Welcome to ITT’s 2019 Fourth Quarter Conference Call. Today is Friday, February 21, 2020. Today’s call is being recorded and will be available for replay, beginning at 12 p.m. Eastern Time. 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 Emmanuel Caprais, Vice President of Finance, FP&A and Investor Relations. You may begin..

Good morning, and thank you, Laurie. Welcome to ITT’s fourth quarter 2019 earnings and 2020 guidance call. This is Emmanuel and with me today are Luca Savi, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer.

I’d like to highlight that today’s presentation, press release and reconciliation of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors.

Our adjusted non-GAAP results exclude certain non-operating and non-recurring items, including but not limited to asbestos restructuring, acquisition-related items and certain tax items. All adjustments in the quarter are detailed in a reconciliation. Before we begin, I’d like to provide a brief overview of our Q4 and full year GAAP results.

Q4 total revenue increased 6% to $719 million, segment operating income increased 13% to $107 million and EPS of $0.75 was 32% higher than the prior year. Full year total revenue increased 4% to $2.85 billion, segment operating income increased 5% to $430 million and EPS of $3.65 was down 3% compared to the prior year.

Please note that our remaining discussion this morning will exclusively focus on non-GAAP or adjusted measures, unless otherwise indicated. Today’s call will contain forward-looking statements that are subject to risks and uncertainties. Actual results may vary materially.

All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affect our business, including the disclose -- those disclosed in our SEC filing. With that, let me now turn the call over to Luca..

Thanks, Emmanual, and hello, everyone. Thank you for joining us today to discuss another quarter and year of strong results at ITT. This time last year, I said, actions speak louder than words.

In 2019, ITTers around the world worked hard, delivered outstanding results, enhanced the resilience of our company and their actions were loud, because of our ITTers, this is the 10th straight quarter that we delivered year-over-year organic revenue growth, segment operating income growth, margin expansion and double-digit EPS growth.

We prioritized on operational excellence, customer centricity and effective capital deployment, and because of this, we further accelerated the pace of our improvement in 2019. Moving forward, we will continue to both drive our strategic priorities and execute on our significant war chest of self-help opportunities to further enhance our performance.

I’d like to share with you some 2019 highlights. At Motion Technologies, Friction OEM outgrew global auto markets by more than 1,100 basis points. This level of performance demonstrates both our ability to outgrow our end markets and our resilience, even during periods of volatility.

Friction Mexico continued to deliver outstanding performance, as margins grew both year-over-year and sequentially every quarter. Our rail business grew 18% on the back of share gains in passenger trains, driven by improved operational performance and cost competitiveness actions.

Finally, Axtone, our most recent rail acquisition, expanded margins 390 basis points. Overall, MT dropped [ph] 70 basis points of margin expansion in 2019.

At Industrial Process in 2019, we delivered 10% organic revenue growth, as we continued to improve our project management execution and drove operational performance across our factories, including our largest plant in Seneca Falls, New York.

As a result of our focus on operational excellence at IP, we improved on-time delivery to customers across the Board and expanded margins by 160 basis points in 2019. We also increased our design and development efforts, including several of the VA/VE initiatives to enhance our product competitiveness.

I am particularly happy with the work of Paul Behnke and his team on the redesign of our BB2 pumps that we launched earlier this year for the oil and gas and petrochem markets. This is the beginning of a larger wave of product redesigns.

Finally, IPs operating margin of 12.7% for the full year of 2019 and 14.2% in Q4 is well on track to achieve our long-term margin goal of 15% plus. At CCT, the team delivered 2% organic revenue growth in 2019 powered by strong aerospace aftermarket and composite growth.

This reinforces our long-term aerospace composites strategy and that recent Matrix acquisition. This growth was partially offset by significant headwinds from large prior year defense programs and late 2019 short-cycle weakness.

CCT flawlessly executed 14 product line transfers to Shenzhen and Nogales and insource critical plating processes to enhance our competitiveness. In total, CCT expanded margins by 130 basis points to 17.3% in 2019. Thanks to productivity and cost actions.

And at ITT level we funded $16 million of incremental strategic investment to drive future growth across ITT while reducing our corporate cost by 24% for the full year. Now let’s go to our full year strategic highlight on slide three. We grew revenue 4.5% organically to $2.85 billion. We grew segment operating income margins to a record 16%.

We grew operating income margins 140 basis points to a record 14.8%. We grew EPS 18% or 22% excluding foreign exchange to a record $3.81. We generated $319 million of free cash flow representing a 95% conversion.

All of this is the result of the hard work of ITTers from the Dammam, Saudi Arabia to Wuxi, China from Nogales and Silao, Mexico to Seneca Falls, New York and Termoli, Italy. Our people came together, executed on our strategic priorities and built a more resilient company, able to deliver strong sustainable results even in a certain environment.

Let me share some examples of how we are working hard to execute on our strategic priorities of operational excellence, customer centricity and effective capital deployment. Beginning with operational excellence, in 2019, we delivered 90 basis points segment operating income growth with strong contribution from all three segments.

IP delivered a 12.7% operating margin which represents 160 basis point expansion. This is particularly strong, considering the 35% increase in project revenue and the 40 basis points of dilution from the Rheinhütte Pumpen acquisition.

In 2019, IP not only improved margins year-over-year every quarter, but they also expanded margins sequentially throughout the year. IP continues to improve shop floor management. Thanks to the use of Gemba boards which track or the project pumps going through our plants. I am particularly happy with the work done in IP South Korea and IP Saudi Arabia.

