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Edited Transcript of ITT earnings conference call or presentation 22-Feb-19 2:00pm GMT

Q4 2018 ITT Inc Earnings Call

WHITE PLAINS Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of ITT Inc earnings conference call or presentation Friday, February 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jessica Kourakos

ITT Inc. - Head of IR

* Luca Savi

ITT Inc. - CEO, President & Director

* Thomas M. Scalera

ITT Inc. - Executive VP & CFO

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Conference Call Participants

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* Andrew Burris Obin

BofA Merrill Lynch, Research Division - MD

* Bryan Francis Blair

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* John George Inch

Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to ITT's 2018 Fourth Quarter Conference Call. Today is Friday, February 22, 2019, and starting the call from ITT today is Jessica Kourakos, Head of Investor Relations. She is joined by Luca Savi, President and Chief Executive Officer; and Tom Scalera, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern time. (Operator Instructions)

It is now my pleasure to turn the floor over to Jessica Kourakos. You may begin.

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Jessica Kourakos, ITT Inc. - Head of IR [2]

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Thank you, Maria, and good morning. Welcome to ITT's 2018 Earnings and 2019 Guidance Call. As Maria mentioned, I'm Jessica Kourakos, and with me today are Luca Savi, ITT's President and Chief Executive Officer; and Tom Scalera, ITT's Chief Financial Officer.

I'd 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. Before we begin, please note that our discussion will exclusively focus on non-GAAP or adjusted measures unless otherwise indicated.

During this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. No forward-looking statements can be guaranteed, and actual results may differ materially from those projected. 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.

With that, let me turn the call over to Luca.

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Luca Savi, ITT Inc. - CEO, President & Director [3]

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Thank you, Jessica. Good morning, and thank you everyone for joining us. I am very honored and humbled to be with you today on my first investor call as ITT's CEO to discuss our record 2018 results, our solid 2019 guidance and our capital deployment philosophy for the future.

Later during our discussion, I will provide you with some insights into my vision for ITT, and more specifically, the actions and approach that we're going to take to deliver on the tremendous growth potential of this historic company that is approaching its 100th-year anniversary.

So with that, let me begin with 2018 strategic highlights on Slide 3. Thanks to the dedicated efforts of our teams across every value center, ITT delivered record orders and revenue, record operating income and margin, record earnings per share, and what I like the most, record free cash flow. We delivered these results while continuing to fund critical long-term strategic investments. Organic orders grew 8% driven by global market share gains and favorable end-market demand in chemical, aerospace and defense and oil and gas. This strong order intake drove our total backlog up 14% excluding FX. Backlog at both IP and CCT improved 18% providing us with significant revenue visibility into 2019. Total revenue of $2.75 billion increased 4% organically. Segment operating income increased 18%, and margins improved 150 basis point to 15.1%. In addition, we delivered earnings per share of $3.23 on 25% growth.

We also produced another strong year of free cash flow, with growth of 34% on a 108% conversion of net income. This is our second consecutive year with a conversion of 100% or better. Our 2018 free cash flow performance was driven by 100 basis point improvement in organic working capital as a percentage of sales to 20.1%. Many of these financial records were powered by operational excellence actions that we will discuss shortly, including supply-chain effectiveness, IP project execution and CCT's connector performance in Nogales.

However, here I'd like to highlight a significant operating milestone for Motion Technologies. In Q4, our new Silao, Mexico facility delivered breakeven profitability providing some nice margin momentum in 2019, as volumes continue to ramp up. Well done Cesare and team. We are all proud of your accomplishments in such a short period of time.

And on the growth and innovation front, we grew market share across all of our diversified portfolio. But let me start here with Auto. Despite the market upheaval this year caused by WLTP in Europe and macro-weakness in China, MT friction OEM outperformed the global market by 800 basis points. MT extended its multiyear track record of significantly outperforming the global OEM markets, and we intend to extend that trend into 2019. So let me spend some more time on our full year 2018 friction performance by region because I know this is an area of focus for many of you.

In China, we outperformed the market by 15 points. In North America, we outperformed the market by 21 points. And in Europe, we outperformed the market by 4 points. In Q4, friction OEM sales were flat compared to a down minus 5% market. We believe that this partially reflected unfavorable Q4 phasing -- phasing impacts from some of our largest European customers related to WLTP implementation. These European dynamics offset the continued Q4 market outperformance in both North America and China that were consistent with our full year strength in these regions.

As we look to 2019, there are several reasons why we believe our global friction OEM business will significantly outpace the global market once again. First, our global friction business is well positioned with the fastest-growing segment of the market, including SUVs, crossovers and light trucks. And to further that point, I am pleased to announce that in Q4, our friction team won a very important and large front axle crossover platform award in North America and that large award is incremental to the strong positions we are currently ramping in Mexico. We are also seeing an increase in front axle awards, representing over 60% of the brand-new platform wins we generated in 2018. And in total, our 2018 friction OEM awards exceeded our 2018 target by nearly 20%, driven by significant outperformance in China.

All of these award momentum further support our $3 billion in OEM friction award visibility over the next 5 years. So in short, while we recognize the volatility and uncertainty in the underlying automotive market, we believe that even with a flattish global market in 2019, we will still deliver healthy friction OEM outperformance.

Now on the innovation front, I'd like to highlight some breakout product lines that helped drive market share gains this year. At ITT, our new sensor-enabled energy absorption solution for rotorcraft is providing safer and more comfortable customer experiences using technologies developed by our dedicated team at Enidine's New Rotorcraft Center of Excellence in Orchard Park, New York. CCT's innovation engine also delivered new high-power electric vehicle charging station connectors, which effectively addressed the world's rising need for superfast EV-charging infrastructure. And at IP, our valves business delivered double-digit growth with strong share gains in BioPharm, that reflected our patented EnviZion technology. EnviZion incorporates game-changing designs to improve manufacturing uptime and reduce total cost of ownership for our customers.

