Welcome to ITT's 2020 Third Quarter Conference Call. Today is Friday, October 30, 2020. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern. [Operator Instructions]. It is now my pleasure to turn the floor over to Alex Sherk, Investor Relations Manager. You may begin.

Good morning and thank you, Laurie. Welcome to ITT's Third Quarter 2020 Earnings Call. This is Alex Sherk. And on the line this morning are Luca Savi, Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's presentation, press release and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors. Our adjusted non-GAAP results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos, restructuring, asset impairment, acquisition-related items and certain tax items. All adjustments in the quarter are detailed in the reconciliations. Before we begin, I'd like to provide a brief overview of our Q3 GAAP results compared to prior year. Q3 total revenue decreased 17% to $591 million. Segment operating income decreased 22% to $84 million. Regarding EPS, we took our net asbestos liability to a full-horizon estimate, resulting in a noncash expense equivalent to $1.20, the main driver of the $0.55 EPS loss. Free cash flow increased 77% to $271 million. Please note that our remaining discussion will primarily focus on non-GAAP or adjusted measures, unless otherwise indicated. Lastly, today's call will contain forward-looking statements that are subject to risks and uncertainties, including impacts from the COVID-19 pandemic. Actual results may vary materially. All such statements should be evaluated together with the safe harbor disclosures and other risks and uncertainties that affect our business, including those disclosed in our SEC filings. Now let's turn to Slide #3, where Luca will take us through the Q3 highlights.

Thank you, Alex, and thank you all for being with us this morning. I truly hope that everyone stays safe. First things first, I'd like to thank all ITT'ers around the world who continue to work tirelessly during this pandemic to serve our customers and to take care of each other in challenging conditions. And to make sure we continue to operate safely, we're implementing our ready, safe, go program across ITT based on the successful containment strategy first developed by our Asia Pacific team. Today, we will present the results of ITT'ers' relentless efforts to drive our performance and fortify our resilience. During the last few years, we at ITT have elevated the strategic standing of execution. Q3's outstanding results are the proof of this and also a testament to our strengthening momentum towards full recovery. Last quarter, we highlighted our focus on protecting our employees and supporting our communities while providing superior service to our customers with flawless execution. We also committed to delight our shareholders with record cash flow generation and timely cost actions while playing offense for the future. This is exactly what we continue to do in Q3. We delivered record ITT operating income margin of 15.4%. We grew 92% sequentially in Friction OE sales. We delivered 19% segment decremental margin and 40% segment incremental margins sequential to Q2. Lastly, we generated record free cash flow of $271 million. We are firmly on the road to recovery. ITT's execution capabilities and our unprecedented granularity delivered higher volume than expected, increased top line sequentially, and through strict fixed cost controls, produced an ITT record quarterly margin performance. This is resilience. We achieved our highest-ever quarterly operating income margin and our highest-ever year-to-date free cash flow. This is even more remarkable given the current macro environment. This…

Thanks, Luca. Let's start with Motion Technologies on Slide 6. Organic revenue declined 13% on lower order production rates and slower activity in the rail segment due to reduced passenger traffic. In the quarter, Friction OE sales were nearly flat to the prior year. This is a strong showing with China and North America growing 11% and 14%, respectively, which was offset by Europe, where we experienced destocking with some Tier 1 customers. Sequentially, Friction OE sales skyrocketed 92%, gradually accelerating during the quarter to show mid-single-digit year-over-year growth in September. Segment operating income declined 12% to $50 million. MT successfully improved decremental margins to 21%. And sequentially, operating income increased 107% with 36% incremental margin performance. We drove operating income recovery through productivity and restructuring actions. Motion Technologies delivered outstanding Q3 margins of 18.5%, 30 basis points lower than the prior year, but increased 630 basis points sequentially. These results were fueled by strong performance in Friction China, which produced its highest margin since Q1 2018, and Friction Mexico is now approaching pre-pandemic margin levels. The MT team delivered above our expectations given the revenue decline versus prior year. In Q4, we expect to deliver margin expansion versus prior year on the back of continuing restructuring actions and productivity as well as low single-digit organic revenue declines. These structural cost actions add to MT's many competitive advantages, material science leadership, best-in-class quality and fastest lead times, all of these together form the foundation for continued outperformance. And lastly, from an award perspective, both Friction and Wolverine continued to gain share with Conquer wins and new platform wins like the 15 new electric vehicle platform awards in the quarter. Moving on to Industrial Process on Slide 7. IP clearly demonstrated the resilience of its business model considering the challenging environment.…

