Welcome to ITT's 2022 Second Quarter Conference Call. Today is Thursday, August 4th, 2022. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Mark Macaluso Vice President, Investor Relations, you may begin.

Thank you, Chris and good morning. It's my pleasure to welcome you to ITT second quarter 2022 earnings conference call. Joining me here this morning are Luca Savi ITT's Chief Executive Officer and President; and Emmanuel Caprais Chief Financial Officer. Today's call will cover ITT's financial results for the three month period ending July 2, which we announced this morning. Today's remarks may contain forward-looking statements that are subject to certain risks and uncertainties, including comments relating to company performance, strategic priorities, business mix, market conditions and the effects of COVID 19 on ITT. These statements are not a guarantee of future performance or events and are based on management's current expectations. Actual results may vary materially due to, among other items, the factors described in our end 2021 Annual Report on Form 10-K and other recent SEC filings. ITT is not under any and expressly disclaims any obligation to update forward-looking statements whether as a result of new information, future events or otherwise. Except for otherwise noted, the second quarter results we present this morning will be compared to the second quarter of 2021 and are based on non-GAAP financial measures. These adjusted results exclude certain non-operating, and non-recurring items, including but not limited to a charge in the first quarter related to the suspension of operations in Russia, restructuring, acquisition-related charges and certain tax items and in 2021 asbestos-related charges. All adjustments in the quarter are detailed along with a reconciliation of such measures to the most comparable GAAP figures in our press release and presentation, both of which are available on our website. It is now my pleasure to turn the call over to Luca, who will begin on slide three.

Thank you, Mark, and good morning. I would like to begin as I always do, by thanking our shareholders, our customers and our ITTers for their continued support and investment in ITT. I firmly believe that at ITT, our people, made a difference and on this topic, I will show you what I mean in a few minutes, when I talk about the resilience of our people in visit China. Let's now discuss the Q2 results. I'm very pleased with ITT's results this quarter, considering the challenging environment that we are operating in today. Our team demonstrated ITT's resilience and the strength of our businesses once again this quarter. I Continue to be confident in ITT's future growth and outperformance potential as evidence by the long-term financial targets, we announced that our 2022 Investor Day. Demand for our products and services remains strong. We saw this in the short-cycle chemical and industrial verticals in IP where orders grew 26% organically. In aerospace and defense, in Connect and Control where orders grew 17% organically. And in our friction business where we want 18 new electrified vehicle platforms. Collectively, this demand generation drove 13% organic orders growth. On the strength of this demand we grew organic revenue by 10% aided by both volume and pricing across our businesses. This was despite the disruptions in China coinciding with the reemergence of COVID. On profitability, IP expanded adjusted margin 210 basis points versus prior year and 400 basis points sequentially while CCT grew margin 380 basis points versus prior year and 50 basis points sequentially. We are also seeing signs that commodity inflation pressures are slowing which should begin to show up especially, in MT's results, in the fourth quarter. In terms of the quarter results Industrial Process was the highlight. IP showed exceptional…

Thank you, Luca, and good morning. We continued to see strong demand in all our businesses. We drove 10% organic sales growth after 7% in the first quarter with CCT again leading the charge. As we anticipated growth in connectors and aerospace and defense components is driving a great performance in CCT from both a revenue and a margin perspective. Demand across IP short cycle continues to be strong, and this quarter we approached 20% organic growth. We are also gaining share in projects where orders grew 48% organically this quarter. All of this drove us 26% increase in orders at IP and the funnel continues to increase with larger multimillion dollar projects moving to the FID stage. In MT, Friction was up 6% organically driven by the continued momentum in aftermarket similar to Q1. Our OE business was up 3% organically despite the ongoing ship shortage. The MT team has been relentless in driving price realization in partnership with our customers and the negotiations in friction with customers are almost complete at this time. We also saw an over 200 basis points impact to reported revenue growth from Habonim. We estimate that the ongoing supply chain disruptions cost us approximately 200 basis points 300 basis points of top line growth with the most pronounced impact in IP. Adjusted operating income was roughly flat this quarter with margin declining 70 basis points. We saw higher sales volumes in IP and CCT and pricing and productivity benefits in all businesses. Adjusted segment operating margin was 15.9% in line with our expectations from last quarter. However, as you will see on slide 14 volume pricing and productivity were outweighed by 880 basis point headwind from cost inflation. The teams to drive productivity of roughly 220 basis points through a combination of Shop…

Thanks, Emmanuel. Before jumping into Q&A I want to recap a few key points. We are encouraged by the strong demand across the portfolio and by our team's ability to deliver for our customers and outperform in all our businesses. Thanks to this performance, ITT built a robust backlog that we provide the runway for growth in 2022 and 2023. On pricing. Our actions are ramping with particular strength in friction. We have reached agreements with the majority of our OE customers which provide good visibility to profitable growth over the long term. And we are making significant progress at IP and CCT, that we begin to accelerate in the second half of 2022. Our un-weathering focus on continuous improvement remains, we are working daily to improve our operations and replicate the success at MT in our two segments. And finally, we are executing all elements of our capital deployment plan, while continuing to invest in the business. As ever, it has been my pleasure speaking with you all this morning and we will happily take your questions now. Please open the line for Q&A.

