ITT Inc. (ITT) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the ITT Corporation Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Melissa Trombetta, Director of Investor Relations. You may begin your conference.

Thank you, Laurie. Good morning, and welcome to ITT's Fourth Quarter 2011 Investor Review. Presenting this morning are ITT's Chief Executive Officer and President, Denise Ramos; and ITT's Chief Financial Officer, Tom Scalera. I'd like to highlight that this morning's presentations, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Please note that all historical data is unaudited and any remarks we make about future expectations, plans, prospects and other circumstances set out in our Safe Harbor statement constitutes forward-looking statements for purposes of the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in ITT's Form 10-K, as well as our other public SEC filings. Let's now turn to Slide 3, where Denise will discuss our results.

Thank you, Melissa and welcome, everyone. I appreciate you joining us as we announce our financial results for the fourth quarter and full year 2011 and provide 2012 guidance. I'm particularly excited since this will be the first time we are sharing financial performance since we completed the spinoff. And I think you'll see we are already delivering on the long-term premier metrics we announced at our inaugural Investor Day. At the same time, let me acknowledge that we understand there is a lot of information to absorb, and that this is the first time we are sharing our results as a stand-alone company. But we're confident that as the nuances of our position and our advantages become clearer, you will be just as excited as we are about our capability to drive profitable growth and create value. So with that, let me turn to the results. In 2011, we delivered solid revenue and order growth, as well as strong full year earnings, even as we executed the strategic transformation of our company. For the full year 2011, organic revenues were up 9%, reflecting market share gains in the chemical, oil and gas, power and transportation market. Organic orders were up 13% and we had a record backlog at year end. Adjusted pro forma earnings per share were up 23%, based on strong revenue growth and solid segment operating margin expansion. And in addition, we ended the year with a strong balance sheet. We have $690 million in cash, we have no long-term debt and we have investment-grade credit ratings from all 3 agencies. So this provides us a very strong foundation from which to drive future profitable growth. I'm very pleased that in 2011, we really saw the investments we've made over the past several years drive strategic wins across all of our businesses and across the globe. So let me share a few of my favorite fourth quarter examples. Our Industrial Process business generated significant wins across a variety of geographies from South America to the Middle East, as a result of our strategic investments to drive global growth in the oil and gas and mining markets. This performance has continued into the first quarter, with our exciting announcement last week of our agreement with Shell, which is the sixth strategic agreement we've signed in the last 2 years. Motion Technologies, previous investments in R&D and technology, laid the foundation for more than 16% increase in revenue as we grow globally with customers such as Ford in North America. Our decision to acquire the remainder of our Korean joint venture helped drive growth in that market, as demonstrated by a significant win in the medical connectors market. And our Control Technologies business recently won 2 key direct Embraer aerospace platforms as a result of our investment in new technologies. Now, for the future. ITT has 6 key growth drivers, that I hold each business accountable to. And these are listed on Slide 4. So let me share with you the progress we made in 2011. Our first growth driver is the emerging markets, where we grew 19% in 2011 and we also continue to expand our footprint in a significant way. Since the spin announcement, I have traveled extensively in the emerging markets, visiting nearly half of our locations, where I met with key customers, employees and other stakeholders. In December, I visited Brazil, where we completed the upgrade and expansion of our facility in Salto to better serve customers in the oil and gas, chemical, pulp and paper and general industrial market. Our expanded capabilities and localized product offering support our growth strategy in Brazil, as well as throughout Latin America. Our customers and distributors, many of whom I met during the facility’s reopening are very pleased with our enhanced ability to ensure a premier customer experience and with our commitment to the region. In addition, last month I was in China to announce a $10 million investment to produce brake pads and create an R&D center in Wuxi. With China being the #1 auto market in the world, we are well positioned to grow with our global and local customers in this important market. During discussions surrounding the announcement with employees and with customers and with government officials, we saw tremendous interest in the opportunities we have across all our businesses to support the priorities that China articulated in its most recent 5-year plan, including