Thanks, Emmanuel. Today, ITT is firmly on the road to recovery, thanks to the resilience of our businesses and the resilience of our people. ITT's performance is the outcome of a sound and actionable strategy, one with clear priorities and a strong focus on execution driven by unprecedented level of granularity. As a result, we generated strong levels of profitability and record free cash flow. We are managing through the storm, and ITT will emerge stronger and bolder than ever before. I look forward to continuing to share the progress we will make in our journey. And with that, let me now turn it back to Laurie to take your questions.

[Operator Instructions]. Our first question comes from the line of Joe Ritchie of Goldman Sachs.

Luca, maybe just starting off, the performance in Friction, particularly in China and the U.S., continues to be really strong. I'm curious, you referenced -- or at least Emmanuel referenced the expectation now is that your outperformance tends to be at the lower end of the range of what you previously provided. I just want to maybe get a little bit more color on that. And then specifically, what are you seeing from a competitive standpoint in the market today?

Sure. Thanks, Joe. So when we look at the Q3, in Q3 we outperformed the market globally. We outperformed in China. We outperformed in North America. We did not outperform the market in Europe. What we experienced was still some destocking, particularly at the beginning of the quarter, and also some slower and lower ramp up for the new Conquer or also some of the rewins. To give you just a specific example in Europe, in France, one of our major customers is a -- as a ramp-up of a new platform, we were on the existing that is coming down. We are in the new that comes up. But the old is coming down. The new is coming up a little bit slower, and therefore, you have a dip in that platform, for example. So what we see is that when you look at 2020, this is the quarterly performance, but it's very important to look at year-to-date because year-to-date in a year where it's very bumpy is more relevant. So year-to-date, Joe, we have Europe outperforming the market by 380 basis points year-to-date, North America and China outperforming the market by more than 1,000 basis points. So now the other thing that I would like to share with you is actually what has happened during the month of September and the month of October where, actually, we have seen our numbers better year-over-year, and this is a positive -- is another positive sign. Looking at the order book, we see a good order book for Q4. So looking good for November and good for December. Having said that, we are really working closely with our customers as we are investigating really how much of this is the real demand and to ensure that we have a better understanding of what is in the funnel, in their inventory, so that we are able to match demand with supply. Now going back to the second part of your question, which is from a competitor's point of view, I can tell you that, for instance, we have been able to take advantage in Europe, exactly, of some of our competitors' strategic decisions, and therefore, in some of the awards that we reported in Q3, there has been some wins with a major customer of ours where we were able to further increase our market share. And this is thanks to some competitors' decisions in the region.

That's super helpful, Luca. And then maybe I'll just ask one quick follow-on. Emmanuel, I just want to make sure that I heard you well. For the Q4 guide, you're expecting Q4 to be sequentially up low double digits, so kind of implying like $0.90 to $0.95 or so in the fourth quarter. I just want to make sure I heard that correctly.

Yes. That's correct, Joe.

Your next question comes from Damian Karas of UBS.

Great job on the margin execution. Speaking of which, I wanted to ask you about the cost reduction progress that you pointed to on Slide 19. It seems that on the areas you're exceeding expectations, maybe tilted more towards the discretionary side rather than the structural. But I know you mentioned you're sort of at 90% of the execution on the structural cost savings. Just wondering, as we kind of think about progression from here moving into next year, is this 35% still the appropriate incremental margin to think about as the business recovers next year?

Yes. Thanks, Damian. You're right. Last quarter, we mentioned that our expectations for incremental margins was going to be north of 35%. This remains the case. For the full year, we expect to generate more than $90 million of impacts in 2020. We also expect a benefit of carryover into 2021. And remember that some of that will be partially offset by some compensation actions that we have rolled back into Q4, but we are very optimistic and very bullish on our ability to generate incremental margins that are higher than our decremental margins.