[Operator Instructions] Our first question comes from Mike Halloran with Baird. Your line is open.

So Luca you guys gave great context and how you're looking at the auto market. So we've always been a little bit more conservative than the trend line there. So maybe you could talk a little bit of how you see the recovery cadence going, what it means for this year, what it means for next year? Obviously ITT differentiation versus what those end markets look like, but any color you could give there would be great.

Sure. So let me start saying that ITT outperformed the market in Q2 and we expect to outperform the market also this year like we have done in the last 10 years. But we're talking specifically about the market -- the market in Q2 was really flat year-over-year after a Q1 that was down. And if you look at the 2022 projection is probably we are looking at in the region of 20 -- 80, 80.5million vehicle produced. A growth of 4% to 4.5% for the year. Different picture in the different regions, for reasons flat to slightly positive in Europe, flattish in China and double-digit growth for North America. What was interesting Mike, We're seeing actually China that quite resilient market. If you think particularly what's happened in Q2 April and May, Still, the focus for the full year has not changed. Thanks to the resilience of the market, the incentive also of the government there. Let me reiterate also the continuous outperformance. If you look at the market is projected to return to pre-COVID level in probably 2024, maybe 2025, ITT was sort of passed pre-COVID level in 2021 so that will keep on that outperformance will keep on happening.\

Thanks. Really appreciate the color, and then follow-up on the IP side of things. Obviously, really good backlog grant. Maybe talk about two things, one, the visibility you're seeing right now with the front log conversations with clients and some of the key markets there and secondarily, anything going on competitively that would be, concerning obviously you're getting some share there, I'm just curious of the pricing dynamics in the marketplace are playing and competitive pressures as these new projects start coming forward.

Sure. When we're looking at the markets we see strength across all the market in terms of oil and gas, in terms of chemical, in terms of general industrial. We see that in the orders, we see that in the funnel of opportunities. Where you look geographically, Mike, we see very good strength in the orders as well as in the funnel, particularly in North America, Asia Pacific, Latin America and Middle East. Probably, we do not see this trends in the funnel in the orders are in Europe, that is the area where probably we don't see that. Then when it comes to pricing, you know Mike, pricing is key and pricing discipline is a must. Particularly, when you're talking about flow, a particularly what you're talking about projects. And if you do not have that price discipline, there is no way that you can deliver the margins that we are delivering today. So we keep on executing on this front, and I will simply not change.

The next question is from Jeff Hammond with KeyBanc. Your line is open.

So maybe these questions are connected, but your price cost gap was $0.29 in 1Q and $0.27 in 2Q and just trying to think how we should look at price got cost gap in the 3Q and 4Q. And then just similarly margin trajectory In MT into the second half, do we kind of bounce back to 1Q levels in 3Q or just how to think about that snap back?

So, yes, you're right. We were heavily, our margins were heavily impacted by the price cost gap. I think that's when we're moving into Q3 and Q4. We're seeing a much better picture. We're seeing that MT is, as we discussed is finally closing on all the, price negotiations with our auto customers. And while we didn't get everything that we wanted I think this was a good compromise, especially to maintain long term healthy relationship and growing business with them. And so as the commodities impact is going to lessen MT will-should be in a better position from a price cost standpoint. And then IP and CCT, it's all about driving price so, we mentioned that we are seeing a nice price impact in Q2 orders for IP that will convert into a strong sales in Q3 and Q4. And CCT is a little less advanced, but there remains a lot of, a lot of opportunities also from a pricing standpoint. So I think that when you look at cost price for the second half, we're probably going to be on par so flat, no negative impact very little positive impact, which is going to be a big change compared to what we've seen in Q1 and Q2.

Okay, great. And then, great performance in IP. But I recall in 1Q, there was a lot of issues with supply chain. I think you still mentioned supply chain being a problem in IP. But it doesn't seem to have shown through in the results or into the second half guide. So, just how should we think about some of the supply chain challenges and are you just kind of overcoming them elsewhere or are you seeing some improvement. Thanks.

