Melissa Trombetta - Vice President of Investor Relations Denise Ramos - Chief Executive Officer and President Tom Scalera - Chief Financial Officer and SVP.

Mike Halloran - Robert W. Baird John Inch - Deutsche Bank AG Shannon O'Callaghan - UBS Brian Konigsberg - Vertical Research Partners Joe Ritchie - Goldman Sachs Joe Radigan - KeyBanc Capital Markets.

Welcome to ITT's 2014 Fourth Quarter and Full Year Results and 2015 Outlook Conference Call. Today is Friday, February 13, 2015 and starting the call from ITT today is Melissa Trombetta, Vice President, Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern. At this time, all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin..

Thank you, Laurie. 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 www.itt.com/ir. During the course of 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 statements, 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. So let's now turn to Slide number 3, where Denise will discuss our results..

Good morning, everyone. Thank you for joining us as we announce our financial results for the fourth quarter and the full year of 2014 which is a record year for ITT. The combination of our focused execution and balanced portfolio drove our extraordinary result in Q4, 2014. So let me share some of the 2014 execution highlights.

Organic revenue up 7%, adjusted segment operating margin up 130 basis points, marking the second year in a row that we delivered over 100 basis points of margin improvement. Adjusted segment operating income up 17%. And adjusted EPS of $2.47 per share, up 22% on top of the 20% growth we delivered in 2013.

Our comprehensive growth directly reflects the power of our diversified and balanced portfolio. As all three of our market segment performed well in 2014. Our transportation and industrial market when combined grew 5%, led by our aerospace, automotive and rail businesses.

The strength in these two segments representing nearly 80% of our portfolio was further enhanced by the 20% growth in our oil and gas segment. I am very pleased with our performance this year which reflects the efforts of our thousands of dedicated ITT employees all around the world.

From enhancing our brake pad and pump capabilities to turning around our connectors and shock absorber businesses to advancing our LEAN journey, they have all used their bold thinking and collective know how to build on a multiyear track record of performance.

As we move into 2015 and continue to face a difficult external environment with global oil and gas market and foreign exchange headwinds, we will proactively drive internal initiatives that will focus on optimizing execution, expanding our global transportation and industrial markets and deploying capital effectively.

Through our collective focus in these areas, we will effectively drive our multi-industry strategy, which is keenly focused on long-term growth and value creation for stakeholders. We'll get to 2015 shortly but first let me wrap up 2014 by turning to Slide 4. In 2014, we focused on these four key strategic areas that drove value creation.

Starting with market expansion. In 2014, we delivered strong performance in both the emerging and the developed market. Emerging markets were up 14% organically driven by oil and gas, mining and share gains in our exceptional automotive friction business in China.

In developed markets, we grew 4%, driven by strong performance in our industrial process North American businesses including oil and gas, chemical and industrial and mining. This was complemented by solid performance across our aerospace platform that was partially offset by defense weakness.

In 2014, we further intensified our emphasis on differentiating with our customers. We extended LEAN far beyond the manufacturing floor. And this improved focus led to solid improvement in the majority of our operational metrics around quality, safety, on time delivery, inventory and productivity.

Further demonstrating our success with customer is motion technologies growth in the aftermarket brake pad business which was up 7% due in part to our strong OEM platform wins over the last several years that are now entering the dealer service cycle. Next is operational excellence.

In order to consistently provide a premier customer experience, we have invested in an environment of continuous operational improvement as we drive towards our LEAN enterprise goals.

As a result of our focus on operational excellence that is powered by our commitment to LEAN, we delivered a third year of more than $100 million in gross productivity savings.

A significant contributor to the products activity savings this year has been interconnect solutions, reflecting both their focus on operational excellence and lowering their structural cost base.

As a result of this tremendous work, ICS increased their adjusted segment operating income by 66% and expanded their adjusted segment operating margins to 13.3% which is 540 basis points better than the prior year.

Given the volatility in the external environment in recent months, in Q4 we continued to capture opportunities to improve efficiency and reduce cost to proactively address 2015 headwinds. During the quarter we executed $11 million in restructuring and realignment actions bringing our full year total to $37 million.

And lastly this year we continued our track record of balanced and effective capital deployment by funding major organic investments that extend our global reach and capabilities while providing meaningful returns to our shareholders.

Some of our more significant organic investments this year included the further expansion of our state-of-the art automotive production and R&D facility in Wuxi, China. And we enhanced our capabilities in the engineered business to better support industrial process customers.

As a result of these investments, we delivered tremendous growth in both categories. We grew our China automotive business 26% and we grew 11% organically in our industrial process business with all core markets contributing to this performance.

We also returned capital to shareholders in 2014 in the form of our solid dividend and $50 million of share repurchases. So as you can see we accomplished a lot in 2014. And we are prepared to face the headwinds in 2015. Turning to Slide 5, let's briefly focus on the fourth quarter results.

