Welcome to ITT's 2021 First Quarter Conference Call. Today is Friday, May 7, 2021. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. [Operator Instructions]. It is now my pleasure to turn the floor over to Mark Macaluso, vice President, Investor Relations. You may begin..

Thank you, Stephanie, and good morning. It's my pleasure to welcome you to ITT's First Quarter 2021 Earnings Conference Call. Joining me here this morning are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer.

Today's press release, presentation and reconciliations of non-GAAP financial measures to the most comparable GAAP measure can be found on our website at itt.com/investors. This call contains forward-looking statements that are subject to certain risks and uncertainties, including, but not limited to impacts from the COVID-19 pandemic.

All such statements should be evaluated together with the safe harbor disclosures and the risks and other uncertainties that affect our business, including those discussed in our Form 10-K and other SEC filings. Actual results may vary materially from the assumptions presented today.

Except where otherwise noted, the information we present this morning will be based on adjusted non-GAAP figures. These results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.

All adjustments in the quarter and expected for the full year 2021 are detailed in the reconciliations in the appendix. Before we begin, I'd like to provide a brief overview of our first quarter GAAP results compared to prior year. Q1 revenue increased 5.3% to $698 million.

Segment operating income increased 52.5% to $119 million, and reported earnings per share increased 4.2% to $0.99. With that, let me turn the call over to Luca, who will begin on Slide #3..

Thank you, Mark, and good morning. I continue to be extremely proud of the way our teams have responded to the crisis. Your hard work is the reason why ITT has been able to effectively serve our customers throughout the pandemic. Earlier this week, I spoke to our colleagues in India.

As you know, India is dealing with a surge in COVID cases across the country, and I want to thank our ITTers in Vadodara for continuing to take care of each other, of our customers and our business in this difficult time. Before we discuss our quarterly results, let's spend a minute recapping how we got where we are today.

This is important as it sets the foundation on which Q1 results are based. The health of our people has been our top priority from day 1. Early in the pandemic, we implemented Ready, Safe, Go across ITT. This allowed us to safely and effectively serve and support our customers faster than our competitors.

We further strengthened our balance sheet through smart cash management. Today, we have nearly $1.5 billion of liquidity at our disposal. Moody's recognized our cash performance with an upgrade to our credit rating in the third quarter. Early on, we executed a plan to significantly lower our fixed costs.

This resulted in structural reductions in 2020 of nearly $65 million. Our productivity and cost actions helped to offset the impact of materially lower volumes in 2020. Today, we continue to drive footprint optimization and sourcing excellence at both Industrial Process and Connect and Control Technologies, while remaining diligent on cost controls.

This has resulted in a step-up in profitability above 2019 levels. All the actions taken over the past year, combined with ITTers collective commitment and grit, have positioned us well to win in the recovery. We will continue to invest in innovation and growth, including important green projects to become a more sustainable ITT.

We are aggressively and diligently pursuing acquisitions in our core markets to put our cash to work effectively and build on our strong businesses. I am invigorated by the progress across our businesses and the momentum, which is accelerating. Now moving to Q1. We delivered a strong quarter and an encouraging start to 2021. Let's get into it.

ITT's first quarter sales were higher than 2019. Organic sales in Motion Technologies were up 17% after 10% organic sales growth in the fourth quarter of 2020. The new auto platforms that we won and Friction's ability to deliver for our customers drove 1,500 basis points of outperformance versus global auto production.

And we secured positions on 9 new platforms with EV content during the quarter, 8 of which are in China, the largest automotive market in the world. This is building on the 42 EV platforms wins in 2020. Connectors grew sales in all regions, and orders were up 20% organically with strength primarily in the distribution channel.

This is encouraging for Connect and Control Technologies heading into Q2. From a profitability perspective, ITT generated adjusted segment operating income growth of 27% and margin expansion of 300 basis points on 2% organic sales growth. Incremental margin was above 70% for the quarter.

IP's margin was nearly 16%, driven by net productivity as we continue to drive supply chain improvements and better manufacturing performance. This follows a 15%-plus margin performance in Q4 of 2020. As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $1.06, a sequential and year-over-year increase.

Even more telling is the fact that EPS was $0.15 above the first quarter of 2019. Free cash flow was up 70%, representing a margin of nearly 16%. On capital deployment, we repurchased ITT shares totaling $50 million early in Q1, executing on our repurchase plan and achieving half of our full year plan of $100 million.

As a result of our strong Q1 performance and our confidence in ITT's ability to outperform, we are raising our outlook for 2021 across all facets of our guidance. On organic sales, we now anticipate growth of 5% to 7%, a 300 basis point increase on both the low and high end of our original guidance.

This is driven by continued share gains in Motion Technologies amidst the broader auto market recovery, stronger growth in Connectors and demand in the Industrial Process short cycle.

On adjusted earnings per share, the increased sales volume and the strong productivity expected in 2021, combined with the carryover impact of our 2020 cost actions, will generate EPS in the range of $3.80 to $4 at the high end, which equates to 19% to 25% growth versus prior year.

