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ITT Corporation (NYSE:ITT)

October 13, 2011 9:00 am ET


Thomas Scalera - Director of IR

Robert J. Pagano - Former Vice President of Finance

Andrew Jones -

William E. Taylor - President of Interconnect Solutions Business

Melissa Trombetta -

Steven R. Loranger - Chairman, Chief Executive Officer and President

Aris C. Chicles - Senior Vice President, Director of Strategy & Corporate Development and Member of Executive Council

Unknown Executive -

Munish Nanda -

Denise L. Ramos - Chief Financial Officer and Senior Vice President


Ajay Kejriwal - FBR Capital Markets & Co., Research Division

James C. Lucas - Janney Montgomery Scott LLC, Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Unknown Analyst -

Steven R. Loranger

The Chairman, President and CEO of ITT Corporation, at least for a few more days. And after a few more days and especially today, this is a meeting that's all about the future. And so I just have to say that you're going to see a lot of pride up here, but no one is more proud than I am to able to stand up here today and talk a little bit about where these companies are going.

For those of you that are interested, you're going to see 3 new companies that are being created. And I want to begin my comments by saying that ITT has a long history of realizing its potential. Value creation has always been at the heart of our nearly 100-year history. But from the recent emergence as ITT industries in 1995, we've really made a lot of progress. Steady transformation of our portfolio in the many industry-leading and attractive businesses, continuing to deliver outstanding financial results, all of which is fueled by some world-class talent and processes.

So the journey ahead of us is really exciting simply because of solid foundation upon which we're launching 3 new independent companies, and the growth prospects that you're going to see from the team today. When I took over the leadership slot at ITT about 7.5 years ago, we took our set of businesses and started a comprehensive journey to align these businesses with enduring global needs. We transformed the company from a collection of over 90 independent businesses, and that includes all the acquisitions we made to a narrower portfolio of 12 strategically strong value centers designed to win in attractive global markets of defense, electronics, services, Fluid Technology and transportation.

And during this time, we acquired some great gems in our portfolio, and you're going to see pieces of that in all 3 presentations. Today, these 12 businesses fit very neatly. 4 into Exelis, 4 into ITT and 4 into Xylem. And over these years, we've also executed a number of enabling capabilities, successful implementation of Six Sigma Lean operational excellence. We've invested very successfully and heavily in growth potential by repositioning our operations to enjoy a globally competitive supply chain, engineering and distribution capabilities.

And in recent years, we've made enormous innovation progress to position all of our product lines for sustained growth in leadership in their respective markets. We've worked tirelessly on the human resource, active talent management in career development, diversity learning and succession planning, and we couldn't be more proud to say that we've staffed 90% of these 3 new companies with this top talent group.

We've inculcated a set of world-class management processes known as the ITT management system with a compelling vision and values, and aligning our employees to do essential things in extraordinary ways. And I share this quick backdrop because we've been building this long-term value-creation capability for some time, and we feel very confident that ITT is well positioned for the successful launch of 3 new companies.

So it's no surprise that we come to this moment with a great deal of pride in our performance. 7 of the last 8 years, progressive annual record in EPS, revenue and cash flow. All nicely above the respective Standard & Poor's CAGRs, and all with a very sound balance sheet.

Earlier this year, January 12, we announced the most significant ITT news in over 15 years, the creation of these 3 new independent public companies. We're almost complete now within days, and we believe these spinoffs are going to enable all 3 companies to realize their full potential, and that this transformation will continue to unlock significant shareholder value.

As a quick reminder for those of you that haven't followed us, how did we get here? In early 2010, we viewed our strategic prospects and began to assess each piece of the portfolio relative to its market strength in its full valuation. Notwithstanding the fact that we had been exceptionally well positioned in each of our markets. By the middle of last year, we began to feel the effects of the defense weighing in our portfolio. Closer examination through the year and through the fall of 2010 lead to further conclusions that we had already achieved a significant amount of operating synergy in the businesses and that, as I've mentioned, we had invested heavily in restructuring, in repositioning globally and in product innovation. And as we were evaluating our alternatives, we then concluded that a separation into 3 independent entities was the most valuable alternative, simply because we could actually accelerate our journey of value creation by enabling each business to focus exclusively on their own markets with their own capital, at par with their pure competitors.

And so with this strategy clearly defined, good solid businesses underneath each new enterprise, a rigorous IMS and terrific leadership depth, we knew we could set up 3 very nicely sustainable businesses with investment-grade financial metrics each positioned with cash flow surplus and incremental debt capacity. But we had to execute. And we set out to accomplish it with decisiveness, commitment and speed, just like we always do. We realigned all the strategic priorities and top leadership teams to focus very prominently on this spin this year. With special care given to retaining our top talent, achieving an expeditious schedule, achieving optimized new company, operating margin, growth and balance sheet structure and to minimize our separation costs, all the while turning in a solid business performance for the year.

And one can only say at this point in time, we believe all of our objectives have been successfully met. From the legal entity separation, tax ruling, the credit ratings, SEC rulings, balance sheet allocations, to the leadership and board composition, debt restructuring and the thousands of other important activities and tasks, we have accomplished all of them on schedule and essentially without a hitch. And I should note the ITT businesses are turning in yet another record year in EPS along the way.

And so the reason I start this day to underscore the great progress of our journey years before the spin, was to establish that this spin outcome is what you would have expected and it certainly is what we did expect. Our underlying capabilities of business strength, leadership depth, process and execution capability and value systems are sustaining, and they will endure in each of the new companies. And so I couldn't be more proud that we are at a new beginning for each company, a fresh beginning, which will be far more successful and exciting than our admirable past.

So turning very quickly to the presentation at hand, our first new business, the new ITT. I couldn't be more excited to see the new ITT continue this legacy of value creation. The new ITT launches with an exceptionally strong management team, where you're going to get a chance to talk to today, that brings a proven record of solid multi-industry performance and a commitment to the ITT values and operating excellence that will continue into their bright future. The new ITT has built leading market positions in energy, mining, transportation, electronics and more fit than ever to continue delivering innovative value solutions and a respected ITT global brand to customers around the world. With ITT's established global footprint and legacy of continuous improvement, this new team, led by Denise Ramos, will drive further market penetration and brand expansion continuing its track record of value creation.

So I hope you share my excitement with the new ITT. And with that, let me introduce Melissa Trombetta, ITT's Head of Investor Relations. Thank you.

Melissa Trombetta

Thank you, Steve. Good morning, everyone. I'm Melissa Trombetta, Director of Investor Relations for the new ITT. And it is a privilege to be here today welcoming all of you to our Inaugural Analyst and Investor Day for the new ITT.

I wanted to take a brief moment before we begin today's presentation to thank all of you for coming. As we approach the completion of the spin-off, we wanted to give you a better sense of the new ITT, our businesses and growth prospects. The entire team of ITT is energized about our future.

On Slide 2, we've given you a brief agenda for today's presentation. New ITT CEO and President, Denise Ramos, will begin the day with an overview of the new ITT. She'll be followed by presentations from each of our 4 business leaders, as well as the new ITT CFO, Tom Scalera. Following the formal presentation, Denise and Tom will moderate a Q&A session. Our business leaders and Executive Vice President of Strategy of the new ITT, Aris Chicles, will also be available. Note that we'll have a 20-minute break from 10:20 to 10:40, during which time I encourage you to visit the displays outside that showcase some of ITT's products.

Before I introduce Denise, I'd like to highlight this morning's presentation and reconciliation of GAAP and non-GAAP financial measures can be found on our website at Please note that any remarks we make about future expectations, plans, prospects and other circumstances set out in the Safe Harbor statement 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.

With that, I'd like to introduce Denise Ramos. As some of you know, Denise has been with ITT since 2007, where she previously served as the company's Chief Financial Officer. Denise brings a distinguished track record of strategic decision making and a wealth of experience in growing consumer-oriented, brand-conscious companies. She spent most of her career in the oil and gas industry advancing the strategies of ARCO. She's been a tremendous asset to our company, and her leadership will prove instrumental as we move forward. It's a real pleasure to introduce her now as Chief Executive Officer and President of the new ITT. Denise?

Denise L. Ramos

Thank you, Melissa, for that introduction. Good morning. I am thrilled to present to you as CEO-elect of ITT at our Inaugural Investor Day. As CFO of ITT, I was part of the process that we undertook to plan the spin-off of ITT's Water and Defense businesses. The senior leadership team recognized that we had amassed an enviable portfolio. And our job in the split was to effectively allocate these businesses to whichever company would provide them with the best platform for growth. And we achieved that. We are excited about the new ITT, and we are poised to achieve significant growth and value creation.

Since we announced the separation, I've had the opportunity to speak with a number of you, and even here today, and I've heard a comment more than once, and that is, "You know, Denise, we know a lot about water and defense, but tell us more about this new ITT and help us to understand new ITT." So that's our goal today. And what you will discover is a portfolio of businesses and attractive niches, a lot of runway to grow with strong brands and channels and a team with the experience and energy to harness our potential.

As part of an $11 billion company, the new ITT segment were obscured by some of ITT's larger businesses. But when you look more closely, it's clear that all of the new ITT businesses share a value-creating repeatable business model that has allowed us to deliver industry-leading performance. We've always known we've been highly engineered. But today, you will see that the new ITT is engineered for growth.

Our foundation rests upon 3 pillars. First, is our markets and brands. In the markets we serve, we are unique because we hold a very tailored niche positions. What this means is that we have built leadership position in some very high-growth defensible segments that are difficult to enter. We got here by making highly engineered products to meet the needs of our customers for critical applications where the cost of failure is high. So from safety on oil rigs to breaking on automobiles, our products are relied on to consistently perform, and our customers trust us to deliver.

As a result of our superior technological innovations and customer intimacy, we're starting with brands that matter. Our ITT Goulds Pumps, Cannon and Enidine brands are recognized and relied upon globally and represent just a few of the highly recognized product brands in our chosen market, where we also enjoy very strong and efficient distribution channels. The strong brand and customer relationships we've developed enable us to generate long-term recurring revenue streams. Once we capture a platform, we maintain our position by delivering a consistent track record of reliability in the kind of harsh environment I talked about earlier.

Our second pillar is our portfolio. We have a highly strategic robust growth profile characterized by balance and diversity across our businesses, market cycles and geographies. While we enjoy the fact that this mix gives us some protection from cyclicality, we also enjoy one thing in common across this portfolio, and that is that we are aligned with the global macro trends that will drive growth well into the future.

The final pillar, which is our foundation, is our proven management system and team. While being in attractive niches and having a robust growth profile is where you want to be, it takes more than that to make a great company. Our leadership team is the driver, and we know that we have the team and a proven management system to move us forward.

Here's why our team believes our foundation uniquely positions us for growth. Our end markets are balanced and diversified, but we're not all things to all people in this market. For example, in auto, we are a leading global friction supplier, a highly attractive niche. The worldwide growth of the middle class continues to drive auto sales globally. And in this growing space, our products are critical to our customer, providing safety, reliability and performance. And they drive high-margin recurring revenues in the aftermarket.

Our products in the other businesses have similar characteristics. One of our differentiators is our strength in the highly profitable business of supplying products to the original equipment manufacturer or OEMs, and for the Aftermarket business. This is a direct result of the highly engineered products and applications we provide. And together, these 2 channels represent 75% of our revenues.

The aftermarket, comprising 30% of our business, drives 60% of our profits, and we serve the world's largest OEMs, relationships that last decades and provide an ongoing annuity stream. These successful platform relationships, in turn, drive new project wins for us as well. As you'll hear more from our business leaders, we're on platforms and have projects in key markets all over the world. 60% of our sales are derived internationally, with 30% of total revenues coming from emerging markets. Importantly, our very strong position in emerging markets distinguishes us from our peer group. Our balance and diversification allow us to deliver industry-leading performance regardless of market conditions. This overall balance and diversity in our portfolio is a strong foundation for growth.

Now being in the right market only matters if what we're selling matters. So while our work may seem invisible, our contributions are invaluable. Our products and applications are part of larger machines and manufacturing processes that let people fly, drive, communicate and power their homes and businesses. The seat you sit in on an international flight uses our control technologies to recline as quietly as possible. City buses and railroad cars rely on our shock absorbers to keep the ride smooth. And our pumps are used in the oil and gas business to refine natural resources into products you use every day. Our products are mission-critical to our customers, and the consequence of failure would be severe. Our track record speaks to the reliability of our products.

So now that I've given you a snapshot of our business, let me tell you how we plan to grow. We see 6 key drivers of our profitable growth into the future. First, we are well positioned and growing in key emerging markets. We're going where the growth will be. And importantly, we are often being pulled into these markets by customers. We already have a strong footprint of existing facilities and global relationship to leverage and further streamline processes and broaden the scope of our offerings.

Second, we have a highly attractive position in the profitable Aftermarket business, and we see more room to grow there. Our customers come back for service and replacement parts long after the initial order.

Third, we're focused on investing in technology and innovation to facilitate new platform and project wins that will drive incremental growth and secure recurring revenues. The ITT team is committed to custom engineering innovative and technologically advanced products, and delivering them in a way that differentiates us from our competitors. We recognize that the way to drive growth is by combining our sophisticated products with an enhanced or premier customer experience, which is the fourth pillar.

We're not taking a field of dreams approach to our business. We build great products. It doesn't mean customers will come. We then combine this with our operational excellence to improve our velocity and speed and optimize our asset base. That is the fifth pillar. And it's this lean, value-based thinking that drives our decision making at ITT. We utilize a repeatable growth model, which drives continuous improvement and cost savings throughout the organization. We implement processes to achieve them for the long term, and then we find additional productivity on top of that. Essentially, we do more with less, which drives margin expansion.