Okay. That's really helpful. And I guess specifically thinking about MT and the Friction business. Luca, as you mentioned earlier in the call, you're near-record margin performance in Wuxi and Mexico. As you think about production ramping, get back to the level where you might have been pre-COVID, I'm wondering at what point does sort of that incremental margin maybe stabilize or perhaps invert as you need to start investing more on new platform build-out. Just maybe you can kind of think about -- help us think about kind of sort of the longer trajectory on Friction moving from sort of earlier production levels to actually expansion.

Okay. So one thing to bear in mind, a couple of points to answer your question, Damian. One is that our approach in this kind of situation is when the market is going down, we are treating our fixed cost as variable, and we variabilize as much as we can our fixed cost. And then when the revenue -- when the growth returns, we are trying to retain those fixed cost fixed. This is a general approach. And in this way, it's helping us obviously to have better incremental margin. Second is the overall Friction and Motion Technologies DNA, which is really driving the improvement, the productivity to a different level. Just to give you an example, I was able to be in the Barge plant during the month of September. This is our oldest, the most mature, the most complex plant. But they've reached level of labor productivity, the highest that I've ever seen in my 9 years in Motion Technologies and in ITT, to the point that, for instance, I met 2 shop floor workers that set up the med record, the fastest ever changeover run safely that we had in Motion Technologies ever. So that's the general approach. Did I answer your question, Damian?

Yes, you did. Appreciate that, Luca.

Your next question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

Can you just tell us a little bit more about this management change at CCT? What prompted it? And just some of the early opportunities you see here as you move towards this kind of Motion Tech manufacturing approach.

Sure. So just to tell you, Ryan -- I personally recruited Ryan a few years back while I lived in China and I was scouting for talent. So at the time, Davide, who was managing the Motion Technologies business in China, Davide started that, was moving back to Europe to manage the Axtone acquisition and the rail business. So we recruited Ryan, a talented individual who knew Asia Pacific very well, is very focused on growth. And Ryan has performed incredibly well in the last 3 years in ITT. So Ryan has worked in Europe, in South Africa and has worked in Africa, knows very well Asia, has worked in Asia, and therefore, has got a very global mindset. Now CCT will be very -- would benefit from Ryan's global leadership and focus on growth. At the same time, with Ryan moving, we have Davide, who has managed the KONI Axtone and managed the Axtone acquisition very well, returning to China to run the Asia Pacific and be part of the leadership team. One thing that would like to stress as well, Jeff, is that if you look at the leadership team, what we have is you look at me, you look at Maurine, the CHRO, you look at Emmanuel, you look at Ryan, you look at Davide, 5 leaders in the leadership team are actually internal promotion, which tells something about the process and the succession program that we have within ITT. Ryan and Davide have both worked in MT several years, and therefore, they will be able to expand the Motion Technologies and Friction approach in Asia Pac as well as CCT.

Okay. Great. And then just -- it sounds like auto production had been challenged, and you have some inventory adjustments in Europe. We're getting news that pieces of Europe maybe are shutting back down again. I'm just wondering kind of how you're thinking about that within the guide. And are you seeing any risk around production in Europe into 4Q?

Okay. So let me frame -- let me contextualize how we see the COVID situation first. So when it comes to COVID, the way that we sit in ITT is that we are in this COVID storm, and we have been in it for 9 months now, and we are roughly halfway through. So this is to contextualize it. Then looking back on how we did during phase 1, when we didn't know anything back then about COVID. When this started in January in China and Korea, we didn't know anything at all. Still, when you look at our performance, the Friction plant was the first plant getting back online. Our on-time delivery with our customers was top notch across all the different businesses. The businesses were up and running all the time for IP, most of the time for CCT and in Motion Technologies. And we have limited infections within our employees. On top of that, we took also some -- we had some opportunities. When some of our competitors stumbled, we were able to get some wins along the way. So this is how we performed in wave 1, when, as I said, we didn't know anything about it. Now we know. So now there is a second wave most likely or a continuous wave, to be honest with you, because as we get into the winter, particularly for the Northern Hemisphere, we see this happening. But at the same time, as I said, we know much more. Ryan Flynn, the new CCT leader, actually led a task force that looked at all our -- what we have learned, the benchmarks of each country, and we came up with this program, which is the ready, safe, go, which is really our playbook now in terms of being ready to ensure that we have all the masks until April of next year, to ensure that we've got all the testing kits, and we do not have any shortages, to ensure that we play safe all the time, and safety is our top priority, and we keep on going, and we keep on serving our customers. So this is really what we are -- how we are working and how we are facing it right now. As you can see in -- at the end of the day, I believe we are halfway through, and therefore, we will have to manage and live with COVID through the winter and spring.

