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 12.00 pm Eastern Standard Time. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.
It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.
Melissa Trombetta - Director of IR: Thank you, Christi. 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 the 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 number 3 where, Denise will discuss our results.
Denise L. Ramos - CEO and President: Good morning. Thank you for joining us as we announced 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 ITT employees all around this world in this, our first full year as a standalone 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 initiative by growing 13% in North America, 12% in emerging markets and 7% in the 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 three of the four segments. Our progress was noted in numerous recent customer awards that recognize our technology and expanded service capabilities.
Another 2012 highlights for me was the commencement of the ITT Lean transformation initiative. This commitment facilitated achieving some of the $110 million in growth 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 benefit 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 into long-term growth platforms with very attractive return profile. 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 event 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 two 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 through 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.
In December, we divested non-strategic shape-cutting product lines at Control Technologies. This divestiture refocused our key end market strategies and generated a nice gain of $9 million. Finally, we returned $147 million to our valued shareholders through meaningful share repurchases and our solid annual dividend. 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 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 commitments to all ITT stakeholders. Our people advanced our strategic agenda, delivered our financial commitment, and enabled the deployment of capital in a meaningful, balanced and value creating way.
So, now let's turn to Slide 4 and let's discuss our 2012 adjusted EPS performance. So, let me start by pointing out that our 2012 adjusted EPS nicely exceeded our expectations, due to very strong operational performance of $0.28 and strong cost controls.
I also want to point out that our November guidance still included the earnings from our discontinued shape-cutting business, and it did not reflect the impact from the Bornemann operations. So, keep in mind that both of these transactions took place later in the fourth quarter. In total, these portfolio actions represented a $0.03 to $0.04 impact, compared to our November guidance.
After giving effect to these actions our adjusted EPS grew 4% to $1.68, but when I stepped back and I look at our underlying operational performance, excluding the spin dis-synergy costs of $0.15, our adjusted EPS was up an impressive 13%. Now, thankfully this is the last time we need to discuss spin dis-synergies. But I do think that in this post-spin transformational period, it is important to assess the underlying financial performance. So in conclusion, we delivered on our adjusted EPS commitment through solid productivity. We did that while absorbing the impacts of our strategic portfolio actions.
Let's turn to Slide 5 and discuss the fourth quarter results. In the fourth quarter, revenue was up 7% on an organic basis. This was driven by strong growth in chemical and oil and gas pumps, as well as market share gains in automotive and strong emerging market growth. The strengths more than offset the weakness in market share losses in connectors, which was down 7% organically.
Organic orders were flat in the fourth quarter. Strong aerospace component order growth of 44% and solid automotive growth of 8% driven by share gains in North America and China were offset by industrial pump project order delays and continued weakness in European connectors. Adjusted segment operating income was up 7% to $64 million, driven by solid net operating productivity, which added $22 million of incremental benefit.
Before the impact of Bornemann, segment operating income actually increased 11% despite the negative impacts from connectors, spin dis-synergies and the $2 million negative impact of foreign exchange. Fourth quarter adjusted EPS of $0.37 would have been $0.39 before the $0.02 Bornemann impact. We also saw a higher effective tax rate of 35% in Q4 due to the stronger mix of highly taxed U.S. income which negatively impacted EPS by $0.03 relative to our expectations. So, I'm very pleased with the magnitude of our fourth quarter operational strength which nicely exceeded our expectations entering the quarter.
The temporary Bornemann impacts were primarily due to some operational disruptions caused by the December timing of the transaction. While we are pleased with how we performed throughout 2012, we recognized that some of the headwind we saw in the fourth quarter are continuing into 2013 and we are specifically watching the order delays in Industrial Process and the persistent weakness in Europe.
So, now let's turn our attention to 2013 on Slide 6, where I will share with you our strategic framework. For 2013, we are providing a balanced revenue outlook in the current economic conditions that reflect solid organic revenue growth of 3% and total revenue growth of 10%.
We also expect adjusted EPS at the guidance midpoint to be up 10% due to our intense focus on productivity and other internal actions, and we expect 50 basis points of margin expansion driven by the impact of the prior year restructuring actions and productivity that more than offset the dilution from the acquisition.
In 2013, we will once again be focused on driving value creation by leveraging our strategic growth drivers. We expect strong performance in North America with growth of 6% to 8% and we expect emerging markets to grow approximately 15%.
We will continue to focus on the customer with strong investments in technology and innovation, accelerated on-time delivery and improved customer responsiveness. 2013, we're targeting $100 million of gross productivity savings furthering our Lean transformation initiatives, and we will take additional restructuring actions totaling $10 million to $20 million largely at Interconnect Solutions as we progress the connectors turnaround led by our new segment President, Neil Yeargin.
Finally, we expect another year of strategic, balanced and effective capital deployment. We expect to make significant investments in the strategic areas of oil and gas, aerospace and aftermarket capture. These targeted investments will drive our growth into the future.