And finally, we generate strong free cash flow. Using our effective capital deployment model, we reinvest money that fuels our growth, and we execute on these strategies to effectively deploy capital both organically and through acquisitions.

It all starts with revenue growth, and we have a strong track record. As the author Pearl Buck once said, "If you want to understand today, you have to search yesterday." So Slide 11 illustrates ITT's performance since 2007. We've outperformed our peers each year for the past 4 years. We have posted strong revenue growth with a 5% average annual organic growth rate. And year-to-date, our organic growth rate is approximately 9%. So that's where we've been.

Now let's talk about where we're going to go and grow. A discussion about the future needs to start with a discussion about global trends. The trends we see are in emerging markets and with respect to resource scarcity and sustainability. Approximately 50% of the world's population lives in urban areas today. Asia is currently about 40% urbanized, but will grow to 50% by 2025. And as a result, many of the world's new 1 million-plus population cities will be in Asia. Additionally, the world's middle-class will represent 52% of the population by 2020, with a significant portion coming from India and China. As a result of this massive growth, substantial investment will be required in new rail, bus, highway, airport and energy infrastructure. And there will be an overall increase in the demand for energy. We are well aligned with these trends across our businesses and end markets. This includes our strong position in emerging markets, where we expect a growth rate of 35%, as well as our strong Aftermarket business, which will become increasingly important as we expand in emerging markets.

Our growth will continue to be driven by our investments in technology and innovation. Between 2011 and 2014, we expect to achieve a 30% growth rate in new products. Many of our new products are targeted for use in the emerging markets, where our ability to custom engineer products that are relevant to the local market gives us a competitive edge.

So you can tell that we're excited about our prospects in emerging markets, and it's with good reason. We have unique competitive advantages that allow us to approach these markets differently than our peers. Importantly, we're not new to the scene. We've been a player in emerging markets for years. So we don't need to discover the emerging markets. We've already planted our flag there. For example, we have well-established manufacturing in Wuxi, China and Brazil. We're already expanding. We have more than 1 million square feet of facilities in emerging markets, and we're leveraging that to our advantage.

The ITT brand is one of our strongest global assets, and we found that in emerging markets, the brand carries a tremendous amount of equity and brand loyalty. Our strong manufacturing footprint, coupled with our established low-cost sourcing, enable us to provide world-class engineering and technical expertise. We operate facilities in 18 different countries with 42 major facilities. And nearly 40% of those facilities are in low-cost and developing regions like Chile, Mexico, Brazil, China, India, Czech Republic and Thailand.

As we analyze our growth prospects, it became clear that we had a significant opportunity in our own portfolio with our top 100 customers. These global customers are taking our products into emerging markets, and they're pulling us with them. And increasingly, we're seeing this across our businesses, and this is a particularly attractive way to enter new market. We can provide customers more attractive offerings while limiting the risks associated with overseas investment. You'll hear more about how we are expanding with Ford into China. Just another example of how we're able to penetrate the emerging markets so successfully.

Finally, we have highly experienced leaders throughout the emerging markets who understand the local cultures and how we can best drive growth. With this strong foundation for our success in the emerging markets, we will now expand to continue this growth by making smart, targeted investments. China, India, Brazil and the Middle East represent the greatest opportunities for us.

In some of these regions, we are able to pursue the same end-market opportunities for growth. By expanding our R&D capabilities, we will make products that are relevant to local markets, while maintaining our high standards. This customization is key to our growth, and it will differentiate us from the manufacturers that focus on low-end, so-called value products for these growth markets. We will also invest in expanding our manufacturing, assembly, service and distribution in these local markets, which will enable us to stay close to our customer while also reducing our cost. We will build out our infrastructure to expand our selling capabilities. We have facilities in emerging markets, but as I said earlier, manufacturing isn't enough. We need to be able to sell these products. So we're building strong sales forces in these emerging markets that are local and know the market and the culture they sell into.

Finally, we are investing to enhance our focus on global strategic accounts. We know our customers, and we know how they operate in the emerging markets. By focusing on our global strategic accounts, we will leverage our customer knowledge to grow across all of our businesses. Embraer is one such company that represents a tremendous opportunity across the globe and across our businesses.

The aftermarket will be another key to our success. We have already taken and will continue to take the actions necessary to ensure that we capture this potential. It's really a simple story. The aftermarket is highly profitable, has strong margins and provides us a steady annuity into the future where it makes sense. We have expanded our infrastructure, including our facility in the Czech Republic to better serve the rail and auto end market. Our technologies provide us with a tight linkage to our customers, and we will continue to develop new technologies as we strategically expand our global footprint.

Our company tagline is engineered for life. It's not merely a slogan though, rather it's a vision that guides our business decisions. R&D is another important building block of our success. The graph shows our increased investments in R&D since 2007. We make smart investments that drive tangible results. We have a 9% investment CAGR, and our R&D as a percentage of revenue is 1.3x higher than that of our peers. This is one of the key elements of our business strategy that solidifies our long-term relationships with our customers, because our R&D expertise allows us to offer highly customized solutions. We are expanding our R&D capabilities and have added R&D technology centers in key markets such as India and China. And we're creating game-changing technologies across all of our businesses and across all of our key market segments, and we expect to grow revenues from new products by 30%.

We've got great products. We're in the right markets. But as I said, before, we're not taking a field of dreams approach. We are making investments in the front end to help us better define our customer needs and improve the customer experience. The size of our company and the new shape of our diversified industrial portfolio will allow us to rapidly expand our global strategic accounts program. We are already further extending relationship with existing customers. And the nimble nature of our portfolio can allow us to focus on an advanced order configuration that provides front-end services to meet our customer needs faster than our competition and set the benchmark.

We are also integrating our supply chain so that we can provide on-time delivery and better meet our customers' needs. We have a data-driven culture and clear metrics, including quality and on-time delivery to measure our performance in these areas. Holding ourselves accountable to these and other metrics drive working capital improvement and enhanced customer satisfaction.

We're really proud of Slide 18. Our world-class customer base is a testament to the value our products and people provide globally. And if you recall what I said earlier about our global strategic accounts program, you can imagine what kind of opportunities we have for additional business with this high-quality and robust customer base. And yet, we also have very nice diversity in our existing customer base.

We have taken actions to ensure that we are not just growing, but growing profitably. To do that, we will expand our margins, and we've identified a number of focus areas that we believe will drive the greatest margin expansion. The overarching margin driver for ITT is our management system. So using that as our guide, we are focused on providing the premier customer experience. Getting our customer relationship right is a critical component of our ability to drive profitable growth. Also important to this formula is our value-based commercial excellence, which capitalizes on our strong global account management and leverages our global clients to continue growing margins across our markets and verticals.

We will also continue to champion our Lean Six Sigma initiative, which lowers costs and drives increased margins. And we have expanded our presence globally. We have established our brands and operations in local low-cost markets, where we are now able to provide the same high-quality products at a much lower cost than we were able to previously.

Taking all these actions together, you might say we're in the midst of a cost revolution, and we are dedicated to lowering operating costs while maintaining production efficiency. Our Motion Technologies team, for example, is expanding margins by focusing on improving cost through automation, while also advancing their R&D capabilities. Innovation and technology are keys to our success. We will continue to make smart investments that drive tangible results and foster long-term customer relationships. That, in turn, will also drive margin expansion.

We've talked about how we're going to grow organically. But of course, we'll also look for the right acquisition to supplement these organic investments. We have a history of making smart acquisitions that are rapidly accretive, and we have a history of being disciplined in our approach, and that will continue. Our sweet spot for acquisition is companies with annual revenues between $15 million and $50 million. We will focus on acquisitions that are close to our core, that fill technology gaps and that selectively expand our geographic footprint. Given the opportunity rich nature of the $23 billion addressable market, we have the luxury of being selective. There are hundreds of potential targets under $300 million.

When we were planning the separation of ITT's businesses, one of our top priorities was to ensure that each company was appropriately capitalized post-spin, and that's what we've accomplished. The new ITT had $600 million in cash, of which approximately $100 million will be used for separation-related transaction costs. While most of this cash is overseas, we are exploring tax-efficient ways to repatriate it. We have no long-term debt. We have an investment grade credit rating and a 4-year $500 million revolver. We are also focused on prudent working capital management, philosophy of value creation and on making disciplined and smart investments.

Now I want to briefly address our legacy liabilities. First and foremost, they are entirely manageable. In fact, as the CFO of ITT, I've been managing them effectively for years. So we went into this with our eyes wide open. A critical component of separation planning was ensuring that the new ITT had the capital structure necessary to specifically address the effective liability. This has been affirmed by the investment grade credit rating we received from the rating agencies.

Our businesses generate significant free cash flow to fund the outflows. We also have a demonstrated track record of effective risk management, and the new ITT is devoting additional internal and external resources to identify ways to further mitigate this liability. The bottom line is, if we see the opportunity to improve our hand, we will, but we don't see anything here that inhibit our ability to execute our plan and deliver on the target we're committing to today.

With respect to targets, we believe these targets provide the clearest insight into our performance potential. We have a results-driven culture and we set ambitious and achievable goals for the long term. We are targeting organic revenue growth of 5% to 7%, annual EBIT margin growth of 50 to 70 basis points. Our goal is for free cash flow conversion to be greater than 105% and to generate EPS growth of 10% to 15%.

So why do I feel comfortable that we will achieve this kind of premier performance? Because we will maintain a laser-like focus on ITT's proven and repeatable model. This model unifies all of our businesses and is at the core of what we do everyday. It drives our growth and profitability, and we believe we do this better than our competitors. We lead with design and technology, differentiate with customer intimacy and leverage aftermarket sales to drive for higher margins. Our businesses each provide lean production, customer intimacy and specialized solutions and production processes that are certified by our customers or by industry standards. The resulting brand strength means that ITT is able to gain a competitive edge in markets with high barriers to entry. And in harsh environment or at any time switching costs are high, our track record of reliability means that our customers continue to rely on us as valued suppliers.

Platform cycles range from 2 to 30 years. When we gain the supplier relationship on a customer platform, we benefit from future production specification that requires the same standard of equipment for a long time. One of the attractive features of our business is its ability to generate recurring revenue streams by capitalizing on high-margin aftermarket sales growth. Today, 30% of our revenues are in the aftermarket, and they representative 60% of our operating profitability.

And finally, our growth model highlights the multiplier effect. If we sell an aerospace component for $100, we aren't only earning $100 in revenue. Because of our strong aftermarket, that $100 sale will eventually turn into $800 over the product's life. Our projects aren't won and done. We have a repeatable model for long-term value creation that is hard to replicate.

So here's some powerful examples that demonstrate how we deliver long-term value creation. In just the past 2 years, we've had 5 strategic wins in oil and gas, including our major partnerships with Saudi Aramco and Chevron. We are now Ford's #1 global friction supplier. We're becoming a major connector supplier to the growing high-speed rail industry. And ITT now have content on every current commercial Boeing aircraft platform. We have a successful growth strategy that allows us to apply our proven models to applications across common end markets, differentiating us from our competitors and providing greater stability through downturn and industry-leading growth through the cycle.

Since the second industrial revolution, ITT's products have been at the forefront of technological achievement. Innovation has advanced rapidly over the years. And at every step of the way, ITT has played a critical role in solving some of the hardest technical challenges our society has confronted. ITT has adapted to the times and always offers customers the best, most relevant products, resulting in powerhouse brands. ITT traces its origins back to 1848 when Seabury Gould invented an all-iron pump that gave gold prospecting 49ers and pioneers a superior way to move water. Shortly after, the pumps became widely popular among railroaders, steel makers and scientists, powering the technological revolution forward.

Today over 150 years later, those Gould Pumps remain one of our strongest brands. And not only do we have Gould Comps, we also have many other highly recognized brands including Cannon, Enidine and KONI, as well as other leading brand names in niche markets. While ITT holds claim to a rich past, I have no doubt that our brightest days are still ahead. The combination of these market-leading and well-respected brands with the ITT management systems, our vision and values and our disciplined culture of execution will keep us growing for generations to come.

At the core of everything we do is our ITT management system or what we refer to as IMS. The IMS structure shapes how we manage our portfolio, deploy capital, achieve operational excellence and develop strong leadership. So as we thought about life as a new company, we could have taken another approach. But we know that this system is at the core of our strength as a company and a legacy we should take to the next level. IMS is the organizational component that sets our growth model in motion, and our management team is what makes our businesses thrive and grow.

So on Slide 28, the fantastic group of individuals who are going to be leading the new ITT. As we stated at the beginning, our management team and Board of Directors together comprised a key piece in making ITT a dynamic and profitable company. In building this organization, it was important to me to have a lean and balanced team. That's why we have 4 functional leaders and 4 operational leaders.

I chose this team, because they are all leaders who are strategic in their thought processes, have proven track records of execution and diversed background and embody the right culture for this company, going forward. The team is results-driven, and they all work collaboratively toward a common goal, to grow this dynamic company. These leaders have rotated through various positions at ITT and have gained a comprehensive understanding of the company. Everyone trained under the ITT management system and our vision and value.

