Q4 2020 ITT Inc Earnings Call
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It is now my pleasure to turn the floor over.
Proud of Mark Macaluso, Vice President of Investor Relations you may begin.
Thank you Maria and good morning, It's my pleasure to welcome you to Itt's fourth quarter 2020 earnings Conference call. Joining me here. This morning are Luca Savi, Itt's, Chief Executive Officer, and President and Emmanuel Kirk Reich, Chief Financial Officer Today's press.
Over the presentation and reconciliations of non-GAAP financial measures. The most comparable GAAP measure can be found on our website at ITT dotcom forward slash 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 actual results may.
Press release purely from the assumptions presented today, all such statements should be evaluated together with the safe Harbor disclosures and the other risks and uncertainties that affect our business, including those discussed in our form 10-K, and other SEC filings.
Except where otherwise noted the information we present this morning will be based on adjusted non-GAAP figures.
They vary but these results exclude certain nonoperating and nonrecurring items, including but not limited to especially as related charges restructuring asset impairment acquisition related items and certain tax items, all the adjustments in the quarter and for the full year 2020 are detailed in the reconciliations in the appendix.
Four we begin I'd like to provide.
Overview of our fourth quarter GAAP results compared to prior year Q4 revenue decreased 1.5% to 700 of $9 million.
Segment operating income increased 11, 6% to $120 million and reporting earnings per share was the net loss of 16 cents. This is principally.
A brief even on a $137 million charge related to the successful termination of our U S pension plan and other items, including tax charges totaling $17 million, partially offset by $52 million, especially this insurance settlement benefit with that let me turn the call over to Luca who will.
On slide three.
Thank you Mark and thank you all for being with US This morning.
I truly hope that everyone is healthy and safe.
Before I begin I.
Like to again, thank all of the ITT is it on the word who continue to work tirelessly during this pandemic to serve our customers.
Begin and to take care of of each other in these challenging times.
I'm humbled by the way. These team continues to respond to the crisis and want to express my sincere gratitude for all you have done.
At first to serve our customers and drive exceptional performance in the safe fast.
The most productive manner.
The Testament to the commitment perseverance and your hard work.
I would also like to welcome to ITT, our new Vice President of Investor Relations Mark Macaluso.
Mark of joined ITT in January of this of year. After the successful 13 year carry.
And plenty of it and has hit the ground running.
I'm happy and excited to have Mark on the ITT team to drive out of global Investor Relations strategy Welcome Mark.
As the result of our focus on the health of our people and our efforts with the leave it another strong performance in the fourth quarter.
Early last year, we took some difficult and the swift actions to respond to the pandemic.
These actions ensure the ITT continued to outperform in 2020, and we will emerge stronger in 'twenty and 'twenty one as the.
Economic environment recovers.
And as you will hear this morning, we have made tremendous.
This progress on both fronts.
Let me now highlight some key financial achievements for the quarter.
We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on the 4% organic sales decline.
And we improved our the command.
<unk> margin every quarter in 2020 for the full year or the commensurate margin was 22% at the low end of our range.
As a result, we delivered adjusted earnings per share of $1.01 of.
And as well as the year over year increase.
We.
The maintenance at free cash flow of $102 million for Q4, and 372 million for full year.
Throughout the year, we drove cash collections and optimize the inventory was applying strict control over capital investments.
These drove of free cash flow margin of 15%.
At the high end of our guidance that we increased just last quarter.
On capital deployment in 2020, we increased our dividend by 15%, we repurchase the ITT shares totaling $73 million and we increased our majority stake in a walgreen, China joint venture as we continue to expand on our market.
Generally in Asia.
Despite the restrictions imposed by Covid I was fortunate to safety.
To safely visit many of our facilities around the globe, including China, Europe, the middle East and across the U S.
As you know I consider this fundamental to identify.
As Shane and executing the many operational and commercial opportunities. We at ITT you have around the globe.
In 2020, we reduce the number of recordable incidents by 25% and implemented stay for the workplace protocols globally.
This is an important element in ensuring the health of our people.
The fund also contributed to a significant reduction in workers' compensation expense in the U S.
Safety is foundational for our operational excellence.
And all of US should expect a continued reduction in incidents in the future.
From the commercial perspective sales in friction output.
And if the global auto production rates by more than 600 basis points for the full year.
We increased market share by almost 400 basis points in North America more than 200 basis points in China, and almost 100 basis points of Europe.
And when it comes to Evs, we secured position.
Position on the 42, new electric vehicle platforms during the year.
In industrial process, we continued to execute on our footprint rationalization projects.
We finalized our first consolidation in Europe this quarter and are progressing according to plan on a second project. This one.
Part of America.
We are making progress in sourcing efficiencies through aggressive negotiation and supplier rationalization.
As I noted before I believe there are still many opportunities to improve our purchasing performance as well as for the lean out our operations.
In.
<unk> in the step process. They leave of 15, 1% adjusted segment operating margins this quarter.
This is the milestone.
Still in IP at the end of last year I visited our industrial of upside in a mode of Mississippi.
I was impressed with the or the management process implemented.
Inducted by Angie and her team that has resulted in best in class on time delivery performance and unparalleled service for our customers.
This is also true from the project management performance standpoint, where IP continued to drive near perfect execution and on time delivery, while driving margin.
The main fashion for many of our large projects.
In connect and control technologies, the order situation improved sequentially in the fourth quarter and a book to Bill was above one thanks to our industrial connectors, while Cct's end markets remain challenged we are deploying the same operation.