Thanks, Jeff. On supply chain. The short answer is, it is improving slightly. So let me share some data and give you some color. If you look at Q1, in Q1 the revenue impact from supply chain was roughly 600 basis points. In Q2 is between 200 basis points and 300 basis points. So obviously that is a data shows the improvement. Most of that was actually in IP. Now going to give some colors, the lead times have probably slightly reduced and also the commodities as you know, have reduced a little. But there are still bottlenecks remaining. So when we talk about plastic, paint raisings, electronic components or electric motors, those are still bottlenecks. And going back to the lead time supplier lead times, why they have reduced slightly, they are still quite above pre-pandemic level. So, what we are looking is really what we are in control and focusing on the internal bottlenecks, which are more on the production line and improve the velocity in the plant.

The next question is from Nathan Jones with Stifel. Your line is open.

Hi, good morning. This is Adam Farley on for Nathan. So there's been some talk of automation production ramp in Europe in the second half, what is your view of the likelihood of this and what are customers saying?

Adam, you cut out in the first part of your question, would you mind repeating it? Please.

Yes. So there's been some talk of an automotive production ramp in Europe, In the second half, what is your view of the likelihood of this and what are customers saying.

Okay. So, we are seeing the supply chain challenges easing and the customers are talking about you know better situation for the chip, in undergone the chip shortage. But when we look at really at Europe production forecast for the full year is really that has not dramatically changed, we are talking about, you know, slightly positive. So, low single-digit growth. This is still the forecast for Europe. We see good order book on our front, but we know that is outperformance there, but there is still, you know, low single-digit growth for Europe. For the full year.

Okay, thank you for that. And then just turning to the orders, Overall, really strong and robust, especially in IP and CCT. So what was the cadence of orders through the quarter and also if you can provide any color on July in each business? Thanks.

Sure. So the cadence of orders in the month was pretty even, in the quarter there was strength for every month during the quarter. And July was not that different from what we've seen from what we've seen in Q2 in IT, we had a really strong month in June and a lot of it was due to project, two projects which were which accumulated out of first phase in June. But overall there was no really -- the growth in orders was pre-even and the numbers is pretty good across the board in Q2. In terms of CCT, it's the same thing and I would say that July orders are not that different also from what we've seen in Q2. So for the moment it looks like the strength continued in Q2 and it doesn't look like there is much different for the moment in July. But there's a lot of ground to cover before the end of the year. So we remain very attentive to that, to that order number and what it says about the market.

One thing that we would expect, Adam, when it comes to the future particularly in IP is that we expect that project gaining more and more momentum where we expect probably the short cycle leveling off. And this is also, if you look at the backlog today for IP, 55% of our backlog short cycle 45 is projects that will eventually have to swap to be 60 projects, 40 short cycle like it should usually be.

The next question is from Vlad Bystricky with Citigroup. Your line is open.

Good morning, guys, thanks for taking my question here. So maybe just following up on IP comments and when we see short cycle orders 21% in the quarter, Can you talk about -- how should we think about, how much of that is actual end market demand going out to the field versus any channel stocking for inventory that you might be seeing?

Sure. So I think that's for the moment our distributors, which were a lot of our short cycle business is going are not reported any type of increase in inventory. Well, we don't monitor is the inventory at their customers. But for the moment, we don't see really any type of inventory buildup anywhere, as Luca mentioned, we, those are really strong order growth numbers. And so we expect that over time this level of short cycle orders cannot sustain and so we'll see a leveling off as Luca said. I think one thing that is important is pricing that I want to highlight here because we, I think that, well, we are very encouraged by the pricing benefits. We have seen in the short-cycle in IP, I think we are only at the beginning of the journey and I think that short cycle is going to benefit a lot from a renewed pricing approach that I think is going to really focus on the differentiation that we bring with our products compared to our flow peers.

Okay, that's really helpful color, appreciate it. And then maybe just shifting to capital allocation, so, you've obviously been leaning into share repurchases more here given where the share price has been. So I guess just thoughts on continuing to lean into share repurchases, given where the share prices. And then also similarly, just can you talk about your appetite for larger scale M&A, given the health of the balance sheet maybe versus obviously some macro concerns out there.