Moving next to capital deployment. In 2018, we funded critical organic investments with strong return and low-risk profiles including our CCT Rotorcraft Center of Excellence in the U.S. and our new MT friction facility in Mexico.

Consistent with our balanced approach to deployment, in 2018, we returned $97 million to shareholders in the form of a solid quarterly dividend and discretionary share repurchases. Later, we will discuss our plans to add to our strong return track record in 2019.

Moving to Slide 4, we will now review some of the details behind our adjusted 2018 results. The 8% organic order growth reflected broad-based strength across all 3 major market categories, generating solid backlog entering 2019. Organic revenue improved 4% as industry and transportation growth was partially offset by the timing of oil and gas projects. Segment operating income improved 18% with all 3 value centers contributing double-digit growth from volume leverage and operational excellence actions.

In 2018, Motion Technologies grew operating income 10%, while IP and CCT both improved around 27%.

From an operational perspective, let me take a moment to highlight some of the underlying drivers of our profitability in 2018 that will continue to positively impact 2019 as well. In 2018, we made significant progress in supply chain effectiveness with new procurement leaders in place at every value center driving focused actions to hold our suppliers accountable on quality, delivery and price.

One of our biggest operational excellence story of the year was our connectors business within CCT. The improvements we made to our Nogales facility were instrumental in driving connector share gains and margin expansion. We did a lot to improve this business. But let me list the specific things that were the most impactful. We developed a talented team in Nogales. We put in place an enhanced quality and compliance system. We significantly upgraded our materials planning and scheduling capabilities, and we expanded and improved customer service to more proactively work with customers and provide reliable info in a timely manner. The team did an amazing job, and I'm confident that Nogales will continue to drive solid growth in 2019.

And at IP in 2018, we removed layers of bureaucracy and created clear lines of accountability within our project business. From a project pipeline development perspective, we were more selective in choosing IP projects that align with our operational strength. Evidence of this is in the project backlog margin entering 2019 that has improved versus the prior year. Let me give you an example of how we have energized IP's international organization and enhanced local market accountability.

I visited our IP site in Saudi Arabia in Q4, so this is still fresh in my mind. Under Hamdy's leadership I saw a dynamic, enthusiastic team that had a great understanding of the local market and its dynamics. As we walked the shop floor together, Hamdy highlighted the many improvements they implemented, including the comprehensive visual management system that aligns all the various activities supporting the different project phases. And as a result, delinquent backlog in Saudi declined by 80%. We see Saudi Arabia as an increasingly important growth market, and we are investing in product capabilities and infrastructure to leverage our already strong presence in the region. Congratulations, Hamdy and the entire Saudi team. Well done indeed.

So that may sound like a long list of operational growth drivers for 2018. But the list for 2019 is just as long, as we have identified many more opportunities for margin expansions in the year ahead. When I look at our internal operational improvements opportunities and couple them with the significant increase in shippable backlog for 2019 and our strong friction awards, we clearly have the foundation in place to deliver another solid year of growth in 2019.

With that, let me turn it over to Tom to review our Q4 results.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [4]

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Thank you, Luca. Let's now turn to ITT's adjusted fourth quarter results on Slide 5.

Organic orders increased 2% driven by 36% oil and gas growth from project and short-cycle demand at IP. Transportation orders were down 1% reflecting an $18 million prior year defense order at CCT. Excluding that impact, ITT organic orders would have improved 5% in Q4. Organic revenue improved 1% on solid chemical growth that was diluted by the timing of oil and gas project shipments at IP and the friction OEM market dynamics that Luca discussed. Segment operating income improved 11% due to volume and productivity actions partially offset by strategic investments, price, mix and commodity costs.

Lastly, fourth quarter EPS increased 28% to $0.82 per share reflecting the double-digit segment OI growth, favorable corporate costs and tax favorability in the U.S. and Italy.

Slide 6 shows our Q4 adjusted segment margin walk. Margins improved 140 basis points in total or 170 basis points from an operational perspective before FX and investments. The operational drivers in Q4 were productivity gains, including supply-chain actions and continued operational improvements at our connector facilities, partially offset by higher material costs. Our enhanced approach to driving operational excellence is clearly producing results, as total segment margins improved by at least 130 basis points every quarter this year. The 2018 full year margin improvement of 150 basis points was driven by a 220 basis point improvement at IP and a 250 basis point improvement at CCT.

Our 2018 operational momentum and significant set of self-help opportunities provides a solid margin tailwind into 2019 and beyond.

Turning now to the fourth quarter adjusted segment results starting on Slide 7 with Motion Technologies. MT organic revenue increased 1% driven by a 16% increase in KONI, primarily due to the strength in global rail, partially offset by a 3% decline from Wolverine on weakness in shims and gaskets. Organic revenue for friction was flat due to European WLTP-related timing issues despite significant OEM outperformance in North America of 23 points and in China of 16 points.

Segment operating income at MT increased 12% to $42 million due to volume leverage, mix and cost-containment actions, partially offset by price, higher commodity costs and strategic investments of $4 million.

Turning to Industrial Process on Slide 8. Organic revenue was flat as an 11% decline in projects, primarily related to delivery timing, was offset by a solid 5% increase in short-cycle activity on chemical strength in baseline pumps, after-market parts and valves, partially offset by service. Organic orders at IP increased 12%, due to a 30% increase in projects on stronger oil and gas and mining activity and a 7% increase in short-cycle demand led by oil and gas and chemical. As a result, IP's backlog expanded 18% in 2018, providing us a significant project revenue visibility in 2019. IP segment operating income decreased 2% to $28 million, reflecting acquisition due diligence costs, unfavorable mix, FX and higher expediting cost associated with the product line reset, partially offset by net productivity gains in price.

Next is Connect and Control Technologies on Slide 9. CCT organic revenue increased 4% to $159 million, driven by 9% growth in commercial aerospace. Strength in medical and electric vehicle connectors resulted in a 3% increase in general industrial markets. This growth was partially offset by a 4% decline in oil and gas connectors. Adjusted for a prior year $18 million defense order, CCT's Q4 organic orders improved 12% due to a 10% increase in commercial aerospace and strong defense connector demand. CCT's segment operating income increased 24% to $26 million and benefited from volume, improved productivity in the connector operations and restructuring gains, partially offset by increased material costs.

