Welcome to ITT's 2021 Fourth Quarter Conference Call. Today is Thursday, February 10, 2021. This call is being recorded and will be available for replay beginning at 12 PM ET. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations. You may begin.

Thank you, Charlie, and good morning. It's my pleasure to welcome you to ITT's Fourth Quarter 2021 Earnings and 2022 Outlook Conference Call. Joining me here this morning as always 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 and 12-month period ending December 31, 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 obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. Except where otherwise noted, the fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2020, based on non-GAAP financial measures. These adjusted results exclude certain non-operating 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 for the full year 2021 are detailed along 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. It is now my pleasure to turn the call over to Luca, who will begin on Slide 3.

Thank you, Mark. And good morning. 2021 was a challenging year. And I would like to thank our shareholders, our customers, and our suppliers for their continued support and investment in ITT. I'm humbled by what our team accomplished in 2021. Thanks to all our ITT employees, the shop floor employees who have been continuously working safely day in and day out, while diligently following our health protocols, and our teams in the office that have been at work in person since May 2020 despite the challenges we all know. At ITT, it is our firm belief that we're all in this together. As we strive to make ESG an integral part of our business model, safety is the number one priority. Building on our progress in 2020, more than 50% of our facilities had zero incidents for the previous 12 months. We continue to improve our safety performance this year; our injury frequency rate and our injury severity rate both declined compared to 2020 despite more output. We will continue to drive better safety performance with diligence and passion across all our sites. Our focus will deliver a better and more sustainable operational performance over the long term. And above all, it is simply the right thing to do. Before discussing highlights from 2021, let me share some details about the environment we've been living in over the past few months. Like most industrials, our operations have been significantly constrained by supply chain disruptions. During Q4, I experienced firsthand the mess the global supply chain is in today. When I was in Germany just before year-end, the team there had to deal with a brand new machining center for contacts that was idle just because the semiconductor chip was missing. We were also impacted by heavy absenteeism as COVID infections hit our shop floor employees at record high numbers, especially in our sites in North America and Europe. Backup plans kicked in, the resilience of ITT went into high gear, and senior management joined the team on the shop floor, including Allen, our GM in Europe, who worked to ship to customers over the holidays. Thank you, Allen. Despite all this, ITT delivered solid fourth-quarter results. Our full-year operating margin and adjusted EPS far surpassed 2019 pre-pandemic levels. This is resilience. Moving to demand, demand is strong in all our end markets. ITT innovative products and technologies drove a 20% increase in organic orders for the full year with broad strength across all three segments. 10% organic revenue growth includes 21% growth in auto with strong outperformance. This is remarkable when considering the demand volatility created by the chip shortage in the second half of the year. We saw 20% organic growth in ITT’s reignited connector business. On profitability, with a lead of 16% operating margins, 120 basis points above 2019 and a new record for ITT, we worked hard to overcome $18 million of raw material inflation with price and productivity. We continue to invest in growth and innovation in friction to support new automotive braking platforms, in connectors to expand our product offerings, and in industrial processes to redesign our pump portfolio. Notably, research and development expense has once again gone over 3% of sales this year, as it has been for the previous two years. Lastly, on capital deployment, we deployed $600 million in 2021 on dividends, ITT share repurchases, and the strategic divestiture of asbestos. These amounted to two times our annual adjusted free cash flow in 2021. Overall, we believe a 27% growth in adjusted earnings per share versus 2020 and 6% growth versus 2019. In the fourth quarter, which was the worst environment we saw all year from a supply chain perspective, we continued to execute pricing actions to counter over $0.30 of raw material headwinds. We executed with an all-hands-on-deck approach like Alan to deliver for our customers, generating adjusted segment operating margin that exceeded 18%. A significant part of the improvement came from CCT, which grew over 500 basis points at an incremental margin of 60% to 18.4% segment margin. Looking ahead, the Q4 challenges will persist in 2022. Still, we've been capturing the strong demand and more in all our businesses to power ITT’s revenue growth in 2022. These will support the expected 10% organic sales growth, while continued productivity and pricing actions will drive nearly 100 basis points of segment margin expansion. Together, our