These plants achieved perfect on time performance with our customers in 2019, a remarkable accomplishment. And in Seneca Falls, our ANSI baseline pump assembly line continues to perform at a high level and maintain industry leading on time delivery performance above 90%.

Across the plant, we continue to attack production bottlenecks and increase critical equipment efficiency. This performance led to the strategic decision to insource additional manufacturing processes to further reduce lead times and increase competitiveness. IP is also investing in innovation by redesigning our products to make them more competitive.

We are working on VA/VE activities for three different pump platforms and we clinched a strategic order for our new and improved BB2 pump and we are advancing new state-of-the-art pump efficiency innovations and are actively engaged in field testing to drive future differentiation and in value to our customers. Well done George and IP team.

Now, moving on to CCT, we expanded margin by 130 basis points. Thanks to a strong connector performance.

As already mentioned, the team at CCT worked hard to -- product line transfer from high cost region to our facilities in Nogales, Mexico and Shenzhen, China, and we are planning more product line transfers for 2020 based on the solid execution we saw in 2019.

Our new place in line in Nogales continue to ramp up in Q4 and we expect significant full-year benefits in 2020. We initiated other insourcing projects on machining operations that we go live in 2020 as well.

The Matrix Aerospace Composites acquisition is performing well and in line with expectations, and the team expanded customer diversification to ensure continued future growth. MT continues to demonstrate outstanding execution, as the team delivered 70 basis points of margin improvement in 2019 on significant progress achieved at Friction Mexico.

I am very proud of our Silao, Mexico plant that performed extremely well this year and became a leading profit generator, while handling enough standing increasing revenue flawlessly. Axtone Rail executed footprint rationalization actions to our low cost sites in Poland in addition to manufacturing and productivity increases.

Full-year margins expanded by 390 basis points, once again, actions speak louder than words as the team at Axtone is progressing nicely towards our mid-teens margin target. It was a busy year for our ITTers.

We walk the talk and delivered results exceeding our ambitious commitments and we continue to see opportunities ahead to drive productivity and eliminate waste, and we wake up every morning determined to up our game. Now, moving on to customer centricity. In 2019, we delivered solid 4.5% organic revenue growth.

Once again, MT executed in a very volatile market conditions, and in 2019, Friction outperformed our end markets and continue to gain share in the OEM segment to reach 25% globally. Friction OEM sales outperformed global auto markets by more than 1,100 basis points outgrowing all three main markets.

We continue to drive share gains and long-term visibility. Thanks to all the auto platform awards we won in 2019. We increased our platform awards by close to 30% compared to the prior year as we focused on outstanding quality and delivery performance and emphasized customer engagement.

Friction quality record of 1 ppm is a competitive advantage to drive our performance in the eyes of our customers. Friction continues to successfully win electric vehicle platforms. I am happy to report that our team’s win rate on EV platforms was higher than on internal combustion engine platforms.

We have been winning several high profile EV platforms that will prepare our future growth. The KONI Axtone railway platform delivered 18% organic revenue growth and continues to gain share by focusing on quality, delivery, product performance, and customer engagement.

Our high speed train business in China is an example of the success, as we worked hard to develop and homologate our products in a segment where we did not play three years ago. IP delivered 10% organic revenue growth as we executed an outperformance commitment to our customers.

At a renewed project management discipline drove significant revenue growth and customer satisfaction. For example, we executed a major greenfield refinery project on time, whilst improving the project’s profitability. I strongly believe performance is the first pillar to build customer loyalty.

We are now well-positioned to win follow-on work with this customer and others. Finally, moving to effective capital deployment, we invested in key organic growth and productivity opportunities, such as the insourcing of critical plating electricity, global friction capacity expansion, the EV and process modernization at IP.

This will support future revenue growth and a margin expansion. We deployed $118 million in strategic acquisitions that fit our target of market leaders and niche applications. Both Matrix and RPG were accretive our 2019 EPS results and are progressing well to deliver our long-term strategic expectations.

Finally, we have returned $94 million to shareholders in the form of dividends and repurchases and we announced a new $500 million indefinite term share repurchase program on the Q3 call, and today, we are announcing our largest ever dividend increase of 15%. For me, 2019 was a year of strategic execution.

We delivered on our commitment and we built a resilient organization capable of operating in all types of environment. We will continue to execute on our war chest of self-help opportunities and our actions will always speak louder than words. Let me now turn it over to Tom, who will review our Q4 and full year results in more detail.

Tom?.

Thank you, Luca. Let’s now turn to the Q4 results on slide four. Organic revenue grew 4% once again reflecting share gains and market growth across our major end markets. Transportation grew 5% and 12% growth Friction OEM, 14% growth in rail and 5% growth in Friction aftermarket. These gains are partially by lower commercial aerospace and Wolverine.

Industrial grew 4%, driven by a 7% increase in chemical and industrial pumps and oil and gas grew 1% and 17% connectors growth from North America and the Middle East. Organic orders were flat as growth in pump projects of 17% was offset by declines of 6% in short-cycle pumps and 10% in industrial connectors.

Transportation orders were up 3% from auto, rail and commercial aerospace strength, while defense connectors declined double digits on a touch compare with large OE wins in the prior year. Q4 segment operating income increased 16%, driven by net operating productivity, restructuring benefits and volume leverage.

These gains are partially offset by commodity costs, FX and the funding of $5 million of incremental strategic investments. As a result of our focus on our three strategic priorities, we delivered record EPS $0.99 per share, which represents a 21% improvement.

The 16% segment operating income growth was enhanced by a 19% reduction in corporate costs and it is worth noting once again that the 21% fourth quarter EPS growth represents our 10th consecutive quarter of double-digit EPS growth. Slide five summarizes the drivers for our adjusted margin performance in Q4.