middle class growth, urbanization and sustainable development. In these emerging markets and across the globe, we're not only focused on new platforms, but on the highly profitable aftermarket business, which is our second growth driver. In 2011, our aftermarket top line growth increased by 12%, and it was driven by our strong relationship with customers in the oil and gas and aerospace markets. Our aftermarket focus is also evident in actions such as our acquisition of Blakers Pump Engineers, a long-time distributor of ITT's Goulds Pumps in Australia with revenues of about $27 million. With our acquisition, we strengthened ITT's capabilities and presence, especially in the oil and gas and mining markets, with a dedicated product channel and a presence that is closer and more accessible to our customers. Another growth driver is investing in technology and R&D to facilitate new platform and project wins that will drive incremental growth and secure recurring revenues. We're spending about 1.3x our peers, and we're focused on meeting our customers' most difficult technological challenges. As a result in 2011, our Motion Technologies business generated 22% of its revenue from new platform wins. And in addition, you'll continue to see innovative products from us in 2012, such as the Goulds XHD Heavy Duty Slurry Pump, which is expected to set new industry standards for performance and efficiency in global mining market; the ECO Series is the world's first comprehensive line of high-performance, environmentally friendly hydraulic shock absorbers; and our advanced connectors that serve the growing electric vehicle market. Another key strategic driver is building a premier customer experience, and many of the actions I've just mentioned, from expanding our global platforms and aftermarket capabilities, to driving new technology in our businesses is a reflection of our commitment to meeting and exceeding the expectations of our customers. Since becoming CEO, meeting with our customers across the globe and getting realtime feedback has been one of my top priorities. I recently visited 2 key industrial process customers in Saudi Arabia, with whom we recently signed a strategic agreement. One is the customer's first global agreement and a model for further expansion of this concept within their organization. I also recently met with one of our top Motion Technologies customers to discuss their priorities and our opportunity to further partner in 2012. These conversations are always valuable and they demonstrate time and again, the importance of continuing to build our long-term relationships with customers. Another area where we have seen progress is in margin expansion through operational excellence. In 2011, we achieved $90 million in gross productivity savings due to our focus on initiatives such as Lean Six Sigma and global strategic sourcing, which also drove margin improvement of 430 basis points. We are also aggressively pursuing a number of initiatives aimed at improving our operating leverage through cross segment councils, focused on global strategic accounts, advanced order configuration, supply chain and production processes and technology. In all we do, we're holding ourselves accountable to clear metrics, to measure our improvement in key areas. While there is more work to be done, we are driven by lean, value-based thinking that promotes continuous improvement and cost savings throughout the organization. And finally, we are committed to effective capital deployment to drive organic and inorganic growth. You see that in the investments we made in 2011, and the ones we are funding in 2012. We expect to make incremental capital investments in expanding our automotive platform in China, in premier customer initiative and in aftermarket expansion. Now, looking ahead to 2012. We are going to continue to build on the performance and achievement of 2011 through our focus as a diversified global industrial company. Our outlook is for organic revenue growth of 5% to 7% and an adjusted pro forma earnings per share range of $1.62 to $1.72, which at the midpoint is a 4% increase over 2011. But it is important to note that from an operational standpoint, our earnings per share is growing 13%, when you exclude the incremental stand-alone costs that we expect to incur as a result of the transformation. So before I turn it over to Tom, I’d first like to say how proud I am of the achievement of our ITT team, and I want to thank each and every employee for all their hard work and extraordinary commitment over this last transformative year. Four months ago, I had the opportunity at ITT's inaugural Investor Day to speak with many of you about how thrilled I was about the new ITT we had created. Since then, I've been meeting with our employees around the world and I feel a huge sense of excitement as we move from a year of separation to a year of growth. I can confidently say that we are collectively focused on our customers, the new opportunities in front of us, and we are passionate and committed to our work in 2012. In the days ahead, we'll maintain that momentum and we'll continue driving profitable growth. We look forward to continuing to create value for customers, employees and shareowners in 2012 and beyond. So thank you again for joining us today, and I'd now like to turn it over to Tom.