We will also continue to advance our portfolio growth strategy through the successful integration of Bornemann, and the building of our M&A pipeline that reflects near term opportunities in the $15 million to $50 million revenue range. As I mentioned we're going to continue to return capital to shareholders through additional share repurchases of up to $75 million and increasing our already strong dividend by 10% to $0.10 per share quarterly.
So, now I'll turn it over to Tom to discuss our 2013 guidance in greater detail.
Thomas Scalera - CFO: Thank you, Denise. Now let's turn to Slide 7 to discuss our annual 2013 guidance. We expect total revenue growth of 9% to 11% that will be driven by the Bornemann acquisition and two to four percentage points of organic growth. The 2013 growth will be driven by strength in core markets of oil and gas, chemical and general industrial, and share gains in global automotive that will more than offset declines in mining and defense.
Also contributing to our revenue growth in 2013 will be another strong year of expansion in emerging markets where our 15% growth will be driven by oil and gas, chemical and automotive gains.
Sequentially, second half revenue will be slightly higher than first half revenue due to the timing of large project shipments out of Bornemann and assumed improvements in key markets. As a result, on a year-over-year basis, first half total revenue is expected to be up in the mid-single digits while the second half is projected to be up in the low-double digits.
Once again we expect strong net operating productivity to fuel a 50 basis point expansion in adjusted segment operating margin to 12.5%. This expansion is over and above the targeted investments we planned for the year. We also expect quarterly margins to improve as we realize the benefit of restructuring actions and improved volumes.
Our 2013 adjusted EPS range of $1.80 to $1.90 per share represents 10% growth at the mid-point and a growth range of 7% to 13%. As Denise mentioned, this guidance is deeply rooted in operational improvements and productivity gains. It should also be noted that our 2013 guidance reflects a $0.02 EPS headwind caused by the recently announced currency devaluation in Venezuela.
As is our practice, we do not provide quarterly guidance due to the lumpiness and long-cycle nature of our Industrial Process segment, but we are currently expecting around 50% or 55% of our adjusted EPS to be in the second half of 2013. As a result, most of our year-over-year growth will be delivered in the second half. The two biggest internal drivers of the performance are the timing of restructuring benefit and the timing of Bornemann backlog shipments.
Next, I'd like to point out that our 2013 free cash flow conversion rate will be less than 100% due to significant organic investments in Industrial Process' global capabilities and expansion in China automotive. We are forecasting 2013 capital expenditures in excess of 5% of revenue. However, keep in mind that the largest capital projects will be heavily subsidized through local incentives that will be recovered over time through lower cash taxes. Before we turn to the next slide, I'd like to point out that we have provided our current projections of the major 2013 special items.
Asbestos and restructuring items are expected to be fairly consistent with 2012 levels. We are projecting higher repositioning cost in 2012 as we will complete all of the remaining required transition service agreements with Exelis and Xylem. Lastly, we anticipate $6 million to $8 million of first year non-operating cost at Bornemann related to integration and inventory step-up amortization.
Now, let's turn to the revenue outlook by end market on Slide 8. Our 10% total revenue growth expectation reflects strong contributions from the Bornemann acquisition and solid organic revenue growth in these difficult macroeconomic conditions. Energy, our fastest growing end market is being propelled by the 40 percentage point growth contribution from Bornemann.
Energy growth excluding Bornemann would be in the mid to high single digits reflecting first half order delays in large projects. Bornemann entered with nearly 60% of its revenues in backlog giving us confidence in our total growth expectations. The chemical and industrial pump market is also expected to generated growth of 19% in 2013 due to global chemical market demand strength and some additional contributions from Bornemann.
In our largest markets of automotive, rail and transportation, we expect low single digit growth due to automotive market share gains in North America and China that will be partially offset by lower European automotive production rates. The mining markets is facing the largest headwinds in 2013 and is now expected to down nearly 20% due to lower industry-wide CapEx projection and project timing following a very strong year of 60% growth in 2012. We also expect to face headwinds in high margin defense markets due to mounting U.S. budget pressures and uncertainty around sequestration.
Lastly, in general industrial markets we expect steady growth during the year at around 8% to 10%. This growth will be driven by our Control Technologies industrial businesses and some recovery at Interconnect Solutions.
On Slide 9, we've provided our 2013 revenue outlook by geography. We expect to deliver total revenue growth in North America in the 6% to 8% range. This includes solid revenue growth in oil and gas and chemical pumps, expanding automotive market share and general industrial growth. These gains are expected to be offset by weak defense conditions and the impact of an end of life aerospace program.
We expect Western Europe to be up 8% to 10% reflecting the Bornemann acquisition. Please note that Bornemann's Western European oil and gas projections include sales that are ultimately destined for global customers outside of Europe and we currently estimate that 30% to 50% of those sales are exported primarily to emerging markets, including Venezuela.
Excluding the benefits from Bornemann, we expect to be flat to down 3% in Western Europe. This reflects weakness in European connectors and pressures from declining production levels in Western European automotive. However our strong automotive aftermarket and recent OEM share gains are expected to mitigate most of these pressures.