So with a record-setting 2018 behind us, I will turn it back over to Luca.

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Luca Savi, ITT Inc. - CEO, President & Director [5]

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Thank you, Tom. Before we discuss the 2019 guidance, I thought this will be the right moment for me to provide my future vision for value-creation at ITT. First, let me start with one of my favorite ways to describe ITT. It is a collection of gems. Many of you have heard me use this phrase before because I believe it. We have a diversified portfolio of companies and brands that have tremendous potential to gain global market share. How we cultivate our opportunities and how we grow from here will depend on how we will execute our top 3 priorities. These are customer centricity, operational excellence and efficient capital deployment. These are not new priorities for ITT but going forward, our energized high-performance culture will drive these priorities with an intensified focus on execution, accountability and speed. The entrepreneurial way with which we attack the many opportunities in front of us will unlock incremental value for our customers and our shareholders.

In my previous role as COO at ITT, I had the opportunity to deeply engage with each and every business. And I've been able to see and feel and touch and smell the opportunities to create value first hand. I believe we have an abundance of these internal self-help opportunities, and it is our duty to realize them and to realize them with speed. To make this happen, we first need to energize the culture and ignite more of an entity-wide entrepreneurial spirit. I grew up in an entrepreneurial family in a small village in Italy, as you know, where my father made parmesan cheese. So this way of operating is really a way of life to me. And I believe this is how we need to operate at ITT, every day and everywhere.

We are a collection of niche businesses with unique engineered solutions so an entrepreneurial mindset perfectly aligns with how we create value. As a result, our first organization priority is customer centricity. When we successfully anticipate our customers' needs and over-deliver, we evolve from being just another supplier to becoming a strategic partner.

Let me give you an example of what I mean. One of our largest European friction customers had difficulty getting critical testing equipment into China. So they called our friction team in Barge, Italy for help. They called Danielle, and Danielle immediately sprang into action. He arranged for our testing equipment in Wuxi to be sent to the customer location in Beijing. An important customer had a problem, and we delivered a solution fast. Think of the intimacy we already had with this customer that they would call us in Italy for help with a problem in China. And then think of the loyalty Danielle generated when we solved it. This is what I mean by customer centricity. This is the type of entrepreneurial spirit that we must drive across ITT and across the world. The second priority is operational excellence driven by execution, accountability and speed to deliver high-quality solution on time, every time.

Today, every performance review at ITT obviously begins with safety and then we go deep into the drivers of value inside our operations. We analyze labor productivity, machine efficiency, supply chain effectiveness, quality, PPMs, scrap, rework, to name a few. This granular approach generates an abundance of internal improvement opportunities. The realization of these opportunities will power our margin expansion for years to come. We already discussed 3 prime examples of this approach in action, CCT Nogales, IP Saudi, and MT Mexico. These are what operational excellence looks like at ITT today.

The third priority is efficient capital deployment, and I address that later in the presentation. Now with these 3 priorities as fuel for 2019 and beyond, let's look into the details of our solid adjusted 2019 guidance.

Our underlying organic revenue is expected to grow 3% to 5%. From a segment perspective, we are projecting balanced growth with all 3 segments growing organically within our guidance range of 3% to 5%. Some of the primary drivers of growth include global friction, improved oil and gas, PetroChem and chemical project shipments and commercial aerospace and defense. We expect to expand our segment operating margin by 60 to 120 basis points, driven by higher volumes and stronger productivity in all 3 value centers, partially offset by increased commodity costs and incremental strategic investments.

We expect to grow EPS 10% at the $3.54 midpoint of our guidance range, despite $0.04 in currency headwind and $0.08 in tax headwinds. These headwinds would be partially offset by lower corporate functional costs, as we are driving the same intensity around efficiency, speed and simplicity at our corporate centers as we are at our operating locations.

Last but definitely not least, we expect to continue to drive strong cash flow performance building on our strength in 2018. Our targeted 2019 free cash flow conversion exceeds 95%, and we are targeting working capital as a percentage of sales below 20%. We will continue to increase inventory turns, reduce delinquent backlog and improve accounts receivable collections as fundamental operating drivers of these targets.

Next, Tom will take us through some of the additional guidance details.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [6]

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Thanks, Luca. Let's move to Slide 12 to review our 2019 revenue outlook by market. Starting with automotive, we expect mid-single-digit growth in a flattish global market due to our recent share gains in Europe, China and North America. In Europe, we believe we will outpace the market by 2 to 5 percentage points of growth due to significant second half OEM platform ramp-ups with large German and French manufacturers.

In China and North America, we will outperform the markets once again by double digits due to the continued ramp of key SUV and light truck platforms in our Mexico facility and strong second half growth rates from new platforms and ramps in China, including share gains with major global and local OEMs. In the chemical and industrial pump markets, we are expecting growth in the mid-single-digit range led by North American and Asian petrochemical projects in backlog and modestly improved short-cycle demand across industrial markets. Aerospace and defense is expected to grow mid-single digits in 2019 on strong commercial aerospace component and connector demand aligned with the 737 MAX, 777X production ramps and Airbus-related share gains, partially offset by difficult comparisons in defense programs and rotorcraft.

In general industrial markets, we expect low single-digit growth due to relatively stable conditions in North America and growth in medical and EV connectors. And lastly, oil and gas is expected to be up high single digits on upstream and downstream project activity and stable short-cycle conditions. Note that our market assumptions are based on WTI staying around the $55 per barrel range.

On Slide 13, we provided an overview of the 60 to 120 basis points of margin expansion that we are targeting for 2019. The expansion will be driven by improved volumes and strong operational execution, partially offset by higher raw material costs, incremental tariffs and strategic investments of 80 basis points. Price is expected to be neutral to margins as IP and CCT actions offset MT.

