Good morning. Good morning, everybody. Thanks for joining us. For those of us who haven't met, I'm Vlad Bystricky. I'm one of the industrial analysts here at Citigroup, and I'm thrilled to have Luca Savi and Emmanuel Caprais from ITT with us here today. Luca is President and CEO of ITT and has been with the company since 2011, I believe. Correct. Emmanuel, SVP and CFO, been with the company since 2012. Welcome, gentlemen, and thanks for joining us. Thank you. Good morning. Lot of topics we wanna cover today. I think, to start off, maybe we'll start with kind of one of the nearer term, just an update. I know you guys reported just a few weeks ago, but maybe if you could just give us an update on, you know, what you're seeing as you're now midway through the quarter, how you're seeing trends develop. You reported very strong orders growth in 4Q, so what you're seeing across the portfolio in terms of demand. Sure. The picture has not really changed when we look at Q1, January, and February. We have a very strong signs on the long cycle. If we look, for example, to the project business in our pumps and valves, the orders are strong and the funnel opportunities is strong. We see continuous growth in markets like, you know, the EV and the EV charging, as an example. And we see some of the weaknesses, the weakness on the shore side. We discussed that for the baseline pumps in IP and also for the industrial connectors when we look at the Q4. That has continued also in Q1. Overall, we see, you know, good orders growth across. Okay. Just maybe digging in on that a bit, you mentioned the strength in the longer cycle. Yeah. Project-oriented portions of the business. Can you just talk about, you know, your visibility to those orders actually getting booked into backlog and then revenue conversion? How should we think about that longer cycle portion of the portfolio helping visibility going forward? Sure. We've seen the project orders growing for the last few quarters now. Q3 and Q4 of last year have been particularly strong. It's not just the orders, but we saw also the replenishment of those orders in the funnel, in terms of the funnel of opportunities is still the largest we've ever seen across the board. This is true for the Americas, North America and Latin America. This is true for the Middle East. It's true for Asia Pacific. We don't see that strength in Europe. It's the only region where we don't see the order strength or the funnel. Overall, definitely, good strength has been for the quarter. We saw it in Q4. We are seeing in Q1 as well, across the region, with the exception of Europe, and I would say across different industries. You're talking about oil and gas, you're talking about chemicals, general industrial. That is definitely across the board. When you look then at the timeline, when you book a project like that, it goes anything between one to two, three years. For example, in our prepared remarks during the earnings call, we talked about a large order for an oil company in Nigeria, an independent oil company in Nigeria. That order probably will last a couple of years and will close by the end of 2024. Just following up on that. As you're booking these longer timeline, longer lead time orders, and we're in this inflationary environment that most of us really haven't seen, how are you able to protect margins going forward? Along with that, I think you had a little over $1 billion of backlog coming into the year. How should we think about, you know, margins in backlog and your ability to protect profitability? When you work on these projects, first of all, you are bidding, and you're working your bids for months. There are several components, be it motors or casting, et cetera, that you are ordering from your supply base, right? What you have, you ask for quotation, and those quotation have got a validity. To be honest, when you win the order, you firm those orders. You should not have, unless there is a misstep in the process, you should not have that variability on this project. When you look at the backlog that we have today, you know, that backlog, when you look about the motors for those backlogs have already been ordered. The quotation are firm. If you look at the casting, it's the same. you do not have that kind of variability. Got it. That's helpful. I guess, you know, just going along with this, sort of profitability and visibility, you have a longer-term target out there, of 20% segment Op margin. You know, you've put up a good track record over time, I think, of driving margins higher. Last year was obviously a more challenging environment with, the inflation. Maybe can you give us an update on how you're thinking about that longer-term target?Whether your views on sort of the timelines to get there have changed at all, and just your level of confidence in getting to that 20%. Last June, we presented our long-term targets for our segments. Since last June, a lot has changed, right? Who'd have known that I mean, we started to see some inflation, but inflation really accelerated in that Q2, at the end of that Q2. What I would say is that if you look at Industrial Process, today, we released our Q4 results. We