This is a $0.30 improvement at the midpoint from our prior guidance and puts ITT on pace to surpass 2019 EPS. Let's turn to Slide 4 to talk further about the first quarter results. From a top line perspective, Motion Technologies delivered a solid performance driven by strong auto growth and continued share gains in our 3 main regions.

Our Friction OE business grew nearly 30% organically with impressive 42% growth in North America. We drove high single-digit organic growth in Connectors, mainly through distribution. Together with Ryan Flynn, our CCT President, in April, I visited our U.S.

distributors and sales representative in the Northeast and on the West Coast to work on our ongoing initiatives. We saw clearly that we have many opportunities to grow this business from a product and customer service standpoint.

And while some of the Q1 growth may have been due to pent-up demand, especially in North America, our dedicated teams continue to work on the optimal commercial actions to gain market share. Our focus on operational excellence produced 280 basis points of net productivity in Q1. These included $50 million of savings from our 2020 cost actions.

Industrial Process grew margin 450 basis points to 15.8% despite a 12% organic sales decline. And Motion Technologies expanded margin nearly 300 basis points to 20.6%. This included triple-digit margin expansion at both KONI and Wolverine. This quarter, I was fortunate to visit our world-class Friction plant in Barge, Italy.

I saw firsthand the continuous improvement in plant productivity. Our team there has improved its processes to increase machine utilization and to respond more quickly to ever-changing order patterns from customers impacted by supply chain challenges.

The strong MT and IP performances offset Connect and Control Technologies' margin decline driven by the pandemic's impact on aerospace. Rising raw material costs partially offset the strong productivity. The impact was 100 basis points this quarter, substantially higher than what we were expecting.

We believe this trend will continue to affect our results for the remainder of 2021. Emmanuel will speak further about this in a moment. We continue to reinvest in our businesses to drive future organic growth. We are funding the most promising growth initiatives in key markets, including EVs, to ensure we keep winning in the marketplace.

When I was in Barge, I also saw the expansion of our state-of-the-art Friction R&D center, including the testing and fast prototyping capabilities, which will be powered by solar panels later this year. This smart growth investment drove roughly 50 basis point impact this quarter.

Rounding out the story of the quarter with free cash flow, we saw a substantial improvement in Q1. This was mainly driven by higher operating income generation in the segment and slightly lower CapEx. Our plan for the year still assumes approximately $100 million of CapEx, an increase of over 50% relative to 2020.

In summary, ITTers around the world delivered a strong performance. We drove positive organic growth at an incremental margin of over 70%. We generated nearly 300 basis points of productivity and invested in ITT's future. We repurchased ITT shares worth $50 million and raised our dividend 30%, the ninth consecutive dividend increase.

And we surpassed 2019 first quarter results in revenue, segment margin, EPS and free cash flow. Let me now turn the call over to Emmanuel on Slide 5 to discuss the segment performance in more detail..

Thank you, Luca. Let me begin with Motion Technologies. Q1 organic revenue growth of 17% was primarily driven by strength in auto. Our strong momentum from last year carried forward as Q1 grew 5% sequentially over Q4 2020. Friction OE grew 29% organically, and we outperformed global auto production by 1,500 basis points.

Segment margin expanded 280 basis points versus prior year and 110 basis points versus Q4 2020. This was mainly due to higher volumes and productivity benefits, partially offset by higher commodity costs. We are very pleased with the performance at KONI and Wolverine.

Both delivered triple-digit margin expansion from operational efficiencies and higher volumes, and we continue to see more room to grow these margins. For Industrial Process, revenue was down 12% organically, driven by short-cycle declines, primarily in oil and gas and chemical markets.

However, we continue to see steady sequential progress in short-cycle orders with 9% sequential growth from Q4 and a strong book-to-bill of 1.1. We continue to see healthy customer quoting activity, especially in the Middle East and North America. In fact, we have seen sequential strength versus the lower Q4 bookings.

However, this quarter, we saw sales and order declines as large project spend continues to be slow. IP margin expanded 450 basis points to a segment record of 15.8%. This represents $6 million of operating income growth on $25 million of lower sales.

Margin expansion was driven mainly by productivity benefits, including our global sourcing performance, significant cost actions taken in 2020 and favorable nonrecurring items, which collectively more than offset the decline in volume.

As an example of our progress in IP, when we visited our Seneca Falls site last month, we were really pleased to see the strategies deployed by the manufacturing and engineering teams to reduce machining bottlenecks and accelerate output. We continue to drive further footprint optimization.

And this quarter, we announced a third consolidation project in IP. Lastly, in Connect and Control Technologies, we generated sustained orders progress. Our Connector business was up 20% versus prior year and up 3% sequentially, driven by continued North American distribution strength.

As expected, sales in aerospace continued to be weak on lower OE production and commercial passenger traffic. We expect that aero demand will remain low in Q2, but will begin to pick up in the second half of 2021. CCT margin decline was the result of lower volumes, partially offset by the benefits of our aggressive cost structure reset in 2020.

