Welcome to ITT's 2015 Third Quarter Results Conference Call. Today is Friday, October 30, 2015. Starting the call from ITT today is Melissa Trombetta, Vice President, Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President and Tom Scalera, Chief Financial Officer. [Operator Instructions]. It's now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Thank you, Crystal. I would like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Please note that any remarks we make about future expectations, plans, prospects and other circumstances set out in our Safe Harbor Statement constitute 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. We undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future events or otherwise. Forward-looking statements made on this call should be evaluated, together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. Let's now turn to Slide number 3, where Denise will discuss our results.

Good morning, everyone. I appreciate you joining us as we announce our financial results for the third quarter of 2015. Q3 was yet another solid operational quarter for ITT, as we continue to execute against our long-term strategies and focus on what we can control. In the quarter we extended our track record of investing in our future, while delivering strong operational results despite the persistent headwinds from the challenging macro environment. Even with the volatile market conditions, we were able to maintain our strong execution and deliver solid margins of 15% and adjusted earnings per share of $0.63, both of which were nicely ahead of our expectations. Delivering on our commitment, even in the face of adversity, is what we do at ITT. And I want to tell the Teams all across ITT how proud I am of the way that we collectively pulled together to overcome challenges and create value for our shareholders and customers. That is our culture and that is what we do. So now let me share some perspectives on the Q3 financial results. Organic revenue declined 2% this quarter. Motion Technologies once again delivered solid top line, with 7% organic growth in automotive friction due to improved global production rates and OEM share gains in key geographies. This was coupled with increased independent aftermarket volumes due to solid execution and a shift in customer buying patterns versus the prior year. This growth was more than offset by weak general industrial markets and a decline in upstream oil and gas activity due to lower capital spending. Organic orders were down 9% on a sequential basis, mostly due to reduced capital spending in the oil and gas and mining markets which impacts our low margin projects, coupled with weaker short-cycle baseline pump activity due to global…

Thanks, Denise. Now let's turn to Slide 5. In Q3 organic revenue declined 2% after adjusting for foreign exchange and the net impact of the Hartzell acquisition and a small Q2 industrial product line divestiture at Control Technologies. The decline in revenue was primarily due to slowing global general industrial market conditions which negatively impacted Interconnect Solutions and Control Technologies. These declines were coupled with the ongoing global weakness in the oil and gas markets due to lower capital spending levels and deferred maintenance activity that impacted Industrial Process and ICS. Industrial Process delivered mixed results this quarter, with an overall organic revenue decline of 1%. The decline reflects soft global parts activity due to deferred customer maintenance that drove the aftermarket down 5%. This weakness was partially offset by a 2% increase in both projects and short cycle baseline pumps. The increase in project activity was driven by strong North American pulp and paper shipments, partially offset by a mid single-digit decline in oil and gas. While we experienced solid global growth in downstream oil and gas which was supported by strong backlog during the year, these results were more than offset by declines in upstream and midstream oil and gas activity. We also had weak project results in petrochemical and mining due to soft market conditions and difficult prior year comparisons. Our diversified portfolio helped to partially offset these declines, as Motion Technologies once again delivered a strong automotive quarter. Global friction increased 7% organically, reflecting automotive market growth combined with our recent global OEM share gains. In addition, the aftermarket grew 5% due to solid execution and a shift in our customers' buying patterns. Moving on to orders, on a sequential basis organic orders were down 9% versus Q2. Compared to the prior year orders declined 17%…

[Operator Instructions]. Your question comes from the line of Mike Halloran with Robert W. Baird.

Could we talk a little bit about how you're looking at your trajectory from here within your Industrial Process business? Obviously, the orders have been much worse, given the environment, than the actual conversion's been on the revenue line which has really held in there. Maybe you could give some thoughts on what that trajectory looks like as we exit the third quarter? And then, more specifically, what that impact looks like as you get towards next year when you think about your end markets.