were around 23%, a little lower than 23%. For the full year, we were under 19%. If you look at that target of 20%, you could say, "Oh, you're almost there." The reality is, as we mentioned, is that both in Q3 and Q4, we had some positive, some favorable, one-time items. Obviously, if they're one-time, they're not gonna repeat in 2023. We think that the right level to think about IP in terms of margin, where it's sustainable, is around 18%. I would say that in this case, we're well on our way to the 20%. I would say that it's probably, it's probably on the lower end of the range of that 3-5 years of margin targets that we're gonna reach, that 20% in IP. In CCT, I would say that we're on track. I think 2020, 2022 showed a nice improvement, a nice margin expansion. Aerospace has not fully come back. We have a lot of, more opportunities and tailwinds. I think we're nicely on track to be at that 22% that we talked about. In the case of MT has been really challenged because of the raw materials inflation. I think the team did an excellent job in trying to get compensation from OEM customers. The reality is that we're not getting 100% of the compensation, but I would say compared to our peers, we're getting more than them. If you think about MT, we're probably on the higher end of the range, so roughly towards those 5 years to get to the 20% rather than being like IP and CCT. Got it. That's helpful. Lots to dig into there across the businesses. Maybe, just sticking with MT since you just mentioned it. Working on price and margin recovery, that'll take some time. Can you just talk more about your visibility to market outgrowth over the coming years and, you know, how you're thinking about your ability to continue to gain share in that business? Sure. You have seen in the past, we have outgrown the market by roughly 900 basis points every year. Last year was less. It was roughly 400 basis points. As we discussed it last night, came after with 2021, where we outperformed by 1,700. Overall, even the average for the last four years was around 800, 900 basis points. We are confident saying that we will continue to outperform the market for, you know, the next three, four years. We are saying this because we have that visibility. If you think the way it works is that the tier one or the OEM will give you the award today for an SOP, a start of production, which is in 24, 28 months, and then you start the production and you ramp up. you know the awards that you won, you know when you will start producing for that platform, and in two years' time, and then you have the next two, three years to ramp up. We have that visibility for the next three to five years. This is why we are comfortable in saying, you know, that we will continue to outperform. The EV trend also is very interesting and very important. You know, Luca always mentions that electrification is good for ITT. In this case, what you're seeing is that in the global auto production that is recovering compared to 2019, we're still 10% lower than where we were in 2019. You see that the EV segment is taking a disproportionate share of that growth. Mm-hmm. Within that EV segment, we outperform even more than on the ICE platforms. You have what's important for us, for everyone to understand is that we will have a compounding effect where we'll get the growth of the market, which is today around 82-83 million cars. At the before the pandemic, it was around 92-93 million. We'll have the segment EV growth that is gonna be disproportionate also. We'll have on top of that, a win rate which is higher than what we've, what we've seen historically on the ICE platforms. Got it. As the EV portion ramps, how should we think about the revenue and margin contribution on electrified platforms versus ICE for you guys? The content is not really changed. You do not have a higher content necessarily, but there is, you know, an add-on to that one. When you look at the margin, they are comparable, and sometimes a little bit higher. Let me go back to the first point. I'm saying there is a specification I want to make is that because the electric vehicle usually is heavier, the pad that you're using, the surface that you're using to brake needs to be larger, and therefore you have more friction material, you have larger material content and therefore a larger brake pad, and therefore is a higher revenue. Mm-hmm. That is a one thing. Usually also the margin could be a little bit higher because with electric vehicles, sometimes the OEM or the Tier 1 are facing challenges that they never faced before. You with your R&D need to solve problems that are difficult. If you're quick in resolving, you beat the competition, and you can have a little bit of a premium on that front. This is really the dynamic. I wouldn't say they are not really substantially different. Got it. Okay. We could probably talk about, brake pads all day. You do have some other businesses. I want to ask you about, the rail portion of MT. Sure. Rail is a much smaller part of the revenue mix, but seems like you've got some pretty good momentum there and some excitement around rail. Can you just talk about how you're thinking about