As Luca mentioned, we are seeing early signs of performance improvement in CCT as we deploy MT's operational excellence playbook from shop floor productivity and improved on-time delivery to customer intimacy. And we delivered a much improved 29% decremental margin in Q1.

As a reminder, for both our CCT and IP businesses, the impact of the COVID-19 pandemic was minimal until early Q2 2020. We expect favorable compares to peak in Q2. Just a few additional comments on EPS for the quarter. In addition to lower corporate costs, we also saw a benefit from both the CARES Act and foreign currency.

Partially offsetting the share count benefit was a roughly $0.01 headwind from a higher-than-planned effective tax rate of 22%. You will find an EPS walk explaining our Q1 performance compared to 2020 in the back of our presentation. Let's turn to Slide 6 to review our revised outlook for 2021. Our end markets are continuing to show signs of recovery.

Global auto production is increasing, albeit constrained by the global semiconductor shortage causing inventory levels to remain relatively low. We expect that demand will continue to be strong in the next few quarters, especially in North America and Europe despite headwinds related to supply chain challenges and rising raw material costs.

Weekly run rates in our short-cycle businesses, primarily in Industrial Process and Connectors, showed encouraging signs of recovery in Q1, and April orders are in line with expectations. We believe that there is some pent-up demand from 2020 that has carried over into 2021.

Given our Q1 performance and momentum in certain end markets, our outlook is more favorable than we anticipated in February. We expect that Connectors growth as well as the stronger growth in Friction stemming from continued share gains in auto will be partially offset by declines in pump project activity and commercial aerospace.

Our assumption is that commercial aerospace may begin to recover in the second half of the year as passenger air traffic continues to increase. We are not anticipating a recovery in oil and gas in 2021, consistent with our initial outlook.

The increase in adjusted segment margin expansion by 40 basis points across our range reflects our expectations for higher volumes and continued productivity generation in addition to the stronger-than-planned margin expansion from Q1.

We expect this will be partially offset by inflation and higher raw material costs, driven by steel, copper and to a lesser extent, tin. As you will see on Slide 7, our revised guidance assumes the incremental impact from this global trend will be $0.25 to $0.30 for the remainder of 2021.

However, we remain optimistic in our team's ability to continue to mitigate this impact through strategic pricing and demand generation. We will continue to monitor this closely throughout the year. Our revised EPS guide reflects a $0.30 improvement at the midpoint of our range to $3.90, which would put us $0.09 above 2019. Some other items to note.

Given the strengthening of the U.S. dollar, the foreign currency benefit contemplated in our guidance is less than originally planned. Our 4-year effective tax rate is now expected to be approximately 22%. This will likely be partially offset by a slightly higher benefit from share repurchases given the execution in Q1.

Our guidance also continues to assume a reduction of approximately 1% in our 4-year weighted average share count. We are raising our free cash flow guidance by $25 million at the midpoint to reflect the impact of higher operating income, and we now expect free cash flow margin of 11% to 12%.

Our higher growth outlook will require further working capital investment. However, we expect working capital to continuously decline as a percent of sales during the year and over the long term. On Slide 7, let's look at the components of our revised 2021 adjusted EPS guidance.

As you can see, the majority of our earnings growth will be generated by stronger volumes and net productivity, partially offset by the incremental headwinds from rising raw material costs and our continued investment for growth. Before I turn it back over to Luca, I want to share some detail on what we're seeing thus far in the second quarter.

The deltas in the second quarter will likely look incredibly strong given the pandemic impact in Q2 of 2020. Organic sales growth is expected to be above 20%, driven by MT's strong performance and an easy 2020 compare. This will be partially impacted by the global semiconductor chip shortage.

The other segments are each expected to grow mid-single digits with anticipated strength in IP's short cycle. Our outlook for CCT has improved, given the strong organic sales and orders growth in Connectors in Q1. The margin expansion is expected to be several hundred basis points, driven by MT and to a lesser extent, CCT.

From a total ITT perspective, adjusted segment margin should be equal or slightly above second quarter of 2019 of 16.1%, which we believe is a more representative comparison. The combined impact of higher sales and strong productivity will drive significant adjusted earnings per share growth.

On a dollar basis, we expect Q2 will be slightly below the second quarter of 2019, and the second half of the year may look very similar to 2019. As a reminder, Q4 of 2020 was especially strong, therefore, we will have a tough comparison in the fourth quarter. With that, let me pass it back to Luca for closing remarks..

Thanks, Emmanuel. I am very pleased with ITT's results in the first quarter. We see signs of a recovery in our end market, and our people continue to differentiate ITT from the competition. We are leveraging and building upon the cost actions we executed in 2020 to drive solid incremental margins as sales volumes increase.

And we are investing our capital effectively. As we said before, Friction continues to win in the marketplace and will be the springboard for growth in 2021. This performance should continue throughout the year, notwithstanding some of the macro headwinds related to supply chain and rising raw material costs that we will need to manage effectively.