Excluding the impact of currency organic revenue growth of 6% was driven by global oil and gas as well as North American chemical and mining project pump activity.

This was partially offset by expected decline in both aftermarket auto brake pad due to a tough prior year comparison driven by significant pent up demand as well as decline in our non strategic connector markets.

ITT's organic orders increased 8%; industrial process whose organic orders grew 26% drove growth this quarter followed by control technologies whose organic orders grew 18%.

Industrial process orders included a 52% increase in global oil and gas due to a surge in order releases on committed projects and control technologies order growth was driven by demand for aerospace and defense components and solutions in the energy absorption market.

Similar to our revenue growth, our order growth was partially offset by an expected decline in both aftermarket auto brake pad as well as decline in our non strategic connector markets. We ended the year with strong backlog which is up 1% compared to the end of last year excluding the negative impact of foreign exchange.

Q4 adjusted segment operating income of $94 million increased 14% and reflected the funding of our organic investments this quarter. Fourth quarter adjusted EPS of $0.59 grew 20% due to the strong segment operational execution and a lower effective tax rate partially offset by higher corporate cost related to benefit cost true up and investment.

I am extremely pleased with the quality of the result our teams delivered. And the intensity of our proactive focuses on addressing 2015 headwinds. ITT has a history of delivering strong operational execution and as we move into 2015, we remain laser focused on proactively managing major activities within our control.

So let's now turn to our 2015 guidance highlight on Slide 6. In 2015, we expect to deliver 1% to 3% organic revenue growth, expand our adjusted segment operating margins by 60 to 80 basis points and grow our adjusted EPS 13% when you exclude the negative impact of foreign currency.

From a capital allocation standpoint, we expect to ramp up our focused execution activity and we will continue to leverage our diversified and balanced portfolio. We expect to further enhance our portfolio with a pending $30 million revenue aerospace acquisition that will expand our content on key high growth and next generation aerospace platforms.

In addition, subject to the availability and timing of acquisition target, we plan to increase our returns to shareholders by repurchasing up to $100 million in shares. And I am pleased to announce that we will be increasing our quarterly dividend by 7.5% representing our third straight year of increases.

So let me share with you how we will expand our track record of execution into 2015. Turning to the next slide, we have provided a snapshot of our strategic framework. We all know in the last few months the level of uncertainty in a macro environment has grown.

This has been primarily due to the sharp decline in crude oil prices, continued strengthening of the US dollar, the deceleration in emerging market and only modest GDP growth. Given its complex environment, we will actively monitor these issues and we will intensely focus on what we can control execution.

We will also opportunistically focus on capturing growth in our core market and deploying capital effectively. So in 2015, our strategy will be centered on just three key areas. Reflecting our even greater focus in this more dynamic operating environment. One, optimizing our execution.

Two, expanding our market position and three balanced and effective capital deployment. It's just that simple. Let's now turn to Slide 8 and let's go through some of the details. Starting with optimizing execution. During 2015, we will continue our momentum in capturing opportunities to improve efficiency and cost.

As a result, we expect to take an additional $23 million to $33 million of restructuring in realignment actions this year. These actions would take place largely an industrial process as we leverage our investments in this business and address the current realities of the global oil and gas market.

This will help to optimize our foundation and position us for a long term organic growth in the engineered systems business. These actions follow the recent reorganization of our industrial process business, where we consolidated into the three more focused business units.

This new model will enable us to better serve customers, rebalance our engineered systems business, while strengthening our focus and market leadership position in our core industrial products and after market businesses.

We believe the combination of our new leadership structure along with the accelerated actions to leverage our prior investments will strengthen the operating foundation of this business, realign our cost structure and set industrial process up for long-term growth.

2015, we are also focused on reducing our overall cost structure across the businesses as well as our headquarters. We aggressively and proactively will drive lower corporate functional cost. The benefit of these reductions will be shared with the segments through lower allocations.

During 2015, we are targeting another year of significant gross productivity savings of more than $110 million driven by advancing our LEAN transformation, leveraging our global strategic sourcing and realizing significant benefits from restructuring. Moving next to market expansion.

We expect strong performance in our non oil and gas related end market which makes up more than 80% of our portfolio. Excluding FX we are forecasting our transportation market to grow 9% and we expect our industrial market to grow 4%.

The growth in our transportation market is driven by global expansion in our automotive friction business due to new OEM platforms and customers in North America as well as market share gains in both Europe and China where we expect to continue to outpace auto production rate.

Our transportation expectations also include approximately $30 million of revenue from a pending aerospace acquisition. Excluding the impact of the acquisition, our transportation growth would be 6%. We also expect strong performance in our existing aerospace market as the result of new platform wins and share gain on existing platforms.

Our industrial growth is expected to be driven by strong chemical and industrial pump activity as we intensify our focus on our core market. Along with solid top line growth in our general industrial market and control technologies. The remaining 18% of revenue participates in oil and gas.