We expanded margin by 130 basis points to 15.4%. The expansion was primarily driven by 150 basis points of volume and price, and 110 basis points of net operating productivity that was powered by manufacturing efficiency, restructuring benefits, supply chain actions and project execution at IP.

The ITT margin expansion also benefited from the continued ramp-up at our Friction Mexico plant and significant operational gains at Axtone and Connectors. Some partial offsets to the expansion came from higher commodity costs and unfavorable foreign exchange.

In addition, our total margin performance was diluted by 70 basis points of strategic investments and 30 basis points from the strategic acquisitions of RPG and Matrix.

In summary, in Q4, we continue to methodically execute on our war chest of self-help opportunities, producing a 10th consecutive quarter of year-over-year margin expansion and setting us up nicely for continued margin expansion in 2020. Now let’s turn to our segment results starting with Motion Technologies on slide six.

Despite challenging auto market conditions MT organic revenue increased 7%. Friction grew 10% driven by 12% OEM growth that outperformed global auto markets by more than 1,600 basis points. This outperformance included 18% growth in China, 10% growth in Europe and 11% growth in North America, despite the impact of the GM strike.

In addition, KONI and Axtone grew 8% and global share gains in rail partially offset by a 7% decline at Wolverine and weak OEM shims demand and a large sealing platform loss. However, it is important to note that Wolverine recently re-conquered this sealing platform of approximately $10 million annually and will start shipping again in Q4 of 2020.

MT segment operating income increased 12% to $47 million. Excluding $2 million of unfavorable foreign exchange, MT operating income grew 16%. Performance at MT was driven by operating efficiencies and productivity, as well as restructuring actions that more than offset higher commodity costs and tariffs, and funded $3 million of strategic investments.

MT margins expanded 90 basis points to 15.4% due to Axtone execution, and volume and efficiency benefits at MT Friction Mexico. In addition MT funded 100 basis points of incremental strategic investments. Now let’s turn to industrial process on slide seven.

In Q4, IP delivered organic revenue growth of 4% and a 13% increase in projects combined with a 1% increase in short-cycle activity. The project strength was driven by chemical and general industrial deliveries. The 1% short-cycle was driven by 25% service and 2% baseline pump growth, partially offset by valves and parts weakness.

Total IP orders increased 3% including the benefit from the RPG acquisition. Organic orders decreased 2% due to 6% decline in short-cycle pumps, project orders rebounded nicely in Q4 and grew 17% driven by general industrial markets. IP segment operating income increased 32% to $36 million and margins improved 220 basis points to 14.2%.

Excluding the impact of the RPG acquisition, IP margins grew 280 basis points. The operating income growth was driven by project and short-cycle volume, improved project execution, price realization and restructuring savings from Q3 actions. CCT’s Q4 revenue and adjusted income results are details on slide eight.

CCT organic revenue declined 2% on flat connectors and a 5% decline in components. From an end-market perspective, commercial aerospace, defense and industrial all declined 3%. Commercial aerospace was down due to rotorcraft and market weakness and destocking actions at a key customer.

Defense declined in a difficult component missile program compares in the prior year. Industrial was soft, softness was driven by short-cycle slowdown in North America partially offset by connecter strength in Europe. And lastly, oil and gas connectors grew 17% on North American share gains.

CCT’s Q4 organic orders declined 8%, despite a 6% increase in commercial aerospace and an 8% increase in oil and gas connectors. These gains were more than offset by difficult defense program compares, order timing and short-cycle industrial weakness.

But despite these pressures, the organic year-to-date book-to-bill ratio is 1.02, driving a 7% increase in total CCT backlog. CCT delivered 6% segment operating income growth to $28 million and benefits from productivity including supply chain and completed line transfers, partially offset by increased material costs and investments.

Segment operating income expanded 70 basis points to 17.1%. Now, let’s turn to slide 10 for the details of our adjusted 2020 guidance. So based on the impact of the Coronavirus on our guidance, let me start here with some background information on ITT’s presence in China.

In 2019, ITT generated about $230 million in sales and we operated five production facilities, but none were located in the Hubei province. Our five facilities are now up and are ramping production back to normal capacity levels at varying rates.

For example, despite passing government audits, our Shenzhen connector site is currently the most impacted with only 30% of our employees back in the plant. We are monitoring this fluid situation daily, staying very connected to our 1,177 employees and we are doing everything possible to protect them and to serve our customers.

This includes closely managing demand and materials planning to mitigate disruption. Prior to the emergence of the Coronavirus when we first built our guidance in early 2020, we expected total revenue to be in the range of down 2% to up 2%.

We expected to expand our segment operating margins by 70 basis points to 150 basis points and we expected to grow EPS by 5% at the $4 midpoint of our guidance range. However, as you know, since January, the economic environment has been severely impacted by the Coronavirus.

As a result, we included the estimated Q1 impact of the Coronavirus on our preliminary operational guidance. The current estimate of the Q1 Coronavirus impacts are as follows, $20 million to $30 million of revenue, $12 million to $16 million of operating income, and about $0.13 of EPS.

So as a result of these impacts, our 2020 guidance now includes a total revenue range of down 3% to up 1%, and segment operating margin expansion of 80 basis points driven by strong productivity in all three value centers. And we expect to grow 2020 EPS by 2% at the $3.87 midpoint.

As a result of the Coronavirus uncertainty, we also widened our EPS range around the $3.87 midpoint to $3.72 to $4.02 per share. In addition, we expect to continue to drive strong free cash flow performance with a targeted 2020 free cash flow conversion that exceeds 95%.