From an operational standpoint, we made further progress in our transformations at both Industrial Process and Connect and Control Technologies. I'm encouraged by what I saw during my visits over the past few months and what I heard in my conversations with employees, customers and shareholders about the strength of ITT.

We also appreciate the partnership with our distributors and sales reps, working as a team with ITT to deliver these results. We are laser-focused on growing ITT through acquisitions while funding high-return growth investments, and the momentum is accelerating.

Our financial health is as strong as ever, and this will allow ITT to effectively deploy our capital on all fronts. We continue to deliver on our commitments, and Q1 has positioned us to surpass 2019. It has been my pleasure speaking with you this morning. With that, Stephanie, please open the line for Q&A..

[Operator Instructions]. Our first question comes from Damian Karas with UBS..

Congrats on the solid progress..

Thank you, Damian..

Thanks, Damian..

So I wanted to ask you about Friction here. At this stage, what is the auto production that you're assuming for the year? I think previously, you had said kind of 10% globally was the number you were working with.

But given some of the supply chain issues and other developments we've seen, just wondering if you could share what your thoughts are on that and, I guess, your expectation for share gains for the full year..

Sure. Thanks, Damian. When we look at the auto production, when we enter into 2021, the expert in IHS were talking about a growth of roughly 14%. And as we moved into Q1, what we saw on one side, positive side, a demand which was higher than expected.

And on the other side, the negative, was really the supply chain disruption, the chip shortages that you're talking about as well as the COVID third wave in Europe. So today, what you see is IHS projecting roughly a growth of 12%, 83.5 million vehicles produced for the year.

We are a little bit more conservative than that, around 10% or a little bit lower than 10%. And please always remember that we are projecting to outperform the market this year as well. We have done so for the last 9 years as an average 880 basis points per year, and we expect to continue to outperform in the next few years as well..

Okay. That's helpful. And then switching over to IP. I guess kind of that 15% margin target seems a little outdated now.

Just wondering kind of what's -- is there a higher number that you think you can achieve for the IP segment margin? Or -- and does the, I guess, the opportunity there get a lot harder from here?.

Thanks, Damian. So for IP, you're right. We're extremely pleased with the progress we've made to date. Keep in mind, in the 15.8% margin for IP in Q1, there was a couple of nonrecurring items that were favorable. So most likely, our actual level is probably something like 140, 150 basis points under that 15.8%.

We are really working right now to solidify that path to 15% plus. And there's still a lot of work that needs to be done because we have so many opportunities. I talked about how we announced a third consolidation project, and we have more to come.

And so I think that right now, we're focused on really making sure that in a sustainable way, we can achieve that 15% plus. And then when this is done, we'll think about a different target..

Your next question comes from Matt Summerville with D.A. Davidson..

Sticking with MT for a second. Can you give a little more granularity on what you saw in the OE business by region during Q1? And how we should be thinking about the full year? In addition, what you saw on the aftermarket side of Friction as well..

Sure. Thanks, Matt. What we have seen per region is China growing at an incredible amount just because it's an easy compare. They were got hit really hard by COVID in Q1 of 2020, and we outperformed China by roughly 400 basis points. The European market declined by roughly 1%, and we outperformed Europe by roughly 1,000 basis points.

And the North American market declined 4.5%, and we outperformed by a multiple of a thousand. So that is what we saw in the region -- in the different regions. Obviously, there has been a lot of volatility in the market. This volatility has increased in the second half of the quarter of Q1, and we expect this volatility to remain in Q2.

Our customer actually telling us that Q2 probably will be the worst quarter for automotive production in the year. In terms of the full year, what we are projecting is will Europe probably growing double digit, the same for North America, and China mid-single digit. Now going to the aftermarket.

We have seen an increase of the aftermarket year-over-year in terms of mid-high-single digit, different for OES and independent aftermarket. And we expect the aftermarket to grow high single digit, low teens for the full year of 2021..

And then again, sticking with MT and the Friction side.

The sporadic OEM shutdowns driven by the semiconductor shortage, is there any way to quantify the impact that had on your top line in Q1? How should we should think about Q2, to your point that, that might be the most challenging period? And then what the full year impact might be?.

Okay. So the most important thing here in the way that we are operating, Matt, is really to stay super close to our customers. So we have aligned our production and our plan to the customer scheduling. And this is what we have been doing in Q1, what we do in Q2, and this is what we will do for the full year.

So all of this is embedded already in our guidance. Now if you look at Q1 and Q2, probably the impact on production will be in the region of 2.5 million vehicles less produced in the first half of the year. The second half might get a little bit better but -- quarter after quarter.

But it might well be that we're going to have a similar impact in the second half as well, but better sequentially..

Your next question comes from Mike Halloran with Baird..

First, on the balance sheet side of things, obviously, understanding the acceleration of share repurchase.

First, what are the chances that, that changes through the year and gets upsized? And then could you put that in the context of how you're thinking about the M&A funnel, actionability and ability to deploy capital on that side?.