The <unk> excellence playbook that we successfully executed in empty and IP.
We expect to reach pre COVID-19 margin levels at CCT in the next two to three years.
Today I'm also pleased to provide our outlook for 2021. The reflects all that we have done to strengthen.
<unk> operations are people and our potential.
We anticipate full year organic sales growth of two 4% of driven by continued share gains the most of the technologies as well as the brought the out of market recovery.
We expect the rest of our markets to be flat to slightly down.
We plan to expand.
Our adjusted segment margins by 130 to 180 basis points.
The increased sales volume and the carryover impact of our 2020 cost actions coupled with the strong productivity from 2021 initiatives will generate adjusted earnings per share in the range of $3 40.
Spent five cents to $3, 75, which equates to 8% to 17% growth versus prior year.
Because of our strong free cash flow performance in 2020, we're well positioned to deploy capital in 2021.
First we will invest in.
40 finishes with approximately $100 million of capital expenditures up over 55% versus 2020.
Second we will aggressively and diligently pursue acquisitions in our core markets to effectively put our cash to work and build on our strong businesses.
The third we increased our dividend by 30% as announced this morning. This is our ninth consecutive dividend increase.
And finally, we are planning to repurchase ITT shares totaling $50 million to $100 million, reducing the full year of weighted average share count by approximately 1%.
Let's turn to slide four to talk further about the fourth quarter and full year results.
From a topline perspective motion technologies delivered a strong performance growing over 10% organically driven by continued share gains and double digit growth in auto in north.
Okay and China the.
This was offset by lower short cycle demand in industrial process, as we anticipated and the impact of commercial aerospace dynamics in CCT.
Our focus on operational excellence is producing strong results.
The motion technologies expanded margins over 400.
American <unk> points to 19, 5%.
Industrial process grew margin 90 basis points to 15, 1%, despite the 10% organic sales decline.
The empty and IP performance fees more than offset connect and control technologies margin decline.
For the full year I'd like to point out a few highlights in addition to doors that we have already discussed.
First.
Working capital as a percentage of sales continues to decline.
And we saw 70 basis points of improvement in 2020, excluding the impact of FX.
Second.
Free cash flow increased 40% versus prior year, despite the challenges posed by the global pandemic.
We hit the high end of our full year target for free cash flow margin, while also investing in the business through growth capex of more than $35 million for the year.
Third we continue to effectively manage out of legacy liability profile.
As I mentioned in our last earnings call early in Q4, we successfully transferred out of U S pension liability to a third party.
This will reduce administrative costs and and all future funding requirements for the plant.
We also continued to successfully negotiate asbestos related insurance settlements with our carriers.
And we drove an increase in our insurance assets of $52 million in the fourth quarter and $100 million for the full year.
As a result of net asbestos liability.
The ability that we recently brought with full of ryzen valuation is now $487 million.
Let's quickly turn to slide five to discuss a few wins and awards in our businesses that we've shaped 2021 and beyond.
He is back.
It shouldn't team developed the strategy to penetrate the growing EV segment, while continuing to gain share of unconventional vehicle platforms.
We focus on our technical folks our technical expertise in addressing tighter noise and vibration requirements, while continuing to deliver a frictionless customer experience.
In China, our EV brake pad development center continues to effectively partner with our customers in the largest EV market in the world.
And in 2020, we continue to see the results of our strategy by winning content on new electric vehicle platforms, including several of platform.
That forms win wins.
The EV manufacturer.
We also won both the front and rear axle for the new U S performance crossover vehicle.
The strength of our friction technology continues to be undisciplined as we assist automakers is significantly reduced.
Using braking distance of heavier vehicles.
All of this is a testament to the innovation and the engineering prowess behind a brake pad technology.
In industrial process, a redesigned between bearing API pump.
New orders increased over 50.
50% this year.
Our customers are benefiting from improved hydraulic efficiency and performance will reduce lead times at the competitive price point.
In Q3, we further expanded and improved our hydraulic pump offering and have an active funnel of potential orders already.
Out of new I alert remote monitoring offers the agnostic capabilities and tailored solutions that predict customer equipment failure and improve asset appetite.
Finally in connect and control technologies, our N of diabetes is teaming with bell textron to produce.
Produce passive vibration control technology for the 360 Invictus.
The Invictus is best competitive prototype to the U S future attack reconnaissance aircraft or the fair of program.
Together with Bell the anodyne team is developing.
Technology for use in the mission critical defense application suitable for the fair of program.
As we embark on 2021, we remain laser focused on operational excellence and customer Centricity.
This has been the ITT playbook for the last four years, we continue to make.
<unk> significant progress and we again saw the benefits of this commitment in the results we delivered in Q4.
We will continue to be good stewards of ITT driving performance for our customers, while searching for organic and inorganic opportunities to deploy capital and.
Eloping to business.
Our effective and comprehensive capital deployment strategy with clear priorities on organic investments first and foremost.
Followed by close to core acquisitions, and then return to shareholders will ensure that our cash is efficiently put to work.
And grow the let me now turn the call over to of Manuel who will take us through the segment results and provide more detail on the outlook for 2021.
Thank you Luca and good morning, everyone. Let me begin with motion technologies.
Q4 organic growth of 10% was primarily driven by the strong performance of friction OEM.
We delivered 640 basis points of outperformance in 2020 on a global basis further evidence that the empty machine continues to win in the marketplace for.
For the quarter friction sales in North America were up 43% and sales in China up 19% while growth.