Now, let’s turn to slide 11, where you will see the key performance drivers and assumptions supporting our 2% EPS growth including the Coronavirus impacts. On the tailwinds front, we will outperform the global OEE markets by at least 700 basis points as a result of our exceptional global share gains in automotive.

We will generate a full year of incremental benefits from our strategic 2019 acquisitions. We will benefit from 2019 restructuring carryover and additional structural actions in 2020. We will benefit from lower commodity costs and intensified supply chain actions. We will continue to expand project margins at IP.

We will fully leverage recent production line transfers to low cost regions and the insourcing of key production activities. We will implement additional tariff mitigation actions and we will generate incremental productivity and continued operational improvements all across ITT from the war chest of opportunities we have amassed.

And in addition, we will continue to invest $0.16 in strategic initiatives to accelerate the commercialization of market-leading technologies and to expand our manufacturing capabilities and productivity.

The underlying 2020 headwinds we are offsetting with our war chest of opportunities include Boeing 737 production challenges and rotorcraft demand weakness at CCT. Lower project volumes at IP, reflecting our recent selectivity, contractual auto price increases at MT and the Q1 Coronavirus impact discussed previously.

On slide 12 we provide an overview of the solid 50 basis points to 100 basis points of margin expansion. The expansion will be driven by strong operational execution, partially offset by strategic investments of 60 basis points. Price is expected to be neutral as IP and CCT actions will offset MT.

We expect operational margins before investments, acquisitions and foreign exchange to expand 110 basis points to 170 basis points. IP and MT are both expected to deliver solid margin growth in 2020, while CCT’s margins will be flattish despite high single-digit revenue decline.

At the ITT level, we expect to show margin expansion over the prior year and every quarter except Q1 due to the Coronavirus impacts. And next, I’d like to provide some perspectives on Q1. In Q1 we are projecting organic topline decline of high single-digits excluding unfavorable foreign exchange impacts.

The Q1 topline organic decline will be driven by the Coronavirus outbreak mainly at CCT and MT, and lower project shipments at IP. Lastly, in Q1 we project a margin decline of approximately 120 basis points and a low teens EPS decline primarily due to the Coronavirus impacts. So, with that, let me now kick it back to Luca for a wrap up..

Thanks, Tom. So 2019 has been the third year in the ITT transformation journey, a transformation that started in 2017 and that elevated the strategic standing of execution. This year, you have seen our ITT hard at work in delivering particularly strong results.

We have executed on our war chests of self-help opportunities and delivered on our commitment. Looking at 2020, we are cognizant that we are in an extremely challenging environment, especially given the uncertainties surrounding the Coronavirus outbreak.

We are executing our countermeasure playbook to restore normal operating conditions as quickly as possible. We continue to drive our priorities and our execution and actions. We will continue to enhance ITT’s competitive advantages. With that, let me now turn it back to Laurie to take your questions..

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

Thanks. Good morning everyone..

Good morning, Joe..

Hi, Joe..

So, Tom, maybe just starting on the Coronavirus impact, really appreciated all the color that you gave us on Q1 and for the rest of the year.

I am just curious, like, how do we think about the range of outcomes? I know that you have given kind of like an $0.08 to $0.18 range for 1Q, but how do you think about this as the year progresses and your ability to get some of that lost revenue, some of that lost profit back and could this extend into Q2 and beyond?.

Yeah. Thanks, Joe, and I will let Luca add some commentary as well. Just from a numbers perspective, I think, the way that we have looked at it is as we assessed what was happening in Q1. Our known production levels, what we are hearing from our customers and try to reflect that in the guidance that we provided.

We didn’t want to look too far beyond what we can currently assess. We haven’t assumed any kind of recovery of the volume.

We haven’t been able to project what could happen next from this point, but we really tried to model out what we are seeing in Q1, and hopefully, the range that we provided will both cover some expansion of the virus, if that were to be the case and also could provide for a recovery to the upside if that were to play out.

But we didn’t want to get too far ahead of ourselves, but we thought it was important to reflect what we currently are seeing through the early part of the year so far..

Got it. That makes sense. And I guess, maybe just my follow on question here, is, look, if you take a look at the composition of your guidance and excluding the Coronavirus impact, you were looking at basically flattish type organic growth, but margin expansion north of 100 basis points.

You highlighted a variety of things across your portfolio where there is a lot of self-help opportunity.

I guess, maybe just provide a little bit more insight, how much of the self-help is within your control? What are the like maybe two or three specific self-help initiatives that you think is going to be drive like a disproportionate amount of that margin expansion in 2020 and I will get back in queue..

All right. Thanks, Joe. So I think our self-help story for 2020 is a reflection of a lot of the work that we started up in 2019.

So we have a high degree of what I would call carryover benefits from things like the 2019 restructuring actions, the 14 line transfers that we did at varying times throughout the year in 2019, we will get a full year benefit of those transfers primarily CCT.

We will get a full-year benefit of the insourcing that we started in Q4 of 2019 where we made the investments and now we have the full year of production.

So, what I think is, we will also get a full year of the benefit from the acquisitions that we put online in 2019 and some of the tariff actions that we have already implemented to mitigate the tariff impacts, we will again get a full year benefit.

So, it was really solid, and this is I think the way we are operating ITT these days is to keep replenishing the next set of opportunities, we will get a nice tailwind from the 2019, we are going to actions that I just listed and then we will augment a bunch of those with additional actions that we bring online in 2020..

Your next question comes from the line of Damian Karas of UBS..

Hi. Good morning, everyone..

Hey, Damian..

Hi, Damian..