Your next question comes from Michael Halloran of Baird.

So the IP side, maybe just some commentary on the underlying trends there. The short cycle business, I think you said, was year-over-year positive in September, good sign. Maybe talk about the drivers behind that and how you think about the sequential trend moving forward, if that's a good piece to build off of or just some pent-up demand type things, and then compare that a little bit with how you're thinking about the longer layer, larger project type activity. Obviously, you're going to be booking that at better margins, but just a little sense for how you're thinking about the ability to convert or even the desire to convert some of the projects right now.

Sure. Thanks, Mike. So when you look at Q3 and the orders of Q3, which was a little bit better than Q2 sequentially, but you have 2 different stories there. You have, as you said, the projects, and what you have in the project that we keep on seeing postponing and some delays to 2021 for the major projects, for the big project, but also for some smaller ones. As a matter of fact, I was talking to one of our larger distributor, part of the GDPWW, the distribution network that we have in North America, which is the envy of the industry. And he was just sharing with me that 3 out of the 5 projects that he had for 2020 have been postponed to Q2 2021. And we see also in the Middle East some of the projects awards that are going to be a little bit longer in terms of the delivery. So we keep on seeing this project. But at the same time, what we're seeing is a 2021 that will be rich of quotation, at least this is the feedback that I'm receiving from customers and from our regional leaders. When it comes to the short cycle, we had a good sequential improvement, Mike. It was roughly 14% when you look at parts and baseline. And we know that this is our bread and butter. And that was -- what was good also that sequentially in the quarter improved. And when you look at October, actually, these -- the numbers for the short cycle were better than what we were expecting and were also better than year-over-year. As a matter of fact, if I can take a tangent from IP, the entire ITT for the month of October, we had orders 2% higher year-over-year. And this is the first month in 2020 where these has happened. So now when you look at the short cycle, it was specifically on the short cycle, the hydraulic institute, for instance, was stating that the ANSI market in North America was probably down around 35%. And I can tell you that our ANSI business, as I said, the bread and butter, we will be outperforming that -- the market by roughly 800 to 1,000 basis points. Then you ask also in terms of the project. You're absolutely right on the project. The story has not changed on the backlog of the project. In the sense, the back -- the project backlog is really more profitable business than it was 1 year ago. But also, it's relevant to say that what we have shipped in the project that has been closed or built are at a better margin than what was shipped and closed last year. So you have this reinforcing loop happening today.

Makes sense for that. And then a question on the Friction business. You mentioned that the project -- the new platforms are getting pushed to the right a little bit but obviously continue to see nice wins. How are you thinking about the cadencing of those platforms over the next couple of years here? Is this just a pickup and just push everything to the right from a calendar perspective? Or do you think that there's a little bit more of a slow adoption to start out and then accelerate later on? Any kind of context of the latest thinking on this would be great.

Okay. So I think that we have to differentiate in terms of awards and SOP. So having said that, if you look at this year, for example, this year, we have been seeing a lower activity in terms of platform awards. Now this situation plays to our advantage if you think about it in Europe, where we have a very high market share. But obviously, in countries like North America or China, where we are going after market share gains, obviously, we need those awards and we need those platforms to improve our market share gains. I think that this activity in terms of awards will probably accelerate in 2021 and for the next couple of years. One thing to highlight on the award, Mike, is that when you look at all the awards that we won so far in 2020, 60% have been awards rewin. And 40% have been new awards in Conquer, which is feeding the market share gains in the future. Obviously, that percentage is different for different regions. And then Emmanuel was talking about 15 awards in the quarter for electric vehicles. This is a strategic platform for growth in the medium, long term because there is a lot of talk about it, but think about how much electric vehicles are as a percentage of the total vehicles and is still below 10%. And in Q4, there will be the start of production of EV platform where we are on with the leading EV manufacturer, but also Ford was talking about the launch of the Mach-E, a platform where we are in. So good story on the awards, Mike.

Your next question comes from Scott Davis of Melius Research.