We expect operational margins before investments to expand 140 to 200 basis points. All 3 segments are expected to deliver solid margin growth in 2019 and at the ITT level, we expect each quarter to show margin expansion over the prior year. IP is expected to produce triple-digit margin expansion, CCT will nearly reach that level and MT will produce solid margin expansion.

So now let's turn to Slide 14. Here you can see the key performance drivers and assumptions supporting our 10% EPS growth to the guidance midpoint of $3.54. The tailwinds primarily include global share gains, increased net productivity, restructuring benefits, lower corporate costs and continued operational improvements from our most recently acquired businesses of Axtone, Wolverine and ECS, as they continue to reap the benefits of ITT's management system.

Headwinds include incremental strategic investments to accelerate the commercialization of market-leading technologies, including i-ALERT pump sensors, the ITT Smart Pad, friction and material science solutions, twin-screw pumps applications and rotorcraft technologies to name a few. In addition, we're continuing the expansion of MT's Mexico and China manufacturing centers, and we are increasing investment in leaning out IP's Seneca Falls location.

The underlying 2019 headwinds we're offsetting with productivity and price actions include material cost pressures, incremental tariffs and automotive contractual pricing impacts. The 2019 tax rate of 22.5% produces a headwind of $0.08 and FX at $1.15 represents a $0.04 headwind that will be a larger headwind in the first half of 2019. Our 2019 operational EPS is actually growing 13% before the impact of these headwinds. Next I'll touch on some of the remaining assumptions in the walk. We expect unallocated corporate cost and other expenses to be down year-over-year to approximately $40 million, a lower functional corporate cost. We expect interest and miscellaneous expenses of approximately $4 million and environmental cost of approximately $5 million.

Our 2019 CapEx is projected to be in line with 2018 levels but just like our approach to strategic investments, we will be prudent in how we deploy our capital in this more uncertain environment.

And next I'd like to provide some Q1 and foreign exchange perspectives. In Q1, we are projecting solid organic topline growth of around 2%, excluding unfavorable foreign exchange impacts. The Q1 topline organic growth will be driven by IP, while MT will be impacted by weaker market conditions in China and timing impacts from last year's WLTP phasing in Europe. It's important to note that 67% of ITT's revenue is derived from international sources. And as a result, FX produces significant volatility in our total revenue. So with our euro guidance rate of $1.15. We expect a $37 million headwind in 2019 with majority of that impact concentrated at MT in the first half of 2019.

Lastly, in Q1, we anticipate triple-digit margin expansion at both IP and CCT and a solid improvement at MT due to negative FX impacts. Corporate benefits will be more evident in Q2 through Q4 as our cost and efficiency actions take effect. The Q1 tax rate and share count will provide additional lift compared to the prior year, driving high single-digit EPS growth including FX and double-digit operational EPS before FX. Now let me send it back to Luca.

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Luca Savi, ITT Inc. - CEO, President & Director [7]

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So let's wrap it up here with an overview of our approach to capital deployment on Slide 15.

Our approach to capital deployment is grounded in a balanced, disciplined and close-to-core approach. Our priorities remain funding of organic investments that provide significant returns with a low-risk profile. Before we approve these investments, we will go deep on our analysis as a team, and especially now in this more uncertain environment. Next, we will focus on close-to-core acquisitions that enhance the ITT gems and add greater portfolio balance. Our approach here is based on deep cultivation and unprecedented granularity in our analysis.

We will target opportunities that provide additional geographic reach and/or technologies to enhance our position in the markets we currently serve.

And lastly, we will continue to provide meaningful returns to our shareholders including dividend increases and timely share repurchases. I am a strong believer that actions speak much louder than words. So today, we are announcing 3 actions that demonstrate our capital deployment philosophy. Action number one, we're announcing a 10% increase to our quarterly dividend, representing our seventh consecutive increase and our first double-digit increase since 2014. Action number two, we're announcing an incremental $25 million in share repurchases. These are additive to the $25 million we announced in November 2018. Of the total $50 million of authorized, we executed $11 million under a 10b5-1 in January and $39 million remains available today. Action number three, today we're announcing the signing of an agreement to acquire Rheinhütte pumps, a specialty centrifugal pump manufacturer with over 160 years of experience that is highly complementary to our Goulds business and its 170 years of experience. Rheinhütte is headquartered in Wiesbaden, Germany, with over 80% of its revenue generated outside of the Americas. Rheinhütte produced approximately $66 million in revenue in 2018 with a strong focus in general industry, chemical and mining market and an installed base that produces a strong aftermarket revenue stream at 40%. This close-to-core acquisition will enhance IP's global reach and product range, accelerating efforts to grow globally in target markets like chemicals.

From a financial perspective, the purchase price was approximately 9x 2019 EBITDA and Rheinhütte is expected to be accretive to adjusted EPS in the first full year. No benefits of this acquisition are reflected in our 2019 guidance as we expect to close the transaction in the second quarter, and we provide updated information then.

That concludes our prepared remarks today. We covered a lot of ground, but I wanted to make sure that I provided you all with a comprehensive overview of ITT's strong foundation and the significant number of opportunities that we have to enhance customer centricity, to drive operational excellence and to efficiently deploy capital. Our actions will continue to speak louder than our words, as we navigate market dynamics in 2019 and deliver on our commitments.

Maria, you can now begin the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Jeff Hammond of KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [2]

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Luca, thanks for all the great color. Just on -- you talked about just kind of going through the facilities and finding still a lot of opportunity after a really good year. But the productivity bridge is kind of a deceleration so can you kind of balance the -- what you see as the long run opportunity with what seems like maybe a little bit lower productivity growth in '19?