When it came to identify individuals for the board, we didn't have to look far to find committed individuals with a deep knowledge of ITT and the market in which we operate. In addition to me, we have named 5 members of the current ITT board to the new ITT board. Their direct ITT experience provides consistency and stability. We've also named 2 new members to the board, Peter D’Aloia and Don DeFosset. Their experience and expertise will serve as additional assets to this dynamic group of individuals. Again, let me say how excited we are to have such a talented group of individuals leading the new ITT. Under this leadership, our business will continue on its successful path.

To deliver shareholder value, we will focus on applying what's in our DNA to running our businesses, that means we've leveraged our highly engineered critical applications, our leadership positions and attractive defensible niches, our global presence and highly diversified products, our long-standing brands and operating history and our proven management system and team. While our businesses may be different, they're inextricably linked by the application of our repeatable model to drive growth.

So when you walk away from today's presentation, this is what I want you to remember, we start from a position of strength because of what's in our DNA. When you combine our dynamic DNA with the profitable growth drivers I mentioned earlier, ITT aspires to be the benchmark by which other companies measure themselves. And we will deliver the premier financial performance that I've shared with you today. When we grow this way, we help our customers achieve their goals, and we make our world better through our products and services, which together, then deliver shareholder value.

The next portion of the presentation will focus on our 4 operating segments, and each of our 4 business Presidents will discuss the business they oversee. They will give you an overview of their segment, the products they produce and will highlight some of the value opportunities that each have in front of them.

Our first business President is Bob Pagano of Industrial Process. Thank you, Bob for joining us today to talk about the exciting work that you and your team are doing.

Robert J. Pagano

Thank you for the introduction, Denise, and thank you for the honor of participating in today's presentation. My name is Bob Pagano, and it's a pleasure to join you today, representing ITT's Industrial Process business.

My goal during today's presentation is to provide you with an overview of Industrial Process and explain how it fits into ITT's overall strategies. ITT Industrial Process has a broad portfolio of pumps, valves and services that can be found in the heart of all industrial processes. Like your own heart, our products bring life to essential services. And just like you can't survive without your heart pumping, our pumps drive the movement of vital fluids through countless processes. From the refining of heavy crude oils, to mining of coal, to power generation. With that, I'd like to introduce you to the Industrial Process business and tell you a bit more about our innovative products and plans for the future.

Slide 34 provides a broad overview of the Industrial Process business. As you can see in the upper left-hand corner of the slide, we expect to achieve sales of approximately $785 million in 2011. The Industrial Process business is a long-cycle business, and we didn't experience the full impact of the 2008 recession until late 2009 and into 2010. We have since recovered and our close to our revenue levels prior to the economic downturn. We have made significant investments in the business, and Industrial Process is well positioned for growth into the future.

Moving to the right-hand side of the slide, Industrial Process has a number of unique competitive advantages, which we have leveraged to grow globally. Our industry-leading Goulds Pumps brand has been around since 1848, and we have a very strong reputation for quality and reliability. We have a broad portfolio of pumps that we continue to expand to meet our customers' needs. And we have a strong aftermarket business, which I'll discuss in more detail later.

We are a North American leader in the chemical and general industrial markets with a very large installed base of greater than 500,000 pumps driving our aftermarket. With this foundation of brand, portfolio and experience, we've been able to establish ourselves in future growth markets globally, and we're excited about the emerging market opportunity.

Lastly, our vision and values, our people and our culture guide us to keep our customers central to our decisions in doing the right thing always. In doing so, we cement long-lasting profitable relationships with our customers.

The graph in the bottom left-hand corner shows our operating margin history. As you can see, we have had some large swings. In 2008, we had higher margins as a result of strong market activity combined with limited pump supplier capacity, enabling us to achieve substantially higher project margins. These project margins have returned to what we considered to be more traditional level.

In addition, we have been investing significantly over the past several years in new products and emerging market footprints to position us for future growth. These have been partially offset by productivity initiatives, including low-cost global sourcing and value-based Lean Six Sigma. We have increased our margins to 14.2% through the second quarter of 2011 due to these productivity initiatives, as well as a very rich mix of base and aftermarket business.

During the fourth quarter of this year and into next year, we will be shipping a heavy mix of lower-margin project business but still expect operating margins to improve over 2010. As I mentioned a minute ago, we have become a global business; we have a strong core business in North America; and we have experienced significant growth in Asia Pacific, Latin America and the Middle East. These emerging markets will be our primary growth drivers and overall constitute approximately 40% of our business today.

Slide 35 represents what I like to call the circle of life for the Industrial Process. As Denise discussed, we have a repeatable growth model, which drives long-term value creation. For Industrial Process, it all starts at the top of the circle with the investments in new projects. At this stage in our model, our projects are very resource-intensive, less profitable and can be very cyclical. Once we've secured the projects and our pumps have been installed, our business model speeds up and our margins grow. This installed base is what drives our strong aftermarket business, which consists of parts, replacements and services. This is a really important component of our business model and is a significant source of reoccurring revenue. I will provide more detail on the aftermarket, as well as other growth drivers later in the presentation. By differentiating ourselves through providing reliable quality service for our customers in the aftermarket, we pave the way for new projects wins, completing the circle of life.

The drivers of our growth are detailed on Slide 36. Denise talked previously about the macro drivers for ITT's business. In Industrial Process, we believe that the oil and gas and mining markets are enduring markets due to resource scarcity and sustainability. Ever increasing global energy needs, coupled with the doubling and the price of crude oil since 2008, is driving our customers to increase investments in their production capacity. In addition to the growing energy needs, infrastructure demand is -- in developing markets are driving long-term investments in the mining sector. Investment trends in energy and other commodities are measured in decades, not years, making our participation in these segments a very sustainable and attractive business model. We believe these markets have very long runways for Industrial Process and expect that we'll grow strongly in oil and gas and in the mining markets from 2011 through 2014, significantly outpacing the overall industrial pump market.

Our growth is also fueled by expansion in emerging markets. The graph on the bottom right shows that we believe our growth in emerging markets will be significantly stronger than our growth in developed countries. We are confident that we can achieve this growth, as industrial companies that we serve are building plants and investing in infrastructure in these emerging markets. This is why we've expanded our global footprint, and we'll continue to strengthen our presence in these markets going forward.

Finally, we're focused on improving our customers with energy-efficient products. All our customers, no matter where they are in the world, benefit from energy efficiency. The products that we develop are all focused on reducing their total cost of ownership, while energy efficiency being the number one driver of our product development. We have a well-balanced portfolio, which provides stability across the business cycle. In particular, we are seeing strong growth prospects in oil and gas and in mining. Clearly, there's a lot of opportunities in front of us, and we have a plan in place to capitalize on those opportunities.

As I touched base briefly before, we are focused on growing in emerging markets, and specifically, in Latin America, Middle East and Asia Pacific. As detailed on Slide 37, with emerging markets, we have focused strategy which includes oil and gas, mining, strategic accounts and the aftermarket. As part of our oil and gas expansion, we recently added to our platform in Brazil with a strategic purchase of a successful pump manufacturing company, Canberra Pumps.

Over the past year, we have invested significantly at this facility to expand its capabilities and localized product offering to serve the large oil and gas and other key markets. We are planning an open house in December to showcase these investments with our customers. This is an excellent example of the types of acquisition that we'd expect to do going forward. It is close to our core, and it fits with the specific financial criteria that Denise outlined earlier in the presentation.

In addition, 3 years ago, we opened a facility in Saudi Arabia that complements our facilities in China and India. We believe the scale and scope of these facilities provides us the right mix of regional presence to directly support growing customers and markets, while allowing us to fully leverage our global manufacturing footprint. We have also been active in growing key strategic relationships in these regions and recently find the 5-year global agreement with Shell and a 7-year agreement with Saudi Aramco.

In terms of the mining market, we've had a very strong year so far, with orders up significantly over 2010. Earlier this year, we launched new slurry valve products and are very excited about introducing a new slurry pump line this quarter. We believe these new products will give us the ability to expand our market share in the mining market. We will continue to grow our strategic account base by focusing on key global customers such as Saudi Aramco, Shell, Chevron, ConocoPhillips, Anglo American just to name a few.

Finally, we remain extremely committed to aftermarket growth. To continue to see profitability from the aftermarket, we are continuously developing service capabilities and offerings, as well as expanding our footprint to match the growing installed base around the world. In the chart on the right, you will see that in 2005, we are primarily -- we were primarily a North America-focused company. And looking towards 2014, our plans are to grow faster in emerging markets until close to half of our business is focused on those regions.

Now before I move on, I have a very exciting announcement we are making public here today and directly ties to what I just discussed. I am pleased to share with you our intent to acquire Blakers Pump Engineering, headquartered in Perth, Australia. Blakers has 30-year relationship with Goulds Pumps and combines a strong portfolio of premium industrial products with a high level of customer service. Blakers' fiscal 2011 sales were approximately $27 million, and the company has sales, service and repair facilities throughout Australia. We look forward to leveraging their local team and our capabilities and resources to capitalize on the strong oil and gas and mining investments in the region. We plan on closing this during this quarter. More to come on this exciting new opportunity.

Moving to Slide 38. It's important to understand the Industrial Process portfolio and its evolution. At the bottom of the slide, you'll see examples of our core technology, reflecting a broad portfolio of process pumps. These products are used across our markets globally and are considered Goulds Pumps' heritage products. Supporting this core is a global manufacturing, engineering and sales footprint. Over the past 5 years, we've leveraged these resources and made strategic investments to expand our product portfolio and commercial resources, which has enabled us to penetrate into targeted applications in select vertical markets.

In oil and gas, we expanded the ranges of our API products and have recently reintroduced a process barrel pump. We have a brand-new line of slurry pumps and valves for mining applications and in chemical and general industry, we continue to lead with our monitoring and controls, as well as our high-pressure multi-stage products. Our experience and capabilities have enabled us to selectively expand into these vertical markets and our customer support and encourage these investments.

As you can see on Slide 39, our oil and gas story has evolved significantly since 2004. In 2004, we had $66 million in orders mainly in the core process pumps that I just discussed. Early in 2007, given the hike in oil prices, we decided to pursue the market even further. We began expanding our portfolio -- our product portfolio, particularly in our hydraulic coverage in enhancing our capabilities and engineering organization. We've then established a footprint in India and in 2009, we opened a facility in Saudi Arabia and cemented strategic agreements with Valero and ConocoPhillips. All of these actions allowed us to grow orders to $200 million in 2010.

As we move towards 2014, we will capitalize on these recent investments to further grow our product portfolio and our geographic reach. As a result, we expect to grow to over $300 million in orders by 2014. Overall, our commitment to grow in oil and gas is expected to yield a 16% CAGR and has been a great progress for our entire team, globally.

We approach the Oil & Gas business, as we do all our businesses, with a focused strategy. We added to our global installed base and subsequently expect to drive further aftermarket content. We have executed systematically and are driving continued results. And we're well on our way to writing a similar story in the mining sector.

As I mentioned earlier, aftermarket is a fundamental aspect of our business. As you can see on Slide 40, the initial cost of a pump is only 10% of the total life cycle cost. Therefore, our new product development, as well as our aftermarket solutions, are focused on helping our customers reduce their energy and maintenance costs which are 65% of the pump's life cycle cost.

The middle of the slide highlights our plant performance services, an offering which we developed over 2 years ago, and that -- so we could work with our customers to assess their plants, focusing together on higher impact opportunities to reduce their energy and other maintenance costs overall.

A final form of aftermarket innovation is our monitoring and controls portfolio. Our Smart technologies provide ways for our clients to monitor their pumps and improve their process reliability and uptime. For example, our ProSmart technology allows us to monitor pumps remotely, so that you can detect issues and solve problems before they become catastrophic.

Our PumpSmart utilizes proprietary algorithms to not only reduce the motor speed and rightsize the pump, but also identifies and protects against process to upset conditions that commonly lead to failure. These solutions not only help save energy, but they also result in significantly lower maintenance costs for our customers.

As you can see, all our aftermarket innovations are focused on improving uptime and our customers' profitability. Importantly, these technologies help differentiate us from our competitors. When a customer buys a pump from us, they do so, knowing that we will continue to offer them high-quality solutions throughout the product’s life cycle.

Turning to my final slide. I want to highlight that we have a demonstrated track record of driving results. We rapidly grew our Oil & Gas business from $66 million in orders in 2004 to $200 million in orders in 2010. We have a strong global relationships with key customers and global production and service capabilities. Importantly, we continue to develop innovative solution aimed at reducing our customers' total cost of ownership.

If nothing else, what I want you to takeaway from this presentation is that we have a strong core business and well-developed strategies that will enable us to grow in emerging markets, oil and gas, mining and the aftermarket. We're excited about our journey. We have a great team of people with a proven ability to execute strategies. And we're having an incredibly strong year, as demonstrated by this year's order improvement. We know what we need to do to grow this business, and we know how to get there. We are just getting started, and I'm confident that we'll achieve our goal.

With that, I'd like to turn it over to Andrew Jones, our Interim President of Motion Technologies. Thank you very much.

Andrew Jones

Thank you, Bob. My name is Andrew Jones, and I'm here representing the Motion Technologies business. I'm excited to be here today to provide insight in our market, our customers and our product offering and to clearly demonstrate our unique value proposition that shows why we are a compelling and attractive business that delivers strong business results.

Motion Technologies is a global leader in designing, manufacturing and selling friction material, back plates, shock absorbers and damper solutions to the automotive and broader transportation market. We're an important player within our markets when you consider with a leading supplier in Europe for friction material and among the top tier suppliers globally. We've around 25% market share within the railway available market for dampers and 20% of the available market for bumpers.