Sure. Thanks, Mike. So when it comes to capital deployment, our strategy on capital deployment has not really changed. The money goes first into the organic investment. This is where we have got the best return. This where there is least risk. Second, it goes into M&A; and third, in return to our shareholders.

We continue to be very aggressive on the cultivation side across all the different businesses, Mike. So we are talking about rail, where we want to build a platform organically and inorganically, about $500 million, $600 million. We talked about some material science within MT maybe, some aerospace companies in CCT.

So on -- the most important thing, though, is to ensure that we have a rigorous process, both strategically and financially. We are looking at regions like Europe and North America, and the size of the company that today are in the pipeline is something between $20 million and $200 million in sales.

Now we still see valuations a little bit on the high side, and with COVID a little bit difficult to do the proper due diligence. But in the meantime, we do not stay still. So we have increased our dividend by 30%, and we repurchased shares by $50 million. So we will continue with this strategy, and the strategy has not changed..

And then Slide 7, you gave some good context on the raw material inflation for the remainder of the year, the $0.25, $0.30. Could you talk about how you're thinking about that price cost through the year? I'm sure productivity is a good balancing mechanism there as well.

But how does the inflation pressure layer through to the remainder of the year? Is it more concentrated 2Q and ease? When is that peak pain? But then also bounce that against how you're thinking about the pricing dynamics out there..

Yes. So from a commodity standpoint, we've seen in Q1 the pressure has started in Q1, and we estimate something like $3 million to $4 million of impact on our results. Some of it, we've been able to pass it through to customers. And this is especially valid -- and this will be increasingly valid for IP, CCT and also our rail business.

We expect that this trend to increase and to strengthen in Q2 and the second half. One of the reasons is because we have contracts on steel, and we booked 6 months in advance. And so at the end of Q1, we're running out of our last booking that was relatively favorable in terms of price.

The difficulty is going to be in Friction, where this is a really competitive environment. And as a result, it's very difficult to get in front of our customers and ask for a price increase.

So I think that here, we're going to try to offset it with productivity as much as we can, use some of the escalator contracts we have with our -- with some of our customers and then try to negotiate lower price reductions, contractual price reductions in order to offset some of that impact..

Your next question is from Scott Davis with Melius Research..

Good start to the year. The emphasis that you guys -- a couple times have kind of commented on M&A and the press release made another comment on it. Is there -- I know it's hard to really talk about this.

But is there a preference to expanding in any particular segment? Or are they each kind of -- you love your children equally? Or how do you guys kind of think about that? Or is there even an opportunity for a fourth leg?.

Okay. I wish I could say I love my children equally in the family. Obviously, you haven't met them. But when it comes to ITT and Motion Technology, CCT and IP, I would say, in Motion Technologies, the focus is really on rail, probably more than on the Friction side.

Surely, we are looking at material science, but rail really has been the focus in Motion Technologies. When it comes to IP pumps and valves, we are looking at valves company and some pumps. But here, really, the focus is niche companies that really have a product to differentiate, not big companies.

We are not looking at playing the consolidation games over there. And when we look at CCT, we are looking in the aerospace environment. So these are really the 3 segments, I would say, the 3 industry where we are really looking after..

Okay. That's helpful. And then just to back up. I mean you commented on the 9 EV wins, and it's hard to really have any context around whether that's good or bad given I don't know how many you bid on, so maybe you can comment on that.

But really, the main question I have is just to clarify what the performance and technological differences in the product you're going to be supplying into those platforms versus perhaps a more traditional non-EV platform?.

Sure. Sure, Scott. ITT win rate in EVs awards is considerably higher than our existing market share. And this will continue to feed our market share gains as the market is moving more and more into EVs. And one of the platform in China is actually with BYD, which is one of the electric vehicle manufacturer, Chinese electrical vehicle manufacturer.

And when you look at the performance, there is a difference. As of today, the market, I would say, is not as well developed or sophisticated to require those kind of differences, for instance, in the noise performance. But it will come.

And this is exactly the reason why we opened a research and development center in China specifically focused on what we call the ePad, which is the pad in the material science for the electric vehicles. Just to give you an idea, Scott, the electric vehicles is very silent.

I don't know if you've driven a Tesla or an E-tron or whatever, but there is no noise. And therefore, the braking noise is something that you really need to make it 0, noise perfect. And this is a good opportunity for our material science excellence in Motion Technologies..

Your next question comes from Joe Ritchie with Goldman Sachs..

Hey, Luca, could you maybe start on some of the commentary on the Connector side of the business. Encouraging to see that your order growth number was up 20%. But I thought it was interesting that, that comment that you made in your prepared comments as it relates to like the opportunity that you're seeing with distributors.

Can you just maybe elaborate on that a little bit more?.

Of course, Joe. I was fortunate actually to travel together with Ryan, and we met with a couple of our distributors in the U.S. and also in face-to-face. And also, I was able to meet virtually with some of our sales reps earlier in the week.