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Luca Savi, ITT Inc. - CEO, President & Director [3]

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Okay. So I think it's different for, I would say, different value centers. But as I said, we are still opportunities rich. So when we're looking at our factories in IP as well in CCT, I think that we have opportunities to lean out our factories in terms of material flow, in terms of increasing the throughput, in terms of getting more labor productivity as well as more machine efficiencies. Another aspect where we are expecting more productivity is on the supply chain effectiveness. This is true across all the 3 value centers. Now one thing also to bear in mind is that probably when we start seeing, when we think about MT, some positive momentum in 2019 with the ramp-up of the Mexico facilities as well. I don't know, Tom, if you want to add anything to that?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [4]

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Yes. And Jeff, I would say, too, on the 50 basis points, I think what's not there is probably in the line up above, which is the IP project performance, is probably up in the mix line and that's a real productivity driver as well, just the way we classified it on the walk if that's where you're picking up the 50 basis points mix. In our project execution, we mentioned that we have good backlog in our IP projects and the margin profile is solid and that's another solid indication of the execution that we have. But I'd also add lastly that material cost are obviously one of the drivers that dilute down the productivity as well. So some of the headwinds there that we're dealing with are just rising commodities. But I would say the underlying level of productivity that Luca mentioned and that we're driving on a gross basis is higher than it was entering this point last year.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [5]

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Okay, helpful. And then just on IP, it looks like you called out unfavorable mix. I just want to understand it a little bit better because it seems like short cycle kind of outpaced projects. And then I think you called out a couple onetime items. If you can quantify those 2 items in any way that would be great.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [6]

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Sure, yes. Jeff, the mix at IP was a little bit of the revenue recognition flow-through that I won't bore you with on the way the projects from the past flow through in Q4 under the new revenue recognition. So I would consider that kind of a -- not an indication of how we enter 2019. So that was a little bit of a mix within the project universe but not one that stays with us going forward. I think as we mentioned, the mix for projects and the margin start to improve as we move into next year. The temporary items I would say that, that hit IP in Q4 were the due diligence costs associated with the acquisition that we announced today. We have been working on that very aggressively through the quarter. A lot of deep due diligence so we have that issue and then we had -- or that opportunity I should say. And then we did have some expediting cost associated with our lean reset in our IP location. Those 2 kind of Q4 items probably impacted us by about 100 to 120 basis points in Q4 and really all 3 of those items I described are not factors as we look into 2019.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [7]

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And if I could just sneak in one more. The 1Q guide of kind of 2% organic. Is that just simply a function of CCT, IP kind of grow within the full year range? And then MT's got a bigger drag given some of the noise in China and in Europe?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [8]

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That's right, Jeff. That's the way to think about it. We will continue to outperform those markets. Particularly, North America, China and Europe, but we are expecting a slower start to the year in China and in Europe. And as the year progresses, a lot of the platforms that we are on, that are ramping, particularly in Europe and also in China, they are loaded into the second half of the year.

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Operator [9]

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Our next question comes from the line of Joe Giordano of Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [10]

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Can you get into maybe quantifying a little bit how much the Mexico facility has been a drag on margins? Maybe in 2019 as it's been ramping towards breakeven. And what percentage of like your pads is it putting out right now?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [11]

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Well, Joe, so it's been a drag all year. We've basically -- a good chunk of the strategic investments that we have had at MT this year are really tied to ramping up that location with some other growth that we have had in China as well. But if you look at the strategic investments in total -- and again, Mexico is a big piece of that. But without getting into all this sub-details, MT margins on a full year basis were impacted by 90 basis points from strategic investment. So I would look at that as being heavily weighted to the MT Mexico facility. I think the good news, as we mentioned, is we've reached a breakeven point at Mexico much sooner than we expected. And the ramp that we're projecting for that location is very significant next year. We are ramping up some of the biggest platforms in North America and we will continue to see a significant increase in volumes running through that locations so that will be part of the margin story for MT next year that will be much more positive than what we had in the investment phase in 2018.

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Luca Savi, ITT Inc. - CEO, President & Director [12]

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So if I can add to that, Tom. If you look at this Mexico facility, as we said, Cesare and the team were able to bring it into breakeven in Q4 -- that was the third quarter of operation. And what we can tell you is that they're already making money in January. So that drag is no longer there in 2019.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [13]

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And then -- so is there any real reason we shouldn't think that, that facility, which I am assuming will basically be supplying your entire North American or close to it, should be like a high-teens facility by like 2020 or something like that? Is that a reasonable expectation? Because that would have a pretty impactful change to your overall dynamic there.

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Luca Savi, ITT Inc. - CEO, President & Director [14]

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I think you're right and -- but I would say, Cesare, if you're listening to the call and you want to beat it, please feel free. But your expectation is pretty spot on.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [15]

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Okay, fair enough. Luca, if I can -- now that you've been all around the firm now that you are in your seat here. When I think about putting your deployment strategy into context, is there anything that you've seen that maybe doesn't make sense for ITT anymore, where you're not planning on deploying enough growth capital where you look for potential divestments?

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Luca Savi, ITT Inc. - CEO, President & Director [16]

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Well, one thing -- going around, as I said, I really think that one confirmation that I have in going around and meeting with some of the customers as well as our people is that ITT is really a portfolio of gems and the niches that we have are really good niches. So as it stands right now, I'm pretty comfortable with what we have in our portfolio. And when it comes to capital deployment, I think that you know -- we have done a pretty good job in the way we have deployed capital in the past. If you look at historically, it's 1/3, 1/3, 1/3. 1/3 in organic, 1/3 in acquisition, 1/3 in the shareholder -- return to the shareholders. That has been a very good and balanced strategy that I will work to emulate and copy, and we will keep on in that direction I would say.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [17]

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And if I could sneak in one last one. A competitor of yours in the pump space yesterday was similarly positive on the project outlook for oil and gas but also noted that pricing was still pretty challenging in that market. And so I look for some color there, and they also said that second-half turnaround MRO-type activity is something that they're keeping a pretty sharp eye on. So just curious if you had any color on either of those.