performance will drive earnings per share growth of 11% at the midpoint of our 2022 guidance. Our adjusted free cash flow margin will be approximately 11% as strong income generation is tempered by increased working capital requirements taken to support our customers. As I mentioned earlier, our guidance assumes that supply chain challenges and higher raw material prices will persist at least through the first half of 2022, modestly easing in the second half of the year. If market conditions improve sooner than we anticipate, there is a path towards the upper end of our guidance, which Emmanuel will discuss further in a few minutes. For 2022, I want to highlight three main points related to ITT’s priorities. First, our products are winning in the marketplace, as seen in the order rate and the backlog today. Organic orders growth for the past three quarters was 47%, 27%, and 10%, respectively. This drives an 18% increase in backlog that will convert in 2022 and beyond. We are seeing growth based on demand across industrial processes in our long-cycle pumps business, and across our short cycle offerings. The project funnel continues to increase, and we are seeing larger opportunities emerge. Orders in connect and control are increasing with a gradual recovery in commercial aerospace, showing strong organic growth for the second straight quarter. Our connectors continue to grow in the marketplace alongside the EV infrastructure build-out, helping our CCT backlog to grow 16% organically for the year. In Motion Technologies, we continue to position ITT as the brake pad supplier of choice to OEMs, including electric vehicle manufacturers around the world. We won content on 33 electric vehicle platforms in 2021, with Ford, Rivian, and Tesla, among others. This and our leadership in EV platforms will drive long-term sustainable growth as the transition to electrification gains momentum. Second, we are accelerating innovation across ITT. We see the benefits of leaning into our EV initiatives as well as in IP and CCT, where we are advancing the VAD activities across our portfolio. We are increasing our growth CapEx to support customer demand and wins, and are ramping green CapEx investments to further our sustainability initiatives globally. Lastly, we are carving out and cultivating certain disruptive technologies, where we see upsized returns to ensure these initiatives receive the investment and attention they need over the long term. Third and finally, ITT is poised to execute strategic and accretive M&A in 2022. We have a revamped M&A team, a solid strategic focus, and plenty of firepower to deploy. With asbestos out of the way, the number and size of deals we're looking at are increasing and the team is ready. This is on top of our share repurchase plan and the 20% increase in our dividend. Capital deployment continues to be a top priority for 2022. Let's turn to Slide 5 to preview some of the most exciting wins across ITT in 2021. ITT operates in end markets that are poised to grow over the next several years. Rail, supported by our shock absorbers and couplers, will become even more important as public investments increase to support a greener and more sustainable world. Similarly, the rapid rise of electrified vehicles will further bolster global automotive production and the demand for our braking products. Our aerospace business is at the forefront of a long-term recovery as people resume traveling domestically and internationally. Our connectors business is actively participating in a world where electrification and digitization are taking over. Our pumps and valves are already playing a significant role in energy markets as we build a greener future. Regarding future growth platforms at ITT, our global OE market share for our friction business is up considerably compared to 2020. Electrified vehicles in 2021 represented more than 20% of friction sales. We will grow these to over 30% over the next two years. KONI won its first award for our new Hydroride product for the defense sector. This solution offers better handling capability for military vehicles as they travel over rough terrain. Wolverine launched a groundbreaking new development tool that simulates shim performance. This is a great example of customer-centricity that will improve R&D efficiency for our customers and internally within ITT. In Industrial Process, our i-ALERT platform was selected to monitor 270 pumps over 5,000 miles of pipeline in the U.S. The algorithm-driven asset intelligence solution will enable predictive monitoring of customer pipeline pumps and the identification of issues and potential failures, while providing recurring revenue for IP through service subscriptions, pump repairs, and upgrades. We also had notable wins related to the new semiconductor plant projects in the U.S. which added more than 200 basis points of growth to IP orders in 2021. Finally, in Connect and Control, we were awarded a contract to provide actuators for the A321neo. This is a multiyear agreement beginning in 2022 on a growth platform used by leading airlines worldwide. In summary, we have positioned the company for strong performance with the backlog and share gains generated in 2021. We're driving innovation across the portfolio and accelerating our capital deployment plan with a smart and strategic approach across our businesses, and plenty of firepower to deploy. I'm really excited about the year ahead. And, Emmanuel, over to you.