Moving business was over 12% with strength in Europe, and Asia Pacific as we gained market share in both break shifts in ceilings.
Segment margins were incredibly strong again.
Expanding 410 basis points on incremental margins of 46%.
It was mainly driven by higher volume and productivity.
Now there is to continue to fund growth investments.
We are very pleased with the pace and the strength of the recovery of an empty as we head into 2021.
For industrial process sales were down as we anticipated with declines in short cycle do too.
The pandemic related impacts that affected our previous previous two quarters bookings our project.
Business, which encompasses most of our oil and gas exposure and IP saw declines in pump bookings as large projects continued to shift to the right.
However, our short cycle orders in the quarter.
<unk> were up 1% driven by aftermarket demand.
IP margins expanded 90 basis points on 7% decremental margins the.
The impact of the sales decline was almost entirely offset by productivity benefits restructuring savings and price also.
So as Luca mentioned, we continue to make significant headway in our purchasing performance. Thanks to our long term supply of rationalization strategy.
Furthermore, ip's working capital as a percentage of sales improved 590 basis points versus prior year, and we still see further.
Synergies to optimize inventory as we consolidate footprint and enhanced materials planning.
IP finished the quarter with less than 20% working capital as a percentage of sales.
Lastly, in connect and control technologies, we continue to see weak demand across all.
All major end markets.
Sales in aerospace and defense were down over 30% driven by lower passenger traffic and lower build rates from air framers the.
The bookings we saw in aerospace in the second and third quarters declined sequentially in the fourth quarter to minimal levels.
We expect that.
The <unk> weakness, we saw this quarter in commercial aerospace will likely persist into the first half of 2021.
Connect yourself, we're down over 10%, mainly due to North America, our aerospace and defense.
On the positive note, we are encouraged by the recovery in orders and defense and industrial connector.
This contributed to a book to bill of more than one in Q4.
CCT margins were impacted mostly by lower volumes, partially offset by an aggressive cost reduction plan. While this year was challenging for CCT. We are encouraged by the productivity, which was over 400.
<unk> basis points this quarter and the full year.
I am now on slide seven to present, a deeper look at the margin performance this quarter.
On a highlight two main points first we generated productivity of 230 basis points.
For the full year that number was over 300.
Basis points.
This is the result of of multiyear approach to reduce itt's cost structure by driving operational excellence across the enterprise and moving towards the leaner ITT in all three segments and at corporate.
We have successfully executed this playbook at motion technologies and we.
Hundreds of the early stages of the journey with industrial process.
At CCT, we're still laying the foundation and overtime, we expect results similar to what we experienced in motion technologies.
The second key takeaway is on strategic investments, while we made necessary cuts to discretionary expense. This.
To manage through the pandemic. These did not come at the expense of growth investments. We continue to selectively fund the most promising growth initiatives in key markets, including in Evs globally to ensure we continue to win in the marketplace as we did with our successful launch of copper.
This year of brake pads several years back.
Let's turn to slide eight to review the 2020 cost action results.
For the full year, we achieved cost reduction savings in excess of $100 million, including $40 million in the fourth quarter.
This came from a combination of head count reductions.
The free reduced executive and board compensation and discretionary cost actions, we delivered approximately $65 million of structural reduction in fixed costs for the full year with the remainder comprising temporary savings, which will partially reverse in 2021.
We are continuing to drive footprint optimization at both IP and CCT, while remaining diligent with strong cost control and accelerated sourcing performance.
We expect that the carryover impact of actions in 2020 will generate approximately $10 million to $15 million of additional savings.
Savings in 2021.
We also expect to fund and execute new footprint rationalization and cost reduction plans. In addition to the normal productivity we will generate.
As a result of these measures our decremental margins improved every quarter since Q2 and.
Instead of the euro at 22% at the lower end of our target given the strong performance in Q4.
In 2021, we expect incremental margins north of 35% as volumes recover and we leverage our optimized cost structure.
Keep in mind.
We feel very from quarter to quarter based on our quarterly performance in 2020, and the mix among our businesses.
Let's turn to slide nine to discuss our 2021 guidance.
Our end markets are showing signs of recovery.
<unk> the full year economic outlook remains somewhat.
Uncertain at this time.
We intend to remain flexible and manage our costs to coincide with the expected gradual recovery.
Despite the ongoing disruption from the Covid pandemic, we see general economic conditions, continuing to improve throughout 2021, particularly in the second half of the year.
This we expect total revenue will be up 5% to 7% versus 2020 and up 2% to 4% on an organic basis.
The strong organic growth, we see in friction stemming from continued share gains and the resurgence in auto will likely be offset by declines in industrial pumps as customer.
Ex continues to be constrained and project activity remains weak.
Notably we expect sales in motion technologies in 2021 to get back to 2019 levels.
In commercial aerospace activity will slowly recover starting in the second half of 2021.
The up as inventory levels normalize and passenger air traffic begins to recover.
Defense should be relatively stable as the large order we won in the fourth quarter of last year will convert into revenue towards the end of 2021.
Finally in oil and gas we expect margin.
Modest growth from downstream activity improvement.
However, the growth rate will be impacted by lower project bookings in 2020, as the result of the market Delta.
We expect to see stronger growth in the middle East and Asia Pacific in particular.
We expect adjusted segment margins to expand.
150 basis points at the midpoint driven by higher volumes continued productivity and the incremental benefits from structural reductions to our cost structure in 2020.
All segments should deliver triple digit margin expansion.