Finally, emerging markets are expected to grow 15% reflecting oil and gas expansion driven by Bornemann, significant automotive share gains in China, and general industrial strength. These gains will be partially offset by recent weakness in large mining project activity in Latin America. Excluding Bornemann and the impacts of foreign exchange emerging, emerging markets are expected to expand 5% following our 12% growth in 2012.
On Slide 10, we will review our adjusted segment operating margin guidance. In 2013 we are expecting segment operating margins to expand 50 basis points to 12.5%. This growth will be fueled by 120 basis points of operational improvements, primarily from productivity. In addition, we are expecting 60 basis points of incremental benefit from the 2012 and 2013 restructuring actions. Prior to the impact of Bornemann adjusted segment operating margins are expected to expand 110 basis points. We will use these operational strengths to offset inflation and to fund our 80 basis points impact from our organic growth investments.
Now I'll wrap up on Slide 11, where we summarize our 2013 annual guidance in the form of an adjusted EPS walk. We expect 2013 adjusted EPS to grow 10% at the midpoint of our $1.80 to $1.90 per share range. Please note that this range reflects the $0.02 per share impact in the recently announced currency devaluation in Venezuela. As a result of some of the top-line uncertainty caused by the current macroeconomic conditions, our 10% adjusted EPS midpoint growth will be driven by strong productivity gains and operational improvements that we can control.
In 2013 we will deliver gross productivity of $100 million or $0.26 per share leveraging the ITT management system to drive incremental Lean Six Sigma and global sourcing initiatives. This productivity also reflects over $12 million in incremental restructuring savings from the 2012 and 2013 actions that were primarily centered on improving our European operational effectives. As we've effectively done in the past we will once again reinvest a healthy portion of this year's productivity back into our long-term strategic growth initiative. This year's $0.14 of investment will be focused in four areas with very attractive and profitable long-term dynamics; global oil and gas, the ITT Lean transformation, aerospace and global aftermarket capture.
Unallocated corporate expenses are expected to be generally in line with 2012 levels, however certain non-operating expense are expected to increased compared to 2012 due to higher prior year insurance recoveries. Our structural effect of tax rate is projected to be consistent with 2012 levels at 31% and we expect the average 2013 diluted share count to be between 92 million and 92.5 million shares reflecting the benefits of today's announced buyback which will help to offset increased option exercises and dilution attributable to the recent share price gains.
Finally, I'd like to point out that in 2013 we expect mid-single digit accretion from the Bornemann acquisition excluding integration and step-up amortization impacts. So, in summary, we believe our 2013 guidance is reflective of the current environment we face and is balanced for the potential headwinds and tailwinds. We will focus our efforts on delivering the productivity within our control, executing the Bornemann integration and generating strong return on our organic investments.
Now, let me turn it back to Christy to start the Q&A.
Operator: Brian Konigsberg, Vertical Research Partners.
Brian Konigsberg - Vertical Research Partners: So, just for starting on the Industrial Process and project delays if you can give us a little more color on where you're seeing the delays, your confidence that it's just simply a delay, not a cancellation and if you can if you characterize it by OE versus aftermarket, we're hearing from some of your peers that aftermarket actually took a pause in Q4, do you see a similar trends?
Denise L. Ramos - CEO and President: Yeah. This is Denise. Good morning. In terms of IP where we are seeing most of the project delays are in the oil and gas end market and what we're seeing and what gives us some confidence in the back half of the year is when you look at some of the activity that's been taking place, the FEED activity, the quote activity that remains high. So, actually we're seeing some acceleration with those quotes and what's happening from that perspective. So, we think and we believe that, that is going to benefit us as we get into the back half of the year. But we need to see some of those projects coming through and around this first quarter in order for us to benefit of some of that into the back half of the year. The other thing remember in terms of the back half of the year, the backlog that we have in IP today is because they're long lead time projects they do -- many of those projects are back-end loaded and we know that they're going to be delivered in the back half. In terms of aftermarket we're actually seeing that aftermarket is holding up very nicely for us. So, we're not seeing many challenges with that currently. We did see a slowdown in the fourth quarter and we saw that continue a little bit into January. But what we've been seeing is we've been seeing some increasing positive signs coming from the aftermarket as we've transitioned into the first quarter.
Thomas Scalera - CFO: Brian, just to follow-up on the mining side, that's one of the markets where we are continuing to see more pervasive delays playing through and that's why we've indicated the down 20% in the mining market. Those projects are in a little bit more of a pronounced delayed cycle at this point, but again we haven't seen cancellations, some of those projects are just slow to come online from an OE perspective.
Brian Konigsberg - Vertical Research Partners: If I could just move over to Interconnect, so the margin in the quarter was actually fairly strong, it's nice improvement from Q3. Maybe just give us a color, how much of that is from restructuring actions you've taken already versus, I don't know improvement operationally within the Group itself without the benefits restructuring and how do we think about the run rate going into '13?