So, just wanted to ask you about the sort of the growth outperformance that you saw in the fourth quarter, I think, you guys had -- if you went back a few months, you guys were looking at kind of low-single digit, I think, is what you were expecting.

Could you maybe discuss what specific areas drove you to the 4% where you were sort of outperforming your expectation?.

Sure, Damian. I think the two areas that rise to the surface from our internal view is the deliveries of projects at IP. I think IP continues to leverage this new project execution model that we put in place.

It’s not only driving great margin performance on the projects, but it’s improving our deliveries and I think we had a strong finish to the year on the project side of the business in IP and our sales there were good, strong 13% in Q4.

I would say the other area that just continues to gain momentum for us is the outperformance we are generating in the OE front in Motion Tech Automotive and rail, two big areas. And maybe the third piece I would mention is good aftermarket strength in MT, Friction as well. So, we did see some of those areas gain momentum as the quarter went on.

I would say the other side of the coin was CCT is feeling the short-cycle pressures in their markets and we are facing more of those headwinds as the market went on..

Okay. Got it. And I guess some while you are speaking of short-cycle in industrial process, it seems they are still be holding up fairly well up a point. Certainly better than what we are seeing I guess in the broader short-cycle market out there. But you have been seeing, I guess, the order rates running pretty soft the last three quarters.

I am just wondering if you could kind of maybe reconcile the difference between the short-cycle orders but the rather resilient revenue growth..

So, Damian, Luca speaking. When we look at Q4 we saw the growth on project orders by 17% and they short-cycle pumps down at 6%.

Now, having said that, what -- when we are talking to our distributors and GDPWI [ph] which is our distribution network, they are optimistic about all the level of quotation activity that they see and that they do have and they are positive about the second half of 2020.

Now, if I add another dot to this information what we can share is that what we have seen in the first seven weeks of 2020 is actually a very good order rate both on our baseline, as well as in our parts. We are growing year-over-year compared to 2019. And just to remind you guys that 2019 was already 6% growth in Q1 year-over-year.

It was already a good growth. So the size that we have seen in the -- in January and in February are actually good on the short-cycle..

Okay. That’s really helpful color. Thank you..

Thanks, Damian..

Your next question comes from the line of Mike Halloran of Baird..

Hey. Good morning, everyone..

Good morning, Mike..

Good morning..

So, the IP margins, very healthy here, and obviously, the mix was against you in the quarter and now the margins on the project activity are a lot better given the selectivity. But that outpacing the short-cycle and still putting the margins up is notable.

So, maybe little thoughts as we work through the year, how you think the margins progress, obviously, some impact in the first quarter that you mentioned in the prepared remarks, Tom, but maybe talk about sustainability how you think this mix kind of normalizes out through the year, and then, obviously, how you are thinking about the productivity side in that segment as well?.

Sure, Mike. I do think that the mix as time goes on is going to be beneficial to IP in two ways. One is just the project waiting we are being, as we have talked about, selective and making sure that we go after the projects that are in our core space where we can execute and perform well. But we are also raising the margin profile of those projects.

So, last year, we probably were -- indicated that we were up 100 basis points to 200 basis points in our project margin performance relative to 2018 and we expect to continue to drive project margin improvement in 2020, compared to 2019, looking at anywhere from another 100 basis points to 200 basis points of project margin improvement.

So, I think, mix is a part of the story in that we are going to have a good balance of short-cycle and projects. But the profitability in this project mix will continue to improve.

There’s good runway there and we would expect to see the margins -- once we clear Q1, we would expect the margins to generally improve as the year goes on at IP and we generally are expecting to beat every one of the quarters of 2019, Q2, Q3 and Q4, we expect to be better than what we saw last year, so good progression again in 2020..

And if I can add a couple of data points, Mike, on this one. We see continuous improvement in all the different sites. When I was in Saudi a few weeks back, the way that they are managing their shelf load [ph] assembly and their [inaudible], it was outstanding.

Our NC [ph] line that now have delivered more than 90% on time delivery for now more than three months on a continuous basis and that we have also decided to insource some machining activities just to improve our lead times but also our competitiveness. So I think that our war chest of opportunities is there for IP.

The example that we gave you in terms of project where we delivered that on time and we improved the productivity of the project was one example, but it was not the only one. So we continue to -- we will continue to improve our margins in IP.

Just to remind you, the IP in the last three years improved 120 basis points, 220 basis points and 160 basis points each for the last three years..

Yeah. Very impressive. Thanks for the color there. And then, on CCT, the connectors growth in a tough environment, there’s variability. The strength in the North America oil and gas is notable, given what that end market looks like, orders were still good there.

But some short-cycle softness which is not a surprise at all, maybe just a little bit more context around how you think that plays out, drivers of the pockets of strength that you are seeing? And are you seeing any kind of signs of stability emerging in any of those core pieces that are seeing a little more softness?.

So when we look at the connector business, Mike, our -- as you say, our revenue grew 3% full year and that is true that the grow that growth was actually very much in the first half because the Q3 and Q4 were flat, which is reflecting a bit of the problem in terms of orders that we saw with the short-cycle.

Now, when we look at the connector, positive on the oil and gas and this was related to the market share gains that we had in North America.

And then when you look at the other side of the connectors, the area where we suffered the most that was actually in the OEM side, which represent roughly 60% of our connectors business and this was where we had also some tough compares.

But I our funnel of opportunities was we are courting OEM connectors is actually increase compared to the previous quarter by 7%. On the distribution side, what we had at Q4 was actually orders were growing 3% year-over-year. So while we had that Q1 and Q2 and Q3 on the negative side, Q4 distribution connector was positive.

To be completely fair, it’s probably easier compared because the destocking started really in Q4 of 2018, but this is really the color around, around connectors..