We're guiding to adjusted.
<unk> by earnings per share growth of 8% to 17% diesel.
This assumes an approximate 1% reduction of four year weighted average share count from repurchases and an effective tax rate of 21, 5%.
Free cash flow will be in a range of $270 million to $300 million.
It earned and we expect free cash flow margin to be 10% to 12%.
This is lower than the 15% of delivered in 2020, as we expect to increase capex spending, including $5 million to $10 million of investment into green projects.
And increased working capital dollars to support top line growth.
However, we expect working capital to continue to continuously declined as a percentage of sales over the long term.
At these levels adjusted free cash flow conversion will approximately be 100% aided in part by working capital optimization.
On slide 10, we.
The walk to our 2021 adjusted earnings per share guidance.
The majority of our earnings growth will be generated by stronger volume and net productivity, partially offset by the reversal of temporary cost savings and the incremental investments for growth.
The reversal of temporary cost savings.
We show the two a combination of higher compensation costs travel expense and cares act benefits that will become a headwind to earnings in 2021.
Foreign exchange is expected to contribute positively to earnings in tax rate is expected to be slightly higher than 2020.
At 21% 20.
Is the 5% with the variance of 20 basis points around the mean, depending on the jurisdictional mix of our income.
Our planning rate currently implies a <unk> <unk> EPS headwind.
Lastly, as Luca highlighted we expect to repurchase $50 million to $100 million in ITT share chairs.
The one and of which will generate a one to three cent tailwind.
Before we wrap up I also want to share some additional details on what we're seeing thus far in 2021.
And while we expect in the first quarter.
Year to date, we are on track.
Our first quarter outlook.
<unk> assumes continued double digit organic sales growth in motion technologies offset by mid to high teens declines in both industrial process and connect <unk> control.
In industrial process soft 2020 bookings will continue to weigh on revenue near term.
Particularly in the.
The chemical and oil and gas segments.
Our short cycle business will decline due to customers maintaining tight operating expense controls and lower ending backlog. However, we expect that IP short cycle will improve sequentially in the second quarter and then grow in the second half of 2021.
As in CCT, the declines will be driven by weak commercial aero demand. This will be partially offset by growth in connectors given the strong beginning backlog after over 30% sequential order growth in Q4.
The margin expansion will be driven by MTN IP given.
Even the higher order volumes and the cost actions executed in 2020.
Despite progress Cct's margin will be lower than last Q1, which was still largely unaffected by the pandemic.
While there remains a fair amount of uncertainty in some of our end markets we're confident.
The <unk> ability to continue to execute and outperform the competition, which will likely generate Q1 adjusted earnings per share growth of mid to high single digits versus prior year.
Let me pass it back to Luca for closing remarks.
Thanks Emmanuel.
One.
Once more I would like to thank ITT ers are customers and all of our other stakeholders for their support and commitment to ITT.
I am proud of the results we delivered in 2020.
We focus on what we could control.
Acted quickly and continue to invest in our business.
Businesses.
Our motion technologies business is a springboard for growth.
Friction continues to win in the marketplace with the focus on capturing share in the fast growing EV segment.
We are progressing in our transformation at both industrial process and connect <unk>.
<unk> technologies with the lots of runway.
And finally, our financial health is the strong entering 2021 with ample capacity to deploy capital.
We intend to fund high return growth initiatives aggressively and diligently pursue strategic acquisitions.
Okay.
Competitive dividend and systematically reduce our share count whilst continuing to wind out of the legacy liability exposure.
We have clear priorities.
We are aligned and purposely committed and accountable.
And we have seen the benefits of our rigor in our rig.
In control.
With that.
Maria could you. Please open the line for Q&A.
Thank you the floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone.
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Please limit your questions to one question and one follow up.
Our first question comes from the line of Jeff Hammond.
You May think capital.
Hey, good morning.
Morning, Jeff more on Jeff.
So I guess on on friction can you just talk about what you see for outgrowth specifically.
Versus the long term trend and what Youre kind of Ias IHS.
Expectations under underneath.
Of course on that as well, which.
Or I guess your production versus IHS.
Sure.
So we as you've seen we outperformed the very well in Q4 and our outperformance for the full year was 640 basis points.
And we outperformed every region.
Underlying three underneath the outlet.
At this point of Europe more than 1000 basis price in China, 17, 100 basis points in North America for the full year.
So we expect it to continue to outperform the market in 2021.
And to have a solid the a significant outperformance.
Of the market, we have done that for the last nine years on average of 900 basis points and we will continue to do so in 2021.
When the Youre talking about the IHS the forecast that for 2021.
The chassis forecasting the grow.
Both of roughly 14%. So this means production that goes from.
The $74 75 million vehicles this year to roughly 85.
As you know, Jeff very well, we tend to be a little bit more conservative than IHS. So we're from a 10% growth in 2021, and our outperformance on top of that.
The one thing to stress is that was when you look at the production vehicles. The forecast is to get back to the 29 2019 level in production probably in 2022 2023, we think we will get there this year.
Okay, and then just on the Incrementals certainly very impressive.
35% plus.
Despite still quite of bit of headwinds on IP and CCT can you just talk about how much of the temp cost I think you have $40 million in 2020, how much of that comes back.
And then.
Beyond just the carryover savings.
How much additional restructuring savings do you expect to get to kind of support that that incremental thanks.
Absolutely Jeff.
We have achieved executed $105 million of cost savings Inc.
<unk> from <unk>.
And.