We are based on current market conditions; we are forecasting a decline of approximately 10% to 12% versus the prior year. We think we have realistically adjusted for oil and gas headwinds based on what we know today and Tom will discuss our expectations in greater detail on Slide 10.

Anticipating emerging markets growth of approximately 6% is the result of ongoing above market performance in our automotive friction business in China which we expect to grow over 20% again this year, this outperformance is a direct reflection of the organic investments we continue to make in our Wuxi China capabilities to meet growing customer demand.

We expect the automotive performance in emerging markets to be diluted by the expected decline in our oil and gas markets. And finally capital deployment. Our third strategic focus area. We will continue our track record of balanced and effective capital deployment by funding major organic investments that extend our global our reach and capabilities.

Acquisitions are also a critical component of our long -term capital deployment priorities. Over the last year, we've been building at our cultivation capabilities by enhancing our processes and reorganizing our internal resources.

At the same time, we are building at our pipeline with a focus on industrial and aerospace target similar to the acquisition we mentioned today. And as I mentioned we are going to continue to return capital to shareholders. So now I'll turn it over to Tom to discuss our 2015 guidance in greater detail..

Thanks, Denise. Now let's turn to Slide 9, where we will start with our adjusted 2015 segment operating margin guidance. In 2015, we are expecting adjusted segment operating margins to expand 60 to 80 basis points to approximately 15%. This growth will be fueled by entity wide productivity driven by a LEAN transformation.

Also included in our margin expansion will be 100 basis points of incremental benefits from restructuring actions. We plan to leverage these operational gains to offset inflation and the pricing headwinds anticipated in the automotive and oil and gas markets.

In addition, we plan to fund 50 basis points a long- term strategic investment that are consistent with those that are powered our track record of strong organic growth.

The 2015 organic investments will include investments in our motion technologies, Wuxi facility as we continue to ramp up production on 10 of Top 20 platforms in China by the end of 2015. Other investments include expanding our aerospace after market portfolio offerings, accelerating our LEAN transformation and upgrading our IT capabilities.

So now let's turn to Slide 10, where we have summarized our 2015 revenue expectations in the oil and gas market. Just to provide context before we get into the details. Total oil and gas represent 18% of our revenue with 10% in the upstream and 8% in the mid and downstream.

In order to better asses how dramatic changes in the oil and gas market would impact our business, we undertook the following activities. We retained a leading third party research firm to assess regional impacts across all sectors. We contacted key global customers and we evaluated our backlog and opportunity pipeline on a project by project basis.

As a result of this analysis, we estimate that our 2015 oil and gas revenues will decline between 10% to 12%. In the upstream, we are projecting a decline of 20% to 25% as we believe the upstream market will be most heavily impacted by project delays, lower capital expenditures on high cost projects and pricing pressures.

However, please keep in mind that from an operating margin perspective, our upstream project pumps are below the margin profile in the industrial process segment and ITT.

We are forecasting a midstream and downstream markets to be up 2% to 5% due to solid global backlog, higher after market activity and our focus on driving market share gains particularly in North America.

In an effort proactively address the oil and gas market headwinds, in Q4, we identified and began to implement actions to optimize and leverage our global footprint and capabilities and to reduce our structural costs. And these activities are continuing to gain momentum in early 2015. So now let's turn to the revenue outlook by end market on Slide 11.

Starting with our largest and fastest growing market of transportation. We expect 9% growth in total revenue or approximately 6% growth excluding the impact of the pending aerospace acquisition. These projections are driven by both global automotive market growth as well as share gains.

Another solid contributor is our aerospace and defense business which is expected to generate 12% total revenue growth driven by new platform wins, share gains in commercial aerospace components and the pending aerospace acquisitions. In our broader industrial businesses, we expect to grow a solid 4% in 2015.

Included in these results are our chemical and industrial pumps which are expected to grow mid-single digits this year. This growth is driven by improving general chemical and industrial pump market conditions as well as expected market share gains particularly in North America where we are well positioned as a market leader.

The Chemical and industrial growth will be partially diluted by mining which is expected to be down slightly in 2015. They will also be muted by our general industrial market which is expected to generate low single digit growth in 2015. And lastly, we are forecasting oil and gas to be down 11% as previously discussed.

So now let's turn to Slide 12, where we've summarized our 2015 adjusted EPS guidance in the form of a high level walk. We expect 2015 adjusted EPS to grow 5% at the midpoint of our range of $2.55 to $2.65 per share representing 13% growth when the foreign currency impact of $0.18 is excluded from the calculation.

The adjusted EPS growth reflects continued momentum in our global automotive friction business along with the strength in our aerospace components and chemical and industrial markets. However, these volumes gains will be more than offset by lower oil and gas volumes in a more intensive pricing environment.

As you can see, the largest portion of our adjusted EPS growth will be driven by strong productivity gains and operational improvements. In 2015, we will continue to drive LEAN further into the organization and deliver another year of significant productivity savings.