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Luca Savi, ITT Inc. - CEO, President & Director [18]

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Okay. So if I think about the market, I would say yes there are several opportunities out there in the market. If we think about the funnel for us, the funnel of opportunities that we ended the year with was larger than the funnel one year ago. And this, despite a growth of 13% in orders. So the data will, I would say, validate what you said in terms of opportunities for the project. When we look at the price, I would say it's still a very competitive market out there and I personally haven't experienced a better price in the project just because of all of these opportunities. This has been our experience.

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Operator [19]

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

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [20]

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A couple of questions. First, with respect to I think something you said earlier, Luca, that the quality of the IP project backlog, the margin in the project backlog being notably better in '19 versus '18. Is there any way to sort of quantify that? And then I have a follow-up on auto.

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Luca Savi, ITT Inc. - CEO, President & Director [21]

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Yes, probably, I would say a couple of hundred points I would say.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [22]

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Got it. And then with respect to aftermarket, can you provide what your organic expectation is for ITT -- or for MT friction aftermarket in 2019? And then specifically, can you speak to China? I think in one of the slides you had referenced maybe having some success early on in cultivating China aftermarkets. So also maybe speak to what your approach is in that country versus what your approach has been historically in Europe.

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [23]

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Matt, so as the year kind of plays out in the aftermarket, kind of the typical story you will hear from us as we enter the year, the phasing and the quarterly progression of the aftermarket is always a volatile one for us. We are expecting independent aftermarket to be stronger than it was in 2018. We were kind of flattish there but we do expect more strength in the independent aftermarket in 2019 kind of in the low to mid-single-digit kind of range I would say. And then the other portion of our aftermarket, which is more of the dealership aftermarket, that's been also a little bit erratic in the last year. And we are keeping low single-digit to kind of flattish expectations there, but we are starting to see ramps in that portion of the aftermarket in China and in North America as our installed base is growing. So we have seen those categories grow off a small base, much larger percentages, and we think that trend will continue and as it relates to the independent aftermarket in those regions, we are taking some rifle-shot approaches at growing selectively where we think it makes sense at this point.

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Luca Savi, ITT Inc. - CEO, President & Director [24]

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Matt, this is Luca. And when you talk about general approach, I would say when we look at the OES side of the aftermarket, we are working closer with each account, each OEM account by account and when you look more at the independent aftermarket, we are working in all the different regions and with the Continental in Europe in order to explore even more growth strategies over there.

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Operator [25]

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

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [26]

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Tom, I think you said -- I don't know if this is a direct quote -- but you said something to the effect of you are going to be prudent towards deploying capital in this more uncertain environment. Can you give us a context of what you mean by the more uncertain environment, like more uncertain versus what time frame? You mean since start of the year -- like what exactly do you mean? Since a year ago? Like what exactly do you mean and how you're working through that?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [27]

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Yes, John, I would say that in Q4 and certainly in the automotive market, we have seen the global market slowdown particularly in China and even in Europe. Some of that is timing, there are different dynamics. But I think that's a market area that we are mindful of. We don't want to get ahead of any of the markets that we serve. We do continue to expect strength in North America and across markets. So that should be a market that is solid for us but I think as we look at our investments, we will continue to be very prudent, as kind of Luca discussed, that the process that we're using, the rigor that we're going through, I think is appropriate as we are rolling through the year. We don't want to get ahead of ourselves. But we do feel very good about the backlog we have exiting 2018. ITT across the board is up 14% in backlog, that gives us a lot of nice visibility. But a lot of the capital that we will deploy is obviously setting up late '20 -- 2019 and even in 2020. So I think we're just going to make sure that we're approaching it in the right way. There's obviously the tariff and other uncertainty in the macro environment so I wouldn't say there is a major takeaway there John, other than we are just going to be prudent and keep doing what we've been doing but we're happy that we've the backlog entering this year that we do.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [28]

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Okay. So you just hit on a not unimportant point, right? The capital you're putting in place sets you up for capacity and other considerations kind of into 2020 and beyond. I mean -- are you in terms of the runway of your business cadence, obviously, we can look at Motion and look at the $3 billion and so forth. But are you -- are there other things that you expect that could lead to some sort of a trajectory altering, if you will, kind of beyond this year? I just -- you tell me, you have the experience, you both do with the experience of historical ITT. Are there any sort of watch signs you're looking for as part of kind of your deployment of capital pertaining to your own outlook for operations, business, demand that sort of thing?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [29]

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You know, I think John that the one thing that we look at probably is the start of the awards that we already have in our kind of treasure chest of wins, if you will. So usually I wouldn't say that particularly on the Motion Technologies side, it's not about necessarily recalculating the amount of capital. It's just about the timing and the phasing. So we don't invest in capital at Motion Technologies until we have an award in hand. The only variable then is exactly when will that project or that award start production. So with that variable, we do look a quarter here and a quarter there to make sure that we are aligning that capital deployment with that award but I think what's unique about our capital deployment is the certainty in the visibility that we have around Motion Technologies in particular. And I'd say that, that remains as solid as it has ever been with a good 30% to 40% ROIC return profile. But the one variable we watch is really when these new platforms start up, and like I said it could move a quarter here and there.

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Luca Savi, ITT Inc. - CEO, President & Director [30]

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And if I can build on that one, John, is one thing is that in answering to this uncertain and volatile environments, we are being very granular. And in the questions and in looking at each and every one request for capital that comes in. So that we ensure that we do not buy any new machine, if we have one machine that is not running in the high-80% or 90% efficiency. And we are really checking if our assets are out there sweating or not before we sign an approval.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [31]

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Okay. So one more final clarification. If I hear you right, Tom, you're saying the $3 billion Motion backlog, the timing of that could -- it could slide a quarter or 2. But that said, I think you commented last quarter that you said you expected Chinese and North American OE to accelerate into the mid-teens in 2019. Is that what you expect and did I characterize the context of what could be a project deferral timing by a quarter or 2 or is there a risk that the $3 billion gets pushed out much further, if say China auto gets worse or something like that?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [32]

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John, I don't think we see any major risk to the $3 billion. If you really look at it, it's about the award generation and the wins, and we are up 20% this year compared to the target of awards that we had for ourselves entering the year. So from that perspective, we are ahead of what we planned on coming into the year and that includes a really significant front axle win in North America on a big ramping platform. So we feel good about the $3 billion -- timing, production rates, that's always a variable that we are constantly managing over a 5-year cycle but like I said, it's a quarter here and there. And we're always monitoring the conditions before we make the decisions but the core $3 billion is solid and our win rate is better than we expected coming into the year.