We expect that there was going to be of significant carryover impact in 2021, roughly something like $40 million.
And then obviously, there's going to be some reversal of temporary cost cuts such as executive compensation and other discretionary costs that are going to come back in the amount of 25.
2% to $30 million, so net net $10 million to $15 million incremental savings in 2021 compared to 2020.
Okay.
Okay, and then just just to follow on that.
It seems like so.
Is there a big just productivity.
The number that you're that you are looking at over and above just the restructuring.
Restructuring costs.
Yes, absolutely.
We expect to in addition to those two of those.
The cost action benefits, we expect to execute on our natural and normal productivity.
Activity that we get every year and we're pretty strong on this we had in the fourth quarter of more than 200 basis points and the productivity is basically coming from sourcing activities and we know we have a lot of opportunities in all three segments shop floor productivity as well as some V. The AAV activity.
Activities in the IP.
So yes the the.
Line of cost reduction and efficiencies for 2021 is pretty full.
Our next question comes from the line of Scott Davis Melius research.
Hey, good morning, guys.
<unk> morning, Scott Hi, Scott.
I think you mentioned 42 EV platforms that you got on.
The weather's this quarter this year, but what what's the hit rate is that instead.
Is that something you can put it in percentage terms for us.
Yeah, He's a he's very high score.
Indeed.
With higher debt.
Our current market share.
In in the executed in the production. So these are ease of very positive because these will feed us continuous market share gains in the year to come.
And the very minded our market share today worldwide.
It is roughly 26% and we are much higher than that in our awards, one EV and just a quick one Scott.
I could share of increased of UC versus prior year and what was really interesting is that it increased in every regions even in Europe, where we are more.
The share position.
Okay, Good and then.
<unk> got a pretty big Capex increase in buyback that you mentioned is M&A kind of in the mix.
I don't think you said anything on prepared remarks, but maybe you did but if you could talk about the.
Yeah, Yes caught the thanks for the question.
More on the cities and this is why I stress day.
The capital that we have we have the ability to do everything that we said we have the ability to grow.
Cash flow our growth investment and we are increasing to roughly $100 million of capex.
Opex second aggressively but at the same time diligently and we the Vega pursue acquisitions in the close the close to core of and quickly out of businesses and this goes across all the three value centers all three businesses and we are actively cultivating right now.
And.
We also have the cash we are fortunate to have the cash also to increase our dividend by 30% and commit to share repurchases.
We want to get our cash to sweat Scott.
Okay. It sounds encouraging well good luck guys I'll pass it on thank you. Thank.
Thank you.
Our next question comes.
From the line of Nathan Jones of Stifel.
Yes.
Good morning, everyone.
Good morning Nathan.
Just wanted to talk a little bit about inflation and price cost you know obviously the thing you know steel prices go.
Go up pretty stably.
And historically that has caused a few issues on the margin.
Side, particularly in empty, where I understand that lot of your contracts. There are fixed price. So you can predict protect your AR.
Protect your intellectual property can you talk about what your expectations on the price cost there, particularly in empty, but also are not paid.
Sure so in terms.
The price cost you know an empty where in the situation where every year, we have to give price to our customers. That's part of our contracts I would say, though that we were able to negotiate with our customers. So that the impact is usually less than the average for the market.
For 'twenty and 'twenty, one we expect a similar pressure than we had in 2020.
But we're gonna have the significant improvements coming from both net productivity and emptied of euro you'll be more than 150 basis points and then from volume obviously as Luca mentioned I think in general the in the other businesses, we're able to get price in IP and CCT, so that should be okay from a cost.
Peter.
We are seeing increases in the commodities, especially steel and here. There are a couple of things that we're doing the first we are obviously tried to mention to our customers and negotiate with our customers. Because we have this increase in cost. The other thing also is we're driving a lot of supply chain savings, especially the resourcing.
Some of our steel to China, and Turkey, which will help us reduce the are the cost of the commodity finally, we're also booking in advance steel. So right now were booked until may and so that will ensure that we are a little bit protected from the current increase.
Standpoint of thanks for that I wanted to follow up with.
Just some questions around your plans on on full cream production supply chain I know you've made some changes to the footprint and probably don't want to be too specific about the wants to come but maybe any commentary on that and also supply chain. I know you guys of I've talked about you know having.
Far too many suppliers where are you in the process of rationalizing the number of suppliers and leveraging the amount of spend where they used to flow.
Okay, Nathan the footprint of we keep on progressing on the footprint across all of the three businesses. As you know also in motion technologies because of the acquisition.
We made the couple of years ago. So the action on the footprint on that front when it comes to CCT, we of action on the footprint of CCT as well and also with the transfer of some product lines and on IP. We successfully concluded that finished our first move in Europe and.
We are progressing nicely on the one in North America, and there are more to come and how the two or three that we are expecting to execute in the in 'twenty and 2021 when it comes to the supplier rationalization. So I would say we started well, but we are at the beginning so I think that there are as I said there is runway there.
And then you called out and his team of doing they are doing an excellent job already on the front.
Is there.
Specific target you have for supply chain Savi, maybe on an annual basis over the next day.
Yeah, So we don't really disclose.
But I would say that in 2020, we especially in the IP, we reached the highest ever sort of supply chain savings and as Luca said, we're just scratching the surface. So we're driving for sure in 2021 higher numbers that we have executed in IP in 2020.
And we also.
Working to deploy the same methodology and the same tools in CCT any Nancy.
Okay. Thank you very much I'll pass it on.