This will be achieved by leveraging LEAN Six Sigma and global sourcing initiatives and implementing restructuring actions to generate $25 million in incremental savings. As we have done successfully in the past, we will once again reinvest a healthy portion of this year's productivity back into our long-term strategic growth initiatives.

This year's $0.10 of investment will be focused on key areas of support of our long-term vision of the company namely China Automotive growth, aerospace aftermarket capture our LEAN transformation and strategic IT infrastructure capability building.

In addition, subject to availability and timing of acquisition targets, we have included the impact of up to $100 million of share repurchases in our EPS guidance. And a couple of housekeeping items, we set our guidance using a current EURO rate of $1.15.

In addition, we expect unallocated corporate and other expenses to be generally flat year-over-year at $60 million. And we estimate our 2015 effective tax rate to be in the range of 26% to 26.5%. Finally, it is important to note that from an EPS perspective, we anticipate that the pending acquisition will have minimal impact on 2015 EPS.

Now let's wrap up on Slide 13, where we've summarized our 2015 annual guidance. From an organic perspective, we forecast our revenue growth to be in the range of 1% to 3% due to share gains and market growth in our non oil and gas markets including automotive, aerospace, chemical and industrial.

These gains will be partially offset by the 10% to 12% decline in oil and gas. We expect total revenue to decline between 1% and 3% which reflects the $140 million of headwinds from foreign currency due to the strengthening US dollar partially offset by the $30 million of revenue we are forecasting from the pending aerospace acquisition.

We expect another strong year of net operating productivity and restructuring benefits to fuel 60 to 80 basis points of expansion and adjusted segment operating margin. Our 2015 adjusted EPS range of $2.55 to $2.65 per share represents 5% growth of the midpoint.

Excluding the $0.18 impact from currency, we expect to grow 13% of the midpoint which is in line with our long-term premium growth range of 10% to 15%. I’d also like to note that we expect our 2015 free cash flow conversion rate to be between 90% and 95%.

While our capital spending will be approximately 15% lower than 2014 at around 4% of revenues primarily due to the additional growth investments in China automotive. As is our practice, we do not provide quarterly guidance but let me provide some perspectives and how the year is expected to progress.

Based on current indicators, we expect our top line to be evenly weighted between the first and second half. However, we expect 55% of our adjusted EPS to be delivered in the second half of 2015.

The biggest drivers for the second half EPS strength are the timing of projects and industrial process and the compounding benefits of productivity and restructuring actions. I also want to provide some insights into our preliminary Q1 expectations.

Excluding the impact of $40 million of negative foreign currency impacts, we expect our top line to be flat compared to the prior year.

In Q1, automotive OEM share gains are expected to be offset by lower after market volumes due to a shift in our customers buying patterns, lower project activity in industrial process and weakness in our connector business.

From an adjusted EPS perspective we expect to be down more than $0.10 compared to 2014 with half of this decline resulting from foreign currency headwinds and remaining decline coming from incremental investments, lower price and unfavorable mix that includes the high margin automotive aftermarket re-phasing out of Q1.

Q1 corporate costs are also expected to be higher than the prior year due to the prior year favorability that is not expected to repeat in 2015. This increase will be partially offset by lower effective tax rate.

And before I wrap up, I’d like to point out that we provided our current projections for the major 2015 special items that are excluded from our adjusted guidance. Please note that all of these amounts are on a pretax basis.

So in summary, we believe our 2015 guidance is down for the potential headwinds and tailwinds we see today, and is reflective of the current environment. As always we are focused our efforts on strong execution and delivering the productivity that is within our control. So now let me turn it over to Laurie to start the Q&A session..

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

Good morning everyone. So one real quick one. The plus 9% transport, plus 4% industrial, minus 11% oil and gas.

are those organic or do those include FX?.

They are organic, they exclude FX and the --.

They do include the acquisition in there, that 9% transportation which would be 6% without that..

Right, which you said would have been plus 6%, yes, that’s right, great. So on the oil and gas side you guys talked about -- two questions there.

One, when you look at the backlog today, how much did the backlog represent of your 2015 outlook and how does that compare to normal trends?.

Yes. Mike, we’re about 65% of our business in backlog, it’s a much higher weighting of project business that we currently have in backlog right now so obviously we have space line activity in the oil and gas markets, aftermarket activity which is a much shorter backlog window.

But we have a higher weighting of our project activity nearly 80% of that is in backlog right now, and again we did go through and look on a project by project basis at the opportunities in our pipeline as well to see how we would best assess to realize ability of those projects coming through.

So we do have solid backlog visibility in projects, we’re always cautious of potential delays which are hard to predict in this kind of environment, but we did try to build the pretty solid bottoms up view of the demand in oil and gas for us..

All right, now that makes sense. And then also just want to ask a question on the pricing side. I'm assuming the pricing commentary that you had for the Motion Tech business is just the standard bleed downs that you have as part of your five-year contracts.