Sure. With IP, when you look at it sequentially, the orders were down 9%. You look at it on a year-to-date basis, they were down 18%. In the quarter, it was down 30%, but last year was one of our highest quarters that we had for them. So, we're looking at some of these challenges that we've got from a project perspective within IP, largely associated with oil and gas here. The weakness that we have here, we do expect that we're going to - that will impact us as we get into 2016. But what we've been focused on is looking at reducing the impact of those declines through the restructuring benefits that we've had, aggressively going after productivity efforts and improved execution. We've talked about how we've already made a 14% headcount reduction. We've been consolidating facilities. We've rationalized product lines. And all of that is going to give us some incremental savings as we get into 2016. Also, while we see that there's been declines in these large projects, we're hopeful that, on small and medium-sized projects, we're going to see some of that coming back next year. And then, we believe we're going to be well positioned if there is any modest recovery in the short-cycle markets or any resumption of this deferred maintenance activity that we're seeing in key markets.

Your next question comes from the line of Shannon O'Callaghan with UBS.

This one's a little technical, but I guess I'll use my question for it just because it's moving around a lot. In terms of this corporate line, how do we think about this going forward? Can you split the corporate - the $45 million of this year, can you split that between sort of base corporate and environmental and give us a sense of where those should move, going forward?

Sure. Shannon, environmental is obviously very specific to site management and developments that are very hard to predict as we manage through the sites in our portfolio. Generally speaking, our range has been anywhere from about $2 million to $10 million per year and it really is hard for us to anticipate how that's going to play out through the year. But that's the range that we've experienced. We usually start the year assuming it will be towards the higher end, around the 10%. And then we actively try to manage that down as best we can through proactive site activities, if you will. So the balance then is the functional cost piece for the most part which has been ranging also between $40 million and $50 million from a planning perspective based on functional execution and the actions we've taken to build a foundation for the corporate team going forward. One of the other big swing factors - so we think about the three, we've got the functional corporate, we've got the environmental and then we have some investments that are also running through the below the line. And, based on the market returns for those assets or other benefits that had come out of those assets, that shouldn't - generally has been a little bit of a positive offset for us in the last two years on a below-the-line basis.

Your next question comes from the line of John Inch with Deutsche Bank.

I was just wondering, with my one question here, could we talk to the oil and gas results and orders maybe parsed along the upstream, midstream and downstream framework, maybe perhaps dovetailing back to, I think it was last year you guys did a really good job of trying to drill into the IP business and what you thought was going to be the impact. So, more what you're seeing now with the orders, how that plays out along those lines and if there's any comment you would make as it pertains to what you thought would be an outlook and, obviously, here we're today. That would be really helpful. Thank you.

Let me start with that, John. From an upstream perspective, when we started out the year, we thought that we would be down around 20% to 25% with the upstream. And then, as we progressed through that - at least this is from a sales perspective, we can talk about orders in a minute. But we've been able to really get - have good project execution in the IP business. And so we've been able to mitigate the impact of that sales decline us on, on the upstream, as we went through the year and we had really good project execution associated with that. From a midstream perspective, we don't play much in the midstream. We have a small business in there, but we don't play in that very much. And then, in the downstream, we do have a reasonable position in the downstream. And what we've seen from a downstream perspective, on a year-to-date basis, is that it's been down for us.