Thanks, Denise. Now let's turn to Slide 5. In 2011, we delivered strong organic revenue growth of 9%, that was driven by emerging market strength, oil and gas expansion and significant market share gains in industrial processing and automotive. Market conditions in the commercial aerospace industry remained strong, and our ability to expand our aftermarket foothold in key segments also had a positive impact on growth. This growth is partially offset by declines in the connectors communications market. 2011 adjusted segment operating income increased 20% to $279 million, and adjusted segment operating margins improved by 100 basis points. This was driven by $50 million of operating productivity gains and approximately $40 million of supply chain actions that more than offset material cost increases. For the year, our adjusted pro forma EPS of $1.60 increased 23% from 2010. The strong full year performance was driven by solid operational improvements that reflected the 20% increase in adjusted segment operating income. Adjusted pro forma EPS is defined in detail in the appendix, but generally excludes special tax items, asbestos and pro forma net interest attributable to the transformation. And lastly, I'd like to highlight that our organic orders were up 13%, reflecting double-digit growth in 3 out of 4 segments. The biggest driver for the year was the intensifying global demand in our late cycle Industrial Process segment, where organic orders grew 25%, generating record backlog. Turning to Slide 6. In the fourth quarter, we delivered organic revenue growth of 10%. Market share gains in North American chemical, oil and gas and power market and emerging market gains in oil and gas contributed to this growth. We also delivered gains in the European automotive market and expansion in the aftermarket. As previously mentioned, this was partially offset by connector declines in communication applications. Adjusted segment operating income in the quarter was up 12% to $60 million, driven by productivity initiatives that offset increased material costs, higher retirement costs and lower aftermarket mix due to strong platform and project wins. Adjusted pro forma EPS grew 20% in the quarter due to operational improvements and a lower tax rate that offset higher corporate costs. Organic revenue orders -- I'm sorry, organic orders were up 9% in the fourth quarter primarily due to North American chemical and global oil and gas and mining strength that drove Industrial Process organic orders up 27%. These gains were offset by weaker global connector market demand and difficult prior year comparisons in Other segment. Please note that we provided additional details on the fourth quarter and full year in the segment financial results section of the investor presentation. Turning to Slide 7. You can see here what we have been highlighting since Investor Day. Our businesses are winning share in very attractive end markets, including energy and mining, aerospace, transportation and industrial processing, which includes chemical. Our businesses serving these growth markets are nicely positioned to meet or exceed expected market growth rates in 2012. So now, let's turn to the revenue by geography details on Slide #8. In 2011, we experienced revenue growth across all major geographies. In North America, revenue was up 7% due to strong pump demand in chemical, oil and gas and general industrial market. In North America, our Chemical business is benefiting from increased chemical market output that is being fueled by lower natural gas prices. We also saw the benefit from Motion Technologies’ penetration of the North American automotive market through share gains at Ford. Revenue in Western Europe increased 11% due to automotive share gains and aerospace strength. These are impressive results given the overall economic environment and ones that we do not expect to repeat in 2012. Emerging markets which represents 30% of our revenue grew 19% due to infrastructure investment and continued strength across a number of key end markets. Wrapping up 2011 on Slide 9, you can see that we drove strong segment operating margin of 100 basis points improvement. Cost reduction initiatives and productivity improvement more than offset headwinds from mix, pension, commodity costs and purchase accounting dilution, associated with the Blakers acquisition. Margin expansion slowed in the second half of 2011 compared to the first half due to lower connector volumes, capacity constraints at Motion Technologies and the higher mix of large projects at Industrial Process. It should be noted that these large projects will help to populate our growing global installed base at a lower initial margin until the more profitable aftermarket cycle begins in the future. Starting with Slide 10, we will now discuss our 2012 outlook that is nicely aligned with the long-term financial goals we discussed at Investor Day. In 2012, we expect to deliver organic revenue growth of 5% to 7%. The Blakers acquisition will also add approximately 2 percentage points of growth but we expect that benefit to be fully offset by a negative FX impact. We also anticipate that emerging market growth will be around 10%, driven by oil and gas in the Middle East and South America. These gains are muted by emerging market megaprojects that shipped in 2011 but do not repeat in 2012. We expect solid adjusted segment operating margin expansion of 40 basis points across the businesses, which will build on the 100 basis point margin expansion and operating productivity we delivered in 2011. This margin expansion includes 40 basis points of incremental stand-alone cost, primarily at our Industrial Process business. Excluding this post-spin impact, our segment margins would have improved 80 basis points. We