Is that fair?.

Right. That's exactly what we have built into this for 2015..

And then so on the oil and gas side, when you guys talk about pricing pressure, is that things that you're seeing already in the quoting activity? Or are these things you're anticipating because of where the environment is?.

It is what we are seeing in the activities that are taking place in our conversation that we are having with our customers right now. We are seeing that there is just more pricing pressure that's being applied to this. So we anticipate that there is going to be some pricing pressure that comes through in 2015 for IP..

Makes sense.

And then last one for me on the Wuxi facility side, could you just talk about what kind of step change you guys are seeing on the -- on boarding of new capacity there? Is it comparable to what we would have been talking about over the last quarter or two? And how is that shaking out?.

It has been very nice, that's a great example of how motion tech is really performing well in China. We talked about China being up over 20% this year. We expect to have continued 20% growth for them next year and we're gradually ramping up the capacity there. We currently have capacity there of $20 million brake pad.

And so this additional investment that we are making in 2015 is to take it up to $30 million brake pad. So we will see that facility continue to ramp up throughout the year. And so that we will end up at around $25 million to $30 million brake pad run rate when we get to the end of the year.

It is important to note that we've been doing this build out in a very modular fashion. And we've done it based on platforms that we've won. So when you look at winning the platform, you basically have 18 to 24 months or so before there was actual production that starts with that.

So we've looked at the platform that we've won and said that we need to ramp up Wuxi to this $30 million brake pad based on what we know today. And a nice thing about with the platform that we are winning is today we are on the top five of the Top 20 platforms and by the end of 2015, we are going to be on 10 of the Top 20 platforms.

So just a nice progression and a nice story for motion technologies and how they are able to really capture market share in China..

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

Thank you. Good morning, everyone. Can I ask about cash flow and CapEx and working capital? I think just if I'm clear, Tom, so CapEx this year was $119 million, you think it goes to kind of $103 million, is that about the number? So that's going to give you a bit of a source of cash.

And I think weren't these IP projects, weren't they also a drag to working capital? So are you assuming kind of a source there? I guess where I'm going with this is that you did a little aerospace acquisition, you've increase the dividend.

Are all of these bucket placeholders that shift from one side to the other, right? You do a little bit more share repurchase -- you're probably not raising debt. So I still want to kind of understand how you're thinking about the balance sheet because it seems like you're just moving things around a little bit which is fine.

But how are you thinking about the balance sheet, financial leverage and just the fact that -- you seem to be very over capitalized still?.

Yes. John, we are gaining some momentum here from the working capital perspective. To your point projects are fairly working capital intensive so as we go into 2015 we would expect to see some fairly significant working capital improvement across, not only the IP platform but across ITT, it is one of our primary focus is going in 2015.

And it is kind of what we think make sense given where we are in our LEAN transformation to really focus on working capital efficiencies. Now and we've been banded in this range between 18% and 20% of sales. It kind of really varies based on what's happening in the project business. So we do expect some favorable trends in working capital.

As you pointed out we are lowering CapEx. Some of the 2015 number of projects that were started in 2014 that would bleed into 2015. So if you really look at the CapEx run rate as far as new, new in 2015 and it is even down more than the amount of cash we are going to deploy in 2015.

So some good positive cash generating activities which are behind our view to increase the dividend to fund the additional repurchases and obviously as we've mentioned this pending aerospace acquisition is another source for us to deploy capital.

Another thing I would just kind of add to the cash flow strength is a lot of our repositioning activities and transformation activities that were tied to the spin. As you can see are now beyond us in 2015.

So there is another category where we are going to provide some additional cash flow and the focus as you move into 2015 and beyond is to continue to invest in organic initiatives, and then prioritize more M&A pipeline build out so that we can deploy this excess capacity and balance sheet strength that we have.

We don't see a need to leverage up at this point, but we are working our balance sheet and the pipeline to make sure that we have opportunities for inorganic growth that fit with our core business.

And if all those things don't materialize just like we are saying here, we would do additional share repurchases just to maintain kind of the current levels we are at today..

No, that's actually - that's very helpful. That's how I was thinking about it. I'm sorry for my multipart question. Denise, you talked historically -- or not that long ago really -- that if the right deal came along you'd be comfortable raising $200 million to $300 million possibly in debt to finance it.

Are you still thinking that or may now -- you've got some cash flow strength tailwinds. You seem to be managing at least the oil and gas downturn with what appears to be sufficiently conservative guidance.

But how are you thinking about the debt threshold and just the opportunity to buy companies?.

No. John, my thinking hasn't changed on that. It really depends on the opportunity that's out there. As we've said, we are aggressively going after acquisitions within our pipeline. Some of the key focus areas for us right now would be in aerospace, would be in industrial, and would be in rail and so we are looking at deals of all sizes to be honest.