Thank you, Luca, and good morning. Looking at the quality results, motion technologies’ sales growth was tempered by an unusually strong Q4 in 2020, when friction OE grew 19% organically, and due to the ongoing OE chip shortage this year. Vehicle inventory levels remain at historic lows in North America and Europe. We suggest that as the chip situation improves, growth will accelerate in MT. The team in MT continues to drive price realization in partnership with our customers. Price was a positive 250 basis points in the fourth quarter, as Luca and I can tell you, this is not an easy task. It shows the persistence of our team and the value our customers place on the performance and quality of our brake pads. Despite our efforts, we estimate that supply chain disruptions lowered top-line growth by over 450 basis points, with the most pronounced impact being in industrial process. Based on what we saw in January, this dynamic is continuing into 2022. In Connect and Control, strength in distribution and conversion of our healthy backlog drove a 26% organic revenue increase in connectors. Our teams drove productivity in the quarter of roughly 350 basis points through a combination of shop floor and sourcing actions, which partially offset 500 basis points of material inflation. As Luca mentioned earlier, margins and EPS were impacted by higher growth investments, which we are always happy to do. From an earnings perspective, we grew EPS by 5% versus 2020 and 7% versus 2019, despite having 5% less revenue. Growth investments were more than offset by lower share counts, foreign currency, and tax rate. While our segment operating income was higher, our working capital requirements due to the supply chain disruptions continued to weigh on our free cash flow generation. Still, we delivered an 11% adjusted free cash flow margin within the range of our previous outlook. We are consciously investing in working capital given the supply chain disruptions. Now let’s turn to slide 11. I want to highlight a few additional points from Q4, which will impact our outlook for next year. First, in MT, the lower vehicle production we saw this quarter was due to year-end customer planned closures that occurred ahead of schedule in Q4 due to the chip shortage. This stands against a very strong production in Q4 of 2020, as we were exiting the first wave of the pandemic. We also experienced delays in the start of production of some new auto platforms, mainly in Europe. Our friction business was exemplary with 100% on-time delivery despite supply chain disruptions. On the commodity side, inflation impacts increased sequentially in the fourth quarter above our expectations, and we expect prices to remain at these elevated levels at least through the first half of 2022. This will cause a significant year-over-year headwind, particularly in MT. Industrial Process top-line growth was constrained by supply chain despite strong demand across project and short cycles. We are encouraged by the demand we see in orders given the sequential increase every quarter in 2021. As a result, we are entering 2022 with significantly higher backlog. Still, the challenge continues to be the timely conversion of these orders. ITT’s margin expanded 70 basis points to 15.8%, driven by favorable mix from the higher proportion of short cycle sales. This was partially offset by labor and material inflation, as well as expedited freight charges. The latest footprint optimization action we announced in Brazil was completed successfully this quarter and will provide savings into 2022. CCT had a very strong quarter in all aspects, with orders continuing to be robust, organic sales growth exceeding 10%, and margin surpassing 18%. We see strong demand in distribution, with orders up 55% for the full year, and our distribution customers are not reporting higher stocking levels. As a result, distribution should again be a big driver for CCT’s performance in 2022. With that, we are turning the page on 2021. On slide 8, we discuss our current outlook across some major end markets. My message to you is that demand is strong across the portfolio, and we're winning in the marketplace. We see that in our backlog, our order rates, our awards, and our project funnel. The challenge we see in achieving the 10% organic growth for the full year is mainly a first-half dynamic, most prominently in the chemical and industrial verticals. In those instances, the long-term trends are very attractive, and we feel confident ITT is well-positioned here. In auto, the first half will be slower due to a combination of chip shortage impacts as well as raw material availability. But with OEM inventory at very low levels, we expect top-line acceleration in MT in the second half of 2022. Regarding aerospace, demand is improving but is still well below sales levels from 2019. We expect this market to start accelerating in the second half, coinciding with a further increase in global travel and a reduction in aero OEM inventory. Now, let’s turn to slide 9 to discuss our financial guidance given these dynamics. For 2022, we expect to grow organic sales roughly 10% at the midpoint. However, unlike 2021, we expect that all businesses will grow at a similar rate, with MT slightly above IP and CCT. Our outlook for 2022 assumes the continuation of challenges related to the global supply chain. From the segment margin standpoint, CCT will expand margins more than any other business, followed by IP. We expect MT margins to be only slightly up given the raw materials headwinds in the first half and the time to receive price recovery from customers. Industrial Process margin expansion will be impacted by the ongoing supply chain disruptions, which will continue to constrain deliveries in the first half. Additionally, the growth in IP’s project business will temper margins. However, we still expect IP to approach a 16% margin for the year after a slower first half. At the midpoint of our range, EPS will grow 11% or 16% if you exclude the $0.16 to $0.20 headwind related to unfavorable currency and an expected higher effective tax rate of 21.5%. If the supply chain disruptions improve, and raw materials inflation does not worsen, there is a path toward the high end of the range. We're planning to take further steps if this does not prove to be the case, including limiting nonessential spending, executing additional footprint actions, and most importantly, incremental pricing actions that we would expect to compensate for the higher raw material prices. In terms of the cadence for the year, we anticipate Q1 to be the toughest quarter of the year. Given the strength in the first quarter of 2021 stemming from pent-up demand in auto exiting 2020, our Q1 organic sales growth will be in the low single-digit range, thanks mainly to the growth in CCT. We expect the other two businesses will be roughly flat. Margins will likely decline to around 17% in Q1 due to first-half headwinds from elevated raw material prices. Margins will then increase on a sequential basis in every quarter of 2022. As a result, EPS is expected to decline in the first quarter in the high single-digit range. Following Q1, EPS is expected to grow on a sequential and year-over-year basis for all remaining quarters in 2022. Given our capital deployment capacity and the market pullback, we have been and will continue repurchasing shares of ITT. We expect this will drive a further 1% reduction in the weighted average share count in 2022. However, our preference remains to deploy capital to growth investments and smart acquisitions. We remain confident in our ability to execute acquisitions in 2022 given the active and growing pipeline. On slide 10, there are a few things I want to highlight; you can see that we expect to generate approximately $0.80 of operationally driven growth net of $0.70 of material inflation through a combination of backlog conversion, share gains, price, and productivity. This will be partially offset by the impact of favorable nonrecurring items, which we highlighted each quarter in 2021, as well as higher discretionary costs. Regarding raw material inflation, $60 million of the $84 million of inflation in 2021 occurred in the second half of the year. There was essentially no impact in the first quarter of 2021, which means we will see continued year-over-year headwinds through the first two quarters of 2022. I will also point out $0.16 to $0.20 of headwind from currency and tax. With that, let me pass it back to Luca to wrap up.