Kind of curious, I don't know if this is the right way to ask a question. But when you think about the structural cost out, is there kind of a percentage of footprint that you've been able to take out, if you think about just square footage reduction? Is that a way that you guys look at it?

Yes, Scott, that's a great question. In our cost reduction plan, we have highlighted several areas, and footprint is definitely one of them, specifically for IP and CCT. And so at IP, we already completed 1 in Europe, and we're really excited about this because this is going to really help us reduce our fixed costs. We also announced 1 in October in North America. And we're really trying to implement the MT business approach, which is about a concentrated footprint close to our customers with very efficient manufacturing structures. So far, we are not realizing any of those savings in terms of footprint because it takes time, but this is going to be a 2021 and 2022 benefit. And the primary areas we're going to focus on are smaller to mid-sized plants that we're going to consolidate into large plants for IP and for CCT.

Okay. That's helpful color. And then just as a follow-up, the pension termination. What are the mechanics? It's been -- I feel like it's been a decade since I've seen one of these. What are the mechanics involved in closing out the pension? Do you have to kind of write a check and firm things up? Is there an upfront cash cost that kind of gets paid back because you don't have to do it anymore? How do you at least -- I'll just stop there. What are the mechanics?

So maybe, Emmanuel, let me frame it first, and then so you can answer the question, is one thing, Scott, to bear in mind is that as a company, we made a very good decision at the time at the end of 2019 to freeze the pension plan. And at the time, we were 108% funded. Okay. So this is when we froze the plan, and this is when really the process started.

Yes. And so in terms of process, it's a similar -- it's a very regular process, a bidding process. We had 5 or 6 different insurers. We went with MassMutual because they represented the best proposal. I think the final cash outlays was around $8 million, which is at the lower end of our expected range. And so it's -- really, we transferred the contribution that we had made and made that additional $8 million payment, and we terminated the pension plan consequently.

So only $8 million. Wow. Okay. I was thinking hundreds of millions, and now it's $8 million. So congrats on that.

Your next question comes from Bryan Blair of Oppenheimer.

I was hoping we could circle back to the Friction OE outlook from a slightly different angle. I understand the timing kind of restricts outperformance a bit in 2020. But based on prior wins and the degree of platform and SOP visibility that you have, is it reasonable to expect your typical 700 to 1,000 basis points outperformance next year? Or are there reasons to lean above or below that range based on current outlook?

Okay. So I would say that it probably is -- we wanted to see really how the market is developing during Q4 because what -- if I look at our outlook, right now, Bryan, on Q4, I will -- I risk of being overoptimistic. And I really want to -- we really want to understand how much of what we see in the order book of Q4 is real demand rather than filling the funnel or the inventory or being concerned of a second wave from some of the major OEMs. So we want to see exactly how Q4 is panning out to better understand it, better give a guided range for 2021.

That's completely understandable. And you've highlighted CCT's increasing adoption of the MT business approach. And look, you've talked for a while about making IP the Motion Tech of the flow world. We can see the operational momentum there. Thinking about CCT, what does the MT approach mean? And I guess, more directly, outside of resetting cost structure, what changes does that entail for the business?

Sure. So it's a, Bryan, it's a very timely question as I spend two weeks in California, in Valencia, in Irvine, where we have our connectors and components plant and together with the team. And so what the MT approach will mean is probably taking the level of granularity to a complete unprecedented level. And this is you're talking about when you're running for a new opportunity, sales, a new award or when you're running into a production or a machine. So let me give you an example in terms of the level of data, in terms of overall OEE of the machines, of the labor productivity and going really with curiosity and understanding every single step that you have in the operation. I spent some time every single day together with Rob or together with Davide, the new plant manager of Valencia, in looking exactly how the operation were running. They are doing a lot of Kaizen events, which have improved the profitability of the plant, but there is more to come. So this is really what we are looking for in terms of MT playbook for CCT, unprecedented granularity in every single step of the operations.

Your next question comes from the line of John Inch of Gordon Haskett.

What is happening and what has happened to your Friction aftermarket business in Europe? Presumably, lockdowns make it worse versus the recession of '08, '09, right, because, well, for obvious reasons, of driving. And can you just remind us what percent of aftermarket is in the mix currently? And is it higher or lower in terms of margins versus the segment average?