And the opportunities are there across the portfolio, and also for a better response to the market from our end from an operational perspective. We have room to improve, and that improvement in our on-time delivery, et cetera, will enable us to win more in the market.

The trend is positive as you have seen in the orders last year -- last quarter, and that you start seeing now in the revenue in this quarter and once more on the orders and sequentially. So those are the opportunities that they see in the market.

Better performance on our side, better lead times on our side, they're going to go down, spending more time on the engineering side in terms of developing prototype and faster samples to give to our sales rep and to our customers..

Got it. That's super helpful, and it's great to hear. I think maybe just following back on the question that Scott just asked. Know what your competitive advantage is on the Friction side of the business.

But I guess, as you think about those 8 wins in China, I'm curious to see if you can maybe provide some context what that means from like a market share perspective. I know that you still have that ambition to be able to double your market share there over the next few years. So any context around that would be helpful..

Sure. When we look at China, we closed our market share in China in 2020 at 24.5%. So this means that in 2020, in the COVID year, we were able to gain between 1.5 and 2 percentage of market share in 1 year.

Now the win rate also in China for EVs on the award, it's higher than this market share, Joe, which means that it will translate in a continuous market share gain in the years to come..

And Joe, keep in mind that the volume for EV, even if it's growing fast, is still relatively small. So we expect that the contribution of EV will take a little bit of time to materialize..

Your next question comes from John Inch with Gordon Haskett..

I just want to confirm. So I think you said, Emmanuel, so we're talking $0.02 to $0.03 of raw material drag in the first quarter. Did you say how much was in the second quarter? Maybe you could say that.

And I'm curious, what sort of pricing are you getting for your rising backlogs? And does it actually match raw price increases based on where they are today? Or are you guys trying to get ahead of the curve, anticipating further price increases in terms of your components and raw pricing?.

Right. So we didn't disclose Q2. I think it will be a little -- probably a little higher than what we've seen in Q1 as some of the bookings that we did in Q4 are running out.

In terms of our ability to price it for what we have in the backlog, I think that's why you're seeing a little bit of delay between the time we actually receive the cost increase and the time we're able to transfer it to our customers. So on the backlog, we're not really able to go back to our customers.

But since that -- since in rail, in Connectors and in the short cycle, this turns pretty -- in the short cycle of IP, the baseline pumps, this turns pretty fast, we're able to, in the next iteration to put that in. And then for Friction, it will take a little time. There will be numerous conversations.

But I think that at certain point in time, customers are going to realize that if this is here to stay, will come to an agreement..

And John, if you were thinking, for instance, to the big projects in IP, you have to think that every time we are quoting on those big projects, we've got firm quotes from our supplier base. So that is protecting us..

No, that makes sense. Does this translate then into some sequential margin pressure for any of the segments that you anticipate, either Q2 or Q3. I mean I see the $0.25 to $0.30. I'm just trying to understand if that triangulates back into some margin pressures that you would care to call out..

Yes, yes, that's correct. That's correct, John. There is going to be sequential margin pressure, especially in the second half, and it's going to be mainly with Motion Tech because this is where we buy most of the steel, a little bit of copper and also some tin, which are heavily impacted by this inflation..

Makes sense. And then as you guys orient toward M&A and thinking specifically in the Connector business, Luca, you just mentioned that your focus is on aerospace. Long term, that's clearly a great industry. It hasn't served the dynamics well being so concentrated in aerospace just because of the aerospace downturn.

But obviously, we're going to come through that. I think it's sort of an interesting concept of building connectors period considering this business may be even, not that long ago, was sort of viewed perhaps by investors as a candidate that maybe should be divested.

Can you talk about -- on that front, can you talk about your critical mass in Connectors competing with the ethanols of the world? The reason you're going after aerospace is because that's where you feel you can sort of achieve and drive critical mass. And then sort of going into more industrial connectors, it just -- you'd be spread too thin.

Or what's really the strategy that's underlying that business?.

Okay. Sure. Thanks, John. So it's -- when we look at aerospace, there is aerospace, industrial and defense. You tend to have these companies that are covering all those 3 areas. Now going back to the point that you're making in terms of Connectors, I'm actually quite pleased from the performance of Connectors in Q1.

When I look at the profitability of Connectors in CCT, in Q1, we were already at the pre-COVID level of profitability despite the revenue decline. So there is the ability to compete with the big guys. Obviously, you tend to be more niche. You tend to be more maybe sometimes closer to the customer and be able to engineer solution together with them.

And I think that this is what will enable us to differentiate ourselves and to win in the market. We are providing a better service than some of the other bigger companies that they cannot provide just because they are much bigger..

Your next question is from Brett Linzey with Vertical Research..

In here over the last couple of years.

Can you hear me okay?.

We missed the first part of your question, Brett..

Okay. I'm sorry. Yes, you've strung together a number of EV wins over the last 2, 3 years. And I appreciate the color on some of the technology. But are you winning both front and back axle in EV? And just trying to get a sense if the dollar content in EV versus conventional has shifted higher..