And just keeping in mind, the biggest challenge is, certainly in the upstream, the project rollover that we had in the beginning of the year. I would say that our order flow in the beginning of the year was stronger, particularly in the upstream markets and probably stronger than some of our peers. I think our Q3 number. As we all cycle through this oil and gas environment, projects are going to roll on and off based on where the spending is shifting to. So, there has been more activity in the midstream as of late. That is not one of our core areas of strength. We have been strong in the first half in upstream. The pronounced declines that we're seeing now, not unexpectedly, are in the upstream and that will continue into the back - into Q4 for sure. And then, downstream has been a little bit erratic. We're still trying to get a good read on where the downstream market is progressing. But when we put it all together, on a year-to-date basis, we're down 18%. I think it kind of cuts through all the markets and all the quarterly dynamics. These are big, lumpy projects. Last year, for example, we had a $25 million upstream oil and gas project that we're lapping this year. So that creates a lot of additional headwinds in the numbers. If you take that out of last year, our orders were down 22% in the quarter at Industrial Process. The point being, we're looking across all these kind of factors and one data point is not necessarily indicative of where we're in the cycle, but what we're doing from a planning perspective, as Denise articulated. The weighting of our internal activities, up to this point, have been in our upstream business. We've been the most aggressive in cost take-outs, repositioning and footprint within the upstream because we clearly can see the signs of where that market is progressing for the short, medium and longer terms.

Your next question comes from the line of Brian Konigsberg with Vertical Research Partners.

I just wanted to ask if maybe if you'd give us a little bit of a taste of what the order profile has been, quarter to date? And, with that in mind and how the trajectory going to the 2016, you kind of talked about before being able to still keep margins relatively flat with the top-line pressure setting in with just some price, but offsetting with restructuring. Do you think you could still maintain the margin profile going into next year? Any detail would be great. Thanks.

Sure. Brian, I'm assuming your conversation is relative to IP. And from an IP perspective, while we recognize we're going to have challenges from a top-line perspective, because of the project business that we're not seeing come through this year, what we're planning on doing is increasing our margins in IP next year. And that is because of all the actions that we've been taking that - with the headcount reductions, the consolidating facilities, consolidating sales offices and then just continuing to drive LEAN and productivity through that business. So, with a 10% or so decline on the top line or whatever it is that it turns out to be - it could be more or less than that - our goal is to increase our margins to help compensate for some of that decline on the top line.

And as you guys are aware, obviously, the project business - at the high end of the project business where we're seeing the biggest year-over-year challenges, those are the lowest margin activities we have in our entire ITT portfolio. So the impact of a decline in project revenue for us is a significantly lower impact from a decremental margin perspective than we would see elsewhere in the portfolio - especially when you consider, as many of you know, we have pass-throughs. A large chunk of that revenue is purchased components that we then do some assembly and pass through. So, the net effect on our operating income from a decline in projects is much less impactful than other parts of the portfolio. Just wanted to reemphasize that.

Your next question comes from the line of Matt Summerville with Alembic Global Advisors.

I wanted to spend a minute on ICS. It looks like your disruption costs, if you will, were $5 million Q1; $6 million Q2; and, based on the math in your slides, $7 million Q3. So, they optically look like they are getting a little worse before they get better. What's the full-year expectation and how much of that can you gain back, if you will, in 2016, just in terms of the disruption costs? And then also, how much of the $15 million to $20 million of restructuring flows into ICS next year as well? Thank you.

Okay. Let me start with that. In terms of ICS, as we said on the last call that we had, we expected to see the same amount or close to the same amount - of disruption in the second half of the year as we did in the first half of the year. And we're tracking pretty close to that. We're making progress with the work that's being done there. The Santa Ana facility that we've got is planned for closure early in 2016. In our Nogales facility, we've been focused on really strengthening that foundation, focusing on machining and other production processes that's going to improve efficiency with that. So, the goal has been to get this facility up and running and really being the facility that we want it to be as we go forward, recognizing that this is going to be a strong facility for us, a center of excellence for us with the Interconnect business there. So, we're progressing according to what we said. We should expect to see margins begin to improve as we go throughout 2016 and we think that we're going to be able to see the benefits of that flowing through in 2016 for us.