expect 2012 adjusted pro forma EPS, and that's adjusted for restructuring, asbestos and nonrecurring spin cost, to be in the range of $1.62 to $1.72. This represents 4% growth at the midpoint. When you adjust for the $20 million of incremental stand-alone cost related to establishing sales and support offices and the corporate infrastructure of a new stand-alone public company, our adjusted earnings per share is actually growing 13% at the midpoint. Finally, we expect free cash flow conversion of over 105% of net income. Again, this is in line with our premier financial targets that we set out on Investor Day. This performance will reflect strong working capital management and favorable cash taxes. On Slide 11, we have depicted our 6% revenue growth expectations by end markets, because a number of our segments serves many of the same markets. For example 3 of our segments serve the growing energy and mining market. We do have strong backlog entering the year in our highest revenue growth market shown here of energy, mining and industrial processing. In these markets, we believe that second half revenues will outpace first half. In our largest markets of automotive, rail and transportation, we expect to be flat to up 2% due to market share gains that are offset by lower European auto build rates. We anticipate the normal seasonality, with stronger first half revenues given European summer work schedules in the second half. We are expecting 6% growth from our business in the global aerospace and defense markets, where both Interconnect Solutions and Control Technologies have content. The growth will come from continued strength in global commercial aerospace that is expected to more than offset defense declines. In general industrial markets, we expect steady growth during the year at around 6% to 8%, and this growth will be driven by our Control Technologies and Industrial businesses. So now let's turn to the 2012 revenue by geography on Slide 12. We expect to deliver total revenue growth in North America in the 6% to 8% range. This includes solid revenue growth in oil and gas and chemical and industrial processing pumps, our expanding automotive market share and a ramp-up in aerospace production. We expect Western Europe to be flat to plus-2%, although we do expect Northern Europe to be stronger than Southern. Finally, emerging markets are expected to grow 10%, driven largely by infrastructure development and automotive gains. Turning next to Slide 13, I'd like to take you through our expectations for adjusted segment operating margins. We are expecting 40 basis points of segment operating margin expansion on volume improvement and operating productivity. These actions will more than offset inflationary pressures and the 40 basis points of incremental stand-alone cost associated with the transformation. In addition, we plan to fund incremental investments of 80 basis points related to premier customer experience initiatives and start-up costs associated with our Wuxi automotive and Korean industrial process expansion activities. For 2012, we are expecting neutral pricing due to automotive and large project pressures. 2012 margins are expected to improve sequentially through the year and compared to the prior year, segment margins are expected to be weaker in the first half and stronger in the second half due to Interconnect Solutions volume improvements, higher aftermarket content and operational improvements at Motion Technologies. It should be noted that margins in the first quarter of 2012 will be down around 100 to 200 basis points from the fourth quarter of 2011 due to a higher mix of large project shipments from Industrial Process and lower Interconnect Solutions volumes. Finally, we’ve summarized our 2012 guidance on Slide 14 in the form of an adjusted EPS walk. We expect adjusted pro forma earnings per share to grow 4% to $1.67 in 2012 at the midpoint. Adjusting for the $20 million of incremental stand-alone cost, resulting from the transformation, our adjusted earnings per share is growing 13% operationally. The growth will reflect our long -- our strong late cycle backlog, recent strategic wins in key markets and continued productivity gains. We are targeting gross productivity of $100 million in 2012 by leveraging the ITT management system to drive value-based Lean Six Sigma and global sourcing initiatives. These growth drivers will allow us to fund incremental long-term growth investments and offset other nonoperating headwinds. Finally, I'd like to wrap up with our views on capital deployment. As you know, our balance sheet is strong and we will be disciplined and measured in our capital deployment, so let me share with you some of the highlights. In 2012, we will fund increased capital expenditures to support our automotive expansion in Wuxi, China and our oil and gas expansion in Korea. We plan to utilize an expected $100 million cash tax refund to cover any remaining additional spin cost in 2012. We are currently estimating these costs to be approximately $65 million in the pretax basis and that number is down from our estimate at Investor Day. We also plan to begin to repurchase shares to offset the impact of recent stock option exercises. Our target annual share count for the year is 94.5 million shares but it should be noted that in Q1, share count may be at least a million higher than the annual target. And we are continuing to build a robust pipeline of close to core acquisition targets in the $15 million to $50 million revenue range. So in summary, we will be diligent in deploying our capital in an effective way to drive both organic and inorganic growth in 2012 and beyond. So now, I'll turn it over to Laurie to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Jim Lucas of Janney Capital Markets.