Great. I appreciate the time. Thank you..

Thanks, Mike..

Thanks, Mike..

Our next question comes from the line of Brett Linzey of Vertical Research Partners..

Hi. Good morning, all..

Hi, Brett..

Hi, Brett..

Hey. I just want to come back to the OE Friction backlog, I was hoping we could just get an update on the size at the end of the year for those award -- the award backlog there, I think, you mentioned it up 30%, but what’s that put the ending dollar number on that? And then clearly you are seeing some good momentum in EV versus combustion.

Are you able to give us a sense as to how that backlog waits between EV and combustion today?.

Okay. So, Brett, when we are talking about the awards, it has been a very successful year in terms of the awards. It was the record awards in terms of PAT [ph]. It was the record awards in China and was also a good conquer rate, which is really feeding the future market share gains.

Giving you a little bit more information in terms of some of these awards, we continue to win nicely in the electric vehicles. We also want part of a high profile electric pickup truck. We had a nice win with a major OEM in India, an Indian OEM and also we had a very good conquer win in the light commercial vehicle.

The light commercial vehicle is an area where our market share is lower than in passengers’ vehicle, so it’s an area where we can grow nicely and it’s also very strategic for us, because light commercial vehicle represent quite a good business on the OES side.

So because of this 30% increase in terms of the awards and some of the color I just shared with you, our backlog independently from the production rate has actually been increasing..

And we kind of put all that together, Brett, as we mentioned, we are looking at it another year of solid outperformance against the global market. At least 700 basis points is what we are targeting for 2020.

So you can see that continued outperformance is built in and a lot of that outperformance particularly for 2020 is for programs and platforms that are ramping up. Programs that we started last year that are -- that were new to us, some in late last year that are going to be ramping up volumes.

So that’s going to give us some good visibility into the outperformance levels that we are targeting for 2020 with the caveat of watching any additional impacts from the virus that are beyond our vision right now..

Yeah. That’s great. That’s impressive. And that’s despite the Q1 impact in China that 700 basis points..

That’s correct..

Okay. And then just shifting back to productivity, obviously, you guys showed a very -- you have shown very good progress. Congratulations on that.

But just wondering of the 130 basis points of net operating productivity, how much is really cash restructuring drop through from 2019 actions or actions this year versus just ongoing productivity from supply chain and other shop floor improvements..

Was that question Brett related to Q4 specifically or how we are thinking about….

No. Within s the 2020 guide I think you have 130 basis points of operating productivity. I am just wondering how that parses out between restructuring savings versus just ongoing productivity..

Sure. So the two biggest buckets for us driving the productivity will certainly be productivity actions that we have been talking about line move, transfers, waste elimination and efficiency followed by supply chain.

The restructuring benefits the ones that we are planning for 2020 and the ones that are rolling over from 2019 are probably going to give us anywhere from 50 basis points to 70 basis points of margin expansion in 2020..

Very helpful. Thanks a lot..

Thanks, Brett..

Thanks, Brett..

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

Thanks. A couple of questions, first just on the MT Friction on the aftermarket specifically the aftermarket side of the business seen some inflection to the positive, I think, mid single-digit organic growth in the fourth quarter.

That comes on the heels of a couple of more challenging quarters for that business, and I guess, I am curious is aftermarket for you guys sort of back on track if you will, are we back in sort of a sustainable growth trajectory there?.

Okay. So when we look at the aftermarket, Matt, is a tale of two cities. You have the OES business and the independent aftermarket. So when you look at the independent aftermarket, for the full year, we were up 5%, and when you look at the OES, we were down 5%.

So the independent aftermarket is also -- you should not look it on a quarter-to-quarter basis because sometimes the customer is really changing their phasing, but this is a business that’s been solid. It has been growing for the last few years, and we still keep seeing it growing.

On the OES, we had a couple of strategic issues in terms of some of we didn’t have the right product and some of our customers went with the strategy that penalize their own business. Now we have put some strategies in places -- in place and I am encouraged by what they see on the OES front today despite these results.

Because as I gave you the example of the light commercial vehicle OE platform is a good win from OE side, is a good market share gain, but is also part of our OES strategy, because the light commercial vehicle tend to generate a very good OES business.

So I start seeing good signs and I am encouraged from what I am seeing the team is doing on the OES front..

Great.

And then just as my follow-up, when you look at kind of sticking with the aftermarket for a moment, how you would sort of characterize the go-forward opportunity for you guys in both China and North America? And then lastly, with your OE share coming in at about 25%, you mentioned, I believe in your prepared remarks, where do you think that goes over the next two years to three years? Thank you..

Okay. Thanks, Matt. So when we look at the aftermarket, in the aftermarket, we really play on the European -- in the European side and at the top end in terms of positioning the aftermarket. As of today, we have decided not to enter the aftermarket in North America.

It’s a strategic decision that we reevaluate all the time and we can go deeper later in questions and answer why that is the case, and in China, we are exploring different alternatives. The aftermarket in North America is mainly an independent aftermarket and it’s not an OES.

It’s roughly 80/20, whereas in Europe, it’s 50/50 between OES and independent aftermarket. China will be something in the middle and we are evaluating options there and do different trials to see how we can better win in China. That is for the China in the aftermarket.

Now when you look at their market share gains in the different regions, what we see in the next few years is that we will continue to outperform the market. We said 2020 is going to be at least 700 basis points. I think that this story will continue, if we continue to win the war in the way that we have done for the last nine years.

So I expect this market share to continue to grow particularly in North America and China where our market share is more modest..

Thank you, Luca..

Thanks, Matt..