For sure, Matt. This is a nice opportunity for us in 2016 to progress the margins in the ICS business. We're currently getting hit with duplicative costs, because we're maintaining a footprint that's larger than we will be maintaining next year. There's some one-time activities. We have a big surge of critical defense contracts that we're working on right now. So, we're progressing through the back half of this year. But I think fundamentally, as Denise articulated, this is a nice source of opportunity for us to offset some of the headwinds we're seeing elsewhere in the portfolio and to drive some strength in margins and strength in execution across ICS.

Your next question comes from the line of Joe Radigan with KeyBanc.

In Motion Tech, excluding the FX headwind, operating margin was almost 23% and that's with price pressure and negative mix. So, obviously, execution there continues to be very good. Can you help me understand the FX impact on the bottom line? Because in Q1, you had, I think, a 15% top-line headwind and it was actually favorable for margin; in Q3, a 13% top-line headwind and then 350 bps negative for margin. And then, obviously, there's seasonality in Q4, but given the change in the aftermarket cadence there and Wolverine - how should we be thinking about revenue and margin in that segment on a year-over-year basis in Q4?

Joe, as you look into Q4, I would expect to see pretty similar FX impacts as we flow in, maybe a slight touch-up. And that's the mix of the impact, obviously, from the revenue and from the OI perspective. So, what we saw in Q3 probably is consistent with what we're going to see going into Q4, with maybe a slight 10, 20 bps tick up from there. It's a global business, we're now, obviously, growing in China and in North America. So it's really the reflection of this evolving portfolio, Motion Technologies, where we didn't have as large of a global presence as we have today. So we're seeing a lot of the cross-currency events. Having said all that, the currency is kind of moving a little bit more these days below the 112 range that we forecast it at. So there could be more pluses and minuses as we go through Q4. And then lastly, I think one of the areas that's really hard for us to project around foreign exchange is transaction. That's kind of a reflection of just the flow of activity during the period. And that's a little bit more inconsistent from a forecasting perspective. But if you put all that together, Joe, I would say a little bit of an uptick in the foreign exchange pressure on margin in Q4 relative to Q3.

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

Two questions really, just follow-ups. One, on your orders in IP this quarter, what impact, if any, did DXP and the termination of that contract have to your order rate? And the second follow-up I had was on ICS. Denise, you talked about some margin improvement next year. Clearly margins have been down significantly this year. Is it your expectation that margins will at least get to double digits in ICS in 2016?

I'll start with the DXP question. Yes, I would say no discernible impacts to the orders in the quarter. We've been aware of this transition with DXP for a long time. We've been managing through it. Clearly, the North American markets that we're serving are facing the end-market headwinds, so I would say the bigger factor in the quarter is the market. As we look forward through the re-establishment of our distribution capabilities in North America, we're very excited about the strategic opportunities we have to reenergize our distribution capabilities in North America. It's going to give us an opportunity to go into some new markets, new geographies and have a much more direct presence with some of our key customers and contacts there. So, not really something that's meaningful to us in the short term, but as we progress into next year, for sure, we like the strategic opportunities that this reset will give us.

And then, Joe, from an ICS perspective, when we think about margins and the trajectory of margins as we get into next year, there will be a slow ramp-up as we go throughout the year. And our expectation is that we will get to low-double digit in 2016.

Your next question comes from the line of Joe Giordano with Cowen.

I'm going to cheat here and try to ask a couple of questions on one topic and see if that's okay.

We've never had such a clean slate here of one question per analyst. But, do what you got to do--

I want to talk about MT. I just was curious if you could parse out your growth in U.S., Europe and China. And I was curious about your exposure to Volkswagen and what that might mean on - if you see a customer shift? Is it just a movement from one customer of yours to another? Or is it worse if it potentially goes to Japan where you may not have as much exposure? How do you look at that?

Let me answer the Volkswagen question. So, in terms of Volkswagen, our main exposure to Volkswagen is largely in Europe. We have strong market share in Europe. We're on numerous platforms. So, if there is some impact of VW in Europe, we expect that, that volume would go to other car manufacturers and we're probably on those platforms. So we see very minimal or no impact to us in Europe. And, again, the Volkswagen volumes that we've got, about 85% are centered in Europe. So we don't expect any big impact on that in the volumes in Motion Tech.