First question. Wanted to delve a little bit more into the backlog number. Just to get a little better clarity of, what is the timing of -- is that a 6-month, a 12-month, a multiyear backlog, and as well as how that ties into Industrial Process with more of these OEM business, what your outlook for the margin in that segment is for '12?

Sure. Thanks, Jim. The backlog has grown from the prior year significantly. Certainly, at the Industrial Process business, we've seen about a 50% increase year-over-year. They do have the lion's share of the backlog based on the large project wins we've had in oil and gas and mining as of late. That's really a reflection of our improving capabilities and technologies in those markets. That backlog gives pretty good visibility into the revenue expectations for Industrial Process for the year, but a lot of that backlog is more weighted towards the second half than in the first half. We would also say that in our other businesses, we have pretty much the normal backlog entering the year. The other 3 segments typically have a quarter’s worth of visibility and we've actually seen that exiting 2011 to be pretty consistent with prior years. So real big strength in our Industrial Process backlog for sure, driving off chemical as well, oil and gas and mining activity and the other 3 businesses in line with what we’ve historically seen.

And then with regards to, with these larger projects shipping, does that imply that margins within Industrial Process likely not to see as much expansion in '12?

Correct. There are 2 pressure points on margins in the Industrial Process business in 2012. One is they have the lion's share of the stand-alone post-spin cost going through their segment, about $10 million of incremental costs year-over-year go through the Industrial Process business. So that will cause some additional incremental margin pressure for that segment as we've been discussing. As the year progresses, one of the key levers in their margin performance is the mix of large projects versus aftermarket content. As we phase those through the year, their margins are expected to improve sequentially as we progress through 2012. So they will start lower in Q1, where we do see a number of very large projects. The weighting of large projects in Q1 is actually up about 10 points from what we saw in Q1 of the prior year. So we do have a significant increase in our mix of large projects in Q1. But as the year progresses, we would expect the IP, Industrial Process margins to improve.

And part of the business model that we have in IP is we're now going after the oil and gas and mining segment of an end market here. And that when you do that, you’ve got to seed these projects, you have to get them in place, and then what happens is you then get the aftermarket that comes after that. So aftermarket is a key strategy for us as a company to be able to get those security revenue streams as we go forward. In fact, when you look at IP and what we're expecting in terms of the aftermarket for them in 2012 versus 2011, we're expecting it to be up about 12%. So as we see these projects particularly in some of these fast growth markets out there, in the Middle East and in other locations, we're going to see the benefits of that aftermarket.

And that also follows up on really strong aftermarket growth in 2011 at Industrial Process as well, where they were up 17%. So that strength in aftermarket is just being outpaced by significant strength in our large project business at this time.

Okay. And then just switching gears on -- any update you can provide on asbestos with where you stand on the liability and also in your free cash flow projection for 2012, how much of asbestos cash payment do you have included in there?

First, let me just comment on the asbestos and then Tom can comment on the cash flow piece of it. But in terms of asbestos, there's no change, nothing new than what we've talked about before. And so, every year, we look at it, we look at it on a quarterly basis, we do our reviews of it and there's been no significant change that's occurred up to this point.

And we look into the 2012 cash flow expectations, our 5-year expected average outflow after-tax for asbestos is in the $10 million to $20 million range. Any year-to-year cycle, you could see some variation in the timing of insurance recoveries, but on average, our range of $10 million to $20 million is what we're projecting for the next 5 years and that largely remains unchanged from how we looked at it several months ago.

Your next question comes from the line of Matt Summerville of KeyBanc.

Just a couple of questions. Wanted to follow up on Jim's. Can you give us an idea of what the mix was in Industrial Process in '10, maybe '11 and what you're thinking about '12 for projects versus aftermarket. I know you said, Tom, in Q1 it's going to be about a 10-point swing, but can you give us some additional, more precise historical framework, I should say.

Yes. We've been certainly seeing the increase in the last 2 years on the large project side of our business. So the very strong growth there has definitely outpaced the good growth we've seen in the aftermarket. When we look into 2012, we're seeing the weighting in large projects increase versus 2011 by about 7 points. So we are seeing a mix shift, most notably in 2012. We saw a similar shift in '11, probably not quite as pronounced, it was probably about a 4-point movement year-over-year in '11, where we've had our percent weighting of projects increase by about 4 points relative to the prior year. So this is a reflection of the real strong growth in the late cycle business of Industrial Process and our ability to really go after some bigger, more complex global initiatives because we have a more expanded portfolio of products that are allowing us to go into emerging markets and global opportunities in oil and gas and mining, and that obviously is the right place to be now from a growth perspective. So we will see that continued shift. Obviously, what we like about these markets is the aftermarket cycle for oil and gas and mining in particular tends to get kickstarted a little bit faster and we progress into the aftermarket cycle more rapidly than in some of our other core products. So while we are growing this base, as Denise articulated, our focus is to capture the aftermarket, which in these markets does cascade faster than in some other end markets.