Okay. So first of all, when you look at the aftermarket and OE, we are roughly 65% OE, 35% aftermarket. And when you look at the 35% aftermarket, you can split half and half in independent aftermarket and OE as chunk. This is how it's split. Now when you look at the performance in the quarter, I would say we didn't see any improvement in Q3. I can tell you that we are seeing a substantial improvement in Q4. And therefore, we have improved our full year forecast of the aftermarket for the full year 2020. We were thinking last quarter what we communicated with you that the aftermarket was going to be in the region between minus 22%, minus 24% year-over-year. We are today thinking of a negative high teens for the aftermarket for the full year. So the picture has substantially improved, but it's more related to Q4 and the order book that we see in Q4 than the Q3 performance. Now when you talk about the margin, I would say, obviously, the aftermarket has got higher margin than OEM. But think about it, the highest profitability plans today are China and Mexico, and both of those are actually only OE. So I will not really draw any conclusion in terms of aftermarket margin and OE margin.

No, that's fair. In aerospace, they track take offs and landings, flight hours, all that sort of stuff. I mean, these lockdowns being reimposed in Europe. Luca, I appreciate the wins. We all know it's a great business. I don't know if there's evidence that, that's going to restrict driving capacity, but does that put a bit of a governor on the aftermarket business as you look ahead? So not about sort of wins that you just chalked up, right? But looking ahead, is there this correlation between sort of these lockdowns and fewer cars than on the road and just like less wear and tear in terms of driving the aftermarket business?

I think that's absolutely fair, John. It's absolutely logical. One thing that it happens conversely on the other side is the public transportation versus your own car. So just because of concern of being in public transport, then you have people. Then when some of these lockdown get lifted, they prefer to drive their car rather than going on a bus or a plane. So you have some conflicting trends on that respect.

Yes. I agree with that. And then just lastly, could you talk about -- because you've -- Mexico and China are clearly doing very well operationally. How has -- in Mexico, a particularly important region for you in terms of production, how was the integrity of your supply chain in Mexico fared over the past 6 months during the pandemic? And kind of what's the current status? And are there initiatives that you're trying to involve into -- to bump it up? Or are you just happy with the performance?

I think that we -- the team has really managed the risk and manage the process very well. So when we look at the supply chain in -- particularly in the Motion Technologies business, we haven't suffered any disruption at all. I think that to be fair, we have seen some disruption in -- I remember on 1 project, for instance, in IP, where a major supplier of ours, just because of technical problems and COVID, delayed some of their deliveries. But we are working very closely with them. We're working with the customer, and everything is managed properly. No major disruption on the supply chain. I mean, I can tell you about, one, this event for the whole of ITT.

Your next question comes from Nathan Jones of Stifel.

Just one follow-up on IP. I think, Luca, you mentioned that the project margins in backlog are better than they were a year ago. We do tend to see an environment like this where volumes are down pretty aggressively. The bidding, the pricing on these projects get pretty aggressive. Can you talk about how you're approaching? Do you need to fill your factories to need to absorb your fixed costs with not looking to fill the backlog up with low margin projects?

Okay. Sure, Nathan. So I think that as of today, this is pretty ingrained in the mindset of the people today. And the process, we are very disciplined today in what we go through in terms of reviewing the proposal, both from a technical point of view, from a cost point of view and also from a terms and conditions point of view. So this process is very diligent. And I would say we will not be able to deliver this better margin, Nathan, if we will not have done this for the last 3 years. I want tell you, this is nothing new, Nathan. This is something that we started when we got into IP in January 2017, and we have improved since then. So that's important. One thing also to bear in mind is that as this is happening on the project side of the business, and there are projects going down, there are some of the, I will call it, service projects, small projects that you do on service that are coming up. And this is if you stay close to your customer, if you got the customer intimacy, this is what is coming into the funnel. On top of that, the profitable margin, the project margin on the backlog is better also because of all the VA/VE initiatives that we have been doing on the product, Nathan. That is also extremely helpful.

Okay. The second question I want you to talk about was free cash flow. 15.4% trailing free cash flow margin. So while we're on the call, I went back and looked at it historically and post the spin of Xylem and Exelis from 2012 to '17, the margin was about 5%; '18 and '19, it was about 10%; trailing 12 months, it's about 15%. Obviously, in environments like this working capital throws off a bit of cash. How -- can you talk about how the approach to free cash flow generation has changed? And what do you think of sustainable free cash flow margin for the business is?