Thanks, Emmanuel. ITT performed extremely well throughout 2021. We reached new records for adjusted segment margin and adjusted EPS, which were both comfortably above 2019 prior to the pandemic. This would not have been possible without the resilience of our ITT employees. We are seeing demand across the portfolio continue to increase. We saw this in order rates throughout the year and exiting 2021. We are entering 2022 with a very healthy backlog of orders to convert. While we ran our capital deployment in 2021, deploying two times our adjusted free cash flow on the asbestos-based divestiture, dividends, and share repurchases, there is still much more to do with a heightened and intense focus on M&A. We are building and cultivating an active pipeline of acquisition candidates and we have the right team in place to execute these deals. Lastly, I'm happy to announce that ITT will host the Capital Markets Day for investors on June 16 in New York City. This is ITT’s first event like this since 2011 and you don't want to miss it. As ever, it has been my pleasure speaking with you all this morning, and we will happily take your questions now. Charlie, please open the line for Q&A.

Our first question comes from Andrew Obin of Bank of America.

Oh, yes. Good morning, Luca and Emmanuel, Mark. Pretty impressive operational performance by the ITT team, particularly given the volume headwinds, kudos to everybody. The question I have is how are you and the board looking at the future, specifically regarding growth costs investments? You did highlight the second point you made about raising R&D and CapEx. As you talk to the board, Luca, how different do you think the world will look over the next several years versus the prior cycle? And as I said, how sustainable should we think these increases in R&D and CapEx are, and what else can you do? Thank you.