Whether you're traveling by car, by train, by bus, or by truck, you rely on our products for safety, reliability and comfort, with solution providers in highly engineered mission-critical applications.

Beginning on this slide, you'll see a high-level overview of the Motion Technologies business. In the upper left-hand corner, we have a chart that shows our revenue growth since 2007. As you can see, we've had robust sales growth over the past few years, generating total revenues of $548 million in 2010, and we're targeting revenues of approximately $615 million this year. That's the projected growth year-over-year of 12%. Overall, Motion Technologies' revenue CAGRs since 2007 through our 2011 projection is 5.5% despite the economic downturn in 2009.

Our product portfolio is a mix of automotive and transportation, with a key focus on manufacturing friction materials for the OE markets, the OES and aftermarket, as well as shock absorbers for rail, bus, truck and trailer. Within Motion Technologies, about 80% of our business is from the friction material, while the remaining stems from shocks. And within friction, our business is split evenly between OEM and aftermarket.

This revenue growth is driven in large part by our ability to leverage our competitive advantages, which are underpinned by our process and our products' innovation. Our material science expertise, particularly, in regards to friction is market-leading and breakthrough and is at the core of what we do. This expertise allows us to engineer friction material that meets customers' varying and demanding requirements, focused on wear characteristics and overall technical performance.

As well as the ITT name, we also have extremely strong global brand recognition within Motion Technologies. In our brake portfolio, the Friction brand is well regarded throughout the industry. Our KONI shock absorber name is very popular in both the rail and bus industry, and specifically, with cars and most racing enthusiasts, with strong linkages to Formula 1 and high-performance cars.

All of our brands in Motion Technologies are known for innovation, reliability, outstanding performance and safety in critical applications. The brands are valuable and are primary drivers of our global demand in the highly engineered premium segment.

Our business in the premium aftermarket segment and the OES is very strong, giving us an important recurring revenue stream across product lines. We have a passion around process, innovation and operational excellence. We have a strong focus on year-over-year productivity and creating more efficient production capabilities. All of this is underpinned by the ITT management system, where we deployed the tools of value-based Six Sigma and global strategic sourcing in order to deliver sustainable and breakthrough improvement.

We have a low-cost regional footprint with a large manufacturing facility in the Czech Republic, as well as a site in Wuxi, China where we manufacture our shock absorbers. We continue to invest in these facilities, and in early 2012, we'll open a new production facility for friction materials in Wuxi, combined with a technical development center. This is well complemented by our 3 highly efficient plants in Italy, as well as a shock-absorber facility in Holland. All of these advantages translate to growth on the top line with an equal focus on expanding operating margins.

The chart on the bottom left-hand corner shows our operating margin history, and we delivered an operating margin for Q2 2011 year-to-date of 14.1%, which reflects headwinds from commodity prices in the first part of the year. We've used our competitive advantage to expand our presence globally, and in the lower right-hand corner of the slide, you can see a breakdown of our revenue by region.

We generate a high proportion of our revenue from Western Europe, as we're extremely well aligned with the major Western European car manufacturers, such as the Fiat Group, BMW, Audi, Renault and Peugeot. These companies are an important part of our revenue stream, and gives us a strong foothold in the global markets.

In addition, we generate about 14% of our revenue in emerging market, which strategically and tactically, is a strong part of our focus. We have fantastic opportunities and run rate for growth in the North American market, where we have strategic opportunities with major customers such as Ford, GM and Chrysler, which not only gives us platforms for growth in the regional market but also a further springboard in the emerging markets.

We have a strong and repeatable growth model that maximizes value creation. And as Bob stated, it's our circle of life. At the beginning of the cycle, there's a high degree of engineering engagement and innovation focused on winning new platforms and being selected as the preferred supplier of choice. The time to market for many of our projects can be 12 to 18 months, but then the platform life cycle can range in automotive from 1 to 4 years and within the rail segment from 7 to 10 years. The business cycle then shifts to the OES market and eventually the aftermarket, which have further longevity to the product portfolio. With automotive, we see an aftermarket of 2 to 12 years. In rail, where we supply replacement parts and offer spares, repair as well as overhaul for dampers, we can see an aftermarket of more than 20 years. This activity is characterized by less cyclicality and higher profitability with ongoing and repeatable revenue streams.

Our strong reputation, technology and performance enable us to gain access to our platform. And through operational excellence, we defend that platform to the long term, because the cost of switching per customer is considerably high. Additionally, our incumbency and our performance leads to the new platform opportunities, wins and a repeatable business cycle. Simply put, Motion Technologies' strategic growth has been taking a highly successful European business and leveraging our competitive advantage and core competencies, while making strategic investments to continue to grow our revenue and expand our operating margin.

From an organizational point of view, Motion Technologies is organized in 2 business units: Private transportation, which is responsible for car, truck and trailer, plus racing products and public transportation, which is responsible for rail, bus and heavy-duty.

Private transportation is expected to grow, first of all, thanks to a favorable to a car production market trend which is projected to increase constantly over the next 6 years. A major driver of this are macro trend studies that by 2025, 1.4 billion people will be considered middle class, with over 50% of that growth coming from China and India alone. Our projections are driven by defending our current position in Europe, where we're already the #1 supplier of friction materials for low metal applications and through our geographic expansion in North America and emerging markets to drive a more significant position globally. Many global manufacturers are focused on China, and we are being pulled into the Chinese markets by our existing global customers, as we become integral to many of their platforms.

Going forward, there's an opportunity for us to penetrate the emerging local suppliers that today have less than 10% of the overall market, but are expected to experience significant market gains as the market matures. As part of this, we continue to invest in our low-cost manufacturing footprint, which will allow us to allocate new capacity and support our increasing order book. We are focusing on the developments of the premium aftermarket segments, where 45% of our overall revenue come from, by adding new references and expanding in new geographies. Lastly, our ongoing focus on productivity and cost reduction through our designed cost methodology will ensure margin expansion and value creation.

Public transportation growth is also well aligned with favorable macro trends, which is urbanization, a growing middle class and resource scarcity. As a result of explosive urban growth, there will be substantial government and private investment in transportation with new rail, bus, highway and airport infrastructure. We've already seen some of these growth in the high-speed rail market in China, whilst the U.S. and countries in Europe are targeting introduce or upgrade current high-speed rail system.

For these reasons, we decided to expand our footprint and engineering within low-cost regions in the Czech Republic in China. We also opened a new research and development center in Frankfurt in Germany last year, given its strategic importance as the largest real country in Europe and as a major influencer on standards throughout the emerging countries. Within public transportation, we're also focused on the profitable aftermarket segments, where we provide replacement products and spare parts. Within our portfolio, we have endurance dampers, which have a life of 20 to 30 years and need to be overhauled every 1.6 million kilometers or lower cost performance dampers which can be replaced every 5 to 7 years.

Emerging market is critical to our success, and the key takeaway is there is significant amount of activity that will generate robust growth in the following years based on product and platform life cycle. A leading indicator of this is the number of projects that continues to grow in our sales and engineering pipeline and especially the significant increase originating or targeted for the emerging countries. These will have a platform release that impact both the short term and beyond 2014. Here, we highlight our emerging market actions, which are focused on key geographies which will fuel our growth China, Eastern Europe, Brazil and India.

In China, we want to grow in both the automotive sector, as well as in the rail and bus sectors. China is the fastest growing global automotive market. And with our facility in Wuxi, we can serve the local market through our collocation of manufacturing, engineering and sales assets. In addition to manufacturing, a critical component of our business is our technical development and service center, which has test equipment and application engineers to support our customers, testing and homologation of our products. As a result of China's significant urbanization, which will expand transportation infrastructure, we see tremendous growth opportunities in rail and bus sectors for our damper business. In the coming years, China is committed to investing more than $300 billion in rail construction, laying 20,000 kilometers of new railways.

In Eastern Europe, we have a plant in Ostrava, Czech Republic, where we're focused on increasing our automotive and rail capabilities. We shape our Ostrava facility to meet OES and aftermarket demand in automotive, whilst in rail, we transferred manufacturing assets in 2010 for the OE and aftermarket. Not only does this mirror the footprint of many of our customers, but it also prevents significant market opportunities for new customers.

In Brazil, the future growth will be driven by infrastructure build, specifically in the short term, the 2014 World Cup and 2016 Olympic Games. Especially, in the public transportation segment, we'll continue to leverage government investment. And last year, we won a significant opportunity for the São Paulo Metro, and we continue to focus on other rail improvement and investment program. In private transportation, we aim to become one of the major suppliers of friction materials to the Brazilian market, especially through platforms with companies such as Volkswagen and through the Fiat Group.

In India, the future growth will be driven by rail infrastructure investments and which were expected to penetrate the locomotive and metro segments. Significant opportunities exist, as India is the largest producer of buses and is because there's also a growing demand in automotive.

We're working hard on creating strategic relationships and developing account relationships with all the major producers, focused on new platforms and delivering innovative and the highest value solutions. While the market continues to demand lower-cost products, they still want and need proven friction material and damping solutions based on reliability, performance and safety. The focus is still on product innovation and offering the highest value to the customer, irrespective of the price of the car for the transportation vehicle.

As mentioned, our strategic selling competency and the value we put on incumbency is critical to our overall success. Here, we provide an example of how strategic accounts drive global growth. We've had a significant win over the last 3 years with Ford in North America.

And as you can see on the left-hand side, we're now on the platform with several leading brands within the Ford product offering, such as the Explorer, the Edge, the Taurus, and the Focus. This is translating tremendous growth with Ford. We've got around 4.6 million brake pads this year, a number which we expect to double by 2013.

Additionally, motion Technologies was recently awarded Ford's first worldwide friction material project for the new Mondeo, which will standardize the friction material for this global platform. This is a significant and game-changing win.

As we partner with strategic accounts, operational excellence is at the core of what we do. We focus on process innovation, as well as product innovation and within this, productivity and efficiency are central to our business model. We deploy and invest in the best-in-class manufacturing technologies and production systems in order to deliver the optimum cost base, strongly coupled with the highest control to ensure we meet the demanding quality of our customers. We are laser-focused on customer requirements, specification and ultimately customer satisfaction, with ongoing engagement by our engineering team to improve the process and product performance.

Motion Technologies translates that towards manufacturing and transactional assets into a highly effective supply chain and fulfillment model. We target to produce 0 defects, and we continue to focus on the cost of quality, which is part of our DNA. We're proud with the accreditation and certification we've achieved from our customers, internationally recognized bodies and standards authority.

I wanted to provide more color on the legacy of our excellent products we produce, as well as our focus on technology and innovation. We have a terrific team of people devoted to this aspect of our business and also to creating innovative applications for our existing products. This is a key foundation of our friction material and damper solutions business. We continue to build on this through research and development.

With regard to friction products, a key element for our strategy is technology that delivers environmentally sensitive products, namely low-copper and 0-copper mixes and solutions using organic and recycled materials. As legislation is introduced, these will be winning innovations.

Additionally, we're a market leader in the development of electronic parking brake materials, which is widely becoming used in car applications. Within damping solutions, our patented FSD and CVD technologies are driving improved comfort on wear characteristics for our customers. These technologies also facilitate the introduction of alternative energy solutions by accommodating and compensating exchanges in vehicle dynamics due to the position of battery cell or alternative energy sources on the vehicle itself. Lastly, we're providing radical solutions to address key issues around heat management and waste reduction requirement.

All of these innovation work, our manufacturing footprint, our testing and validation processes create our unique value proposition. That value proposition has enabled the growth and success, as shown in our friction technology story since 1999. In 1999, there were 55 million light vehicles manufactured. And in 2011, 78 million light vehicles were reproduced, representing a market CAGR of 3%. From 1999 through 2011, Motion Technologies increased the number of friction material units sold from 18 million units to 75 million units per annum, representing a CAGR of more than 12% or 4 times the market.

Throughout the period, we've made strategic investments in technical and development centers, we've won major platforms with key customers, we paced and sequenced our capacity, always focused on the most efficient and effective production capability, and we continue to innovate and provide proven validated solutions.

The takeaway is simple: We've enjoyed tremendous growth in our friction material business, where we've outperformed the growth of the market by 4 times in the period. The growth has continued despite difficult economic conditions, and our pipeline of activity continues to grow, which is a leading indicator of future growth potential.

In closing, Motion Technologies will continue to deliver robust growth, expanding operating margins and creating value for shareholders by leveraging our competitive advantages and our unique opportunities. In terms of competitive advantages, we have market-leading material science expertise, high-innovation content products, strong brand recognition and a profitable aftermarket and OES revenue stream. We have efficient production capabilities, operational excellence and a low-cost regional footprint in Eastern Europe and China that collectively differentiates us from our competition. We also have significant opportunity that allows us to create more value.

Our customers are bringing this into China, which allows us to provide market-leading service and create relationships with local businesses. Emerging markets also provide us with key opportunities for the OE market and to expand our profitable aftermarket business. Finally, we'll further penetrate the U.S. market, leveraging our low-cost regional footprint and continuing to gain wins on global platform.

Lastly, and above all else, Motion Technologies is comprised of a group of talented and experienced people. We're results-oriented, process-centric and focused on our execution. And we want to continuously improve on the superior products that we offer to our customers. In short, we're engineered for life and also engineered for growth. Thank you.

We'll now take a short break, and we encourage you to look at the product displays and talk to our people about the exciting and diverse product portfolio of ITT. After the break, we'll resume with the next presenter, Bill Taylor, President of Interconnect Solutions. Thank you.