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

Good morning everyone. Strong finish 2019..

Thanks, Bryan..

Thanks, Bryan..

Circling back to Friction profitability, Luca, you seemed very pleased with the progression in Friction in Mexico and I think you have called out previously that you expect that to be your highest margin plants over time.

Is that -- and I guess, question is two-fold, what was Friction Mexico’s profitability in 2019 and then is it fair to expect that North America generates your highest margin in 2020?.

Okay. So, Bryan, Mexico’s team achievement is simply outstanding, as they were able to outgrow the market, grow tremendously, install the new lines, execute flawlessly with an on-time delivery of 100% and they became the top performer plant in Motion Technologies in terms of profitability.

So I mentioned previously in previous call that they were on their way to become the best profitable plant in 2020, 2021 and they prove me wrong, so well done Matteo [ph] and the team. They are the one today..

That’s great to hear.

And any quick update on your M&A pipeline changes entering 2020 and if you were to find the right opportunity, how should we think about your near-term capacity?.

Bryan, so I think what you are seeing in the M&A pipeline is just a continuation of the type of transactions that we were able to successfully execute in 2019. Close to core acquisitions that give us geographic reach in the case of RPG or additional technology like our Matrix Composites acquisition.

So the pipeline looks a lot like what we did in 2019 and that will continue to I think be the nature going forward. Clearly our balance sheet is strong. We have capacity for clearly funding organic initiatives and continuing to pursue these close to core inorganic targets that are out there.

But in this environment, we will watch to see if valuations line up and if any of these heavily cultivated transactions become actionable. I think one of the other things that we have been doing very aggressively over the last two years, three years is a deep cultivation.

So the pipeline is not only close to core and strategic, but I would say it’s more heavily cultivated and if the opportunity presents itself, we certainly have the capacity to go out and do some more deals like we did in 2019..

Yeah. Appreciate the color. Thanks..

Thanks, Bryan.

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

Hey. Good morning, guys..

Hi, Jeff..

Hi, Jeff..

Hey. You mentioned $17 million of incremental investments.

Can you just talk about kind of where that’s falling out between the businesses and maybe if anything, kind of jumps out and yeah, it’s very exciting and just maybe within that talk about the Czech investment and MT, that seems like a newer initiative?.

So, Jeff, I -- let me answer about the Czech investment in MT, because we do not talk about the -- our plant in Ostrava, in the Czech Republic very, very often. But this is another gem in the ITT portfolio.

Ostrava is usually producing aftermarket pads and because of their good performance, we have been expanding their capabilities and install lines that are going to make also OE pads. So what you see in the Czech Republic is investment for the market share gains that we had in Europe on the OE side. So is capacity expansion really..

And then I would say, Jeff, as far as the other initiatives that we are driving. So some of the key initiatives that have been underway are going to continue to gain momentum. So we are taking for example smart pad and were looking at aftermarket opportunities to broaden the reach of the ITT smart pad within Motion Technologies.

We are -- we have had some good early success with our VA/VE initiatives and IP has done a great job of bringing those new newly designed products to market and I think we are going to -- we will continue to invest in more of those designs.

There are some state-of-the-art innovations that we are investing in as well that really drive some new pump efficiency and we are pretty far along in developing those and testing those with customers.

So in addition to kind of building out our capabilities driving productivity, we do have some of these nice new topline growth drivers that we are backing and planning to invest in in 2020..

Okay.

And then I don’t know if I missed this, could you quantify the 737 MAX headwind and what are you kind of underlying assumptions for one that return for production?.

So Jeff, when it comes to the Boeing 737 MAX, we are completely aligned with Boeing in terms of production and so with some of the components, we have been able to maintain some production month-after-month, but that is the minority I would say.

And when you look at the topline, we are looking at something like between $15 million and $20 million of topline hit year-over-year related to the Boeing 737 MAX..

Okay. Thanks a lot guys..

Thank you..

Thanks, Jeff..

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

Hey. Good morning, guys..

Good morning, Joe..

Hi, Joe..

So curious just on a finer point on the China assumption in 2020 MT, within the context of that plus 700, like, where you pegging China like is that shutdown for a longer, like, how do you how do you have that model ramping up? And are you still feeling that still planning from Wuxi or are you having to shift some from [inaudible] something like that?.

Okay. So just, just to give you an idea, when we look at our Wuxi facility, let me give you some color here. While everybody was leaving China, Danilo, our operations manager fought, he’s back in China and that he managed to get our plant up and running in Wuxi on February 10th, which was the very first day available for operations legally.

He managed to go through all the audits together with the dream team we have in China, passed all the audits, the government audits. Have again all the licenses to produce and we started producing in February 10th. On February 10th, we were -- none of our competitors were able to do that.

As of today, we are running two shifts at 12 hours, but not all our people have actually returned to work. So we have indirect people in the shop floor helping in making our parts and we have the plant running at roughly 70% of capacity. There are more people returning every day as they are exiting the quarantine.

So we are in constant contact with them on a daily basis. This morning I was talking to Ryan. There are 50 more people returning to Wuxi during the weekend and the operations will keep on ramping up.

As you do that, as you took care of the people, you took care of the business continuing today, the plant operations, so we are working also with the supply chain and we have some key suppliers where we work together with them, accessed our consignment inventory.

And the challenges are more sometimes on the logistics, because you need to move some of these parts from region to region, and therefore, you need special permits. But I would say, as of today, the operation is running at 70% and running well..

And then on IP, yeah, some pretty tough revenue comps for the year and what’s your kind of embedded in the guidance? What’s your expectation for orders in IP and revenue for that business for the year, comps there are still pretty tough all year..