So Vlad when it comes to capital deployment the priority are the same, this has not changed. The money goes first inorganic investment, these where we have the best returns. These are the less risky investments and we have seen it being in IP or being Motion Technologies all in CCT. So this is where the money goes first and 80% of that CapEx is really going into growth and productivity. Second is M&A and you have seen it applied these in this first half of the year with the acquisition of Habonim. That is already accretive is a great story already 140 million deploy there. In ventures like Cuts works or WECODUR or CRP, in all adjacencies to the business, and this is where money goes second. And then of course dividend and share repurchases. And this is a good use of our capital and that today we have the opportunity to all three of them. And this is what we'll continued to do. When it comes to acquisitions that we have a very good funnel of opportunities and the opportunities there are in the bulk is anything between $50 million to $300 million of revenue. And of course, there might be few that are ready to be larger than that, but the bulk of the M&A opportunities are in that range.

The next question is from the Damian Karas with UBS. Your line is open.

Good morning. Congrats on the hard work and accomplishments on WUXI.

Thank you, Damian

So just a follow-up question on price as it relates to orders. When we look at those robust order rates in IP and CCT, could you just help us unpack how much is from inflationary effects versus underlying unit demand, I mean, every kind of talk at high single-digit, low double-digit on price. The rest on order maybe just help us unpack that a bit.

Sure. So, in IP the majority of the growth is through volume. We are seeing the pricing building into our backlog, but we for the moment, this is still the majority of the growth is driven by volume. And I'm talking specifically on the short cycle here so, mainly baseline pumps and spare parts. In terms of CCT, I would say the large majority is also volume because CCT is less advance from a pricing standpoint. The only exception may be that it will, that would say is industrial connectors where we are seeing flattish type of volume and what gets us a little bit over is pricing.

Okay. That's helpful. And I guess just thinking about expectations going into the quarter, I think, a lot of investors were concerned you'd be lucky to even hit the 430 -low end of your EPS guide considering all the exogenous issues out there from your markets. Just thinking about the updated guidance, where would you say the biggest risk is of not hitting that guidance this year?

I would say the biggest risk probably is an external risks, some type of disruption to demand like we've seen in Q2 for with the China lockdowns. The rest we have really strong backlog in IP and CCT. We have proven that we're able to ramp up the volumes, as you've seen in Q2, IP was roughly 25 million above Q1, organically and then CCT was 10 million above Q1 also. So we know how to flow through these additional products through our facilities. And then from a cost control we've been very attentive to costs and being and tightening all our expenses. So I would say to me, the impact or the downside potential is mainly due to external factors.

And Damian, the team did an amazing job in the quarter. If you think about all the headwinds that we had to face the Emmanuel reiterated in the prepared remarks and many piece of the puzzle that actually coming together, have been the backlog, been the pricing, been the execution on the shop floor being WUXI. So, and this is the reason why we really tightened the range. You know, things are coming together.

The next question is from Joe Giordano with Cowen. Your line is open.

Yes, I had a similar question on that, maybe just asked a little differently. So last quarter when you were talking towards like the lower part of the guidance. And then, at Investor Day I guess, qualitatively, just based on the bullet point that you guys had it did sound like incrementally, the guidance was getting a little bit worse. And now I think raising the low end is a major statement here. So I'm just curious of anything actually changed in your mind between kind of Investor Day commentary and today?

So I think that's, I think you'll appreciate that the environment is very volatile and so for us this is impacting our visibility on what we're seeing out there. And so I think that we've been appropriately cautious in our description of what we were seeing out there and at the same time in parallel we were driving execution within our segments. And I think that we saw some really strong performance, so performance improving in May versus April and in June versus April and May, and so I think that when you think about all the progress we've done in terms of pricing, especially at MT, which was really the biggest price that we were going after, we're now --we now feel more confident that this pricing is almost more or less done. And then we got to focus on making sure that we take advantage of commodities going down and the same execution that you've seen in Q2 in terms of on-time delivery and quality for all our businesses.

And Joe, if you think about volatility. Just to give you an example, I mean, you're on 4th July celebrating Independence Day here in the US and you're on call with WUXI, where companies are shutting down and you know the team is putting their amazing feed that we were describing before, so just these gives you an idea of the volatility that you have to deal with. But as I said the pieces are coming together nicely so far.

I appreciate that. Again on orders, I know we've talked a lot about business. I think it's hard to, or some of the year on your comparison is just become challenging just because the numbers are weird and price and inflation. If you were to think about it unless strip out MT because that's its own kind of animal, but if we think about IP and CCT orders if we think about it is unlike a dollar basis per day or something like that. How do you see that going from a get 2Q level, Orders per day still going up. I don't care about the year-on-year so much. I'm just thinking about the sequential progression in dollar terms from here. How do you see that?