Anywhere from smaller ones, we are announcing the $30 million acquisition in aerospace today all the way up to some larger ones. So would we be willing to take on debt for the right kind of deal? Yes, we would. It is what's important to us we would like to maintain our investment grade rating..

Can I just ask one more follow-up? GE built all of these oil and gas businesses at great expense when oil was $100 plus and they basically have said, well, we don't put any more money into this. Now Denise, you've talked about the fact that you still like the oil and gas markets very much.

With oil doing what it's done -- you didn't mention oil as one of the three buckets, aero, industrial, rail. Would you consider doing an oil and gas deal? It strikes me that you could potentially buy some properties at a discount..

Our focus in IP right now is with optimizing what we currently have in there. We put in some of the new facilities and we did that thinking that we were going to utilize those to optimize our position in the engineered systems part of that business. And that is still the intent to do that.

So we are restructuring that organization, we announced that in December. And we are focusing vertical on the engineered systems and industrial products and the aftermarket and we think that's going to produce for us a lot of benefit. We are still cultivating target in the IP space.

There is variety of different types of cultivation activities in areas that we are looking at there. So while our activity level in oil and gas acquisitions for IP I would say is little bit lower than what it has been historically. We haven't shut the door on those opportunities.

And if a compelling opportunity comes our way, we would absolutely consider it..

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

Good morning. It sounds like you guys did a lot of detailed work around oil and gas.

I'm just wondering as you came out of that were any of your ingoing assumptions changed in terms of things that you thought would hold up due to just sort of MRO activity-related things that -- once you talked to people and did the work, you said actually maybe that's going to be a little different than we thought or vice versa? Just wondering if anything came out of that that was different than what you might have thought going in?.

Shannon, I think the one thing that we learned in this -- the last couple of months have really diving deep into these different factors is, there really isn't a pattern within the oil and gas industries that we really had to get very project specific, very regional and kind of go through each one of those categories because some things that we did anticipate were potential drivers of opportunity proved to be a little bit in a different risk category that we anticipated, and it wasn't until we really peeled back into the project and into the field, where we had a better appreciation for what the true puts and takes were.

So I would think that's a major revelation and not really being able to apply broad generalities but really need to get inside the projects and specific..

I'd agree with that. In general, our conclusion that we came to at a very high level, we are very consistent with what we have been thinking. But when you delved right into and looked at the details behind of this Tom said we could not really find a pattern to say that you can take that pattern and apply it across the globe for oil and gas activities.

Some of these areas that we are involved in, they have different dynamics taking place. You've got the NOCs versus the IOCs. You've got different cost structures in these various applications that are out there. So everyone tends to be somewhat unique.

Which is why we had to go to the level of detail that we did and look at it project by project in our backlog and really triangulated with what we are hearing in the market place?.

And just to kind of briefly, Shannon, you mentioned MRO; I think the MRO view is generally in line with what we thought going into the exercise as well..

We do believe that focusing on our core from an IP perspective, we believe that we are going to be able to gain some opportunities there and to gain some market share and focusing in that area because that's we have historically been very, very strong. So we are going to take advantage of that in this market place.

And we are going to aggressively go after those activities..

And it does sound like you came out still feeling okay about the mid and downstream here. So you mentioned some share gains.

Is that more specific to you or do you just generally feel good about that activity holding up?.

I would say on the general chemical side of thing. Or on the petrochemical side, it is relatively okay the market place. We do think we are going to outpace the market with it, again going back to the core that we've got.

And with our core of brand of Gould here and we think that we are going to be able to take back some lost share because of -- okay how we operate with gold and also because of these new organizational structure we put in place an IP, we are going to have team laser focused on these very specific areas..

And just last one for me is how does this all play out in IP in terms of margins? As you have the lower margin stuff declining and your non oil business is doing reasonably well, can margins actually go up or can you hold margins? Maybe a little just thought of how to think about that..

Yes, absolutely, Shannon. Our plan is to move the margins up nicely probably above what we are targeting for ITT as a whole. It is a source of opportunity not only from improved deficiency operations; we do have a lot of the restructuring actions focused in that segment this year. So those factors will give us some nice margin lift.

We will be also enhanced by mix as the project mix shifts a little bit from its weight that we had historically. The big headwind is pricing that we are watching as well but net, net we do expect a nice margin performance in 2015..

It is important to note in that respect. We are somewhat different than other companies in our IP business. Its acts are -- how we have been evolving that business. So they were really two dynamics taking place.

We were growing and maturing in the engineered systems part of this business which we've said that as we've gotten the facilities in place and the teams in place and a new organizational structure in place. If that enough itself, would drive efficiency and productivity.

So we would -- so that is what's going to drive the IP margins to be better than what they have been in the past. Now you couple that with now what's happening in the oil and gas market.

But we still believe that even when that comes into play, and we focus on our core and we develop more efficiency in our manufacturing operations with our engineered systems business that we are going to be able to have some margin improvement..

And, Shannon, just to clarify, the margin expansion in IP we expect to be ahead of the IT margin expansion level, just to put a final point on the comment that I made previously..