Thank you Nathan Thanks Man.
Our next question comes from the line of Andrew the oven of Bank of America.
I guess the good morning.
Close the morning, Andrew Good morning, Andrew.
So very interesting.
Very robust increase in dividend.
I was just thinking how.
How should we think about that.
You know in terms of your capital allocation going forward.
And the dividend.
Let's.
And what kind of signals are you trying to sound of something clear liking of Lucas that that you feel very confident about your cash flow generation, but how do you prioritize dividends versus buybacks, how should we think about that balance. Thank you.
Okay. So let me start and then the Emmanuel you can that you can build on day, one when it comes to capital deployment.
The priorities of very clear the.
The only goes into organic investment first and foremost these ease of where we know our business very well, we get the highest return and this is the best value creation for our shareholders for all of our stakeholders secondly, and ease of if you think about it in 2021, we are increasing.
That by roughly 60% and 90% of that Capex is really in the growth in innovation and in productivity only 10% of that is really maintenance.
It goes on into acquisitions close of the core and as I said is across all the different businesses we of.
Pursuing aggressively but diligently with the rigor we don't want to do anything stupid over here and then.
Last lastly is really returned to our shareholders in the dividend and share repurchases and we are in the lucky position to have all of the capital to do all of that.
Yeah.
I think.
Specifically on dividends what was important for us is to maintain a yield of 1%.
And so we can we can still put up a really good increase in terms of dividend and do that and do $150 million to $100 million on repurchases and do also the acquisitions that we.
And while investing in growth for the future.
That's true.
That's very helpful on the second.
Question on restructuring and I know people have asked you about the numbers, but just philosophically you were in a very unique position to have started restructuring into COVID-19 and the our.
Numbers indicated that you were among sort of top.
People in the sector in terms of taking the cost out two of Covid, but I was just wondering given that you have the head start how has the plant evolved throughout the COVID-19.
And what sort of operational changes.
Will you make of the other.
To do all of it right because I'm sure Covid has changed the big thinking right. So how can you just walk us through how has your thinking changed over the past 12 months.
Execute on your cost cutting thank you.
Okay. So let me, let me start and the amount of money if you want to build on day one.
The.
The two two.
Two sides of Andrew on these one one thing is the structural cost.
The COVID-19 as it happens the QD and the challenge of those fixed costs, the and making some of those fixed costs to variable and reducing our cost of the aqua cost structure reduce.
You see our breakeven point and the D C something that we of challenging the business to keep in mind, all the time as that we out of recovery as the economy recovery and now when he comes on the direct labor when he comes on the operation of cost is really in trying to make it as flexible.
As possible. So in terms of off it is running the shift and that maybe he's using the shift to make any of them that the are using the same the workforce for a longer weekend, so flexibility and the.
Judy it's been really the rule of the game on the on the direct.
And I think part of the efficiency Andrew He's also for us to always look at the way we are organized in the way, we're structured and our processes. So that we can possibly do more with less and so we have done as you mentioned a lot of work in 2020, and we will continue to do that.
The work maybe not to that much of an extent, but we'll continue to do the same work in 2021 and beyond.
Uh huh.
Yeah. Thank you of your cost cutting was.
Very very impressive thank.
Thank you.
Thanks Peter.
Our next question comes from the line of John inch of from Gordon Haskett.
Thank you and good morning, everybody.
John John.
Good morning, everyone. So.
I wanted to know what of your oil and gas customers, saying with respect to <unk>.
Respectively, boosting E&P Capex this year.
Or even say next year like in terms of there.
Our planning given the rising price of oil if I remember correctly I don't think you have great visibility into that but maybe there is some commentary you can can add and the other sort of part of that question is no.
Given the advent of federal fracking restrictions.
Does that have to really have any kind of material impact on.
On the spending plans for areas. The touch you. So like how important just remind us is fracking to ITT I don't think it's that important but I did want to kind of.
If you get if you could just give us a refresh on that that'd be very helpful. Thank you sure John Thanks for the question. So when it comes to the visibility on the investments.
We continue to see investments shifting into the second half of 2021 and also when we're looking at the funnel of the opportunities that we see coming up we see that the funnel as increased in the last quarter in Q4.
This is what we had at the end of October and also.
Also when we closed on January the funnel as the increase in January over December but that increase is no really coming from oil and gas that the increase is coming more from general industrial and petrochemical. So we don't see the opportunities in the funnel.
Coming okay.
So having.
He said that I can tell you that the.
The the activities of is Bubbling up at the well stoking to Hyundai Hyundai Sonata had on in the Middle East and he was telling me the things that seems to be moving over there, where we are making an investment actually in our facilities in enlarging our tests then over that.
Going back.
Second part of the question, which of the fracking from.
The fracking is not in the area, where we are really playing in terms of as the ITT with the exception of our oil and gas connectors.
But we before you know these that before Covid, we made an agreement with.
Back to the in oil producer for a solution with our twin screw pumps, our multiphase pumping an exclusive deal where they will be able with our solution to eliminate completely the the flaring and DC is an important initiative for the oil producer of these days.
As you know the pressure that they are under the ESG.
Okay, so that I think that.
Answers that and then out of curiosity I don't know if I caught this but kind of of the impact of the.
The raw mats Emmanuel I know touched on the little bit the raw mats on the component price increases.
Yeah.
You kept your 10 to 15 million of restructuring net savings I think you had mentioned that same number in 2021 last quarter.
Is the messaging here that the raw mat price increases.