So when you look, is a little bit different picture, I would say, depending on the different markets. But if you look at the Q2 in the short-cycle indicator, So, you talked about baseline tops, service, valves and we actually, we are really looking at some of those numbers every day or every week, Joe, exactly you are saying. Q2 was a very strong quarter so, and these was sequentially. Was there -- So that is a very good sign. But I would say, Joe also that what we expect in IP, those order in the short-cycle to level off and we expect the project to come up stronger in the second half of the year. That either for the short cycle in IP. We see also some good sequential orders in a connector, for example, as well as in components are coming mainly from aerospace and defense and those are very strong and compensating some of the industrial connectors that a manner was talking about, which showed some weakness sequentially. Did I answer your question.

The next question is from Andrew Obin with Bank of America. Your line is open.

Hi, you have Sabrina Abrams on for Andrew Obin. How are you guys?

Good morning, Sabrina.

Can you just talk, please, about the structure of inventory on your own balance sheet and sort of how much of the issue is sort of a golden screw issue. How do you think about dealing with the potential Bulwark fact down the line when lead times normalized and when do you think levels of working capital start to normalize?

Yes. So, you see working capital is a huge issue for us. Working capital has been a use of cash in the first half and really large one. And so right now, I would say that we are targeting to reduce our working capital by roughly something like a little bit more than 100 million in the second half. And this is going to be a function of collecting AR past dues and collecting some of the pricing that we have agreed on and that we haven't collected yet and then the large part of it is going to be inventory. And I think your description of the golden screw, I think it's a good description. We have a lot of our projects that are, half-finished or 90% finished and not leaving the dock because we're missing a motor, we're missing a casting and so and so we're focusing on making sure that we improve our supply chain at the same time as Luca was saying, we improved the velocity through our factories. And I think that's, these are, this is going to give us some significant benefits in the second half in terms of working capital.

Great, thank you. And how are you thinking about getting the European business ready for potential disruptions related to Russian gas in the fall/winter?

Okay. So, there are two things that we're doing. Things that we're doing in the short-term and in the short term we are across the board everywhere globally. We are really paying attention to our consumption of energy and we are really working with the business in order to reduce our electrical energy consumption. And then on the, over the medium long-term is that we are investing heavily in renewables. So, I mentioned that we have committed $8 million of renewable projects, solar projects, in our facilities globally. And those projects are going to come online between the second half and the first quarter of 2023. And so as a result, this should really help us reduce the consumption of external energy and produce our own energy in the significant portion, like for instance when typical solar panel, a project for our facilities between 10% to 20% of the energy that we needed that we're going to produce in-house. So we're rolling out those projects for the medium term. And this is going to help us we think in terms of our energy consumption.

Our final question is from Matt Summerville with D.A. Davidson. Your line is open.

Thanks. Couple of questions on MT. What will priced cost coverage actually look like when all the actions you've taken the contract negotiation process is fully complete and what will that coverage ratio would look like. And then in these new contracts or is there anything structurally different about how you might be able to pass on raw material inflation, MT inflation in the future looking forward. But this is may be different than the structure previously and then have a follow up

Okay. Thanks, Matt. First of all, I'm very proud of the result has been done by the team because the team has been able to shift that we said auto paradigm of giving price and that be able to obtain price. When we look at the price the cost price equation, if you look at the entire in inflationary costs including energy, etcetera. We are still not able to cover everything. So, for 2022 is going to is going to be a hit, when you look at the coal cost inflation. Better picture, if you just look only on the material side. When you look at the, as we moving forward, then it would be once again being on the table of the negotiation, and it will be up to the team in trying to -- they get negotiation to our advantage. But as we've shared the pain, then it will be share also the other side when you move in the other direction. So I think that will present an opportunity for us. And as a man will always described, this is a timely thing and we will come out of these in the next 18months,24 months. But the other side, probably would be more positive than this one.

Got it. And then just as a follow-up. Sticking with MT, I think you mentioned 18 new EV platform wins in the quarter. How should we be thinking about what that kind of win rate that suggests. And how is that tracking to the plan you laid forward, are you set forth at your Analyst Day as of late. Thank you.

Sure. Thanks, Matt. First of all, these are electrified platform. So you're talking about both EV and hybrid. So these, I mean 18 electrified platforms in the quarter is massive. And if you give some examples, these are customers like BYD or a new part of Tesla. So these are all very good successful. With our win rate in awards ability five platforms is considerably higher than our global market share today. And so in 2022 like in 2021, our market share in electrified platforms will be higher already than internal combustion engine. So, and the other thing is that this is a perfectly aligned for us to get to that 37% market share that we discussed during the Investor Day and that we set out in the prepared remarks, we are on the good path there.

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