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Q2 2013 Earnings Call

August 01, 2013 9:00 am ET


Melissa Trombetta

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

Thomas M. Scalera - Chief Financial Officer and Senior Vice President


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

Brian Konigsberg - Vertical Research Partners, LLC

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

James Krapfel - Morningstar Inc., Research Division

John G. Inch - Deutsche Bank AG, Research Division



Welcome to ITT's Second Quarter 2013 Earnings Conference Call. Starting the call for today from ITT is Melissa Trombetta, Director of Investor Relations. She is joined by Denise Ramos, Chief Executive Officer; and President Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Daylight Time. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Melissa Trombetta

Thank you, Hope. Good morning, and welcome to ITT's second quarter 2013 investor review. 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

Please note that any remarks we make about future expectations constitute forward-looking statements under 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 10-K and other -- and our other public SEC filings.

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

Denise L. Ramos

Good morning, everyone. Thank you for joining us as we announce our financial results for the second quarter of 2013.

Q2 was another strong quarter for ITT due to our continued financial discipline and focused strategic execution. In the quarter, we extended our track record of delivering solid results on the top line, strong adjusted segment margins and earnings per share despite the unpredictable economic environment.

Total revenue was up 9% due to solid execution from our Bornemann Pumps acquisition, which is delivering on all fronts due to the strength of the strategic fit and the quality of the teams' integration activities. Organic revenue was solid at 2%, driven by 12% growth in global automotive that was driven by recent platform wins and significant market share gains at Motion Technologies. It was also positively impacted by a strong 19% growth in global energy that was fueled by focused execution and our expanded portfolio of energy products at Industrial Process. These positive results were unfavorably impacted by significant anticipated decline in demand for global mining equipment.

We were very pleased with our adjusted segment operating margin expansion of 70 basis points, which was up 110 basis points when you exclude the impact of the Bornemann Pump acquisition. Three out of 4 segments delivered margin expansion of 180 basis points, reflecting the organizational commitment to advance the Lean initiative that we began a year ago.

As we have previously communicated, we are in a unique position compared to other industrial companies as we have identified a significant number of opportunities to enhance customer satisfaction and deliver margin expansion through our multiyear initiative to leverage Lean across our entire enterprise.

We are also extremely pleased to report second quarter adjusted EPS of $0.51 per share, which grew 4%. The EPS growth is driven by solid 15% segment operating income growth that was partially offset by a higher effective tax rate and a difficult corporate comparison due to prior year benefits.

Solid organic order growth of 8% reflected gains across all segments, with increases at 3 segments exceeding 8%. Total orders improved 13%. The automotive, aerospace and oil and gas markets drove our order growth.

So based on the comprehensive nature of our first half execution, and the strength of the operational playbooks we put in place, I am pleased to announce that we are raising our adjusted EPS guidance range from the prior range of $1.80 to $1.90 to the new range of $1.86 to $1.92. The new midpoint after the $0.04 increase now reflects a growth rate of 12.5% versus 2012. We have also raised the low-end of our previous organic revenue guidance from 2% to 3%. So our updated organic revenue growth guidance is now 3% to 4%.

Let me just take a moment to acknowledge those 9,000 dedicated employees all across ITT that make a daily commitment to their customers and to the execution of our strategic plan. We could not have delivered the increased guidance today without their commitment to sustainable growth.

Let's next turn to Slide #4 for an update on our strategic growth drivers.

Our focused growth drivers have provided the momentum for our double-digit growth in the first half of 2013. And we will continue to direct our resources towards these growth drivers because they create ongoing value for our customers, employees and shareowners.

So when we think about Lean on an enterprise basis, it starts in the factory, but it can't stop there. Yes, we have set a goal of becoming 80% Lean in our factories by 2015, but it is important to understand that we have already started to broaden our initiative to the front-end and supply-chain, and extend it to non-manufacturing environments as well.

Lean manufacturing and cost structure optimization realized by leveraging our global strategic sourcing group contributed to our $55 million in gross productivity savings in the first half. The same time, our proactive restructuring and operational turnaround efforts at Interconnect Solutions and at Motion Technologies shock absorbers business, KONI, contributed to our ability to drive operational excellence in the quarter.

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