The components that youre seeing youre going to be able to more than adequately raised your own prices or you hedge I know you do forward buying that.
Sort of thing and therefore, it is not dragging of any consequence out of and I apologize. If you had already sort of mentioned that previously in the discussion.
So commodity ease of drag, but it is offset by productivity and all of the mitigation actions that we're taking such as the booking and such as the resourcing to low cost regions.
We expect for the for the full year two.
We have of commodities impact of maybe 20 to 40 basis points in terms of margin, but as I said, we have strong productivity to mitigate that.
And on the price side of Emmanuel are you able to like kind of slowly bleed in pricing or modify your project terms.
Or leveraged from path pass through stuff that offset the 20 to 40 of that somehow somewhere else in the context of the guidance or you know the kind of the the waterfall down.
Yeah. So in the case of IP on the short cycle, we're able to pass on that increase and most of the also in CCT.
On the case of empty.
It depends we have some customers with which we have escalators and it's probably a 40% to 50% of our customers with which we have established contracts.
And it's it's then it is the negotiation and we intend to make sure that they recognize the fact that I call. It a cost of increasing because of commodity.
We'll just do that as a regular negotiation like we've been doing for several years.
Well I guess of those copper free pads, you don't have to worry about copper prices rising so, yes and yes.
That's a very interesting point, because we have also been able to decrease our exposure to copper and so I'll give you just a quick stat.
And in 2015 of our copper content.
Was a cup of free content was 7% and we are now to 50% of our brake pads that are copper free. So that's also a way to mitigate from commodity inflation.
I'm heading out to buy those copper free.
Now thank you.
[laughter] thing, we'll be taking orders.
[laughter].
Our next question comes from the line of Joe Ritchie of Goldman Sachs.
Hey, good morning, guys on a welcome lots of Mark.
Good morning, Joe Good morning.
So.
The pad just maybe my first question just touching on motion Tech margins for a for a second I know you guys had called out a greater than 100 basis points of margin expansion in 'twenty one.
For each of the segments.
The margins in the <unk> are really strong and I think you guys highlighted.
The volume productivity.
Just curious.
It is the fourth quarter, maybe like a baseline for empty margin moving forward or was there anything maybe kind of one time ish that help the margins in the fourth quarter.
Yeah.
So there was there was not really anything that was one time or in a in the Q4, what you're seeing Joe.
Moving some ease the fact that we really acted early on our fixed cost structure and now that volume has increased.
We are we were able to really benefit from that and keep in mind that in Q4 volume increased by 30% from motion Tech in auto compared to compared to Q3. So that's.
That's a really nice.
Improvement and we're able to really take advantage of that lower fixed cost structure that we have now.
We didn't say that this is necessarily the baseline.
For for 'twenty, 'twenty, one, but I think that we expect to show of triple digit improvement.
Joe in 'twenty, and 'twenty, one compared to 2020.
Got it no that makes sense of Emmanuel I guess, maybe asking it differently. If the if we did have like similar scale call it $350 million or so in revenues on a quarterly basis is it reasonable then to assume given given the fixed cost leverage that you're getting that the margin should ship.
Movement should be comparable to what you saw on for Ken.
Yeah.
So so I think that there definitely will have the leverage impact just keep in mind that.
Some of the margin expansion.
And especially gross margin expansion, we'd like to reinvest in some of on.
Our.
Initiatives, such as the smart pad the easy break that in China. So we are definitely going to see a really large leverage and an improvement into our gross margins.
But some of it he is going to be compensated by some strategic initiatives.
I think if I can build on that one is that ease.
These are exactly right in terms of are we in the 2020, we kept on investing in the business, but as you can see in 2010 to one of we will invest much more so he has gone up roughly by 60%.
Lot of that is going to be an empty.
Got it no that makes sense and maybe if I can sneak one longer term question in.
Yeah, the penetration you're seeing in EV.
On the breadth of again and congratulations on that I know that some of the questions that we get at times.
As it relates to the longer term opportunity for you on the friction business. It is.
Does that shift the EV and whether that has any structural implications on your aftermarket business.
The Luca maybe if you can elaborate now that youre seeing all of these orders come through I'm curious like what do you see how do you see that affecting your business longer term and how are you guys involved in trying to set the standard for electric vehicle brake pads.
Sure so.
First of all when you look at our aftermarket.
You're talking about roughly.
30% to 35% of our business is aftermarket and the split in half between original equipment and the independent aftermarket ease of exclusively today the E.
European and so even when you're so that just to confirm.
Contextualize it now.
Thinking about the impact of EV in the aftermarket you have to think about all of the car Park.
And how impactful would that be in terms of time and it.
It will be very little impact on at least for.
The margin ex that 10 13 of years Joe.
So think about it you know the our fully electric vehicle.
Last year was probably 2 million vehicles of that.
The projected to be at the high speed and high speed the roughly more than 10 of 12 million vehicles in the 'twenty.
25, 2026, so think about how much they're going to.
Get to to get impactful in the car Park did I answer your question Joe.
Yes, you did thank you very much.
And have a great weekend.
You too.
Joe.
Our next question.
<unk> comes from the line of Damian Karas of UBS.
Hi, Good morning, Luca Emmanuel Mark.
Good morning, Damien shall dania.
Oh hi.
A follow up question on M. T. Emmanuel you mentioned that you are expecting double digit growth in the first quarter.
But there's a lot of news out there regarding some component shortages.
Across the auto mode of supply chain I was just wondering what kind of impact you would expect for the business and how that might be weighing on your guidance for the year.