Denise L. Ramos - CEO and President: Let me just give an overview first for connectors now. I'll have Tom respond specific question. What's happening in connectors right now is we are refocusing that business on some of the key growth markets in a harsh environment sector of these markets. So we've been doing a lot of work from a very holistic perspective around front-end and better coordination on the front-end around engineering, marketing and sales. We've also been driving the operation. We've been driving more productivity, we're doing more Kaizan's in the facilities and we're driving considerable operational improvement in productivity into that business and we took some restructuring in that business, it's going to help change that cost structure so that we get a more efficient and effective cost structure.
Thomas Scalera - CFO: Brian, at this point there were benefit in Q4 from a restructuring actions we had initiated earlier in 2012. So we're starting to gain momentum there about maybe $1 million to $2 million of restructuring benefits already falling into Q4. And the way to think about this, we've announced some other actions, those are coming online earlier in the first half of 2013, so the run rate that we exited 2012 will certainly accelerate, we'll generate incremental savings in 2013 from new action. So, on an all in basis for the full year 2012 we probably generated anywhere from $4 million to $5 million of benefit on restructuring activities at ICS in 2012 and we would expect the number about twice that size based on the actions we're taking in 2013?
Operator: Mike Halloran, Robert W. Baird & Co.
Mike Halloran - Baird: So, on the Industrial Process side, you know I think the slide deck had the Bornemann Pumps acquisitions about 110 basis points headwind in the quarter on the margins there. Could you talk a little bit about how much that is kind of operational, how much of that is more one-time items associated with the transaction itself and then also when you think about '13, could you talk a little bit about how you expect those $6 million to $8 million of cost layer into the year and I'll leave it there?
Thomas Scalera - CFO: Mike so that 110 basis points impact to IP margins in the fourth quarter was attributable to operational disruption in the fourth quarter. So, there is about a $0.02 hit that we saw in the Bornemann results and I think that was really attributable to dealing and acquisition late in the year. So, we didn't have very much timing including the December holidays to really go through the required kind of shut downs, inventory accounting and other activities. So, there was a little bit of disruption in the December results that really caused the drag you are seeing in the margin. Again that was about $0.02 impact. What we've excluded for 2012 and what we'll exclude for 2013, our integration cost and the inventory amortization step-up, so there was some of those cost that took place in 2012 that were not part of this margin announcement because they were in the special items category given the size and the non-recurring nature. As you look into 2013, the $6 million to $8 million that we're talking about is probably $4 million to $5 million of inventory step-up amortization and the rest is integration activities. I would say given the long-cycle nature of this business it's going to take us all four quarters to run that $6 million to $8 million through the P&L and it'll be done ratably throughout the year.
Denise L. Ramos - CEO and President: So, we've owned Bornemann now for about two and a half months and let me tell you, this is an exciting business. There are fundamental businesses outstanding. We're very optimistic. In fact we even like it more now than we did really before we owned them. Their product development pipeline is very exciting. We're really getting into that and getting the teams together to align around that. They have a food and pharma business, which is very exciting to us where we see that we can provide some infrastructure report in North America to help it grow. The synergies that we've identified we're excited about, those synergies tend to be in the aftermarket which is one of our key growth areas in IP anyway where we're going to leverage service centers and we're going to look at pricing strategies. We are going to be able to leverage our North America distribution channel and leverage some of the strategic agreements that we have there. We've had really positive reaction from our customers. So, it's all been extremely positive for us with Bornemann. I have visited there twice. The team is excited. We're excited about having them as part of ITT going forward. When you look at what we've seen in the first quarter, so far in the first two months they've had very solid orders and backlog, in fact ahead of our expectations. So, we continue to remain very, very excited and optimistic about this acquisition.
Mike Halloran - Baird: Last one there, the $6 million to $8 million, Tom you guys are including or excluding that from the adjusted number?
Thomas Scalera - CFO: That is an adjustment so it would be a special item. It would be excluded from our guidance. We've put a table in our slides that highlights the items that are excluded being special items, so there's actually one of our pages on Page 7 you could see the table there with the items that are excluded.
Mike Halloran - Baird: Then on the European automotive side of things, maybe just talk a little bit about what the production schedules look like, what the customers are saying at this point of how they expect their business to ramp or not ramp I suppose through the year at this point?
Thomas Scalera - CFO: Mike, the conditions in European automotive are obviously challenging and we're now seeing that across all the different countries in Europe and including Germany at this point. So it's been evolving throughout the region to the point where all of the producers are facing more pronounced headwinds. So, the way we look at the market going in, we expected to be a down market, it's similar to what we've saw in 2012. Despite these production challenges across Europe, which could be anywhere for the full year anywhere from 4% to 5% down from a total production basis including Eastern Europe, we'll expect to outperform that based on the market share gains that we've generated in 2012 and the platform content we've seen Europe across our customer base. We also have a strong aftermarket component within Europe and that may make us unique relative to some of the other peers. While there is some pressures in the aftermarket it is generally stabilizing factor when we look across our revenue for the year. We have pretty good line of sight at this point through the first quarter production and I think that's giving us some comfort as we look to the first half of the year, the uncertainty remains around the second half production level. So our year is fairly balanced, but we do have a front-end weighting towards more aftermarket where we're seeing some better visibility and we think we'll be watching more closely the second half production levels across the European producer customer base.