With regards to Motion, just focusing on the automotive side of the thing. If you look at new platforms in 2012 versus 2011, what kind of growth are you seeing there versus whatever you're anticipating in your base business? And then, I guess, as a percent of sales in Motion, how much is currently represented by new platforms? I think you gave the figure. I may have missed it.

Yes. In 2011, about 22% of our revenue was tied to new platform wins. So those would normalize into 2012 on a full run rate basis. We've been continuing to take really strong market share in our core market and also making good expansions in China and North America. We are seeing some of the same phenomenon play through where as we're winning new platforms, we're increasing our OE content, which is weighting a little bit more towards the OEM margin versus the aftermarket margin. So we're seeing a little bit of downward pressure there but that's a reflection of our global expansion. So now that we're able to grow in China and North America, that's an OE play for the most part at this stage and that comes at a slightly lower margin. But the bottom line too from the aftermarket perspective, a good 45% to 50% of our revenue in the Motion Technology segment is still in the aftermarket and that gives us some really good stability and visibility, even through some difficulties that are expected in Europe.

Your next question comes from the line of Mike Halloran of Baird. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: So first, just on seasonality. Could you just talk about what a seasonal progression looks like for you guys both on the top line and then also maybe on the earnings line, if you could. And then it sounds to me that if you look at a lot of the end markets that you're talking about, you're back-end loading, not dissimilar to what a lot of companies are doing now, but back-end loading your guidance for this year. So maybe could you also talk about the normal seasonality in the context of this guidance as well?

Let me just talk at -- from an ITT perspective as we think about the seasonality for the year. When you look at the top line and you look at revenues, we're pretty well balanced as we go throughout the year in terms of our revenues. Now it will fluctuate by business. In our Motion Technologies business, seasonality tends to have those volumes more in the first half than you do in the second half. But then we are expecting the Connectors business to improve as we go from -- as we go throughout the year from the first half to the second half. Now that is the benefit that you get with a very diversified portfolio that we have here. When you now transition and you talk about the bottom line and what's happening from an income perspective, we do expect to see margins improving as we go from the first half to the second half. Now part of that is because when we talk about IP and we talk about the large projects, we're going to have more of those projects in the first half of the year coming through than when we get into the back half of the year. Also, we have expected with the Connectors business, that we're going to see improvement and there's quite a bit of leverage that you get in the Connectors business when your top line increases. And so we're going to see some of that benefit flowing through also in the back half of the year. And then in Motion Technologies, we've got -- we're looking at -- we've got some -- in our KONI business, we're working through some operational issues that we've had there and we believe that we've got a successful path with that. And we're going to see just from an operational perspective, that they're going to get better as we improve into the back half of the year. Now remember, with Motion Technologies, you do have that seasonality. So from a top line perspective, you do have lower revenues in the third quarter with that business. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: Great. And then on the 4Q order trends and what that looks like now. Obviously, the industrial side was -- the Industrial Process side was very strong, the other 3 divisions saw some contraction. Could you just talk about what were the predominant factors there? Was it market weakness, Europe specifically destocking, timing, things like that? And have you seen any of those trends normalize as we work through the first quarter here?

As we look into January, really, January has been very much in line with the expectations that we've had there. We've seen some really good order growth rate on the IP side and in the Motion Technologies side of it. And as expected, we saw that our Connectors business would be lower in the first half as some of the -- an early cycle business associated with that. But the orders are basically what we projected and what we thought when we went into the year. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: Great. And then on Europe specifically and the build rates, you just mentioned that you saw reasonable Motion orders in the first quarter here or so, so far through January. In the outlook, the 0% to 2% auto was driven in part by lower build rates in Europe on the newer platform side. Could you just kind of rectify whether that's something you're seeing now or if that's just expectations to see lower overall cars built this year?