I think, before we answer that, Joe, I realized that probably I didn’t answer your question in terms of expectation of the China market for the full year and our expectation for the China market is negative high single-digit. This is what we build in our plan..

That’s the market assumption..

That’s the market assumption that we will outperform..

Great..

Okay. Joe and then going back to the question of how do we see the orders progressing in IP and how does the year kind of play out. I think, clearly, we are watching how uncertainty may play to the market. As Luca indicated the early signs for 2020 on the short-cycle order intake were positive. We have seen a few projects start to shake free as well.

So we have also had some decent early project indication as we kind of project out through the end of the month.

What we have seen kind of in recent quarters and recent months in particular is the advancing of engineering orders and those are usually good indications that projects are going to advance and that we are in a good position to capture those projects.

So this is the typical evolution through the cycle where you may see engineering orders as a precursor to the project moving forward. So those signs have been positive. And I would say, probably, the most important data point that we are watching.

We have been talking about this going back a couple of quarters as we have seen the funnel of projects start to get bigger within the IP business. It’s up about 35% year-over-year. So the project’s funnel is solid right now. And I think we are looking at some good opportunities there, but clearly we are hesitant to get ahead of the market.

But what indicators we see at this point activity through the end of February this year the funnel are all indicating some opportunities for us to grab some order opportunities as we go. But it will be lumpy. It will be spotty. But I think those are decent signs early on..

Does the order performance of 2019 kind of put pressure for revenue in 2020 towards maybe the bottom end of your consolidated revenue expectation?.

Well, we definitely know that the project backlog is down year-over-year and we are focusing on the right projects for us. So, again, it’s a margin expansion story for IP in 2020.

But I think, that’s starting to get baked into kind of a core mix of this business, if you will and I think one of the big stories in 2019 were all the chemical projects that were orders in 2018, revenue in 2019. So one of the areas that we are looking at is will chemical projects pick back up from an order perspective in 2020.

But I would say that we are getting kind of rebase lined a little bit and how this business looks from the topline perspective in total and we will just keep driving margin expansion to make sure we are on the right projects..

Great. Thanks, Tom..

Yeah. Thanks, Joe..

Thanks, Joe..

Your next question comes from the line of Ivana Delevska of Gordon Haskett..

Good morning, guys..

Hi, Ivana..

So I just wanted to ask about -- good morning. So, just wanted to ask about the higher commodity cost in MT, I believe you have cited this for several quarters now.

Are these expected to reverse in 2020? And how significant could this be?.

Yeah. Ivana, what -- when you look at the commodities cost, in 2019, it was a headwind of roughly $7 million and those headwinds came mainly from what we call an indirect commodities raisings or something like that. Now, when you look at 2020, this is going to be a tailwind for us and the tailwind is mainly coming from the steel.

It was steel and tin was -- were going to be tailwinds. Now with the Coronavirus situation, the situation might change also on the copper side, but this is -- we will see. So tailwind for 2020, roughly $3 million..

Thank you.

And then just one follow-up, for the strategic investments you talked about, what kind of payback do you guys expect and over what timeframe?.

So, I think, generally speaking, Ivana, when you look at our strategic investments, a good chunk of those are productivity and investments in the Czech Republic capabilities investments and our capabilities in Mexico and in China. So I would say that a good half of those investments are quick payback in the year.

I’d say the other half are a little longer term commercialization of innovation and other opportunities, but generally speaking, when we make these internal organic investments. Our average IRR that we have been kind of seeing across this portfolio of opportunities for us has been around 25%.

Certainly a higher return on the productivity, but on balance, a pretty good healthy set of opportunities for the future..

Great. Thank you very much..

Thank you, Ivana..

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

Hi. Good morning. This is Emily Xu on for Andrew Obin..

Hi, Emily..

Hi, Emily..

Hey. So a quick question on the Coronavirus.

How has the virus impacted your expectation for your market outlook in the China OEM business since the beginning of the year?.

Okay. So as of today, what we have at China is that the negative high single-digit and when we were looking probably a few months ago, we had China at roughly negative low single-digit. So probably roughly 5 percentage points, that would be the impact that we put in our estimate..

A lot of our outperformance has stayed consistent with what we initially planned, just to recalibrate it around the market as well. So one of the other dynamics in the market that we are watching, and it’s way too early to project, but there is talk about how the government will react, and will there be stimulus in the auto market.

There are a lot of variables and dynamics still to be played out, but our outperformance level I think is going to remain constant through those different elements, but we will wait and see how that plays out..

Okay. Great. Thanks for the color. And then my last question is, are there any unusual puts and takes to free cash flow in 2020 that we should know about, for instance, do you expect CapEx levels to be down from the prior year? Thanks..

I would say, Emily, nothing unique, I would say, CapEx will -- we have some investments queued up.

You could drift up a little bit from maybe it’s going to look more like what we have been doing over the last two years, I think, 2019, the timing of it was a little lighter than what we typically see, but in that 3% to 3.5% of revenue was generally where our CapEx falls out. So I would say normal variation on the CapEx front.

We are going to drive working capital improvements. We made some good progress and receivable collections particularly at the end of the year and our project execution is lending itself to better realization on the receivable front.

We have had good execution on inventory from a project perspective but we have more work to do across the board on inventory management and some of our tariff mitigation strategies that hurt our inventory working capital. In 2019 we expect those to dissipate and have less of an impact in 2020.

And lastly our goal is to drive the acquisitions to improve working capital. We kind of put all that together and was still targeting around the 95% free cash flow conversion but generally speaking no major unique changes year-over-year..

Perfect. Thank you so much..

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