William E. Taylor

Welcome back. Welcome back. I'm Bill Taylor, President of ITT's Interconnect Solutions business. I'm excited to be here today to walk you through the products and services that we offer and to tell you more about the vision we have for our dynamic business. Interconnect Solutions is a global leader in providing connectors in the harshest of environments, such as extremes of temperature and vibration. Our customers seek our high-reliability products because of the high cost of component failure in their products, and because of our long track record of success in helping them find innovative solutions to difficult problems.

You can find Interconnect Solutions miles beneath the earth to thousands of feet up in the air. From the power connector that links a pump 1 mile down in an oil well beneath the surface, to the avionics on a commercial jet that navigate the plane to its destination, to ecofriendly electric vehicles that need to have their batteries charged, Interconnect Solutions is everywhere. Let me begin by giving you a broad overview of the Interconnect Solutions business. At the top left-hand corner, you can see Interconnect Solutions revenues from 2007 to our estimates in 2011. ICS is one of the most economically sensitive businesses in the ITT portfolio. And it was impacted during the economic downturn in 2009.

In 2011, while we've seen good revenue growth driving attractive margins in the first half of the year, we're now experiencing a softening of revenue based on current global economic conditions. In an industry that values reliability and performance, our Cannon brand, the core of the Interconnect Solutions business, symbolizes the high-quality, high-reliability products that customers have come to expect from ITT. We also have a very strong brand in BIW, which is the leader in the oil and gas wellhead connector market. Our engineering capability allows us to analyze a customer's situation and formulate solutions that can make a difference, such as BIW's new, innovative splice lock system that saves hours of field installation time at well sites. We have a global manufacturing footprint, including a strong presence in China. I'll discuss more about that in detail later.

The graph in the bottom left-hand corner shows our operating margin history. And we have a 12.8% operating margin for the second quarter of 2011. As I noted previously, we expect to see softness in revenue in the second half, as the electronic industry experiences the current global economic volatility. The final graph demonstrates that Interconnect Solutions earns revenue from a diverse geographic set of customers. It also shows that we have strong revenue streams from emerging markets, a fact that I'll discuss more later. In summary, we operate in a number of attractive segments, which are forecasted to grow at a 6% CAGR for the next 5 years according to Bishop & Associates, a widely known connector industry consultancy group.

Interconnect Solutions' repeatable growth model is highlighted on this slide. The picture is a visualization of our business model, the ICS circle of life, which revolves around customer programs and their product platform. It's divided into 2 broad phases: the engineering design phase, which is then followed by the customer platform life cycle. Engineering design is resource-intensive and requires investment in engineering hours while we develop the solution for the customer. This phase can last anywhere from 1 to 4 years. And during this resource-intensive time, minimal revenues are generated. However, as our relationship with the customer moves into the platform life cycle, Interconnect Solutions is able to generate recurring revenues and profits for anywhere from 5 to 20 years.

An example of our repeatable growth model is the Boeing 737 platform. We've had content on the 737 platform for many years now. And Boeing has just extended that platform, and that will extend the life of the revenue stream to well beyond 20 years. Thus, while Interconnect Solutions does not have an aftermarket business like ITT's other businesses, we have long-term product platforms that can generate substantial revenues over time. Our upfront investment in engineering produces long-term sustainable revenue. Our goal is to remain an agile segment flair while continuing to support a broad offering to the market.

Turning to the next slide. You'll see that we've identified 3 major areas that will drive our growth. First, and as Denise mentioned in her opening remarks, Interconnect Solutions is poised to respond to the needs that macro trends are creating, such as the need to replace aging infrastructure in developed economies like the ongoing upgrade of passenger rail systems to high-speed capability, such as the rapidly escalating demand for clean energy in emerging markets. The electric vehicle policy, adopted by the Chinese central government, is a prime example of this opportunity. The policy includes a target of 1 million electric vehicles on the road in China by 2016. Such as the rising global demand for petroleum-based products, which drives the need to enhance oil well production by the use of electric submersible pumps, and the exploding demand for intelligent portable devices for security, health, business, industrial and consumer applications.

Our commitment to innovation and our ability to create technologically advanced solutions for our clients' most pressing problems will also fuel our growth. And to that extent, we expect that 13% CAGR in new product revenues through 2014. And finally, we will continue to expand our successful global footprint. We estimate a 19% CAGR in emerging market growth through 2014. That will be driven by telecom, medical and general industrial applications.

I just spoke about the larger drivers that will fuel our growth. And on this slide, I want to highlight 3 specific strategic areas that we are focused on as we look to expand our opportunities. First, we want to extend leadership in the harsh environment applications where we are already a leading player. To do so, we will expand our portfolio and platform capabilities into new market verticals, the creation of standardized connector product lines. Standardized connectors can be industry-specific or they can be a unique combination of Interconnect Solutions technologies. Customized products are profitable and require a close work with the customer to develop effective solutions.

One example is our high-performance Universal Contact product serving the handheld device market. About 8 years ago, we began investing in Universal Contacts. To date, we have sold over 4 billion without a single field failure. That's an impressive track record on a profitable product, and we're committed to maintaining this performance. We also intend to extend further into harsh environment connectors by continuing to penetrate the oil and gas industry segments that require interconnect approaches. Our leading BIW brand, which is already a wellhead power connector market leader, can be leveraged to defend the leadership position and grow into adjacencies such as substate [ph].

Second, we're targeting specialized connector applications, specifically in the handheld device market. We're seeing an attractive opportunity for growth there. To do so, we plan to leverage existing design capabilities to penetrate OEMs and adjacent markets such as handheld GPS devices and medical devices.

Finally, we will optimize our cost structure. To do this, we will increase vertical integration in our main manufacturing centers around the world. Because our connectors are so critical, we must constantly be improving our supply chain to ensure that we are delivering orders on time and at the lowest price possible while remaining focused on the highest product quality standards. We're also focused on refining and synchronizing our external supply chain to drive reduced lead times. We will continue to expand our localized assembly capabilities and our rapid prototyping services so that we can apply our flexible engineering capabilities closest to the customer.

We've identified a number of emerging market growth opportunities for Interconnect Solutions. And on this slide, we've provided some detail on these opportunities, particularly in China, the Middle East and Brazil. In China, we derive our revenues mainly from the rail, handheld device and general industrial markets. And we expect to continue to grow in these areas over time. We're proud of our Shenzhen facility, which is vertically integrated, and has the lowest cost profile of any of our operating sites. The product that flows from this facility represents about 20% of our P&L. Our Shenzhen engineering group has global design authority for a number of products and has regional design authority for a wide range of industrial connectors including applications for construction equipment and agricultural equipment, which are 2 of the stronger markets that we serve in China.

In the Middle East, we have a strong presence in oil wells throughout the region. We have a successful partnership with our ITT Industrial Process business that allows us to leverage their customer relationships and their physical presence in Saudi Arabia. It allows us to provide inventory close to our customers so that we can quickly respond to market demand. The 7-year contract that Industrial Process signed recently with Saudi Aramco was also a significant win for Interconnect Solutions. Through this contract, ICS has been granted a guarantee to upgrade opportunity to replace our competitors' connector systems in all Aramco wells.

In Brazil, our target markets are oil and gas, aerospace and rail. We continue to partner with other ITT businesses, particularly in the aerospace and rail segments. And we plan to capitalize on the ability to leverage the new presence that Industrial Process has established near São Paulo. We're also excited about our relationship with Embraer, the Brazilian regional jet manufacturer for whom we've just signed a long-term agreement.

Interconnect Solutions is committed to innovation and technology, yet another factor that we believe will contribute to ongoing growth. Interconnect Solutions has an innovation edge that is founded on a command of a broad base of technological building blocks. At the bottom of the slide, you see the technologies that serve as the foundations of our business. We apply them to our customers' unique and complex problems, developing the custom products that are required in those situations. These are featured horizontally across the middle of the slide. Each of these custom products represents a specific application of one or more of our technological building blocks. Over time, we identify other applications for our existing custom products that can be used in other market segments. Simply put, when we approach a client's unique problem and develop an innovative solution, we find that over time, other customers and other markets have similar challenges to which we can provide our trusted solutions. This entire process allows us to develop standard product lines over time, over and over again.

Interconnect Solutions involvement in the development of chargers for electric vehicles provides a great example of the process that I just described to you. Recently, we utilized our high efficiency power contact technology to develop an application for a standard electric vehicle charging connector that met industry specifications in North America. Due to our industry-leading technology and manufacturing capabilities, we launched a product in North America ahead of our customers that was UL-approved. While the connection between the charger and the car is standardized in North America, there are different standards in Europe, Japan and China. Given our experience in delivering workable solutions to our clients, we'll be able to continue to drive innovation in the charger industry and grow our product line on a global basis by adapting our previously developed North American technology to other regional standards. Our engagement in the electric vehicle charger market underscores that we can streamline the go-to-market process, utilizing our existing building blocks to conceptualize and create trusted solutions. Simply put, we have the ability to move directly from technology building blocks to standardized products.

To tie this in with the macro trends we've discussed throughout today's presentation, developing more energy-efficient vehicles is a major trend in the automotive industry, where there are likely to be significant growth opportunities. To date, our electric vehicle charging coupler has sales of $4 million. We anticipate orders totaling $7 million in 2012 and believe that by 2014, orders will approach the $30 million mark. That will be a 95% CAGR.

I'd like to close my discussion of Interconnect Solutions with a review of our advantages and our opportunities. Our broad technology and product portfolios are firmly linked to the macro trends that will drive growth for ITT. We'll leverage our premier brands and global manufacturing footprint to seize these key opportunities, rapid emerging market growth in our targeted market segments, expansion of our position in the harsh environment connector space, development of new standardized connector product lines and optimization of our global footprint.

That concludes my remarks, and I want to thank you, all, for taking the time to learn more about ITT's Interconnect Solutions business. It's now my pleasure to introduce my colleague, Munish Nanda, President of ITT's Control Technologies business.

Munish Nanda

Thank you, Bill. My name is Munish Nanda, and I'm happy to be here today representing ITT's Control Technology of business. Like my colleagues, I'm going to spend the next 20 minutes or so giving you an overview of Control Technologies and our strategic vision for the future.

Control Technologies specializes in aerospace components and industrial products. Our products and services go into key end-user applications, from the commercial airplane seats we've all sat in to fuel distribution components in airplanes, to sophisticated energy absorption equipment like industrial shock absorbers inside the Eiffel Tower in Paris, or vibration isolators in power generation to advanced motors that control the precise movement of medical equipment. Our diverse product line is respected throughout the industry for solving complex engineering challenges relevant to humankind, as is the reliability of our products, services and our demonstrated commitment to innovation.

First, I'd like to give you a general overview of the Control Technologies business, including our strong revenue growth. From 2007 through year-end 2011, we anticipate to almost double our revenues. Our significant growth between 2007 and 2008 reflects our successful acquisition of the International Motion Control business, which provided the bulk of our industrial revenues and added significant strength to our aerospace portfolio of industry-leading noise and vibration isolation technologies products and services.

I've outlined several competitive advantages that will drive our continued growth. These include market-leading technologies, which drive differentiated solutions for our customers. The unique materials that we use in manufacturing, our superior engineering capability, and our innovative designs give us a clear and compelling edge over our competitors. Our industry-leading application engineering expertise helps us offer customized solutions using modular platforms that effectively deliver our technologies into customers' applications. We have strong aftermarket opportunity, especially in our aerospace business, with field offices and manufacturing locations across the world, including a manufacturing facility in Wuxi, China. We meet our customers going needs of localized products and services, and our access to customers are global. We offer an extensive portfolio of qualified products such as fuel management and noise-absorption components in the aerospace end market and a range of products that manage and absorb energy in a variety of industrial end markets, including shock absorbers and wire rope isolators. Our solutions are vital in mission-critical applications and are required throughout the product life cycle of the customers' application. From products used in commercial aircraft to those used in medical imaging, our products are engineered to ensure reliability and uptime of critical human need.

The graph on the bottom left-hand corner shows our operating margin history. Our margins decreased in 2008 as a result of the blending of the aerospace and industrial businesses. We experienced a further decrease in margins in 2009, with a sharp decline in volume following the economic reset and in 2010 due to targeted investments. You'll note that this year, we have more than restored our margins by capitalizing on some of those investments, driving growth and leveraging our integrated management system to drive significant productivity, thus growing our margins to over 19% year-to-date.

While the Control Technologies business has historically been focused in North America, we are rapidly expanding our presence and penetration internationally. On Slide 63, I've highlighted some of the drivers behind Control Technologies' growth. And now, you can see how all these together in our repeatable growth model. Like some of the other ITT businesses, our growth starts with new applications and projects, a period that can be influenced by the economy and be more resource-intensive.

As we move to the parts, replacement and service segments of our business, we see less cyclicality and higher profitability. This model leads to strong value creation. By focusing on attractive niches through differentiated application engineering and making targeted strategic investments, we strengthen our relationships with the customers. Once we have established a strong relationship, we continue to provide differentiated value for our customers with efficient processes and throughout the life cycle of the customer’s application, including strong aftermarket products and services.

Turning to Slide 64. I'd like to lay out for you the key drivers of growth in Control Technologies. As Denise and the other business presidents have highlighted, we are well-aligned with the macroeconomic trends, such as growing global population, large-scale urbanization and energy efficiency. These trends will result in an increased demand for expanded and efficient air travel. And we see a number of exciting opportunities for our innovative aerospace products.