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Operator [33]

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Our next question comes from the line of Andrew Obin of Bank of America.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [34]

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Just a question. I know you highlighted rotorcraft strength in commercial aerospace. Is that helicopters, I'm just wondering? And what is driving the strength?

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Luca Savi, ITT Inc. - CEO, President & Director [35]

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That's correct. I would say this is one of our, I would say another gem. It's a beautiful investment. It's one of the inorganic investments, it's a gap that we saw in the market a few years back that was discussed at one of our strategic meetings when we reviewed the strategy, and we realized that we were not playing in the rotorcraft business at all. So -- but one of our competencies is really energy absorption, noise, vibration, these are key and in our Center of Excellence in Orchard Park, New York. And before we look at the market, we saw a gap. We worked very closely with the customer to develop a solution where they had an issue and this translated in millions and millions of dollars of orders. The return on invested capital here is beautiful.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [36]

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So but that is an aftermarket -- that is a market share opportunity. It's not the end market, right? It's just you gaining share in a new market?

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Luca Savi, ITT Inc. - CEO, President & Director [37]

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Absolutely right. And this is what has helped us, if you want, to have the growth in order that we have and the growth in revenue in 2018. But as you said, it adds also very nice beautiful aftermarket opportunities.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [38]

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Got you. And I apologize if I missed the answer. But on IP you highlighted expediting costs, these seem to linger. And given sort of the ramp up in backlog and bullishness, how fast will those go away and what makes you think they won't linger?

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Luca Savi, ITT Inc. - CEO, President & Director [39]

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Okay. So -- no, this is an issue that we have on a specific site. As a matter of fact when we look at our delinquent backlog across many of our facilities, it went down. It went down in all of our international operations. I give you the example of Saudi. But I could tell you about Bornemann. I could tell you about Korea. So all of this is good. But in one specific site, which is the Seneca Falls facility, we just reset a layout. We went for a lean and a one-piece flow operation for our ANSI pumps. This has changed also the way they were planning and scheduling and therefore, the working together with the supplier, hit some bumps in the road. We are out of that now, and we are improving. So it will not linger.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [40]

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Thank you, and I'll just sneak in one more question, sort of more philosophical question. We look at CapEx revisions for large oil and gas companies for North American producers. And all we are seeing, all of these guys consistently guiding to no CapEx growth and we have you, we have your other competitors in the flow space. And then the backlog just seems to completely -- your revenues and backlogs just seem to completely contradict what your large customers are telling The Street in terms of their spending plans. And I'm just trying to reconcile why is the industry seeing this good visibility into 2019, optimistic about the backlog, the numbers are there, yet your customer base is consistently telling The Street, even in the MT space we're seeing the same thing. But your customer base sort of tells The Street that there's not going to be any CapEx growth in 2019. If you could help us?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [41]

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Andrew, yes, so for us, what we have in backlog is generally the orders that we received during the course of 2018 with a lead-time of 12 to 18 months on average. And our oil and gas orders entering -- backlog entering 2019, were from a different investment cycle perhaps, and those are the ones that we're going to be working on and shipping in 2019. And the strength there for us is generally the downstream category where we have the bigger sales expectations, a lot of our growth is already in backlog. So for us the backlog in oil and gas is strong and the orders really across the oil and gas space, even beyond the projects, the orders are very strong across all the categories in 2018. So we have seen some good solid growth in the market, and we are going to execute on that in 2019. Obviously, the funnel that we are monitoring is what's critical for us as we build order momentum and backlog momentum into 2020. But as it relates to 2019, based on the strength that we see in downstream and some of the other recent wins we've had in the upstream, to add to that, gives us the certainty in the oil and gas market today. Despite what you might hear...

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [42]

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Yes, no, and these are all the usual suspects, right? There's nothing strange about people who are ordering stuff, right?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [43]

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Correct. And I would say the other thing, too, Andrew, is we are a niche player. So we can win an award here and there, and we do end up with a very nice growth rate. So we're not the biggest player in the space but we do go after very specific opportunities. And that is why we've been able to take some really nice share in the oil and gas market and that's what we're delivering on now.

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Luca Savi, ITT Inc. - CEO, President & Director [44]

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One thing, Andrew where we suffered probably in Q4 on the oil and gas is on the connector side of the business. This is a much faster and is a small business, you're talking about roughly $30 million, $40 million business yearly. And this is a business as soon as the price of oil collapses, they pull it out. And this was more related to the price of Canadian oil actually than anything else. So when we -- as you see the price of the Canadian oil coming up, and we saw also that business of oil and gas connectors picking up as well. But it was mainly related to that probably.

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Andrew Burris Obin, BofA Merrill Lynch, Research Division - MD [45]

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And that's upstream, right?

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Luca Savi, ITT Inc. - CEO, President & Director [46]

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That is upstream, correct.

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Operator [47]

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Our next question comes from the line of Bryan Blair of Oppenheimer.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [48]

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Just wanted to quickly circle back to the unique platform visibility you have in friction. Is there at this point -- to ask more directly, any reason to question further OE acceleration into 2020?

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Luca Savi, ITT Inc. - CEO, President & Director [49]

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Okay. So not really. So as Tom was saying, we won those awards -- the awards that -- we are ramping up the awards that we won 2 years ago. So when you see the growth in North America, a lot of the growth that will come in North America are projects that are already ramping up. So 80% of that are projects that already started the production. Then when you look at Asia and China for instance, the growth is warped. So a lot of the growth in 2019 will come actually from SOP. So awards that we won in the last 12, 18 months, when they need to start up production. So the only reason we were discussing like before with John is if you are shifting the start of production by a few months or a quarter. That I would say is the only risk that we could see.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [50]

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Okay. Appreciate that color. And then on the nonfriction side of Motion Tech, can you speak to the current blended margin of nonfriction. I think you said in the recent past something in the 10% range and where we should expect that to go in 2019, 2020?