So you are not going above 1t% this year time, Tom..

Correct, correct. Some day but not --.

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

Good morning.

Maybe just a little bit more on the pricing dynamics and IP, when you talk about this increasing pressure, are you having customers approaching to re-price orders already won or is it discussion on what is going forward? I am just curious what's the risk potentially in the backlog?.

Yes. We are really seeing the pricing pressure on projects going forward and that is really where the focus is.

What we have seen in the feed stage is that the level of activity in the feed stage is down about 10% or 15%, and so along it was being down is continuing pricing pressures getting applied in that whole dynamic and that at the front end of those projects. So it is really there that we expect to see the price pressure slowing through in 2015..

Right, Okay. And just coming back to the assumptions on the mid and downstream, so you said you anticipate you're taking share gains.

But I guess -- what are the assumptions on the core markets? Are both of those markets down in 2015 and you're just outpacing the headwinds? Or is it kind of flattish and you're going to do a little better? Can you give a little more just granularity on what the base of those markets really are?.

Yes, so Brian we are expecting to outperform in general chemical and the industrial markets primarily being driven by strength in North America where Denise mentioned it is our core stronghold if you will for the gold business, we have a tremendous distribution capability and we are seeing with some targeted activities and opportunity for us outgrow fairly flattish type of markets in those categories.

So we are going to opportunistically go after some share gain and that compounding what we currently in have backlog for those categories..

Okay, fair enough. And then on the Interconnect business, when do you anticipate the disinvestment phase to come to an end? Is that a 2015 event? Not that it's --stop.

Yes, we are getting closer -- the bulk of the restructuring this year is not really in ICS, there will be some continuation of the activities that we have started, the big move that is taking place in the first half of this year at ICS as we move more production into our new Nogales, Mexico facility that is going to cause a little bit of first half disruption.

We have been parts of those operations and that activity will continue in the first half of this but the bulk of the major kind of restructuring and investments in ICS have already played through in 2014 and 2013, and the focus is to kind of get the new operating capabilities and run rate totally online in 2015 and start moving forward from there..

So we knew when we undertook the ICS turnaround. We knew that we needed to focus on the operational pieces first and the restructuring and getting the cost structure in line there.

So we have aggressively gone after that and as Tom side this is the year that was going now have to make that all work with some -- one of the major facilities being moving from Santa Ana California down in Nogales Mexico which is underway right now and should be completed by midyear this year.

So now we need to make sure we operate and do things the right way, that's really what has been strength behind some of the margin improvement that we have seen in ICS.

We also looked at some product lines and decided that we needed to reduce some of our focus on certain product line, so we have been resetting the front end of the business also, we put the new organizational structure in place and so now it is going to be all about innovation and working on the front end.

But we don’t expect the top line to have improvement this year, that's going to be later but we need to get the cost structure and the operations working in the right way first..

I guess my question is more around exiting some of these non-strategic lines. Just curious when the headwind from that -- those actions start to abate. Are we going to continue to see those disinvestments in 2015 where we have more headwinds because you're just exiting more businesses? Or -- I guess that was more my question..

Yes, from that prospective Brian we are still cycling through the end of life platforms and that will continue to be the reason -- part of the reason why we don’t see lot of top-line growth from ICS prospective in 2015.

So those end of life programs are going to probably cycle down over 2015 and in the 2016 as well, but we're starting to see the accelerated ramp out of those activities..

If I could just sneak one more in.

So of the restructuring savings you have baked into the number, how much of that is coming from the actions taken in 2014 versus the actions taken in 2015? And what do you anticipate at this point from the actions announced will be carried over into 2016?.

Right now Brian it's about 50-50 between the 2014 actions we did some more at the end of Q4 proactively getting some momentum there. So the splits about 50-50. And you could assume a good chunk then of the 2015 actions are going to carry into 2016 about 40% to 50% obviously that we will carry into 2016.

It's usually about year -- a little over around a year payback in general..

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

Thank you. Good morning, everyone. So my first question is on IP margins. Tom, just going back to your point on margins improving this year, can you just talk a little bit about the puts and takes? I know that you had some elevated investment in 2014 and clearly we've talked about the pricing pressure in 2015.

If it's possible for you guys to quantify what's embedded in your expectation from a pricing standpoint that would be helpful as well..

Yes. So, Joe, from a pricing perspective we don't want to get to overly specific but I would say that we're expecting pressures that are probably significantly how about what we've seen in the past. So that is one of the factors that we're putting on the IP business assumptions at this stage. But the goal is really to drive the productivity.

That's where we're getting the offsets to some of these top line headwinds if you will.

And the reason why we feel good about the productivity is our industrial process business is making very solid gains in the way that we operate as we brought out new capabilities online in Korea and Seneca Falls, that's enabled us to eliminate a lot of waste, a lot of scrap, a lot of rework that we are experiencing over the last couple of years as we are really starting to ramp up our capabilities in engineering systems business.

