested $100 million in stock repurchases without sacrificing our M&A strategy. We still have more than $2 billion available for M&A while keeping our investment-grade rating intact. Therefore, we have numerous opportunities ahead of us.

The next question comes from Jeff Hammond with KeyBanc.

Just on the buyback, I'm just wondering if this is kind of a change in approach around the asbestos being behind you or was more opportunistic around dislocation in the stock or just maybe how to think about buybacks differently here going forward?

Yes, I think you will see us taking a more aggressive stance on buybacks, although not excessively so. So far, we've repurchased over $100 million worth of shares, which is roughly 1% of our outstanding shares. I expect this trend to continue because our main focus is on mergers and acquisitions, and buybacks will follow that priority. Yes, so in CCT, I mean, you guys have done a lot of work there through kind of the downturn, and now we're seeing the inflection here. I think the incrementals were mid-30s in a tough environment. Just how should we think about incrementals here over the next couple of years in CCT as Aero, in particular, recovers? Yes, I believe you are correct. Aero will significantly enhance our incremental gains. As I mentioned, we are already close to pre-pandemic levels despite having $20 million less revenue per quarter. So will we reach pre-pandemic margin levels sooner than anticipated? Definitely. We are fortunate that CCT has the highest incrementals within ITT's portfolio. I expect this to be very beneficial for CCT as we aim for our margin target in the high teens. However, I want to temper that expectation because there are still many investments required for CCT. We've discussed value analysis and value engineering, but there's also substantial fundamental R&D needed, which will impact margins. Nonetheless, the incrementals look very promising.

The next question comes from Joe Ritchie with Goldman Sachs.

So just a few quick ones for me. Just the Friction aftermarket growth, 70%, I mean, it's my calculation, it seems like it drove most of the year-over-year growth in MT. I'm just curious like what happened this quarter? Why was it so strong on a year-over-year basis?

Sure. So let me take that one. So obviously, Joe, there are some easy compares if you think about the 2020 in terms of the COVID year. But also think about it, we play the aftermarket mainly in Europe. And what has happened if you look at also sequentially, also that year-over-year is that Europe was coming out their vaccination in Q2 and therefore, in Q3, they were coming out the vaccination, they were coming out of the lockdowns, and therefore, people traveling. So this is what pushed the aftermarket tremendously. And on top of that, I will also say that a lot of the dealers, with less sales coming from the OE, they really pushed for service. All of this, combined with the award that we won together with Continental, the Arctic brand by ADAC, which is a very established German certification, all of that helped our growth. The growth is both on the independent aftermarket as well as on the OES side. So we expect, at the end of the year, to have a very healthy double-digit growth for aftermarket.

Yes, that's super helpful and great to hear. I guess just on the 350 basis points that got pushed out this quarter, is it fair to say that most of that came in the Friction OE business? Or did it affect other parts of the portfolio as well?

So Joe, most of the delays were actually in IP, amounting to around $15 million. The 350 basis points represents roughly $20 million, with $15 million of that related to IP. This was caused by issues with castings and frames from the auto region that significantly disrupted our operations. Once we received those components, we needed to reorganize our labor to effectively process them. A significant portion of the issues stemmed from IP, and we also faced continued challenges with Wolverine as well as some minor plating issues with our suppliers for CCT. Overall, we anticipate recovering from this, and nothing is coming out of our backlog. We expect to see recovery over the next few quarters.

So to frame it, Joe, the 350 basis points are our supply chain challenges. And these are excluded completely from the chip shortage issues that our OEM customers had in MT.

Got it. That's super helpful. And then maybe my one last one. On the fourth quarter, you guys talked about margins being up 50 to 75 basis points. I guess, as I kind of think through on a segment level basis, it seems like MT likely down year-over-year but up sequentially. And then I guess Industrial Process in CCT basically consistent with 3Q? Is that kind of the way to think about it?

Sure. I think you're right. In MT, we're going to see sequential improvement because of the incremental pricing we're getting in Q4 compared to Q3. And IP probably pretty in line with Q3. And then CCT, just a small progress. As we benefit from all the efficiency actions we're taking, this is allowing us to improve also CCT's margin sequentially.

The next question comes from Matt Summerville with D.A. Davidson.

Just two quick ones on MT. First, if input costs sort of stay where they're at and don't rise further, can you achieve price-cost parity in that business, given how the auto industry sort of functions from a contractual standpoint? And if so, when would you expect to be in parity?