Yeah, so in the <unk>.
In Q1 of 2021, we don't expect to really of things to change compared.
We've seen in Q4, you know Luca mentioned that we have a really strong order book and so even with the shortages in.
Electronics and other commodities by the way.
We're seeing still are our order book that he's still staying pretty strong I think that's right now in what we expect we kind of limited.
The impact to our two Q1, maybe early Q2, and we expect things to to improve in terms of electronics starting mid of of Q2.
Yeah, if I can build on the on this one damian.
The impact first of all the numbers that you've seen.
Two of communicated with you today are already taken into consideration the D.
The difficulties on the supply chain.
You can imagine that the impact that we have it from the supply chain.
Two on two aspects one of his volume reduction that is already in the numbers.
We're talking to our Oems to every single plant looking at every single platform and we are adjusting our scheduling accordingly, so that is the impact number one the second impact the ease of course because of all of these changes so the.
Much more right now the plant out of not running as efficient as effectively.
And we ask that you can imagine and for that for that reason because you've got more changeovers. It's an example, so supply chain he's going to be a challenge to manage in 2021 in automotive.
Okay, Great that's really helpful commentary.
And.
But you also.
Mentioned earlier.
The flu.
<unk> gas and how of Ip's products are of dressing that made me think of a little bit about the.
Current situation in Texas with the power outages and a lot of refineries.
Petro Chem.
The plants shut down just wondering if.
And look the potential impact to.
The business that we should be thinking about.
And.
I'm wondering if to what extent there actually could be some aftermarket business to be had as a result of that once those.
Facilities come back on line.
The damien's as Emmanuel So we're seeing a little bit of impact in February.
Where are you in some of the deliveries on some of our customers are now able to take some of the deliveries, but we think that we're going to be able to get that back in March I think that are similar to what had happened in the Houston a couple of years ago Ive the opportunities for parts and aftermarket will jump on those and we'll make sure that we are our salespeople.
Paul on the forefront with our customers.
Okay, great. Thanks, a lot.
Thanks Damian.
Yeah.
Our next question comes from the line of Bryan Blair of Oppenheimer.
Thanks, Good morning, guys.
Good morning, Brian Good morning, Bryan.
I was hoping you could drill down a little bit more on your motion check growth outlook. If we account for friction OE momentum, even even taking the more conservative stance on the global production.
On the comps you have across the platform and FX tailwind it.
At the low double digit growth is a bit conservative.
I'm, just hoping you could drive a little more color on maybe parse out what you're looking for in terms of growth by friction OE aftermarket and then the non friction.
Okay. So so just let me start maybe Bryan and then Luke I can add some color.
Seems like it.
So keep in mind is that we are taking a we're not taking exactly the IHS number as Luca mentioned, you know IHS was an improvement of 14% in 'twenty and 'twenty. One we're taking a slightly lower number but so some of that maybe that and and I think that IHS has been recognized to be a little bit optimistic at the time. So I think that's.
This is why we're a little bit more conservative on that front I think that's there you know there is like in 'twenty 'twenty. There is a lot of volatility in the market. So I think that's there. There is we are expecting a pretty strong quarter in Q1 for motion Tech.
And I think that so well.
The if if that are maintained in the next quarter as you know we.
We talked about the semiconductor of difficulties and and other commodities. So so we'll just play it by ear, but I think that's right now we expect motion technologies.
Most of really strong growth in 2021 and.
And the and following up on that you were asking about the aftermarket as well Brian on the aftermarket improved substantially in the in Q4 and the in terms of expectation for the aftermarket in 2021 easy to grow high single digits to low teens.
That's the expectation for the aftermarket and plenty of Pennsylvania.
The man.
Okay I appreciate the.
And you mentioned for CCT of getting back to pre Covid margin within two to three years. So if we have rough that out the 450 <unk>.
500 basis point lift versus the trough in 2020.
How should we think about the splits between contribution from volume recovery.
Of the self help actions you have underway.
So for the moment this is mostly going to be driven by productivity because we don't expect aerospace to come back before two to three years. So you know of CCT as we said from the beginning was hit pretty heavily about.
Aerospace aerospace represents more or less 12.
And the percent of the CCT the revenue and also oil and gas and as a result, we weren't really heavy in the in restructuring and cost cuts and so I think that we think that there's more in the pipeline. In addition to productivity window. When we walk the shelf flow with Luca you in October we saw a lot of opportunities.
It is in Valencia for instance, we of many opportunities also in some of our North American facilities. So so.
Mostly it's gonna be productivity and hopefully by the third year, we expect aerospace of volume to start picking back up a little bit.
Got it okay.
Thanks again.
25.
Ladies and gentlemen that was our final question I'd like to turn the floor back over to Luca Savi.
Thank you Maria just of a couple of last words dirt.
During 2020, we had the clear priorities, we focus on the health of our people.
Which enabled us to ex.
The lever for our shareholders, we didnt outstanding cash generation.
And the lever for our customers, which translated in the winning share in several markets that we operate so we won in the down.
For 'twenty 'twenty, one the focus will be to win in the in the up and we.
Executing flawlessly in the recovery, we keep on investing in growth, putting our cash to work.
And having empty as I said as a springboard for growth.
I want to thank you for joining this morning, and the stay safe and I really hope to see you soon.
And thank you ladies and gentlemen, this does conclude today's call you may disconnect. Your lines at this time and have a wonderful day.
Yeah.
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Yes.
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Yes.
Yes.