In addition to the macroeconomic drivers, our growth will be fueled by additional expansion in the profitable aftermarket segment across all end markets, especially energy absorption and aerospace. The graphs at the bottom of the slide demonstrate that the markets in which we compete are growing. For example, there is strong growth in energy absorption and aerospace end markets, both of these are extremely important for the Control Technologies business. Also we estimate robust emerging market growth through the year 2014. Overall, Control Technologies is growing at twice the rate of the market, with extremely strong growth in emerging economies.

Now let's move to the next slide to show you exactly what we're doing to drive results. As we think about our strategy, we are focused on 2 broad key areas. First, we want to expand on our already successful leadership in the aerospace industry. To achieve this goal, we will continue to aggressively grow our aftermarket position, which provides strong margins. We are pursuing FAA-approved, second-sourced aftermarket opportunities, and we're maximizing repair and overhaul of our products, as well as select competitors products. We are continuing to invest in new technologies in actuation and noise management in order to meet the future needs of our customers. Our new products will provide higher performance, lower rates and higher reliability.

Further, we will leverage and grow our existing customer and platform relationships. We have key relationships with customers, such as Boeing, Embraer and Airbus, and are on several of their platforms. So we continue to improve customer responsiveness and further differentiate ourselves based upon our ability to deliver highly engineered products and solutions. Finally, as our customer base expands into emerging markets, we will grow as well to meet the needs and the needs of the customers in these emerging economies. To that end, we're already working directly with integrators in China.

The second area of our strategic focus is to drive energy absorption and controls. We plan to selectively target attractive markets and applications, especially in the areas of power, oil and gas, medical and industrial, which we believe are aligned with the macro trends me and my colleagues have previously discussed. Emerging markets will be key in driving growth in this area as our customers look for us to deliver application capabilities that provide them unique solutions to solve their mission-critical problems.

Finally, we leverage our engineering and modular solution capability in which we will take complex customer requirements and routinely create effective and unique solutions. Overall, we believe that given our product offerings and innovation solutions, Control Technologies is very well positioned to grow in the coming years.

We see strong opportunities in emerging markets, and I'd like to now discuss in greater detail the strong growth potential that we've identified. Currently, we do approximately 11% of our business in emerging markets. It is our goal that by 2014, we will grow that figure to 16%. We've identified key emerging areas where we see the greatest opportunity.

In China, energy and aerospace will be key drivers. We already have a strong presence at our Wuxi facility, and we will capitalize on our investment to become more successful with localized products and applications. We have an established distribution network in China, and we will continue to develop this. We will also continue to develop important customer relationships in the region, such as our growing relationship with COMAC.

In India, power generation and energy absorption are important macro initiatives that will provide opportunities for Control Technologies. The growing investments across hydro and nuclear power will be well positioned to leverage our strong portfolio and presence. We have localized application expertise for alternate energy and industrial shocks and have front-end expertise to deliver this value to our customers.

Finally, Brazil represents opportunities for growth in the aerospace and power generation markets as well. We already have a strong relationship with Embraer, and our products are on several of their aircraft platforms. We will continue to leverage the strong ITT brand and footprint in Brazil to grow our business both from an OEM and an aftermarket perspective.

Mission-critical applications require a commitment to technology, innovation and process rigor. Control Technologies is committed to providing solutions to our customers that are on the leading edge of this need. Slide 67 highlights our innovation and technology focus across 2 of our key end markets, industrial and aerospace. In terms of industrial, we are focused on innovation in key segments, namely energy absorption and motion control. Our innovation in these areas allows us to create mission-critical applications by utilizing standard platforms to provide customer solutions. Our technology allows for modular plug-and-play solutions that a customer can with one piece of hardware that is integrated, accomplish the job of a competitor's solution that involves multiple [indiscernible] pieces of hardware, and is very often less reliable than the solutions we bring to the market.

Our manufacturing facilities are uniquely equipped to test industrial products on-site for varying customer applications. Our Web-based product configurator [ph] allows us to differentiate ourselves further by providing reliable, real-time, customized solutions. And finally, our ecotechnology is designed to provide biodegradable products in customer application, satisfying global needs of sustainability.

Looking at aerospace, our focus is on smart actuation, fuel management and noise isolation components. In terms of technology, we have smart actuation platforms that enable equipment and seeks to operate more efficiently and lower operating cost by providing prognostic system management and diagnosis. We also have an advantage over competitors in our processing material that are lightweight but successfully isolate noise and vibration through rigorous noise specifications.

On the next 2 slides, I want to highlight the examples of growth within Control Technologies. The first example highlights how we will more than double our energy absorption business from $24 million to $56 million. To accomplish this, we've invested in technologies and infrastructure that's paying off. We penetrated markets in China through additional investments in our Wuxi facility. We positioned ourselves better in the European market by opening a European technology center in Germany. This allows us to better serve our European customers and provide localized engineering and manufacturing solutions throughout the region.

All of this has led to tremendous growth in our energy absorption business. We now have a strong presence in this segment and our products are being used on large and profitable platforms. Further, the launch of our eco-friendly products will serve the growing needs of sustainability in many of these end applications. As a result of our innovative technology, we are industry-leading experts in this market, and that has translated into strong growth and increased our revenues and profitability. We estimate that our energy absorption business will grow at a faster rate to $56 million by 2014 for an overall CAGR of 9%.

The next slide highlights a similar growth example within our noise isolation component business. We've been able to incubate this segment of our business from $2 million in revenues in 2004 to $14 million in 2010, and are forecasting revenues of $20 million by 2014, yielding a 26% CAGR. Manufacturers in the United States like Boeing has stringent noise requirements that suppliers must meet. With our ability to uniquely meet these needs, we continue to be the supplier of choice at Boeing and are well positioned to be the noise isolation supplier of choice on international platforms as they migrate to stringent noise requirement specifications.

Slide 70 shows you a profile of the aerospace industry. As you can see, component suppliers generate the highest operating margin. Control Technologies will continue to focus on growing in this segment through expanding our technology, product and aftermarket content and leveraging our key relationships.

In closing, you can see how we have created differentiated competitive advantage across Control Technologies. We remain well-positioned to grow by expanding our leadership in targeted aerospace components, enhancing our energy absorption industrial portfolio and leveraging our growing presence in emerging geographies. All of this, while we remain operationally efficient and continue to provide a premier customer experience using ITT's management system.

Led by a strong team of forward-thinking and talented professionals, I'm excited about all that Control Technologies can accomplish as part of the new ITT. This concludes my portion of today's presentation. Thank you for offering me this opportunity to tell you more about Control Technologies. I'll now turn the presentation over to Tom Scalera, ITT's Chief Financial Officer.

Thomas Scalera

Thank you, Munish. And thank you to all of our business presidents that have joined us today to tell the unique but unified value-creation stories. As you listened to these leaders describe their businesses, you can really appreciate the tremendous growth potential we have here at new ITT. This potential is built up through years of execution, combined with disciplined and strategic investments that we made in the right market, at the right time and at the right price. As Denise mentioned, part of understanding our future is exploring our past and how we arrived at where we are today.

So I'd like to spend some time today discussing the framework we use at ITT to make investment decisions and the systems that we use to drive execution and to measure financial results. Today, I will also provide some key unaudited pro forma financial data that many of you have been patiently waiting for. This data was derived from our historical consolidated financial statements, and it gets us back to the spinoff. A more comprehensive required set of pro forma financial information will be filed on an 8-K within 4 days of the distribution. As you review this financial data, keep in mind that as a result of the separation, there will be certain incremental costs that are higher than those allocated throughout some historical pro forma results. These are primarily attributable to public company governance and reporting requirements, investments in new information systems and some loss leverage. We are currently estimating this growth impact to be about $20 million. Later, I'll discuss some of the initiatives that we have underway to mitigate these impacts.

Turning to Slide 74. So as you've heard throughout the day, we do deploy a repeatable model across all of ITT that drives our growth. We have our own model in finance, and it focuses our daily activities and long-term decisions on creating and sustaining shareholder value. The repeatable finance model has 3 structural elements. First, we have a sharp focus on executing on our financial plans and meeting our long-term commitments. We apply rigorous planning and forecasting activities and we measure and countermeasure our performance continuously across all levels of the organization. Second, we drive targeted strategic organic investments that are consistent with those that have generated our exceptional upper-quartile organic growth in the past. And finally, we make additional targeted investments and M&As that are consistent with our strategic blueprint and satisfy our strict financial criteria.

Within this framework, we are driving 3 specific areas of performance. First, we will focus on margin expansion through the application of our ITT management system and the critical areas such as Lean Six Sigma, global strategic sourcing and value-based goal deployment. As ITT's former operational excellence leader, Munish Nanda, from Control Technologies, can tell you firsthand, these activities are truly a part from our operating DNA. Second, we will effectively deploy our capital organically by confining strategic filters with rigorous financial criteria. We will continue to make investments today that will best position us to realize the greatest growth opportunities of the future. In the words of the great Gretzky, we, at ITT, like to skate to where the puck is going to be. And lastly, we will generate strong free cash flow that will provide additional firepower when combined with our strong investment-grade balance sheet.

Now let's turn to the financial management overview on the next slide. As you know, our ITT management system requires all of our leaders to examine decisions based on data-driven analysis. We engineer our financial decisions for like [ph] as well. Another critical element of our management system is our focus on enterprise risk management. Today, we have a very strong enterprise risk management foundation. And moving forward, we are making this process even more rigorous and more data-driven. We've already established a crossfunctional risk center of excellence that I believe will drive our capabilities to world-class standards.

A disciplined focus on liquidity and cash management is also a major part of how we will manage ITT's financial performance. We plan to maintain a capital structure, balance sheet and financial policies that are consistent with our investment-grade credit ratings. After the spin, we will have a strong balance sheet with no long-term debt and over $600 million in cash that will help fuel future growth. However, it should be noted, as Denise mentioned, that approximately $100 million of this cash will be required to pay down the aggregate spin cost, and the majority of the remaining cash is currently overseas. In addition, we have a 4-year $500 million revolver that provides additional liquidity and flexibility. And as it relates to dividend policy, on October 5, we declared a fourth quarter dividend of $0.091 per share after giving effect to the 1-for-2 reverse stock split. This level of payout is consistent with other growth peers. And with respect to the dividend policy, all future decisions, of course, will require approval by the new ITT Board of Directors.

Finally, we are committed to making differentiated investments in both organic growth and targeted acquisitions. All of our organic investments will center on expansion in emerging markets, aftermarket and innovations that will help us meet our global customers' needs. In terms of acquisitions, we will look at targets with about $15 million to $50 million in revenue that complement our existing business and core strategies. We believe that in the markets where we play today, there are dozens of opportunities of this size that will provide additional reach for technology in attractive end markets and at a reasonable valuation. The Blakers acquisition, announced earlier today by Bob Pagano of Industrial Process, is a perfect example of this strategy. It hits the target revenue. It was in the right end market of oil and gas and mining, and it addressed emerging market demand.

Finally, you should note that the new ITT's finance leadership team is comprised of professionals with many years of public company experience, many of whom led various critical functions at the ITT level and were incremental in effectuating the spinoffs of the 2 new companies.

On Slide 76, the theme of the day is engineered for growth. And I believe that no 1 slide demonstrates that better than our organic revenue growth history. We're pleased with the 5% growth CAGR we delivered from 2007 through estimated 2011, including our relative strength in the economic downturn. We attributed this strength to our 30% emerging market presence, our balanced cyclicality, recent share gains, most notably in automotive, and strong recurring aftermarket and platform-driven demand. We have talked a lot about the balanced cyclicality across our businesses today. So to that point, I'd like to share an interesting observation with you. Over the last 4 years, 4 different ITT businesses have delivered our highest organic growth level. In 2007, organic growth was led by Control Technologies; in 2008, it was led by Industrial Process; in 2009, Motion Technologies was the organic growth leader; and in 2010, Interconnect Solutions was the organic growth leader. I think this demonstrates our balanced cyclicality very well.

Turning to our 2011 forecast. Estimated revenues of $2.1 billion nearly approached 2008 levels, and our organic revenue growth is on track to be in the high single-digits. On a year-to-date basis through June, we posted a 9% organic growth, and we've seen strength building in our late-cycle Industrial Process business, primarily due to investments we've made in oil and gas and mining capabilities. Motion Technologies and Control Technologies posted strong results in 2011 due to market share gains and solid aggregate demand in automotive and aerospace end markets. One pocket of softening we saw exiting the second quarter was in the order rates of our early-cycle Interconnect Solutions business. This is primarily attributable to weakening in global consumer electronics. We do expect this softening to continue in the second half of 2011. However, because of our balanced ITT cyclicality, in total, we expect to generate high single-digit organic growth in 2011.

On Slide 77, you'll see a summary of adjusted segment operating income prepared on a pro forma basis and excluding restructuring and realignment for comparability purposes. These results reflect the allocations of historical corporate costs and the benefits from previous entity-wide initiatives. As a standalone public company, we would expect to incur incremental cost as I mentioned. Our segment operating income over the 4-year period primarily reflects mixed shift and changing cycle dynamics prior to and after the economic downturn. We saw strong margin results in 2007 and 2008 when the aerospace and industrial processing markets were strong. The 2009 and 2010 margin reflects the impact of the economic downturn on volume and price and incremental disruption costs associated with the $110 million of restructuring and realignment we executed during that period.