Yes, I think we can, but it's a question of timing. It's going to take a long time. Because right now, we stopped giving any price concession in Q2. We started recovering and getting the price increases in Q3. We're going to do more in Q4. But to be honest, this is very, very difficult. And so it requires a lot of negotiation, a lot of interactions with our customers. So it's going to take several quarters for us to get there. And just keep in mind that for 2022, in terms of raw materials, we're not expecting inflation to get worse, but we do expect a year-over-year negative impact, especially in the first half, where we benefited from a lot of the steel bookings that we did at the end of 2020 and that positively impacted our first half of 2021.

The math when I look at the ITT portfolio, it's a good portfolio and the businesses where we have pricing powers are really CCT and IP. This is where we have more pricing power, and this is probably where we're going to end up using it more.

The next question comes from Joe Giordano with Cowen.

We've noticed some rapid declines in iron ore prices recently. If this leads to reductions in steel prices, what would be the immediate effects on margins? How quickly would this impact your operations, considering your backlog? Additionally, how would this influence your discussions with customers in MT?

Well, Joe, we are not really anticipating a decrease in price. If you consider the broader picture, it's not only about iron ore but also the energy costs, which are significant issues this year. It's likely that energy prices will increase. Furthermore, every industry is undergoing a transformation toward greener practices, like green steel. So, we are not expecting prices to drop. Currently, our discussions with different original equipment manufacturers are focused on price increases. As Emmanuel noted, we aren't at parity yet. Therefore, even if there are any price shifts, I don't expect to see that challenge in the near future.

Okay. Fair enough. One thing I found interesting was the sequential increase in bookings at IP, while it wasn't the case for all your competitors. Can you discuss what is driving that increase sequentially? Are you noticing any uptick in project bookings? I'm also curious about the energy sector specifically.

Sure. You're correct. Orders in IP increased by 6% sequentially, which is quite positive. Most of this growth came from short cycle activities. Project bookings saw a moderate increase of about mid-single digits. A significant portion of the increase was related to our baseline pumps, which are higher-margin products for us. We're pleased to see this growth as it positively influences our product mix, even though it may be short-lived. In terms of market performance, we observed strong results in general industrial, oil and gas, and chemicals. Although mining was slightly lower, we have recently experienced good performance in that sector.

I believe that when I consider a couple of the factors behind it, in terms of the baseline, it's a short cycle, and much of that is related to our distribution. Our distribution serves as a key differentiator for IP, and it is admired by our competitors. This is certainly a positive aspect. Additionally, I want to remind you that until the first quarter of 2021, we were achieving over 90% on-time delivery. Currently, however, we are not even close to that level. Nonetheless, by maintaining close relationships with our customers, we are managing the situation effectively. We have a clear understanding of the demand, and we are addressing it accordingly.

Our final question today comes from Nathan Jones with Stifel.

Question on the IP regarding the project side of IP. Typically, during downturns, capacity tends to follow volume, which leads to pricing issues. However, considering the current supply chain constraints and improving demand, it seems that now demand is following capacity. Does this situation present an opportunity for higher margins and potentially better IP margin performance on the projects that are currently entering the backlog and over the next few quarters?

I think you are absolutely correct. You have a good understanding of the situation. This is actually something we will discuss with IP in the coming weeks because you are right, but I believe it may still be a bit early in the process. However, I think that is precisely what will happen. I agree with you, Nathan.

Okay. And then in Motion Tech, some of your competitors there haven't historically had the best operating metrics, margins, on-time deliveries, and could probably be even more challenged in the current environment. Does that really highlight the customers the differentiation of ITT and potentially present even more share gain opportunities for you than you've seen over the last few years?

I think that three things that really differentiating ITT from everybody else was: A, the level of quality, the level of consistency. The consistency you have across every single plant around the world, the performance on-time delivery, all of that is differentiation and the thing that it will keep on happening, I would say. We haven't seen any change at front. One thing that I believe is going to help even more Motion Technologies and differentiation is our R&D, is our material science and our people that have been able to come up with the right mix with the right material knowledge and with the EV, for instance. And this is why we're winning more in the EVs and our market share win in the world is higher there. That is probably the differentiation that is more valuable today.

And then one last one. I haven't heard an update for a while on Smart Pad. I know a lot of the investment dollars over the years have gone into Smart Pad. Can you give us an update on where that is in development and when potentially it could go into operation?

Sure. We have the product. It's been finalized in, I would say, in 60% of these capabilities. And we are still working with some OEMs in terms of the testing. And being a safety component, there are a lot of tests that the OEMs and the Tier 1 need to feel comfortable with before putting it on a platform. But we are actively discussing with a couple of OEMs and the one specific Tier 1 today.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.