So let me start, and then, Emmanuel, you can take it from there, is -- if we look at our working capital, that is an area where we have been focused tremendously. We have improved year-over-year for ITT at 180 -- by 180 basis points. And if you look at the improvement here, we have MT being stable, roughly. In CCT, we deteriorated a little bit year-over-year. And then at IP, we improved by 800 basis points year-over-year, and we improved again from Q2 to Q3. If you think about IP today, working capital is at 19%. They are the best in ITT. And the improvement has been particularly on the accounts receivable and the current receivable past due, and there is still a lot of improvement to be made in inventory or other areas. But Emmanuel, I leave you to...

Yes. And in terms of long-term margins, I would say we're not really ready to give you a number, especially because the 15.4% free cash flow margin that we realized so far is -- I mean, we manage really well working capital, as Luca said, but there's also an impact of a lower revenue base, which is improving that number also. And so it's not really a long-term target for us. I would say that in addition to what Luca said, with working capital being a major driver of our free cash flow performance, we still have some opportunities in inventory turns, for instance. And all our businesses have inventory -- opportunities on inventory. AR past due is also a major opportunity for us, even though we've made a lot of progress. So I would say free cash flow performance is going to continue to be driven by working capital improvements. We have implemented a really nice discipline around CapEx, and we intend to continue to this -- to continue to focus on productivity and innovation. But I think that, I would say, overall, we would expect to be above 10% for sure in the future.

Your next question comes from the line of Matt Summerville of D.A. Davidson.

Just one quick question. With respect to the incremental cost reduction benefits you're going to see in '21 from what you've done thus far in '20, can you maybe quantify that as well as what you expect to derive from the latest footprint actions that you just mentioned today in IP and CCT?

Sure, Matt. So as I said, we expect full 2020 P&L benefits of more than $90 million this year. The carryover impact of some of those actions that have started midyear is going to bring us an incremental $40 million of positive benefits in 2021. Some of our temporary cost actions are going to -- have been rolled back already in Q4. So they're going to be a headwind to that carryover in 2021. But as I said, this is when footprint is going to kick in. And footprint is going to bring a lot of benefits probably in the second half of 2021 and also into 2022. So -- and this is -- obviously, this does not include the regular productivity that we have -- that we are implementing and driving through all 3 value centers. Finally, I would say that for 2021, we expect to add more actions, and we're actively planning -- we're active -- in the planning cycle here, and so we're looking at what we can do incrementally in 2021. That's going to impact both 2021 and 2022.

Your next question comes from Brett Linzey of Vertical Research Partners.

Just one for me on Industrial Process, specific to the orders down 17%. Just curious how you see the order profile in that segment playing out over the next few quarters. I mean, do you think Q3 is the low ebb here? And maybe just share some differences in that business now versus '15, '16, whether it be the aftermarket mix, market complexion that might prevent those orders from worsening to those levels historically.

So maybe I start, Emmanuel, you can build on that one. When we look at the orders for IP, I think that for the full year, Brett, we are looking at probably a decline year-over-year of roughly 11% for the full year. And when you look at geographic, I would say that there are some bright spot in this one, like, for instance, Europe, Latin America or Middle East in terms of projects. Another element to give is probably we are seeing the supply chain -- sorry, the short cycle improving -- improved in September. It improved again in October. The trend is positive. And when I talk about ITT being positive on orders in October versus prior year by 2%, the positive were really IP that was positive 9% in October year-over-year and Motion Technologies as well. So this is what's happening from a trend perspective.

And I would say for the long term, when we look at our funnel, our funnel has been going down. There is a little uptick in October, but it's really too early to tell if this is a meaningful trend. And I would say when we look at the funnel going down, this is mainly coming from upstream and downstream oil and gas as well as some chemical products. G&I, which is really the core of our IP business, is behaving pretty well, and it's showing some positive signs. But for the moment, in terms of project activity, the picture is pretty grim given the current environment.

And I guess just a follow-up point of clarification. So you said that total IP orders were positive in October?

That's correct. That's correct.

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