ITT Corporation (ITT)

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ITT (ITT)

Q4 2012 Earnings Call

February 27, 2013 9:00 am ET

Executives

Melissa Trombetta

Denise L. Ramos - Chief Executive Officer, President and Director

Thomas Scalera - Chief Financial Officer and Senior Vice President

Analysts

Brian Konigsberg - Vertical Research Partners, LLC

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

James Krapfel - Morningstar Inc., Research Division

John G. Inch - Deutsche Bank AG, Research Division

Presentation

Operator

Welcome to ITT's 2012 Fourth Quarter and Full Year Results and 2013 Outlook Conference Call. Starting the call today from ITT is Melissa Trombetta, Director of Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12 p.m. Eastern Standard Time. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Melissa Trombetta

Thank you, Christy. Good morning, and welcome to ITT's Fourth Quarter 2012 Investor Review. Presenting this morning are ITT's Chief Executive Officer and President, Denise Ramos; and ITT's Chief Financial Officer, Tom Scalera. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir.

Please note that any remarks we make about future expectations, plans, prospects and other circumstances set out in our Safe Harbor constitute forward-looking statements for purposes of the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in ITT's Form 10-K, as well as other public SEC filings.

Let's now turn to Slide #3, where Denise will discuss our results.

Denise L. Ramos

Good morning. Thank you for joining us as we announce our financial results for the fourth quarter and full year of 2012 and provide our 2013 guidance.

I'm very pleased with the performance delivered by our nearly 9,000 ITT employees all around this world, in this, our first full year as a stand-alone company. In 2012, we collectively delivered premier organic revenue growth of 8% for a third consecutive year. We also delivered our adjusted EPS commitment, and we delivered a very strong adjusted free cash flow conversion of 172%.

In addition to these impressive results, we also continued to execute our post-spin transformation activities while we advanced our strategic growth drivers and intensified our focus on our valued customers. In 2012, we delivered against our key market expansion initiatives by growing 13% in North America, 12% in emerging markets and 7% in a profitable aftermarket for pumps and aerospace components.

We also continued our laser focus on the customer, which was evidenced by our investments in R&D at approximately 3% of revenue and by our improved on-time delivery metrics at 3 of the 4 segments. Our progress was noted in numerous recent customer awards that recognized our technology and expanded service capabilities.

Another 2012 highlight for me was the commencement of the ITT lean transformation initiative. This commitment facilitated achieving some of the $110 million in gross productivity savings generated in 2012, and we're only in the initial stages of our entity-wide lean transformation. The company's continued focus on lean, combined with the proactive restructuring initiated in 2012, will drive further productivity benefits in 2013, representing the real driving force behind our guidance.

In 2012, we also continuously demonstrated strategic, balanced and disciplined capital deployment. We made organic investments of $40 million in 2 long-term growth platforms with very attractive return profiles.

First, we started production in our state-of-the-art Wuxi, China automotive research and development and production facility. This investment drove Motion Technologies' 2012 growth rate in China of 78%. So as a result, China now represents 6% of Motion's total revenue, an improvement of 3 percentage points from last year. And we now have a strong foundation in China that we will leverage for even further growth.

Second, we invested in a new Korean oil and gas production facility with advanced lean capabilities, which will come online in the second half of 2013. This facility will play a central role in advancing our energy strategy by becoming our eastern hemisphere energy center of excellence.

We also executed 2 significant fourth quarter portfolio actions, representing a net deployment of $154 million. In late November, we completed the Bornemann Pumps acquisition, which will play a key role in advancing our global energy strategy by adding Bornemann's leadership in differentiated oil and gas pumping technologies to our existing portfolio of highly engineered solutions. I want to once again welcome the Bornemann team to ITT and let you all know how energized we are by the magnitude of our combined future growth potential. And in December, we divested nonstrategic shape-cutting product lines at Control Technologies. This divestiture refocused our key end-market strategies and generated a nice gain of $9 million.

And finally, we returned $147 million to our valued shareholders through meaningful share repurchases and our solid annual dividends. And I'm pleased to announce today that we will continue to return cash to shareholders in 2013 through an additional $75 million of share repurchases and a 10% increase in our quarterly dividend to an even $0.10 per share.

So in summary, I'm very pleased that in our first full year, we were able to deliver on our commitment to all ITT stakeholders. Our people advanced our strategic agenda, delivered our financial commitments, and enabled the deployment of capital in a meaningful, balanced and value-creating way.

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