Denise L. Ramos - CEO and President: The business model that we have there and the operating model that we have there is proving to be very effective in this type of situation that we have in Europe right now, because while Europe is having some of its challenges in the automotive market, because of the type of operation that we run, we're able to solve problems quickly. We've got very good quality in the brake pad. We're able to continue to gain share in Europe to help compensate for that. Then you know with our brake pad business, what we're doing is taking what's been historically a European business and we're expanding that into North America and China and so we're expecting to see very strong growth rates in 2013 that's about a 20% growth rate in North America and about a 30% growth rate in China, so those platforms continue to do well for us as we become more of a global automotive company and transition away from just the European one.
Mike Halloran - Baird: In sense of auto aftermarket is still about two-thirds in Europe give or take?
Thomas Scalera - CFO: The auto aftermarket is probably little closer, its 50-50 Mike.
Mike Halloran - Baird: 50-50?
Thomas Scalera - CFO: And as we've been winning share content, it's probably drifting a little bit north on the OE side of 50, so maybe 55-45 at this moment based on the recent share gains we've had.
Mike Halloran - Baird: Last one from me then, you saw a spike in the margin on Control Tech side, maybe could you just talk a little bit about how much of that is just the reconfigured portfolio, how much is mix, how much is mix from here and what's the appropriate level to think about when you look at '13 and beyond?
Thomas Scalera - CFO: It's a great question Mike. We did pick up maybe 20 basis points of margins based on the divestiture as a non-strategic product line. So, that gives us a little bit margin headwinds, but obviously you look at those margins for Q4 north of 21%. We have a very strong operating culture at Control Technologies. So, where we're focusing the front-end of that business, the product line divesture is an example of that, that we're going to continue to drive very strong productivity oriented organization through end markets where we have greater competitive advantages and the ability to really drive value for our customers and that has been translating to positive mix, positive price, positive volume. So, at this point we're continuing to refine that portfolio and really channel those strengths to drives these kinds of margins. We'll have a little bit of a marign headwind next year when the defense and one of the aerospace programs that they have face some pressure. But the underlying strength of this business is something we're going to continue to leverage and grow on from where we are at this point.
Operator: Matt Summerville, KeyBanc.
Matt Summerville - KeyBanc: Couple of questions, you've talked about the anticipated growth rates you're looking for in North America and China in Motion Tech. Can you talk about specifically if that growth is predominantly being driven by the historical relationship you've talked about with Ford or whether or not you are seeing progress in breaking into some of the other two large remaining North American OEs?
Thomas Scalera - CFO: Yeah, great question, Matt. So, at this point North America for us is still a Ford conversation. Having said that we continue to work on expanding platforms with Ford and we will obviously benefit from new introductions and new models that they have. But what we're talking about for 2013 at this point is exclusively Ford, but I could tell you that we have a number of ongoing conversations. GM is a global customer of ours that we deal with quite a bit in Europe and also in China. So, we'll continue to have ongoing dialogue with all of the producers, quite frankly anyone in the world including the primary U.S. manufacturers. In China, our customer base is really nicely diversified across our existing global relationships we have and the JVs that they are part of, and even some of the local producers we look at from time-to-time. So we have a very good pipeline of opportunities China and the fact that we've been up and running and you see in Q4 that our margins at Motion Tech were impacted by some investments at much higher rate than you have seen historically. Those investments are really about starting up that facility in Wuxi, China which is a very well run, heavily automated facility that mirrors the strength that we have in Europe. So we really replicated the European production strengths and move those into China. The fact that we're there and that we're up and running is drawing a lot of attention in the marketplace and it's giving us a very significant pipeline of opportunities in the China market as well.
Denise L. Ramos - CEO and President: The fact that we have relationships with GM and some of these other more global companies outside of North America is benefiting us especially as they start going more to global platform and as they start looking at consolidating their supplier base. So I would expect to see that we'll continue to be able to penetrate into GM, Chrysler and some of these others because we build relationships with them not in North America but elsewhere and I think that will eventually transit into North America.
Matt Summerville - KeyBanc: As we think about what you are trying to do from a Lean standpoint in this round numbers, $100 million of productivity in '12 looking for $100 million of productivity in '13, how much of that are you seeing get inflated away, how much would you anticipate reinvesting into growth near-term but also just more on a longer-term run rate standpoint, I guess Denise or Tom, what can we expect to trickle down to the bottom line as you get further along with this productivity push?
Denise L. Ramos - CEO and President: The Lean transformation just from a high level prospective is something that's getting a lot of focus here internally at ITT and we've laid out a roadmap over the next three of five years of what we're going to be able to accomplish. So, this is something that has gotten a lot of momentum that everybody is getting aligned around because we do believe that this is a way that's going to help drive value in this company. And so we've got a roadmap laid out for the next three to four years that lays out how we achieve the goals that we've established. So, with that Tom, then I will turn it over to you.