Since 2007, our 2 main drivers of margin expansion, Lean Six Sigma and global strategic sourcing, have effectively offset inflation and higher material costs. During this period, we've seen limited benefit from pricing due to automotive industry dynamics and intense price competition for large industrial projects that began in 2009. To improve price realization, we launched our value-based commercial excellence initiatives, and we're focused on the premier customer experience. These initiatives are both targeting pricing and improving the value-creation potential for our customers.

We will also continue to leverage our expanding low-cost footprint strategies to the major new facilities we have in place in China, Mexico, Brazil, India and the Czech Republic to name a few. In total, we have over 1 million square feet of capability in these regions. And these facilities produce our quality products at a high velocity, while minimizing operating cost.

As you've heard throughout the day, we expect to expand our highly profitable aftermarket reach, which provides both strong margin potential and a higher degree of demand stability. Lastly, our first half 2011 margin have been strong due to volume mix and productivity initiatives that are more than offsetting commodity prices. However, we expect some margin moderation in the back half of 2011 due to the larger project mix in the industrial processing and the lower volumes I mentioned at the Interconnect Solutions business.

On Slide 78, we've provided operating EBITDA for 2008 through 2010 and for the 6 months of 2011. As you can see, we've generated solid EBITDA over this time frame. We're also intensely focused on generating strong free cash flow, and we have a stated goal to drive our free cash flow conversion to over 105% of net income. ITT has a strong tradition of free cash flow generation through our working capital, management and disciplined capital deployment philosophy. The new ITT is fortunate to have a world-class shared-service capability that will be instrumental in driving strong working capital practices into the future. In addition, our focus on the premier customer experience is generating extensive order-to-cash cycle reviews in 3 of our businesses. The primary focus of this is to drive on-time delivery and quality for the added benefit of these initiatives, as you know, is an improvement in working capital to reduce cycle times and improve receivables collections.

Now let's turn to Slide 79 for an update of the annual asbestos remeasurement process that we normally provide with the Q3 earnings. We've completed our assessment -- preliminary assessment and we are currently anticipating a $25 million after-tax charge to continuing operations. This charge adjusts the balance sheet to reflect the latest trends impacting their measurement of our 10-year net liability. It should be noted that this year's remeasurement charge is significantly lower than the amounts recognized during the last 2 years, which averaged $168 million. As of September 30, the net liability is now estimated at $707 million, and keep in mind that this net liability is undiscounted and it does include an estimate for defense clause. Based on this remeasurement exercise, we are now projecting average annual net after-tax cash outflows of $15 million per year over the next 5 years, down slightly from the prior year's estimate. The average after-tax outflows for the subsequent 5-year period will be approximately 30% -- $30 million, excuse me, due to anticipated insurance depletion. The range of anticipated outflows during this timeframe is between $19 million to $47 million. We've also provided some additional details that show the relationship between the expense we recognized and the actual cash outflows in a given period. From 2008 through 2010, the provision required to maintain the asbestos liability ranged from $9 million to $34 million, while the actual net cash outflows ranged from 0 to $8 million.

As we've experienced in the past, this liability is subject to variation due to many hard-to-predict factors, but we wanted to provide the most current estimates available to put this liability in perspective.

So in summary, there are 3 key takeaways here. One, our most recent balance sheet adjustments imply that there has been some degree of stabilization in the underlying data supporting our projection. Two, we do have a very strong balance sheet, and we are very focused on active risk management practices. And most importantly, our anticipated cash outflows are expected to continue to represent a manageable percentage of our free cash flows going forward.

Turning to Slide 80. We are focused on sustainable value creation. And as a result, we invest for the long term. However, when we see indications of slowing macro growth drivers, we utilize a phased investment approach that allows us to moderate the pacing and sequencing of our investment through a gating process. But over the long term, we have a number of investable platforms and defensible niches with geographic end market or technology-driven expansion potential. We not only evaluate our capital deployment opportunities on a strategic basis, but we also evaluate opportunities utilizing rigorous financial criteria. The combination of the strategic and financial analysis helps us determine which investments to pursue and on what timeframe. We also focus on return on invested capital and expect investment returns to exceed the risk-adjusted cost of capital. Over the long term, we expect that our targeted investments will help us achieve our premier financial metric.

Turning to Slide 81. I'd like to highlight some of our organic investment priorities over the next couple of years. Many of the investments shown here are consistent with the types of investments made in support of the growth stories you heard each of our business presidents describe today. In fact, many of these represent what I'll call next-generation investment that enhance and extend strategies that have convincingly proven their success in the past. Approximately 80% of our capital expenditures will be focused on growth and productivity initiatives. For example, in emerging markets, we are building a new R&D facility and new production facility on our existing Wuxi campus to capture the tremendous growth potential in the China automotive market. We would also utilize this facility to service new opportunities in the U.S. In the aftermarket, we will be focused on further expanding auto and rail capabilities in the Czech Republic. In energy and mining, we are expanding our Korean operations to better serve global oil and gas and mining demand, primarily in the Middle East, Asia and South America. In addition, a substantial percentage of our R&D investment is focused on growth and productivity in attractive global end markets.

Let's turn to our M&A strategy on Slide 82. One target -- our target areas are close to core opportunities that generate value in a consistent manner with a repeatable growth model. All acquisitions will be expected to meet our strict financial criteria, including being accretive to EPS in the first year. We will generally target companies in the $15 million to $50 million revenue range, which is our evaluation sweet spot because of the fragmented markets we serve, and the fact that large buyers may not focus on this space, which helps ground valuation. We also intend to balance this -- to maintain the balance, cyclicality, geographic diversity and end market richness that we currently have embedded in our businesses today. The strength of the new ITT is derived from our balance and our diversity, and future acquisitions must further enhance these uniquely strong positions. Our specific focus areas include, oil and gas and power markets, harsh environment connector technology, selective aerospace and rail components, energy absorption capabilities and aftermarket reach.

In addition, we have a strong M&A execution track record and a world-class M&A team that averages over 16 years of experience per member. Collectively, the group has closed over $10 billion in successful deals and has a proven track record of integration in both emerging and developed markets.

On Slide 83, you'll once again see our premiere long-term financial metrics for the new ITT. Denise spoke about these targets earlier today, but I wanted to highlight our commitment for these once again. All of these targets are long-term goals. We are not yet in a position to provide additional insight into the 2012 expectations, but we do plan to provide 2012 information either in the mid-December to early January timeframe. So for the long term, we are targeting organic growth of 5% to 7%. And once we begin to build momentum through our focused M&A actions, we would expect to add another 2 to 3 points of growth through acquisitions. In terms of operating EBIT margin, we are targeting 50 to 70 basis points of annual expansion. Our goal to deliver free cash flow that converts at over 105% of net income, and our earnings per share growth target is 10% to 15%. It should be noted that these are also the metrics that are expected to govern our annual incentive compensation programs. These targets are deeply ingrained in the operating rhythm of our businesses, and we've chosen to utilize them because they have been historically correlated with upper quartile shareholder value. In addition to these annual performance metrics, we are also targeting return on capital metrics in our long-term incentive program.

So to recap on Slide 84. Following the completion of the separation, we will be focused on driving premier financial performance. We are confident that we will leverage our proven management system and financial leadership team to deliver a seamless transition to a standalone company. We will continue to employ our strong corporate governance practices, and we are augmenting our enterprise risk capabilities with the goal of achieving world-class active management. We will drive the execution of the repeatable operating model across all of our businesses and across the finance function. We believe that our deep understanding of the value-creation potential of these businesses provides us with a competitive advantage and creates an attractive investment thesis. Margin growth, cash flow generation and differentiated organic investment, combined with targeted close-to-core acquisitions will further enhance value. In closing, we do have a very solid financial position, including a strong investment-grade balance sheet, exceptional policies and people, combined with exceptional businesses that are all in place to drive premiere results and create shareholder value.

Now I will turn it back to Denise for some closing remarks before we start the Q&A.

Denise L. Ramos

It's been a busy morning. You heard a lot about our businesses. And remember, we started the day with a question, “Denise, can you tell me about the new ITT and what is it?”

So the answer is that we are well positioned as a diversified industrial company with a set of businesses that are very balanced across end markets and geographies. Our growth prospects in these markets are built on the strong foundation of an already significant global footprint, strong product brands and distribution channels, and a disciplined management system and seasoned team that has demonstrated repeatable success time and time and time again. This is our DNA. What's more is that while these businesses have diverse customer bases, in some very high-growth areas that we call niches, those customers stay with us for a long time because of the reliability of our products. So we have learned our products are highly customized to solve very challenging problems for our customers. And while we are building solutions that last, we're building relationships that last too. So you will probably do something today that is made possible by ITT. Because we create enduring products and services that underpin our modern way of life. And we do that with a repeatable operating model that drives sustainable growth and premiere performance. So thank you for your interest in our great company. Thank you for your time today, and we hope that you will be as inspired as we are about the future of ITT. So now with that, I'm going to ask my team to come up. And in one minute, we need to set up the stage here. But in one minute, we will begin the Q&A. So, come on up.

Question-and-Answer Session

Denise L. Ramos

Are we ready?

Unknown Analyst -

Denise, I'm always famous for asking the long-term questions, I'm going to turnaround my usual long-term question and ask a very short-term question. And I know you haven't talked today at 25,000 feet because you're introducing a new packaging company, but can you give us a sense of your businesses tone in this environment. I'm getting very frustrated because I'm relatively optimistic that every time I look at the TV or read the press or frankly talk to most of my clients, they tell me I've got rocks in my head. Can you give us a sense of just what you're feeling in terms of your relationships with your customers and your end markets over the next 3 to 9 or 12 months?

Denise L. Ramos

I will. Let me give you more of what we're seeing and experiencing today. We all read about and hear about what's happening globally and what's happening with the various economies. And we all know the volatility that exists within the economic environment that we're all experiencing. We've talked about and we've talked about on the second quarter earnings call how, with our connectors business, we are beginning to see some softness in that business and Bill referenced that today also. So while we're seeing that, and it's primarily in the electronics portion of the connectors business. So we are seeing that, but when you then step back and look at the rest of the businesses that we have and we look globally across those businesses, we're not seeing challenges in our orders at this point. In fact, we're seeing orders that continue to be strong for us. Now there could be a couple of reasons for that. One is, that we do have a strong aftermarket business, as you've heard about here today. You've also heard about how we play in these defensible niches, and so I think that, that helps us from that perspective also. And then also if you go back and you think about the last downturn that we had. We actually performed very well during that downturn because of some of the positions that we've had. So when we talk to the customers, again, it's more on the connectors side, but we've not seen any significant change or variability in our customer's habits at this point.

John G. Inch - BofA Merrill Lynch, Research Division

Hi, back here. Oh, I'm sorry, John Inch.

Denise L. Ramos

Hi, John.

John G. Inch - BofA Merrill Lynch, Research Division

So in the recession of '08, '09, it looks like, again, based on your numbers, your revenues were down 17% in '09. I hear what you're saying and actually your comments were reserved really nicely. If the U.S. and Europe were to go into a recession, how are you going to engage it? Are the reasons to take under mix or perhaps the way you had previously restructured -- the restructuring that you had taken before or something that you think would allow your performance to be better and so maybe why?

Denise L. Ramos

I think I'm going to come back to some of what I said when Cliff asked, that's his question, and that is when you think about the nature of the business that we have and we have the strong aftermarket component to our business. That really helps us when we go through some of these economic downturns. Also, when you look at the cyclicality that we have within the portfolio, you have about 25% of our revenues early cycle, about 35% mid and about 40% late cycle. So those businesses will ebb and flow at different stages and in different ways. When I think about the Motion Technologies business during that downturn that happened, you saw Andrew's chart where he talked about how they've been performing at 4x the market growth rates. So what happened in that situation is they actually gained market share during this period of time. So you have some of those factors that then help to mitigate some of the decline that you would be seeing on the top line. But recognizing all of that, we will still see some softness as others will too, but that will help mitigate some of those factors. Yes?

Unknown Analyst -

Denise, I'm going to reverse my normal orientation of questions and ask a long term one. How do you envision ITT 5 years from now and also to -- given the changes that have taken place? Is the corporate structure optimized? I asked this because it seems to us that $10 billion of deals over the last several years, I don't think it's going to be traditionally past the $30 million to $60 million off these transactions, it's probably pretty over staffed for that kind of orientation, but anyhow, more importantly, what do you see ITT in terms of size and business mix over a 5-year period.

Denise L. Ramos

So let me talk first about your -- the corporate structure. We went through a very rigorous process when we were splitting up these 3 companies and everyone did this. So we looked at it from 2 different perspectives in how to design the corporate structure. We looked at benchmark companies, and with those benchmark companies, we looked at what an acceptable margins would be in our peer group. So that was one metric that we looked at. The other thing that we looked at is we went and built up from the bottom up, looking at the activities that we would need to do as to what the cost should be associated with that. And then what we did is we brought those 2 things together to -- and we gave targets to each one of the functional areas about what we thought would be an appropriate spend for those areas. So we went through that rigorous process, and I believe that we came out with a cost structure at corporate that married those 2 things together. But saying that, I do believe that as we go forward, we are going to find ways to further optimize what we've got within our corporate structure. Because there were some things that you had to, you couldn't optimize while you were going through the split off, but you had to do more of come and go [ph]. Because we recognized that we wanted to get this done as quickly as we could. So we've not optimized totally where we need to be from a cost structure standpoint with corporate, and we have a lot more work to do on that. But saying that, we were -- we look very closely at what kind of a cost structure we should have, and we tried, and we did design appropriately to do that. So that's the corporate cost structure answer. When I think about this company going forward, we will be a diversified industrial company that deals in mission-critical applications. That is who we are. That is our sweet spot. That is what we're going to continue to do. I like these attractive markets with these very defensible niches that we have. And through that, and through the repeatable growth model that we have, I do believe that we will be able to demonstrate very strong performance and be considered premiere. And so that's how I think about this company. Now in terms of size, we're going to continue to grow this company. We've got strong cash flow that we're going to be investing organically, and we're also going to be investing in terms of acquisitions. So we're going to significantly grow this company from where it is today. That's what this whole presentation was about today. It was all about the growth that we see in this company. And so that's what we expect to do. Yes?