When you look at it from a global perspective. From a global perspective, we do expect that the automotive market is going to be up mid-single digit. There are some very big differences between what's expected in Europe and then what's expected in North America and in China. And so in Europe, it is expected to be down but we've been taking share. And when we were back in the economic downturn that happened back in '08 and '09, we saw that we were able to offset some of that downturn because of the strong position that we have there, and we were able to gain share associated with that. Saying that, though, we do expect that Europe is going to be an impact to us, relative to the other geographical locations in the U.S. and China, where the U.S. is expected to grow about 7% to 8%, China still -- again the #1 automotive market, that's expected to grow probably close to double digit this year.

[Operator Instructions] Your next question comes from the line of Ajay Kejriwal of FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So first, maybe just on the 2012 EPS walk, the $0.14 in dis-synergy, sounds like that's recurring. Maybe any color on the strategic investments, how much of that’s onetime versus recurring?

Yes. The strategic investments that we're really focusing on for 2012 are around 3 main areas. Our expansion of our China automotive facilities in Wuxi. We're building an R&D facility to be able to address local automotive requirements and we're also building expanded production. That production is going to serve not only the local market needs but our hope is that we'll use that facility to export production into North America as we grow share in North America as well. There will certainly be start-up costs in 2012 for the Wuxi facility, as we migrate to production. And the reason why we see that in our industries and we'll see that same phenomenon in our Korean expansion, where we're expanding our facility there to service the global oil and gas markets, we do have start-up costs anticipated there in 2012. Given the unique and highly technical nature of what we produce, there are longer start-up times required as we build new facilities. We need to have our factories and our procedures and processes kind of certified to be compliant with the regulations of our industries that we're serving. So that adds to longer start-up costs. Effectively, in the future, they’ll be absorbed into the production. So I don't consider those start-up recurring costs per se, but they will be part of our long-term cost structure. And then one other area that we're really focused on, maybe 2 other, is our premier customer initiatives, where we're very focused on improving our order configuration capabilities, improving our on-time delivery and rationalizing our supply chain process to make sure that in our fastest-growing market that we're able to maintain good quality performance and timely delivery. So those initiatives go from the front-end configuration through the supply chain into production. Again, some of those would be, I think, onetime costs just to get those initiatives up and running. But we see a lot of long-term value in those initiatives, not only from a cost and customer service perspective, but we think it also will help our cash flow velocity as we run more efficiently from order to delivery.

What you're really seeing here is that we see that there is a lot of value that can be created in this company by investing organically. So we have great businesses and we're going to take these businesses and we're going to invest in them to be able to create new products, to be able to create new geographical locations for them, and we just see a lot of opportunity for us to be able to drive this business organically. So these investments that Tom is talking about fit very nicely into how we think about these businesses.

And as we kind of progress through the year, managing a lot of uncertain conditions primarily in Europe, we always look to make sure that we pace in sequence our investments in these areas. Obviously, some of the key areas we're all in and we're moving forward because we know we need to grow in China in automotive and in oil and gas. But other initiatives, we would regulate based on the pacing of the economic activity this year.

Now the 2 investments that Tom talked about, the infrastructure investments within our IP business in Korea and then in Wuxi with our Motion Technologies business, those are the 2 businesses that have had just phenomenal growth over the past couple of years. And in fact, those are situations where they have capacity constraints right now because they've had so much growth and so those facilities are just really going to play nicely into the future for those 2 companies. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: To clarify those investments expenses, that would show up in the segments or at the corporate level?

Correct. The majority of those expenses would be at the segment level, and those are incorporated in the segment operating margin guidance. About 80 basis point impact on the segment margins. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it. And then, Denise, you talked about new products in R&D and the Goulds Heavy Duty Slurry Pump. Any thoughts on frac-ing and frac and pumps, any new products you think in there?

Yes. We don't really play much in the frac-ing side of things, we're involved more on the ancillary services associated with that. So what I mean by that is when you got to transport the water that comes out of that to where it's going to be treated, we're involved in the pumps that would be associated with that. We're also involved is when you have to pump water into the container to have it treated, we're involved in that. So we're involved more on the ancillary side, but we're not directly involved in the frac-ing side. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Yes. I know you're not doing the frac-ing side, my thought was Goulds has just such a good technology in pumps and frac-ing, there was just such a growth market. If there was something in the pipeline in terms of a solution or a product. But...