Thomas Scalera - CFO: Matt, we typically target about 4% gross productivity using the mix of Lean activities those are obviously accelerating our focus on a go-forward basis Denise mentioned. Global sourcing and then restructuring, so this year in 2013, we will see a heavier weighting towards restructuring benefits rising our gross productivity. So, that's around 4%. We net that against the inflationary pressures that we see that range typically 2.5% to 3% inflation that we want to stay ahead and we really want to drive productivity and not be reliant on price. So, price for us is something that we strive for and we have a lot of initiatives that we go out and target it, but it's not an area that we want to rely on because of our market dynamics that sometimes are hard to control. So, we drive productivity to offset inflation and then we look at the balance of what drops through and use that to fund our strategic investments, maybe anywhere 50 basis points that will go into strategic investments based on the opportunities that we see. This year we have a nice set of opportunities. We're talking about $0.14 of investment, but they are in some cases refueling the Lean transformation because we are putting some of that investment dollar back into relaying out some of our largest facilities really improving our Lean flow and we're also looking at some very strong growth markets for us. So, that's the way we think about it at a very high level.
Matt Summerville - KeyBanc: I just want to spend a minute talking about Industrial Process. First, can you talk about what the mix of business that you saw in the core company for 2012 project versus aftermarket versus and based on how you've rolled up the year for '13, how you expect that to evolve?
Thomas Scalera - CFO: Sure, yeah. We're definitely seeing a change in dynamic there Matt, there is no doubt about it. So, we've been growing our portfolio in oil and gas and mining and our capabilities are much more global than they've been and we've been talking about this change in the weighting. So, if I look at really large project mix. In 2011 it was in the 33% of our total revenue range, by 2012 that number had grown to 39%. So you look of that strong 20% organic growth that we drove in Industrial Process this year that was heavily weighted towards new projects that increased the weighting. For 2013, especially when you put Bornemann in that numbers going to move all the way up maybe closer to 45% to 50% for 2013. So, the key then is to really and Denise mentioned it, the aftermarket cycle for all of these OE platforms is going to start to kick in, in a much more significant way from a growth perspective. So, it will take us time to kind of rebalance this percent mix that we see. But two to three years down the road this aftermarket cycle should really start to torque up and that will give us an even nicer margin profile going forward.
Matt Summerville - KeyBanc: Then just one last one for me on Bornemann, I think Tom in your prepared remarks you specifically called out, Bornemann being much stronger in the second half of '13 versus the first half based on the project shipment schedule. Can you quantify that, is it 60%-40%, is it 80%-20%, can you help with some numbers around that so we're able to model this currently?
Thomas Scalera - CFO: Yeah, it's closer to 60%-40% Matt and back half being 60%, first half being 40% and that's been the typical seasonality that we typically noticed in Bornemann and that's what we see in the current order book at this point.
Operator: Jim Krapfel, Morningstar.
James Krapfel - Morningstar: Can you explain efforts to expand your aftermarket capabilities in overall capture rate and then what growth rate have you been seeing overall across the business in aftermarket?
Thomas Scalera - CFO: Sure, Jim. The aftermarket capture strategies are fairly comprehensive. So we've looked at new systems and data to help us track aftermarket opportunities. We're putting new footprint online in key regions where we've been recently selling large projects and we need to have a local presence to be able to provide the service capabilities. We're also putting new leadership in place that we're very excited about in our Industrial Process aftermarket to help us drive new strategies on a global basis in that business. And even as you go across the platform there are some very interesting activities we have in both Motion Technologies and in our aerospace business to basically drive additional parts into the aftermarket cycle. Next year we would expect, on this base aftermarket growth, in the 5% to 10% range given where we are in 2013, but as I mentioned before we're starting to kind of build into that upward trajectory based on the projects we've been seeing globally over the last two to three years.
James Krapfel - Morningstar: Then second question, I know you have spoken about Interconnect Solutions being all thing all people focusing more on the harsh environment, so for the 30% of the business that's specialized applications, would you – how much of that would you expect to kind of go away over time and focus more on the harsh environment?
Thomas Scalera - CFO: We're in the process now Jim, so it's about 60% to 70% harsh environment today, so the remaining products lines were going through. We always do have product line EVA analysis, but certainly when a business is facing the pressure that you're seeing in ICS, we've spent a lot more time really focusing through each product line and building a specific strategy for each one, and it varies across the portfolio based on the age of the product and what we see for the future. But the reality is we're going to keep focusing on our key growth end markets like aerospace and oil and gas in particular medial and a few of these harsh environment spaces where we are very strong. We think we have nice growth trajectory from this point and will be very prescriptive in how we kind of manage the other product lines including in some cases exiting small lines if that makes more sense to refocus on the primary areas.
Operator: Brian Konigsberg, Vertical Research Partners.
Brian Konigsberg - Vertical Research Partners: Just following up on Industrial process and it really kind of honing in on your strategic alliance, so you guys have aligned yourself with Chevron, with Shell. You announced something fairly recently. I think you have an alliance with ConocoPhillips as well. Just kind of thinking about the upcoming build of petrochemical projects in the United States, kind of really North America, how did those strategic alliances actually position you? Does that give you exclusive rights to sell pumps and valves into the projects that they're building, or is it really going to be – remain a competitive scenario when those get off the ground?