So we are reaching a level of maturity where we're starting to reduce a lot of those types of headwind, and we would expect those approved manufacturing efficiencies to start to flow through for us in 2015. So that's probably one of the biggest drivers.

This kind of margin expansion wouldn't have been available to us without bringing up these new capabilities. We were incurring a lot of third party cost for example to do testing because we didn't have the internal capabilities and a lot of that -- those kind of challenges now are ones that we can address very effectively internally.

So 2015 margins for industrial process is really about productivity efficiency, the benefits of the lower cost structure from the restructuring actions we're taking. And all of that more than offsetting the headwinds we do expect to be more pronounced from a price perspective..

Okay, that's helpful, Tom. I guess maybe a follow-up just in general on the guidance and the cadence of the guidance with the first quarter being down $0.10. Clearly there's an expectation for a ramp as the year progresses.

I guess I'm just trying to parse out like how much of it do you think is within your control today versus reliance on the demand environment and exogenous factors?.

Yes, it's great question, Joe. One of the factors in Q1 is again this re-phasing of motion technologies; one of our customers is changing their patterns. So that's just a calendar shift if you will. We then have this backlog visibility that we've been talking about in the industrial process business. And really nice visibility into our aerospace.

So when you take a lot of these factors and you kind a laying the progression of the year. We do have a pretty good visibility into the flow out of the top line which we said is fairly evenly balanced as the year progresses.

What are going to accumulate as the year goes on are the benefits of restructuring, the benefits of the productivity actions we have. The foreign exchange on a year-over-year basis does moderate as time goes on. And then share repurchase as we think will be another factor that will give us some lift to our EPS as we progress through the year.

So Q1 is definitely at the lower end of the spectrum with more FX headwinds and not fully realizing these benefits yet. But as the year progresses, I would say the bulk of the assumed improvement we are making in EPS on sequential basis is based on us driving the restructuring plans we have, driving the execution plans we have.

And progressing through this difficult environment with real focus on our optimization. So I would say it is largely within our control..

Your final question comes from the line Joe Radigan of KeyBanc Capital Markets..

Good morning, thanks. First on Industrial Process, I think it makes sense to take a conservative view of end markets there.

But how do you reconcile that with the order growth that you saw in Q4 with organic orders up 26% and really strong orders in oil and gas and mining?.

Those orders that we saw coming through in the fourth quarter were really on committed projects. And one that will be orders we are just flowing there. We do expect that as we get into the 2015 that you are going to see the order rate decline. We have factored that in to the analysis that we pulled together here.

And so based on that and based on looking at the pipeline and what's out there this is what -- this is our best guess at this point so what it will look like..

Okay. And then how much did the aftermarket business grow in IP last year and what are your expectations for 2015? And may be part two do that, you've had pretty significant organic growth in years past in this business.

Have you started to see aftermarket volume pull through from some of the project installs that you had that occurred two or three years ago yet?.

Yes. Great question, Joe. I'll take a slightly different approach on it. If you look at our non oil and gas business in 2014 that business grew about 5%. And it is pretty similar to the expectations we have lining up for the non oil and gas business at IP in 2015. So there are lot puts and takes within that.

But it is a fairly similar trajectory as we go through that but to your point and I'd say in mining and in chemical and other parts of our portfolio, we are seeing some nice progress in the aftermarket business based on the installed applications we have. Little slower ramp up on the oil and gas side of the aftermarket.

Lot of the big projects we put on in the last four to five years is just now getting into that aftermarket phase. So the growth that we have seen in aftermarket has continued to accelerate in our non oil and gas businesses.

But we are getting into the phase where I would expect to see continued build in the growth rates of our oil and gas related aftermarket..

Okay. Thanks, Tom. And then maybe one last question. You guys have been good at getting at least $100 million a year of productivity really since you spun. You're several years in now. How much runway is left there? And I'm assuming some of the low hanging stuff has already been picked off.

So how long can you continue to get this sort of significant productivity run rate going forward?.

We started from a low point in terms of our LEAN activities. So we have a long runway, a very long runway in front of us here. And we still believe when we look at the facilities that we have, and we look at across the board, our LEAN activities, we think they are just right for continued improvement with it. So we are going to continue to drive it.

It is one of our key goals as an organization to continue drives LEAN. When you think about where we are for 2015, we've got IP and all the works that's being done there to optimize these new facilities that we've got.

In motion technologies, we've got LEAN, we are looking at press efficiencies in our Barge facility, and we've got our new Wuxi facility and building that out. We are getting LEAN associated with that. We are getting LEAN in KONI. We have been leaning out those facilities. In ICS, you see the benefits that we've got there.

Control technologies, even with as well run as they are and as LEAN as they are continue to find opportunities. So this is a journey that just doesn't end. We are going to continue to drive productivity. We are going to continue to focus on and I think we've got a good runway ahead of us still..

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