Just to give a geographic perspective on what we're seeing in the quarter from a sales perspective, the U.S. was up for us in the mid-teens and this is on automotive friction. Europe has continued to be a good story for us, up high-single digits in the quarter. In China, for us, was - our volumes were up, but there's flattish revenue because of some of the pricing in the marketplace. That situation in China, we expect to resume growth in Q4. Certainly there's some recalibration in the market. But we have programs and platform startups in Q4 and our indications are that China will get back to growth in Q4 and give us, for the full year, a solid mid-teens-level growth in China. And that will continue into 2016 as we continue to start new wins that we have in China. So we'll have new volumes for us driving through China and we'll all be watching how the government incentive programs play through the Chinese market. But, for us, it's a lot about share gains and new platforms in China.

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

I'm going to cheat as well and ask for a clarification before my question. Denise, you said a slow ramp-up in ICS and get to low-double digit. Is that exiting the year at low-double digit or low-double digit for the full year?

It could be for the full year. We've got to see how we end up in Q1 here for next year. It's a very complex move that we've made here. The goal is that it would be low-double digit in 2016. And we'll just monitor and track it up to that point. We'll give you better clarity in February when we talk about our 2016 numbers. But that would be our goal.

Obviously, the IP backlog has helped to prop up revenues in that business this year. You came in with a very healthy backlog. Looks like you started to really start to chew through that in the last couple of quarters. Can you talk about maybe where the backlog is now relative to where it was when you came into 2014, what the difference in pricing is, what the difference in mix is and how that all plays together looking out to next year?

Sure, Nathan. Part of the reason the backlog is coming down at the rate it is, is we have really amped up our execution capabilities in the engineered-systems business. As you know, we entered this space about seven years ago and we're continuing to improve our operational capabilities there. So, the objective going into the year was to improve on our delivery and I think, as we progress through the year, we've actually seen nice progress there. And that has helped us drive shipments out the door that we've been working on. Some of these are 9- to 12-month lead-time-type projects. We have seen those go out. But I would say that was how we expected the year to play out and, quite honestly, we're executing and performing at a slightly higher level as we go through the cycle. As a result of all of that, the project backlog certainly has come down from where we began the year. Total backlog relative to the end of last year is down about 17% organically and the weighting of that is certainly on the project side. I think our baseline and aftermarket businesses, in totality, has been relatively flattish. So there's been some ups and downs as we progress through the year. But I would say the story for sure in our backlog is getting these projects out the door as efficiently as we can. And, obviously, the replenishment rate. As we indicated, those new projects are getting delayed three to nine months, so we're not seeing the backfill in the projects. But, we're building a much more capable Industrial Process segment to be able to go out and win new projects when they are available and demonstrating our execution this year is a part of that strategy as well.

And pricing and mix in the backlog?

I think pricing in backlog, we don't - there's no repricing of backlog. Obviously, it was set in last year's conditions. The mix is, I would say, towards kind of the higher end. There's been a weighting of unconventional upstream in our backlog, but the mix is decidedly towards projects, as is often the case. Pricing is continuing to stay difficult, certainly on new activities that are coming through. We're seeing up to 15% pricing headwinds. We're doing better than that, on average, but we're seeing projects facing those kind of headwinds. Not seeing that kind of pricing challenge in the aftermarket or baseline business. But, as expected, the project pricing has been difficult. And we're staying disciplined through the cycle. So the projects that we're bringing in right now, I would say the team is being very disciplined in making sure that we're filling the backlog up next year with projects where we can improve our margin profile because we know what it's been like over the last couple of years with project margin, how thin it can be. And I think we're maturing into the space to realize that we can be more selective in the projects that we're going to go after.

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