Denise L. Ramos - CEO and President: No, it remains a competitive scenario. But what happens is you become what I'll call a preferred supplier. So what typically happens is there would be maybe three suppliers that would have these strategic agreements, and really what you've done is they've said that you meet their criteria that they have for a person that they want to do business with. And so while it doesn't eliminate the competition that exists there, it does make does narrow it, and so that you're in competition with just a couple of people within that bidding process. And then what they end up doing is because they don't want to align totally with just one supplier, they will tend to spread out the process over a number of different suppliers, and so they don't just rely on one supplier.
Brian Konigsberg - Vertical Research Partners: And just on aftermarket there as well, how would you say or how would you characterize the biggest competition? Is it more the customer base that's repairing or working on their own equipment, or is it really – are you competing against your peers there?
Thomas Scalera - CFO: Brian, I’d say it kind of varies, so there are certain pumps and projects based on size and complexity where we could see our customer servicing that equipment and you will see that kind of activity that maybe part of the delays that we experienced in Q4 in the cycle. As you start to move up the complexity scale, certainly we think if we're the only producer we have, the best opportunity to capture that aftermarket given the technical specifications and tolerances which really where our focus is. There are some areas in between where we do see other players that will try to just intermediate and try to grab some parts here and there and occasionally, the larger players will also look across the spectrum of opportunities, but the key for us is to remain very competitive in how we see these large complex global projects and then follow that up with a good global aftermarket capture stream, so that we can be close to those customers and we think that combination give us a high capture rate success.
Brian Konigsberg - Vertical Research Partners: Do you have any idea how penetrated you are today and where that could go?
Thomas Scalera - CFO: In North America, we are very heavily penetrated from an aftermarket capture strategy. The key for us is the global growth that we've had in oil and gas and mining and now even in chemicals really picking up on a global basis is that we need to continue to put more resources in play outside of North America and that will help us capture higher percent of the activity. We do have a new aftermarket leader in Industrial Process, that's helping us really map out where we think we see the best opportunities to make those aftermarket investments, but we do have good capabilities around global parts in the aftermarket. We do have strong service, but there is certainly opportunity for us to make growth investments outside of North America.
Denise L. Ramos - CEO and President: We see this as a very nice growth opportunity for us and we recognize that when you look at where we are today in the margins that we have in IT being impacted by the fact that we have a lot of these large projects that are there. Over time, that is going to change as we get more aftermarket business and as Tom indicated, we just hired a new aftermarket leader in Industrial Process that we're very excited about that's going to be looking at our aftermarket strategy globally and so our focus is to be able to drive that to create incremental value for us.
Brian Konigsberg - Vertical Research Partners: Just one last question, just on seals, so that's obviously a very important component of the pump and I guess the biggest source of aftermarkets service, is that something you'd be strategically interested in bringing it in-house or does it make more sense to source it externally?
Denise L. Ramos - CEO and President: We look at a lot of different opportunities when we think about the pipeline for IP. We have to think about whether or not that is a core competency that we really think that we have internally to be able to do that and couple it with the pumps that we have. So, I'd say it's an ongoing discussion point that we have internally and but we've made really no conclusion on that.
Operator: John Inch, Deutsche Bank.
John Inch - Deutsche Bank: So, I apologize I call on the call late, but does your '13 guide, Denise and Tom include aftermarket benefit from all of the sort of class 3, class 4 pumps that you've been installing over the years. Do you think about aftermarket, the installs kicks in this year or is it more of an event for next year?
Denise L. Ramos - CEO and President: I don't think it's a significant impact in 2013. Of course I'd say it's been a gradual incline around those – around that aftermarket, but I wouldn't hold that out as something that's significantly changing and impacting our trajectory for 2013. We will see that continue to build as we go out into 2014 and '15.
Thomas Scalera - CFO: Certainly, going into net right now is more heavily weighted towards OE. So, we'll continue to add – they have about 25% of their revenue in the aftermarket. So this gradual build I think, is from our recent project activity and that's going to start to pick up. If you go back two or three years ago, those projects are starting to kind of begin to ramp through in 2013. What we want to do, as Denise mentioned, is build up the aftermarkets we can capture the greater content on Bornemann, their aftermarket as we're building up our own aftermarket base. But I do think it's a gradual slope in ‘13 and start to pick up more noticeably in ‘14.
John Inch - Deutsche Bank: But you are seeing some of this already, are you not?
Denise L. Ramos - CEO and President: We are.
Thomas Scalera - CFO: Yes, we are seeing, the first cycle that churning through we are seeing capital spares start to come through at this point, from projects we sold two to three years ago.