Thank you, Andrew. This is a conversation that we have regularly with the board. We have a strategic plan review in September and October, and then every meeting with the board, we're reviewing the strategy for the different businesses. This is a discussion that happens regularly. We feel positive, as most of our businesses are at the very beginning of a growth cycle. We have good investments that will feed this growth. There is a lot of conversation on innovation, which is really the biggest topic we're having with the board and our investment in innovation. In our presentation, there is a specific venturing we are doing internally, detaching from the business, and managing it separately in order to focus and give the proper attention it needs. You've also seen our investment in external companies. We are discussing these aspects regularly, as well as the geopolitical environment and the impact of China.

And Andrew, just to put a finer point on what Luca was saying, a lot of our 2022 assumptions include a step-up in CapEx, roughly from around $90 million to more than $150 million, with some of that dedicated to growth and R&D. It is important for us to maintain the gap we have with our competition and maintain our competitive advantages. We will be expanding R&D in Italy and also in China. We have many initiatives, like Luca said, to invest in innovative products.

Thank you. And just a follow-up question. Specifically on slide 9, you highlighted supply chain disruption in industrial processes. I'm comparing your outlook on chemical and industrial pumps versus energy. What specifically are you facing on chemical and industrial pumps versus energy? Because it seems to reflect a more conservative outlook for the first half. On the energy side, is it simply a difference in the connectors? Please provide some color on what's happening in the supply chain. Thank you.

In IP, we're facing supply chain disruptions across the board. In Q4, the impact was worse than in Q3. You might remember in Q3, we had a 350 basis point top-line impact, largely due to IP. In Q4, the situation worsened, resulting in a more than 450 basis point impact. Roughly $25 million to $30 million in revenue was missed in IP, and we believe this situation may not improve until the end of the first half of 2022. These disruptions are impacting many of our end markets.

If I may add one brief point, Andrew, if we look at the Q4 revenue for IP, the most impacted was the project revenue. Our revenue for projects in Q4 was the lowest we've had in the last couple of years, whereas the short cycle had the highest revenue in the same timeframe. You're probably more in control of your supply chain when it comes to short cycles. That's the biggest difference.

Your next question comes from Joe Giordano of Cowen.

Good morning. This is Michael on for Joe. This is a two-parter. Looking at MT, you mentioned there was an asset sale that helped margins for the quarter. Can you quantify that sale and what exactly it's related to?

Yes, Michael, there are timing items that affect our results every quarter, which we highlight in the segment margins. In Q4, we had a significant one-time item in MT, including the land sale I referred to. Approximately $1 million to $2 million was above our forecasts. We included this benefit in our budgets from the beginning. This added roughly 50 basis points of margin to MT in Q4. For the full year, net of all non-operational items, the benefit is around 10 basis points, which is minimal and immaterial.

Thank you for the clarification there. One more time, you mentioned that the company is poised for organic growth. What areas are you finding most favorable at this time? And what do you see in terms of market multiples and such? Thank you.

Yes, we are ready, and with asbestos out of the way, we can focus on M&A. We have a talented and experienced team and a good pipeline with strategic deals at different stages. We're seeing a good pipeline across all three businesses, including rail, flow, and favorable opportunities in CCT on the connector side. We always follow our rigorous process to ensure we create value both strategically and financially, but those are the areas of interest.

The next question comes from Scott Davis of Melius Research.

Good morning, guys. I wanted to ask about i-ALERT, as I'm trying to get a sense of how broad that product can go. You talk about pipelines, but what are you measuring? Standard stuff: vibration, temperature, electricity usage? Is it pretty standard, and how are you aggregating that data and getting paid for it?

Thanks for asking the question because I'm very proud and excited about this win, Scott. We launched i-ALERT a few years ago; it took time to gain traction. When installed, maintenance teams at both the customer and our end need to read and interpret the data, so it took time to take hold. The i-ALERT works on every rotating equipment, meaning it can provide insights on any pumps, among other things. We have a vibration analyst engineer in our Houston pro shop who looks at data and analyzes what might be going wrong and provides reports to the customer. It measures vibration and temperature and is working on more than 10,000 routes through a partnership with a company in the Northeast.