Sure. When I look at the last year in 2020, and this -- there were 42, if I remember correctly, EV platforms, the split was winning more on the front axle for the EVs. Now if I look at the 8 -- at the 9 platform wins, 8 of which were in China this quarter in Q1, I would say the split is reverse.

It's actually 60% in the rear axle and 40% on the front axle. So I would say no substantial difference, Brett. 1 year might go in 1 direction and 1 year in the other, but no substantial difference there..

Got it. And just shifting back to the footprint optimization, you said you announced a third program here.

What are the expected savings for this year from those actions then? Could you just give us an update on what the total savings are for all actions, 2020, '21 actions? And then what the carryover might look like into next year?.

Sure. Sure. So in terms of footprint, really, the benefits that we're going to have is related to the footprint we announced last year in Q3 in IP because we since then closed the factory and then we are enjoying -- we will be enjoying the savings probably in Q2, starting Q2. For the other footprint actions, the other 2, they are quite comprehensive.

And as a result, we don't expect to have material benefit this year. And the benefits, we'll get it in 2022.

I think that regarding the rest of the cost actions, so you may remember that last year, we announced that we were going to have a $40 million gross carryover impact in 2021, and then some of it was going to be offset, probably $15 million to $20 million, by some costs that are rolling back, such as executive compensation and other sales and marketing costs.

So this is still our view. We are putting a really strong emphasis on fixed cost. And here, the mantra is that whenever revenue is down, our fixed costs are variable. And whenever revenue is up, our fixed costs are fixed.

And this is why you've seen a lot of leverage, the benefit of that leverage in Q1, and we expect to get more of that in also the next few quarters..

And could you maybe just put a rough estimate on what the round 2, round 3 actions will yield into next year and beyond?.

We're not really prepared for that right now. So we'll get back to you on this in the next few quarters..

Your next question comes from Joe Giordano with Cowen..

Can you maybe talk about anything you're seeing from your customers? And you could talk kind of wherever it needs to go in the portfolio.

But are you seeing examples of kind of -- not just restocking, but like ordering much earlier than normal and kind of stockpiling because of fears of not having available supply?.

Okay. So when we look at -- let's start with Friction, of course. This is where we are facing the biggest challenge from a supply chain point of view. As when talking to our customers, what we see is really that Q2 is probably going to be the worst quarter. They're going to be -- the production is going to be impacted the most.

But then when you look at the inventory that you have in automotive in the different regions, you still see a relatively low inventory worldwide, is that you have a pickup in inventory going up a little bit in China, but that is not too much of a concern. And you have a low inventory in Europe and extremely low inventory also in North America.

So that is from an automotive perspective. When we look at -- when we talk to -- in IP to our distributors, for instance, I was with some of our distributors in Florida last week, and I was at one of their sites, and I walked the shop floor and they showed the inventory.

I was not surprised either by the low or the high inventory, absolutely normal operation. So I don't think that there is anything like that. Another important thing that we see in IP -- and this is not talking to the customer, but just in looking at the funnel of opportunities for projects. What we saw is that the funnel got larger in the quarter.

The funnel went up at the end of March compared to the beginning of the year by 2%, and the trend continued in April. In April, it was up 11% from the beginning of the year.

And then let's move into Connector, into CCT, in aerospace for instance, I think that there has been no buildup, but the positive trend on this one that we have seen is actually on our backlog in aerospace. They started going up in January, February and March in the quarter.

The Connector side is where we have seen the orders going up substantially coming from distribution. And this is where we think there is some buildup of inventory. Having said that, when I talked to some of our distributors in Connectors, their bookings, their book-to-bill is higher than 1.

So this building up of the inventory is going to feed a very good bookings that they have in their books..

That's very helpful.

Emmanuel, on IP margins, can you just let us know what are those nonrecurring things hitting this quarter? And even if we back that out, is there any element of margins in IP now that are like almost unsustainable because of the mix, because of how little project activity is and how much it's skewed more towards higher-margin pieces of the business? How should we think of that as economies normalize and your more of a normal flow of business starts coming into IP?.

Yes. So actually, Joe, the mix was negative this quarter in IP. And so because we had really flat project revenue and then much lower short cycle. And so the impact of the nonrecurring in the quarter, as I said, were around 140, 150 basis points.

There was one on a successful project that we delivered, and we had a settlement with the customer, and so that went our way. And then we had also a positive impact from the CARES Act for roughly $1 million or so. So overall, 140 to 150 basis points negative mix in the quarter. So we think that the rest, outside of that, is pretty sustainable..

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

As I said, I'll add, great quarter. Just a question on oil CapEx. I think you sort of commented that you don't expect a pickup in oil CapEx. I think Emerson highlighted improvement -- potential improvement in second half. I think Flowserve highlighted.

Is it a difference in the mix that you are more tied to production versus automation? Or you're just being conservative. Just want to try to understand why you're being somewhat more conservative relative to your peers..