John Inch - Deutsche Bank: On Bornemann, my understanding was that they licensed away their aftermarket and that ITT on a relatively short period basis would be able to sort of realign contracts and begin to do that stuff yourself. Is that – and I apologize if you went over this, but is that a significant part of your ‘13 guide or does that kick in more proportionately as you want to unwind some of those third-party agreements and do more of the stuff yourself? Is that more proportionately an impact for ‘14?
Denise L. Ramos - CEO and President: It's going to impact in 2014, because we've got some things to work through there. And remember, this is a long-cycle business. So what you've got in the pipeline today and in the backlog today, you're really not going to be able to impact much until you get out into 2014 based on the initiatives that you put in place today.
Thomas Scalera - CFO: But I can tell you, John, we're actively working all of the issues right now. It's one of our top priorities. It's just the contract timing and the market timing issues that we just have to work through this year.
John Inch - Deutsche Bank: If I can switch gears to automotive in Europe, where was your auto business in Europe in ‘12 like was it roughly flat because the builds were down about 10, where I'm going let's say…
Denise L. Ramos - CEO and President: Yeah. It looks like a plus 1, John and that's Europe in total that would be Western and Eastern Europe.
John Inch - Deutsche Bank: Right. So, builds are going to be down, I realize it's still difficult, but down much less, are you expecting the business to be up?
Thomas Scalera - CFO: We're kind of targeting more in the flattish, John. I think the reason why it's hard to bring it over exactly last year's formulas we were able to win platforms in 2012 based on the responsiveness of our R&D. The responsiveness for our manufacturing where we basically captured some of these opportunities mid-year and that's a little different dynamic, I think there was a reflection of some of the instability in the marketplace, some of our customers were consolidating their supply chain, and I think we happen to be very well positioned to grab that share. We are positioned well to do that in 2013. It's just a little harder to project whether or not some of those opportunities may fall our way, but right now we'll continue to assume a reasonable aftermarket and the benefits of what we've been able to capture and win from a European platform perspective, and if we're able to be more successful in some opportunities that pop up during 2013 that will be a tailwind for us.
John Inch - Deutsche Bank: It just sounds like the 50% of the business aftermarket that's your assumption is pretty conservative for '13. I want to ask you too about these plants in Korea and Wuxi. How much if you were to kind of look at them at collective, how much are they dragging results perhaps because of startup cost and other things in '13 and what could that leads you in terms of state benefit in the other years?
Thomas Scalera - CFO: Yeah. So, the P&L drag right now had been more pronounced in the Motion Technologies buildup of Wuxi. We really brought that whole facility on line putting new staff, new training, a complete reset of that facility to really something that at this point looks to be fairly state of the art and how it is operating. So we had a bigger set of startup costs in 2012 for Wuxi and those were a drag on anywhere $6 million to $7 million just to get that kind of up and running. It takes a long time in that industry to have your technology and your capability certified by your customer, so there's a long process where you just have to get everything in line before you can start to produce. We're glad in Q4 we've really hit our stride from a production perspective, but we see a lot of additional opportunity going forward. So we will probably see some additional costs in '13 as we take the China volumes even up to the next level. In Korea we've had minimal P&L impact, it's been more of a capital build out of that facility and we have a strong operation in Korea today that's well capitalized of good engineering and infrastructure talent. So we'll probably have a $1 million or $2 million of startup in '13, but we'll hit the ground learning once that facility is up.
John Inch - Deutsche Bank: So it's also fair to say, I'm assuming that '14 should be a more significant contributing year or both of those plants in terms of their efficiency and asset utilization and so forth?
Denise L. Ramos - CEO and President: Yeah, because they're both be up and running and would have gone through the initial stages of operations. The other thing that we're doing is in the IT business. We are expanding our Seneca Falls facility also. So, because of the tremendous growth that we've had there as part of gleaning out that facility and the growth that we've had we're also expanding that along with building the Korea facility. So we feel really good about this business and where it's headed.
John Inch - Deutsche Bank: Just lastly, I know you did that small divestiture of some with unrelated business in the Control Technology segment, how you guys feeling about the portfolio. You see any other little divestiture pruning to occur or are we mostly set?
Denise L. Ramos - CEO and President: We're mostly set with Control Technologies. We may see a little here or there but nothing significant. We're aligned around two main platforms in Control Technologies, one being aerospace components and the other being energy absorption. Now what we're doing is we're looking at ways to expand and grow those two platforms that we have really looking at global growth at times direct the customers with those two platforms. So we have been able to nicely focus and reposition that portfolio around those two key categories.
John Inch - Deutsche Bank: We should not really be expecting any further divestitures even small ones have been coming years.
Denise L. Ramos - CEO and President: You should not be expecting anything really John. We may be as Tom mentioned in connectors exiting some product lines, but that probably would not be through a sale even though it could be, but it would be something very, very small.
Operator: I would now like to turn the floor back over to management for any closing remarks.
Denise L. Ramos - CEO and President: Well, I just want to thank you all for joining us on our call today. We feel very good about our first year in 2012 and what we were able to accomplish and we're excited about the initiatives that we've laid out for 2013 and what we are going to be able to achieve in 2013. So, we look forward to talking to you during the next quarter.
Operator: This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.