the growth potential of that rail business and whether you see opportunities to scale it and make it a more meaningful part... Sure of the portfolio? I will tell you know, when it comes to rail, it's really there are two stories in MT for rail. One is KONI, our shock absorber business, and one is Axtone, an acquisition that we made in 2017 in terms of crash buffers, et cetera. When you look at, there are some similarities in terms of when we look at KONI. Remember when we arrived in ITT, KONI was losing money. I remember, you know, the board asking either, you know, should we get rid of it or not, presenting to the board a turnaround plan. Today, KONI has, you know, made it to high teens profitability, just to give an example. It's been a good turnaround story, and it's a growth platform. It has been growing organically, has allowed us to make another acquisition, Axtone, in rail, which has been another turnaround story. We bought Axtone in 2017. It was single-digit. We turned it around, we brought the EBIT to double-digit, then boom, you know, February 2022, you know, the war in Ukraine. Which has been very painful for Axtone. We had a very good profitable business with Axtone in Russia. 25% of our Axtone business was in Russia, that disappeared overnight when we decided to suspend our operations. It was the right decision. It was the right call. No discussion about that. Despite that, the team has been able to deliver, you know, profits in 2022 in terms of mid-single-digit. What I would say is that the team has been very good in converting and trying to compensate for the loss of 25% of the Russian business with more passenger business from other regions, so that our decline, both in orders and revenue in 2022 was only 12%-13%. We like the rail business. I think that we like the secular growth. I think that we like the macro trend that will push the rail business, and therefore we keep on growing organically and potentially also inorganically. Another beautiful aspect of the rail business is that there is a lot of aftermarket. When you look at the rail, it's roughly 35/65. 65% of the rail business is aftermarket, and that has got good profitability. That's great. I think you had mentioned when we were talking before about your opportunity in India in rail, do you wanna tell us a little about that? Yeah, sure. I was in India at the beginning of the to see our IP business. We took advantage of having our IP business pumps and valves in India to really localize the manufacturing and assembly also of our shock absorbers. You all know, you know, the rail industry is quite important in India, and a new regulation came to place in the last few years where you really have advantages if you have a local manufacturing. If you are importing, you will be exposed to tariffs, et cetera. We are the only Western, you know, shock absorbers manufacturer that is based in India. We have good contracts with both local companies as well as, you know, locomotives and train manufacturer from the Western world. With this local facility that is up and running, we will be able to win a good market share in that market as well. It's exciting. Maybe just shifting to IP since you did mention IP. You mentioned, obviously we talked about earlier the ramping, larger project activity and some slowing in the shorter cycle-based business at IP. How should we think about mix shift potentially impacting margin both this year and going forward? I think one thing that, you know, we've been working really hard on is the project margin expansion. That goes with really a streamlined project management. I would say that we've done a really good job at improving that margin. As we mentioned during the Q4 call, we had a significant margin expansion, and we think that this is really gonna help us drive margin expansion overall at IP. The mix is not as positive, but it's still gonna be, it's still gonna help us drive margin expansion in IP. If I can build on what Emmanuel said, is that even if the mix is not gonna be that positive, because with, you know, long cycle projects, et cetera, we have plenty of opportunities still to improve. Mm-hmm. On the make and buy, for example, we shared with the investor community last year that we decided to close our foundry in Seneca Falls, upstate New York. We looked at what we really make, what we strategically should make, et cetera. That, you know, making the casting is not something that really was strategic to make the casting over here in the U.S., in Seneca Falls. That is a process that is taking us two years, because if you don't really want to mess it up, you do things properly. The closing of the foundry is a two years process, and therefore the foundry will be closed by end of this year, Q1 of 2024, and that will give us considerable opportunity in terms of cost competitiveness. That is just one example. Right. The leaning of SFO, the transformation that we discussed during the earnings call is another example that we have that trajectory. Yeah. I wanted to ask you more. You mentioned the foundry, but I wanted to ask you about the activity you have underway at the plant, at the Seneca Falls plant. Because I know