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Luca Savi, ITT Inc. - CEO, President & Director [51]

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So okay. So let me give you some color on that and then Tom you may add to that. So when you look at -- there are 3 different businesses over there. There is KONI, Wolverine and Axtone. So when you look at KONI, KONI was a turnaround story and from a turnaround story it became a platform for growth. KONI has achieved already very good and healthy double-digit margin and even though I would say there is room to keep on improving to reach the entitlement. The acquisitions, Axtone and Wolverine, they are on their journey to get to what we see in their entitlement. But I don't know, Tom, if you want to add anything to that?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [52]

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That's right, Luca. And I think the KONI generally more established has been moving into the mid=teens, low mid-teens kind of range. Axtone and Wolverine mid- to high single digits on the journey. Those 3 entities will be an important part of the margin expansion story for MT. Obviously, we need to keep building the momentum and it's step-by-step. It's going to be a gradual improvement in those businesses but they do drive some of the margin expansion that we are planning for MT in 2019.

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Operator [53]

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And ladies and gentlemen, we have time for one more question. Our final question comes from the line of Nathan Jones of Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [54]

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Just starting with your outlook on the auto and rail markets, you have got flat global market growth. Can you possibly split that into what your assumption is on rail and then what your assumption is on auto OEM and auto aftermarket?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [55]

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So for auto, we are in the flattish range. That's definitely, depending on the region, anywhere from flat to plus 1 or minus 1. So that's how we have looked across the spectrum. I would say on rail, probably a little bit more of a low single-digit market in rail and it's a very regional business, rail. So you really have to kind of break it down by what we're seeing in the North America and the European and the China markets. I'd say we've had a little bit more strength as of late and good backlog in Europe and North America and I think we are a little bit more cautious on the China rail markets dynamics going into 2019.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [56]

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The auto aftermarket?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [57]

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That one we don't really tag to the market. We kind of look at our own projections and I think our blend of some of the prior commentary, Nathan, probably gets the auto aftermarket for us in a flattish to low single-digit kind of growth environment.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [58]

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Okay. And then on the IP and CCT businesses, I guess, combined. You've got high-teens backlog growth year-over-year there. Some continuing pretty strong orders in IP. Yet you're only talking about 3% to 5% growth in all of the segment, so IP has got to be in that as well. Can you maybe square that with the backlog growth, the continued strong orders here with only 3% to 5% growth in that segment in '19?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [59]

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So I think, Nathan, obviously there's a book and

(technical difficulty)

Expectations that as we go into the year, we do enter both IP and CCT with more backlog than we had last year at this point so that gives us some good visibility. But I think there's always that 40%, 50%, 60% of our revenue that's still book and bill in the short cycle where there's some uncertainty there. The other factor that while we have great project visibility on the IP side, we also have to be aligned with our customers on when they will take delivery and that can be a factor at times in the ultimate conversion of that backlog to revenue. So there's a little bit of those things that we think about as we look through in our backlog. But a lot of our backlog as you can imagine on the short cycle side is really part of the Q1 or Q2 story and then we will wait to see how the back half of the year fills in.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [60]

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So it's a little bit more -- there is some lack of visibility into the second half?

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Thomas M. Scalera, ITT Inc. - Executive VP & CFO [61]

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I would say and plus on the project side, delivery is always -- it's partially our execution and we're going to work like heck to make sure that we're hitting our marks -- and it's also the customer's final delivery and acceptance dates and sometimes there could be some pushing and pulling there that could take really good backlog that's ready to go and turn it into backlog versus revenue as we exit the year. So we are hopeful that we can get them all out the door on schedule, but we do plan for some customer perhaps, delays of projects that are nearly ready to go.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [62]

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And then I have got a longer-term one for Luca here. You did mention margin entitlements and I've heard some of these before. Maybe you could run through what you think the margin entitlements are over a cycle, longer-term in for IP, MT and CCT, and how you get from here to there?

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Luca Savi, ITT Inc. - CEO, President & Director [63]

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Okay. So when we look at the margin entitlements, I don't know if we will have all that time, Nathan, right now. But I know that we are going to have later on our one-to-one. But in terms of margin entitlements for IP, I think that it should be 15-plus. This is what we thought and this is what we keep on thinking. And the reason for that is because we continue to see opportunities in terms of leaning the factories. As I said, the VAVE in terms of how we engineer the product. The supply chain effectiveness. But also if you think about the acquisition of Rheinhütte Pumpen today is going to be a great opportunity for us also to expand to leverage more our engineering as well as to look at opportunities in terms of our footprint. So this only confirmed this view of 15-plus for IP. When we look at CCT, I think that it's in the high teens and it's a little bit of a same story. I would -- in terms of how do we reach this high teens, high-teens-plus for CCT, is -- it's really in terms of I would say efficiencies in the factories in the way that we are -- engineer the product and the supply chain again. Now also the strategy of where we -- what we make and buy and where we make, what we decide to make. So you've seen our transfer to Nogales. Maybe more utilization of our factory in Shenzhen on the connector side of the business. All of that will help us in getting to the high-teens-plus for CCT. All of these I would say are between 3 to 5 years, vision. Regarding MT, I think that we can say that we will continuously to solidly expand our MT productivity and this will come, obviously, from the acquisitions that will have to reach their entitlement, which is going to be in the double digits. But the ramp-up of the Mexican facilities will help in the short term. Now the material cost is an area where we are going after tremendously. This is also what has affected a little bit 2018 in terms of MT results. And as well what I'm really pleased about is every time I go into a friction factory shop floor, the team is always creative in finding ways to find further efficiency and further savings. So solid expansion there as well.

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Operator [64]

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And thank you, ladies and gentlemen, this does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.