That's helpful. Are you sending out digital twins when you send out a big project and custom pump? Is that something you're already doing or envision doing in the future?

Yes, in most of our projects, the frame is really shaped in a way that i-ALERT has got the exact position on that. It is by default.

We offer this to our customers, whether they request it or not. Over the past few months, because of the chip shortage, we haven't been able to do that necessarily on every pump. However, as supply shortages improve, we aim to put one i-ALERT for every pump that we ship.

The next question comes from Jeff Hammond of KeyBanc.

Hey, good morning, guys. Just back on MT margins, even if you adjust for the gain, you showed nice sequential improvement. I'm trying to get a better sense of how you're thinking about margins in MT sequentially. Also, on friction supply chain, we're hearing optimism from some OEMs and pessimism from others. What's your take on the auto supply chain? Is it starting to improve, and why do you think it gets better?

The supply chain in Q4 was worse than in Q3. I've noted some lines that were completely stopped either due to supply chain or absenteeism due to Omicron's massive impact in December and January. I haven't seen any improvements in Q4, and not necessarily in January. It's notable that our friction team delivered 100% on-time despite all those challenges. We expect supply chain conditions to improve towards the end of Q1 and in Q2, noting a much better second half.

Regarding 2022, sequentially in Q1 and Q2, there will be a step down from the Q4 margins for MT. We are working diligently with our customers to secure price recovery, which will compound productivity and pricing to help improve margins in the back half of the year, hopefully to high teen levels.

Thanks, guys. Appreciate the color on the change in capital deployment.

The next question comes from Vlad Bystricky of Citigroup.

Good morning, guys, thanks for taking the call. Following up on your prior response on absenteeism and Omicron, can you talk about how you're seeing things evolve now? Have you seen Omicron peak domestically? And what you're seeing from Omicron in other regions? How do you think about labor disruption impacting Q1?

As mentioned, throughout January, we saw over 200 new cases weekly, and currently, I cannot confirm that the peak has passed because we've had around 180 new cases just last week. Omicron came on strong; while you might see reports that suggest a peak, operationally, the situation is still quite high. Europe and North America have been the most affected regions.

From a result standpoint, you'll see this impact on Q1, which will be our lowest quarter in terms of revenue growth. The lack of volume will lead to lower margins around 17% for Q1 and lower EPS as well.

That's helpful color. Turning to working capital, you're exiting '21 with a higher inventory than is typical. Can you discuss how much of the increase in inventory is strategic versus challenges with working product and what you're facing with logistical challenges?

Supply chain issues have driven most of the increase in our working capital, specifically our inventory in 2021. The majority of that increase is due to the higher inventory that we secured in 2021 and will continue to do in 2022 to ensure shipments to our customers. We also expect a significant increase in activity, anticipating a 10% revenue increase at the midpoint, which will also impact working capital. We plan to invest around $155 million in CapEx in 2022 to support customer growth.

The next question comes from Joe Ritchie of Goldman Sachs.

Thank you. Good morning, everyone. I want to focus on the chip shortages for a second. Luca, what's your best guess on when some of these shortages will start to ease? Also, regarding the growth number of sales, how much visibility do you have on the amount of chips needed to ship products?

We've noted that the chip shortage is likely to improve in the second half of the year. This outlook is partly why we see MT as a tale of two halves for 2022—H1 is expected to be similar to H2 of 2021. Our forecast accounts for market growth, as experts project an 8.5% increase. While North America and Europe are growing, China is remaining practically flat. We're confident that we’ll outperform the market, as despite the problems with the supply chain and chips, we maintained 100% on-time deliveries.

That's helpful. A follow-up question: when considering your margin expectations for the year, how much of that is dependent on volumes coming through versus self-help and productivity improvements?

The primary challenge we foresee from a margin perspective in 2022 is actually pricing. This has been our main topic of discussion. We've managed to recover some pricing in 2021, but not even close to what we should have received. When we look at 2022, I'm pleased to report that we've already closed discussions on roughly 40% of our friction business, which is good news as we enter February. However, that leaves 60% that still needs to be secured, which represents a significant challenge.