you're in the process of a lean transformation there. If you could just give us an update on, you know, where you are in that process and, you know, I know lean is a journey. It never ends, right? Yeah. When do you expect to see sort of tangible benefits from what you're working on at Seneca Falls start to show up in the financials? Well, you think that some of the benefits of this journey, you have seen them in the results, right? Because if you think about IP had a 7% EBIT four years ago, and through the last four or five years, we continuously improve year after year, despite COVID, despite the supply chain, despite all the war, the surprises, the unknown unknowns that we have to face. Part of that was really the lean transformation in SFO. But as you said, it's a continuous journey. We were in Seneca Falls, you know, a couple of weeks ago. We are in Seneca Falls next week, and there we are discussing with the team a complete different layout and material flow and way to assemble also the large pumps. We transformed the way that we are assembling and making the small pumps. That is already done. It's in a one-piece flow. Now what we have to adjust is just how the materials get. Mm-hmm. -to that line. We are transforming also the way that we are making the large pumps more similar to one-piece flow as well. I would say we are in the journey. We are not even close to the end, I would say. Everybody's excited about the transformation and it will take, you know, the next two-three years, I would say. We view that layout transformation really as critical to sustain those long-term margins and that current level of margins that we have today. I think we've shown a lot of improvement, but it's really important for us to stabilize and really consolidate that level of performance. We need to have facilities that are completely lean and not only one part of the facility. Got it. You sticking with IP here, your most recent acquisition that you did last year, Habonim, which is now in the IP segment, you know, I think that gave you more presence in valves within that business. Can you talk about, you know, Habonim specifically, how that's performing versus your expectations, and then more broadly, how you're thinking about the potential to further scale or do further M&A in IP generally and in the valves business? Habonim is performing extremely well. They have beat our expectations for the first year. It's across the board. It's revenue, it's orders, revenue, margin and cash. That's very encouraging for the future. We brought this new technology, which is the ball valve technology, the way they really transformed this business over the past three years has helped us understand what we could apply to our existing engineer valves business. I think that this is really the case where we have strengthened our valves platform, accelerated the growth on our existing business by making it much more competitive from a cost standpoint. We see a lot of potentials a little bit everywhere, it's not only low-cost country sourcing. It's the way we design the actual product, and we standardize as much as we can while customizing the last piece to for our customer. The growth that we've seen in Habonim is really, really encouraging. We have a nice backlog. They've grown orders significantly. They're taking market share. They're expanding in North America. They're expanding in Europe. Yeah. I think it's been going really well. We're very attentive to make sure that what we're seeing is sustainable, but we're very happy so far. On the second part, in terms of the M&A, this is very encouraging because it means that, you know, the rigor that we apply strategically and financially to that acquisition, paid off. The market in terms of valves and pumps is still very fragmented. There are opportunities out there, and therefore we are very active in cultivating those opportunities. Those opportunities are, in some cases, very well-run companies. Mm-hmm. -that you can add to the, to the portfolio. In some other cases are companies where, you know, our rigor, our discipline, our operating mechanism, and our, and our lean will help in making them better. We are actively, you know, cultivating and hopefully we will add more Habonim in the, in the near future. Great. You know, as you've said, M&A is a strategic priority for the company and particularly in 2023 and going forward. What are some of the key characteristics you're looking for in potential acquisitions? You know, are there parts of the portfolio where you think M&A is likely to be a more material contributor going forward? Sure. When you look at ITT, we really, you know, we're demonstrating our capacity to execute, our ability to grow organically. Acquisition of Habonim has been very successful. M&A is a key component that will compound on our growth. When you look at the portfolio, I think that there are definitely, you know, rail. We talked about rail, which will be an interesting area. I would say rebalancing the portfolio is something that we're looking at. The areas where we are most active today are really in pumps. Mm-hmm. In flow, and the connector side of the business. I mean, the