Thank you, Andrew. So let me share with you a couple of data for you. First of all, when you look at oil and gas for ITT, probably it's a little bit less than 10% overall.

Now when you look specifically in IP and we look at the orders in IP, Q1 in the quarter, you have the orders of -- oil and gas was the only sector where -- which was down quarter after -- year-over-year, was down roughly 30%; whereas chemical and general industrial were up.

So what we see some improvements, because when you look at this sequentially, then you will see that both general industrial, chemical and oil and gas orders are up sequentially. But what our view is that we will start seeing most of the projects actually moving towards the end of the year in Q3 and in Q4.

And this is what our customers are telling us, and this is what we see. And while you got these projects booking towards the end of the year, you will not be able to see the revenue straight away because you're talking about 6, 18, 24 months of execution..

Got you. I'll follow up offline on color. And another question -- and I apologize if you've sort of answered this question. But the unemployment numbers today, people are having difficulties getting folks back into the workforce.

Can you just comment what are you seeing in terms of being able to find qualified labor force out there? What is it doing to labor inflation? And how are you thinking about sort of mix between labor and capital given this strange labor market?.

So yes, so around the world, I think for different reasons, our sites are having difficulties, somewhat difficulties in finding talent. We're -- so far, it hasn't impacted really our operations, but it's pretty difficult. And some of it is because there's a tight labor market, as you mentioned, in North America, for instance.

Some of it is because of the lockdowns in Europe, for instance. So at the moment, we're not seeing increased inflation from a labor standpoint. However, we're always ready to pay a competitive wage. So at one point in time, if that happens, we'll adjust. But I think that for the moment, we haven't really been impacted.

I think regarding your second part -- the second part of your question regarding our choices, if we go manual or more automation, we are looking very closely at automation in some of our businesses. In our KONI business, for instance, in our Axtone business, we're looking at automation.

In our CCT business, also, we've made some pretty good CapEx investment for machining centers. And so as a result, we're always trying to look at the trade-off between the investment and manual -- and costs coming from manual operations.

And we're -- and so far, we've been able to make some pretty good -- to have some pretty good benefits because of that..

And as I said, great quarter. I'm sure the team worked extraordinarily hard to achieve it..

Thanks, Andrew..

Thanks, Andrew..

We have time for one final question. Your last question comes from Bryan Blair with Oppenheimer..

I was hoping you could offer a little more color on Friction OE share gains, and how we should think about the cadence of your outperformance throughout the year. I was kind of assuming coming into 2021, based on the huge outgrowth that you had to kick off 2020, that outperformance would be back-half weighted.

So 1,500 basis points outperformance was not on the radar for me. It sounds like you're confident in sustaining the outperformance going forward as you always are. But just curious how we should think about that quarter-by-quarter or first half versus second half, however you could frame that..

So Bryan, it's very difficult to look at outperformance quarter-by-quarter. Now it was true in -- was difficult in 2020 because it was a very volatile environment because of COVID. When you look at 2021, our -- the volatility will be different, will be reduced, but there will still be quite a lot of volatility.

It will still be quite bumpy because of the strain in the supply chain. And different OEMs have been impacted differently in different regions.

So you really need to stay close to your customer, to the OEM to the GM to the Volkswagen, to the [indiscernible] and align your production schedule to them, be super fast, super agile and flexible and deliver on time. So do not look on a quarterly-by-quarterly basis is -- because that would be very dangerous. It will be a bumpy ride.

There was a lot of volatility. One thing I can tell you is that we will continue to outperform to similar level of what we have done in the past 9 years..

Appreciate the color there. And a follow-up on your intensified M&A focus. You commented on priorities across platforms. Your messaging has been pretty consistent there. I was wondering if you would be willing to share if there's been a notable increase in your pipeline over the last few months.

And whether the increasing optimism on 2022 being more of a normalized year is leading to more constructive conversations? And I guess in the same, at least for U.S.

companies, whether the likely changes in tax code have pulled forward any conversations?.

Okay. So maybe let me address the M&A. And maybe, Emmanuel, you can talk about the tax. In terms of -- absolutely, there has been an increase -- many more discussion on the M&A. We have reestablished regular cadence and regular meetings within ITT to review what is in the pipeline in each of the businesses.

And just in the last couple of months, we, at the headquarter, have been involved in several conversations with a couple of businesses on what is in the pipeline. So that's absolutely the case..

Yes. And Bryan, in terms of the rest of your question, I think for us, we are really focused on the quality of the businesses. And then if there is a tax impact, this is just a side benefit for us. We want really to make sure that we have targets that are complementary to our existing businesses, that are strengthening those businesses.

And as such, we've been increasing the rotation of things that we look at. And we really have that, as Luca was saying, that intensified focus on M&A. We have restarted that, yes..

At this time, I would like to turn it back over to management for closing remarks..

We'd like to thank everyone for joining us today, and we'll talk to you soon. Have a great weekend, and Happy Mother's Day..

Thank you. That does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day..