The next question comes from Mike Halloran of Baird.

Morning everyone. On the IP side of the business, can you provide thoughts on short cycle versus project-oriented business from a revenue cadence perspective and how you expect orders for those two buckets to progress through the year?

In Q4, we achieved a very strong quarter for orders with a 39% increase, performing well on both the product side and short cycle. The second half of the short cycle was the strongest, and that momentum continued into January, which is an essential leading indicator. We expect project orders to be robust throughout the year as we have a healthy funnel, including significant projects in the pipeline.

The momentum in orders for 2022 should be pretty strong overall. We're planning for orders to grow on top of robust 2021 levels by roughly low single digits. The challenge remains converting those orders into revenue, particularly in the first and to some extent the second quarter.

Thanks for that. A related follow-up but broader than just IP, does your guidance assume backlog normalization to more regular levels throughout the year? How should I interpret the backlog normalization curve from your perspective?

We expect to see steady growth in IP and CCT’s backlog throughout the year. CCT, particularly in aerospace, has long-term contracts, which we'll see translate into increased backlog, even if it doesn’t generate immediate revenue.

The next question comes from Nathan Jones of Stifel.

Good morning, everyone. I wanted to follow up on the CapEx, which is greater than 5% of sales. Can you talk a bit more detail about where the CapEx is going? Are these growth investments? Is some of it refreshing the asset base? Should we expect elevated CapEx next year?

In 2022, we’re planning for $155 million in CapEx, with the majority dedicated to growth and R&D. Around 80% of this CapEx focuses on specific growth initiatives and expansions in Mexico and China, where we see increased customer demand following platform wins in our friction business. We will continue to invest in our R&D centers in Italy and China, enhancing testing capabilities and rapid prototyping.

Are these single-year projects, or should we expect a step function change in your long-term capital investment as a percentage of revenue?

We've won several easy platform projects, necessitating our capital investments—especially in North America. However, I wouldn’t consider this a step function change. We invest heavily in CapEx for friction, and this level of activity is normal.

I wanted to ask about the target to expand the CCT product portfolio. Can you discuss priority areas for adding products? Can you do this all internally, or can you accelerate product development through M&A?

It's a bit of both. On the connector side, ITT can innovate and improve, as we've done with our connector business. We're reinforcing our engineering team and giving them needed investment opportunities to come up with new products. Additionally, we’ve made investments in complementary companies and are looking for further potential acquisitions.

The next question comes from Bryan Blair of Oppenheimer.

Good morning. Circling back on capital spending, given your recent and planned CapEx in friction, how much capacity are you adding to China and North America?

We're investing capacity only after winning the awards, which is advantageous. Our Mexican plant currently has five installed lines and room for additional lines. Our goal is to reach a 40% market share in North America within about five years.

Are we looking at a higher entitlement margin for MT or CCT in the 2023-2024 timeframe?

We're happy with CCT’s financial results and on a continuous improvement journey. We have room for improvement, but as I said, you don’t want to miss our June 16 Investor Day—I'll ensure we provide proper answers then. The journey does continue.

The next question comes from Damian Karas of UBS.

Good morning, everyone. I joined late from another call, so I apologize if I missed this. I'm wondering about your sales guidance for the year. Could you outline the price impact versus volume expectations at the statement level?

The price recovery we’re considering for 2022 is over $100 million, mainly coming from MT. That price recovery will build quarter over quarter. In Q1, we have a decent chunk already planned. Luca mentioned we've secured about 40% of the expected price recovery increases. We're tasked with recovering the remaining 60%. This demonstrates the challenge ahead as we aim to offset inflation in materials and other cost categories.

The last question comes from Matt Summerville of D.A. Davidson.

Good morning. This is Will Jellison on for Matt today. I have a quick question regarding M&A. To what extent are the companies you’re examining facing material impacts from supply chain and inflation? Do you see that impacting multiples and potentially offering better prices?

Absolutely, we're observing similar impacts from supply chain in the companies we evaluate in North America and Europe. The difference lies in how well they're able to recover pricing, which tells us about their pricing power. While it's a broad-base issue, we're paying close attention to this.

This concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.

Thank you, Charlie.