connector is another great story, is a business that we like, that we love, and it's got great potential, and we can deliver growth and value in the years to come. How should we think about, you know, as you think about deploying capital going forward, you know, you still have a very under-leveraged balance sheet. Mm-hmm. Net cash position still, I believe. How are you thinking about sort of the optimal capital structure for the company going forward? First of all, you know, we don't feel pressure at all to deploy capital and make bad choices, you know, especially in this environment where interest rates are really high. We're very disciplined. We look at strategic fit, we look at the financial return curve. I think that if we see those two, the strategic fit, the fact that it's gonna be a nice complement to our business, it's gonna strengthen our existing businesses. And the financial returns equation makes sense, we're more than happy to deploy capital. We're not gonna deploy capital to just for the sake of deploying it. We're really disciplined with the returns. We're really disciplined with the strategic fit. As we said, 2023, we intend to accelerate the capital deployment. Our pipeline, our funnel of opportunities in M&A has improved with the addition of Bartek at the end of 2021. He has really worked on expanding the pipeline, and we feel good. We feel good at what we have ahead. I think that we look forward to having a really efficient capital deployment that is accretive to ITT's performance. If you look at it's where M&A is where the money goes second. After organic investment, this is where it goes. If the rigor that Emmanuel was talking about strategically and financially tells you, "No, this is not a good acquisition," you know, it might be a valve business, but you don't really think that, no, this is not the best use of our money, then we are not concerned about. I mean, we buy back shares, which is what we did, you know, in the last couple of years as well. Right. That makes sense. You mentioned M&A being the second, with organic being the first. In terms of organic investments, you've ramped CapEx pretty significantly over the past few years. I think you're expecting another step up in CapEx here in 2023. Can you talk about, you know, what these investments in CapEx are going to, how you're prioritizing them, and what you're doing, you know, to ensure you get the returns you expect from this increased CapEx? A lot of the destination for that CapEx is towards productivity and growth. It actually more or less represents 80% of our CapEx spend. A lot of the investments are going to our friction business. Mm-hmm. which needs capacity expansion because of the win rates we've been having and we continue to have. This business provide us great visibility, as Luca was saying. For us, we can time the CapEx really nicely, and we are sure that we're getting the returns that we're expecting because it's just a prolongation of the existing business conditions. Then productivity is also a very important part. Because not only it allows us to maintain those competitive advantages we have in friction, but also strengthen the rest of the businesses and improve the profitability. In general, we are, you know, our... When we deploy CapEx, this is the area where we get the best returns because we have the best risk profile. We know where we're investing, we know the end markets, we know the products. In IP and CCT, we've seen a lot of opportunities in rejuvenating our product portfolio. I think that this is for us it has been a really good success story and an integral part of the margin expansion story at ITT. That makes sense. I did wanna ask you about free cash. Free cash was a bit pressured last year. I don't think that was unique to ITT. Looking forward, can you talk about, I think the forecast is for 11%-12% free cash margin this year. Can you talk about your visibility to that improvement in free cash, and how much of the rebound is within your control versus, you know, needing things like supply chain to continue to improve? Yeah. Free cash flow was pressured. Even though I would say in Q4, I think we really drove a really nice performance, and we caught up a lot of this lackluster performance that we had in the first three quarters. If we look at 2023, we're expecting to be a little less than $400 million of free cash flow for the full year. A lot of it we're working on, and we already saw results in Q4. AR collections, this is something that we've been really working hard, and we're making really good progress. Inventory. In 2022, we increased inventory by $100 million, more or less. I think that as we are deploying plans, as we are working to improve our inventory management performance, and also as supply chain hopefully continues to improve, at least in our main business except Aero, where it's actually getting worse, we should see a nice improvement. Now, as you said, not everything is in our control, but for sure, we're putting really good emphasis on cash, especially given the interest rate environment we're in. Okay. I wanted to ask you guys, a question around CCT. CCT has been a great business for you