Not at this point. But we've been building out the IP product line for a couple of years now. And so it's always something that we're looking at. We're always looking at building new products, particularly when you think about the upstream side of things and what's happening there and the growth that we're seeing in the upstream side. Because historically, IP has been more on the downstream side of things. And not only with oil and gas but on the mining side. I did mention the slurry pumps and the valves that we've developed for the mining side of the business and we see that that's going to be a big growth area for us also.

Your next question comes from the line of Jim Krapfel of Morningstar.

Can you provide some EPS sensitivity around foreign currency, and what are your key currency assumptions included in your guidance for foreign currency to be a 2% revenue headwind in 2012?

Sure, Jim. So our assumption on the euro is $1.35. We actually picked that rate when we started our budgeting process back in November and interestingly, it seems to be the right rate at this moment. So we're very well calibrated around the rate that we have in our guidance slides. That's about a $0.04 EPS impact to us. Generally speaking, we're certainly a very global company. So we're dealing with a number of different currencies and different dynamics. But as a generality, we typically see about a $0.01 impact for each $0.01 movement in the euro-dollar exchange rate.

Okay. What would be the next largest currency that would impact your bottom line?

We do -- we have a lot of production in Mexico and production in Korea. Those centers are used to produce and export globally. So those facilities create some transactional FX impact and then our European automotive business and rail business is also exposed to translation FX impact because they typically produce and sell in Europe. So we do see more translation out of those businesses and more transaction exposures in Korea and Mexico, and that's how we have our footprint laid out.

Your next question is a follow-up from Matt Summerville of KeyBanc.

I just wanted to make sure I had some math right here. So you have $690 million roughly in net cash on the balance sheet. You're going to get net $35 million from the taxes less remaining cash costs on the spin, and then you generate somewhere between $150 million and $175 million based on your EPS and free cash guidance. So that would put you almost at $900 million at the end of 2012, unless my math is incorrect. I mean, what's sort of the optimal amount of cash for this company to have? And have you formalized a dividend policy yet?

Yes, Matt, so a couple of comments there. We did discuss our intention to turn the share repurchase program on to offset the stock option dilution activity we've seen recently. And that is one of the transformation-related activities. It's not in the $65 million. But we ended up with a large number of options that converted as a result of the mechanics behind the spin and how the distribution agreement decisions were made. So we ended up with a significant number of options and we have seen a lot of activity there. So one use of our cash will certainly be to offset those options through the share repurchases. We would also look at some potential pension pre-funding activities on a discretionary basis. We do have some contributions that are required over the next 2 years of about $20 million per year. Obviously, our dividend at this point, we recently announced, is at $0.091 per share and we still maintain that that's a good reasonable place for us to be, as we get calibrated and move forward. But we certainly appreciate the fact that we have a strong position on our balance sheet right now, that's going to allow us to really start to grow these businesses. I mentioned our pipeline of acquisition opportunities that we're building in our sweet spot. We're making some larger investments in CapEx this year and next year, as we kind of catch up some capacity constraints based on our recent growth. So we have a very detailed growth plan that we're executing over a number of years and that's our primary focus. But I mentioned some of the other areas we'll be deploying in as well.

How much has the board authorized for share repurchase?

Yes. So we have an existing program from the legacy ITT days and it was a $1 billion program. There's probably about $550 million of capacity remaining. But that program was calibrated around the old ITT structure, size, share count, what have you. So that's not rightsized for the new ITT, but it is in fact still an effective authorization at this point.

[Operator Instructions]

All right. Well, let me just say, I'd like to thank each of you for joining us today and for your interest in ITT. Before we conclude the call, I’d just like to again share our team's excitement about the opportunities we have to grow this company. We are truly uniquely positioned. We have a clear and focused strategy, we have a talented and committed team, and we are laser-focused on execution. Across our businesses, our teams are focused on exactly those things that they can do to power our growth, whether it's helping us lead with technology, differentiate with customers or optimize our operations. So when I see all of that engagement and commitment, I couldn't be more excited about our potential and our ability to drive profitable growth and deliver value to our stakeholders. In the days ahead, we'll have more accomplishments to share and you'll be hearing more from us about how we are performing and where we are taking this company. So thank you again, and I look forward to our next call.

That does conclude today's ITT Corporation Fourth Quarter 2011 Earnings Conference Call. You may now disconnect.