guys. I think, almost 20% growth last year. Forecast this year, I think, is for more like mid-single digit growth. You mentioned some constraints on capacity there as well, I think. Can you talk about, you know, what's influencing that growth outlook and what could make growth better or worse in 2023 versus that mid-single digit range in CCT? When you look at CCT, you really have two stories within CCT. You have the connector business and the components business. When you look at the components business, it's very much exposed to Aero and Defense. All of that will be a tailwind for CCT. The ramping up of the Boeing 737 MAX or the ramping up of the wide bodies that are coming, that will be a benefit for CCT. But at the same time, I would say the supply chain constraint has been probably more than what we expected in Aero in the last six months of 2022. This is also what, when we looked at the closing of 2022, we said that some of we were not able to deliver some of the things that we were supposed to deliver in Q4, despite the growth, et cetera. That is really because of the supply chain constraints and also because of some internal labor constraint that we had in our factories, specifically in California, here in the U.S. That will be a tailwind, you know. Mm-hmm. The Aero and Defense. I would say on the connector side, we discussed about the short cycle before, which is true, but still you have seen our orders in connectors going up. The reason for that is because that weakness that we saw on the industrial portion of the connectors, the distribution, is more than compensated by the EV Charging Connectors, by the growth on the medical side, or by the connectors in Aero and Defense. We are working very closely with some of our major customers for some big programs in Defense. It's fair to say that, if and when we win those contracts, those are long-term contracts. Even if we win the award, those will happen probably next five to seven years, the large Defense contracts. Right. the last point I wanted to mention on CCT is the fact that we believe there's still a lot of opportunities in terms of pricing in CCT in 2023. If you look at 2022, we barely compensated our costs, so we had a price cost neutral from a dollar basis in CCT. As we dive a lot more into the pricing opportunities, we see a lot of pricing opportunity. This is a business where from a connector standpoint. You're sole sourced with a lot of customers. Mm-hmm. That gives you a lot of pricing power. We are, we are currently laying out plans to really shift from compensating the inflation to really do some value-based pricing and understand where we can really improve from a price standpoint, the acceptance by our customers of the value that we provide. Got it. Then just on that shorter cycle connectors business in CCT where you mentioned some slowing on the industrial side. Is there any way to understand whether that's really end demand slowing or whether that's kind of normalization of lead times and... Sure. -cycle times? Sure. There is a way, particularly because when you look at your distribution, out of your distribution, you get all the data on their POS, on their bookings, and on their inventory level. That allows us to see their book-to-bill. We know that there is destocking going on. Mm-hmm. that probably will be, you know, in Q1 and Q2 of this year. Okay. That's helpful. We're running short on time. I wanted to ask you guys one question we've been asking every company that's been here over the past couple of days, and that's: What are the top two or three innovations, mega trends or structural changes that you see affecting the company over the next five years? On the flip side, are there any emerging trends that maybe are being overlooked in the current discourse? Okay. I would say, if I could mention two, I would say electrification. Mm-hmm. energy efficiency. As Emmanuel said, we always keep on saying electrification is good for ITT. It went through the compounding effect for motion technology, but think about also the potential for the EV Charging Connectors. Okay? This is an area where we've been growing tremendously and where we have some differentiation, and we are making them, you know, in Shenzhen as well as we make them in Europe. That's definitely a good trend. For ITT. The other, I would say energy efficiency. When we look at energy efficiency, that goes in the traditional energy. If it's the revitalization of the old oil wells in the Middle East, we have the technology, we have our pumps, our multiphase pumping, our bottom-hole pumps that help them to do that. If it is also in do better job with environment, in stopping flaring, for example. The big order that we talked about it at the earnings call is it will stop flaring at this site in Nigeria with our multi-phase pumping. All of those are definitely 2 mega trends that will benefit ITT, would be good for ITT. Also probably we can do a better job to communicate more how these will really benefit our growth and our differentiation in the future. Great. Well, thanks again for joining us. It's great having you both here today. Thank you. Thank you. Thank you, Vlad. Thank you, everybody.