Unknown Analyst -

Two questions. Maybe first of all take a [indiscernible] or from a slightly different angle, now before you got here, you've got 4 very different businesses. First time you actually reviewed the portfolio, you're obviously being more focused on [indiscernible] company right now, but at this stage to what extent could any of this be a source of funds for future programs.

Denise L. Ramos

Excuse me, the sort of what?

Unknown Analyst -

The source of funds.

Denise L. Ramos

Source of funds. Yes, so while we were going ahead, putting up the company, we spent a lot of time going through a very rigorous detailed strategic planning process for all of these businesses. And these leaders up here can tell you the amount of work that they did associated with that, much more focused, much more detailed than what's been done in the past. Because we recognized that they are a significant part of this company going forward. So we look at all their businesses, all of their product lines, broke them down into parts that were more detailed than had been done in the past. And through that process, what we identified that there's about 80%, 85% of the revenue stream that fit our model very well. That fits the model of -- in attractive defensible niches with critical applications where we see that we have a nice position and a repeatable growth model out into the future. The other revenue streams, we're still evaluating. And those are more product lines, as supposed to businesses. So it's going -- we're going through an evaluation process to just detail out the remainder here. Some may stay, some may be sold, and we'll see. But the one thing that I was, frankly, a little bit surprised at, is how strong this portfolio is. And so when we went through that process, that was one of the things that I was very pleased, when I saw the results of that. But we did it in a very unbiased way in looking at these businesses.

Unknown Analyst -

Secondly, how reliable a lead indicator is [indiscernible] sort of the business within next [indiscernible] i.e. is this and typical in the past for this business to disconnected from the -- mid cycle investments, i.e. should we be concerned by [indiscernible] in this business.

Denise L. Ramos

I think you just have to look at that electronic business on its own and think about what's happening there. Remember, the other businesses have more, they have an aftermarket content. It's just structured differently with those businesses. I mentioned with Motion Technologies before where they actually gained market share during this period, you look at the IP business and the strength that we have in the IP business right now, where you're really feeding into some of these secular trends with oil and gas and mining. So you can't just take that and assume that the rest of the portfolio is going to flow from that, but you need to look at the strength of the businesses by themselves and where they participate and where they play.

James C. Lucas - Janney Montgomery Scott LLC, Research Division

Jim Lucas. Two housekeeping questions and a strategic one. First, on the number side, CapEx how do you think about that in relation to D&A.

Denise L. Ramos

I'm sorry, what's the question?

James C. Lucas - Janney Montgomery Scott LLC, Research Division

CapEx in relation to D&A for the business going forward.

Denise L. Ramos

I'll let Tom Scalera answer that.

Thomas Scalera

Sure. So based on the investment options we have, we've been talking about the growth of the portfolio over the last couple of years, CapEx has been in excess of depreciation. And that is really been a part of the global buildout, primarily in emerging markets where we've added a large chunk of that million square foot of capability we talked about earlier. A lot of that investments were placed in the last 3 to 5 years in addition to the growing the capital potential within the automotive business. So on average, we've been over 100%, but I think that's largely a reflection of the investments we've in the right end markets to grow in the future.

James C. Lucas - Janney Montgomery Scott LLC, Research Division

Okay, thanks. And then with regards to M&A, if you could talk about your ROIC hurdles first off. And then secondly, in terms of a bigger picture question, you've talked about targeting $15 million to $50 million revenue companies but could you give us a little color from a thought process standpoint, say, a $300 million, $400 million attractive niche, defensible company would be presented to you, how you would think about a larger opportunity that came about.

Denise L. Ramos

In terms of ROIC, I think about it just from a broad perspective for ITT. I really expect our ROIC to stay within a 15% to 18% sort of range for that. And I say that because while we're investing in this company and while we're investing from an acquisition standpoint and a growth standpoint, I would expect that ROIC to kind of moderate at about that level. But ROIC is an extremely important metric to make sure that we're continuing to make the returns that we need to have for our shareholders. In terms of the acquisitions, as I said, what we are really focusing on is growing close to the core, in growing where we may have a technology gap or where we may want to improve from a distribution standpoint. And so we're focusing on the $15 million to $50 million revenues at this point in time. That's what Aris and his team were looking at. We see so many opportunities there, and I do think that, that is a sweet spot from a valuation standpoint. You typically don't have a lot of competitors in that space, and I think that you can extract a lot of value when you take a company that size and put it into a larger company that's more experienced and more seasoned as we are. So I see that we can extract a lot of value through those opportunities that we have and because of the various markets that we're in and the spaces that we play in, when you think about a $23 billion addressable market that's there and all the small companies within that, and all these different end markets, and all these different product lines that we have, it is a very rich set of opportunities. So that's where we're going to be focused.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

This is Ajay from FBR. First, I just wanted to follow-up on that question on acquisitions and free cash flow. Maybe based in part on how you're thinking of advocating acquisitions versus returning cash to shareholders looks like if they can retain lots of free cash. What are your priorities? Do you have targets with -- of that capital allocation in mind?

Denise L. Ramos


Thomas Scalera

Sure. Our focus primarily is to grow this business. You've heard about the potential that we have, both from an organic investment perspective, which a number of the opportunities we have ahead of us are really next-generation opportunities, very achievable, evolutions are very successful strategies we've had. So our primary focus will be to continue to fund organic growth, including R&D. We are then going to target the M&A activity level that we've been articulating to try to grow some momentum where we can add 2 to 3 points of growth to the revenue performance based on our acquisitions. So we do see a rich set of opportunities to grow this business organically. The objective, obviously, and through acquisitions, the objective is to continue to generate strong free cash flow, which has been part of our legacy and our tradition. But our primary focus over the next couple of years is to continue to invest in this growth potential.

Denise L. Ramos

Many of you have asked a lot of questions about our strategy and our M&A. We have Aris Chicles here, our Head of Strategy. So I'm going to let him comment on how he's thinking about things.

Aris C. Chicles

Let me stand up so I can see everyone. So as it's been stated, our markets are characterized as being highly fragmented and target rich in terms of acquisitions that fit our businesses and fit our model into the future. And a lot of small acquisitions is actually a beautiful thing. Because they tend to be under the radar of bigger players. They tend to be less expensive from a multiple standpoint and benefit disproportionately from the scale, the reach and the capabilities that we have as a company. Also, there's -- when you think about deploying capital, deploying over a lot of or multiple smaller acquisitions versus less big acquisitions is great from a risk standpoint. You're spreading your risk that way. So we feel really fortunate that we're going to have a rich set of opportunity that we can choose from going forward. So we see it as a pretty consistent, sustainable growth avenue for us, well into the future.

Thomas Scalera

And I'd just like to add one follow-up, our objective through the capital deployment opportunities is to continue to maintain our investment-grade credit rating. So that is a core part of how we think about the phasing and sequencing of our capital deployment strategies going forward.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Thanks for the color. Just one more on the leverage of the business. So I guess you can't spill the details that you have on Slide 76 and 77. Looks like going into the downturn, the incremental margins were in the 30% range, but coming back in 2009 and '10, your incremental margins were around 10% and maybe there are some adjustments there. But maybe talk about, how should we be thinking about incremental margins in the portfolio?

Thomas Scalera

Yes, coming out of the last downturn, we did have some incremental disruption costs associated with a lot of the actions we have taken to restructure and realign a number of businesses. So some of those impact trailed into 2009, 2010 results beyond the restructuring. So there's a little bit of that, that flowed through and had the effect of reducing the drop we had as the revenue recovered. We've seen a lot of that come back certainly in 2011 when that -- those transitions are largely behind us. And now, we've been able to generate strong incremental margins, really as all the businesses have generally to the early half of 2011 seen strength in the core market. So I would say that the 2011 performance is much more indicative of the drop through potential now that we have more stabilized conditions post the downturn.

Unknown Analyst -

[Indiscernible] shorter investments. Just a follow-up on that. It seems to me that if I look at your margins now versus '07, you guys really, through that restructuring it doesn't seem like you generated much positive margin and then I think early in your presentation in fact are growing 50%, 60% -- 50 bps, 60 bps going forward on margins. What's going to change there? What is it? Is it spending? Something [indiscernible] moving to emerging markets and lowering margins, or is there's something you had been going on [indiscernible] and maybe you'll be more going forward. And then 2 follow-ups. On the asbestos, what are the legal entities that actually carried the liability? And then $100 million incremental cost, over what time period are we going to see that?

Thomas Scalera

So -- I'll try to work backwards. So let me start with just the margin question. One of the factors that we'll play through going forward that you haven't seen in the last few year period is really capturing the aftermarket strength, primarily industrial processing business, where we've been very busy putting global projects online, primarily in oil and gas and mining, outside of our core North American base. So as we grow in emerging markets, those project activities are at the very low end of our margin scale, when we are successful on capturing the aftermarket for those projects, that will give us some additional upside from what you've seen historically. So that's one factor I would put out. But I think a lot of the investments that we've made over that timeframe will start to generate additional margin expansion. We're committed to this 50 to 70 basis points of improvement on an annual basis. We think we have the right programs in place through Lean Six Sigma and our global strategic sourcing continue to maintain that level of margin expansion. We will ebb and flow through different cycle dynamics. But by and large, the portfolio is going in the right direction and continue to drive long-term value creation. As it relates to asbestos, any specific matters on legal entities or other disclosures, I would refer you to the 10-K for that level of detail. Right now, on a go-forward basis, it's a liability and that liability is to be likely -- we will be managing on a go-forward basis. And your third question again was? Sorry.

Unknown Analyst -

$100 million...

Thomas Scalera

So the $100 million is really the cost that remains post spin. It was actually the 2 spin offs. It's not specific to the new ITT, but as the parent company in a spin transaction, we do have the responsibility to pay some of the bills post spin. So some of the cash that we are being allocated will be used to pay for the remaining cost throughout the 3 companies.

Unknown Analyst -

But all of it showing up on your income statement, the $100 million? Or do I, I don't know if I could...

Thomas Scalera

They're accruing and recorded at different -- it's not all going to be in our income statement, but a good chunk of it will be, yes. But there will be a transitional period as is customary with any transaction of this nature, where we're going to have to recalibrate some very specific deal related events that will be recorded on our financial statements, which we'll call out, so you can all understand. It's a normal operating conditions, but certainly, in Q4 we will be some of those items play through and a little of it into the first half of next year.

Unknown Analyst -

How was your sales force setup? I imagine that, usually an engineer is engineered sale. It's done by operational segment or just in general, your sales force, is it arranged by operational segment or is it focused by end market or batches of customers, or how do you approach that?

Denise L. Ramos

It's by business here, so why don't you guys comment on that.

Unknown Analyst -

Actually that's all I wanted to know so...

Denise L. Ramos

It's just by business. So each one has their own structure around their sales force.

Unknown Analyst -

So I'd want to understand why it made more sense from old ITT to put the Industrial Processing business in the new ITT versus in flow and I got [indiscernible] answers that I just, I can see some [indiscernible] is leveraged on the energy customers, but I also just don't understand how that could possibly offset the operational leverage that you can get in terms of just the valve manufacturing, or et cetera and whatnot from putting together companies. So if you could just review the rationale for that strategic development.

Denise L. Ramos

So I go back to the -- what I talked about, the DNA of this company. The DNA of this company is all around highly engineered critical applications and products associated with that. That's what IP is. So IP fits very distinctly within the DNA of this company going forward. And they also serve the industrial market, which we serve the industrial, the other players, the other businesses here serve industrial market also. So for instance, I'd give you a good example of where there is some relatedness. We talked about the strategic alliance or agreement that we have with Saudi Aramco. Within that agreement, it's not only the pumps business, but it's also the connectors business that's in there. So there is relatedness that can go across. But it comes back to being critically engineered and it comes back to the industrial products focus that we have. And then when you look at emerging markets, we're able to leverage our emerging market and the infrastructure that we have there across all of these businesses. So you take China and what we're doing in China. We have infrastructure there that we're utilizing for multiple business lines, and we're going to be using a shared-service organization that is going to be utilized for multiple business lines. In India, currently, that's primarily an IP location that we're going to use to expand for the other businesses that we have there also. And when we look at having global strategic accounts, it's through those customers, when we see a common customer that we can then leverage across the business lines. So there's a lot more than what you may think that's related about why IP is in this business.

Thomas Scalera

And just a follow-up, there are a couple of key end markets where we do have integrated strategies, particularly rail, aerospace and oil and gas where the businesses has had a very focused strategy of going to markets together where it makes sense because it's all about the highly engineered, customer-centric view and leveraging our strength, because it's really important. So where it makes sense, we are currently going together in the key markets.

Unknown Analyst -

I just want to swing back to acquisitions. Can you just talk about how pressured you might be in making acquisitions with your strong balance sheet and a global slowdown, there are companies that are in trouble. And I'm just curious in the next 12 to 18 months, kind of how aggressive you might be to make these acquisitions?

Denise L. Ramos

Well, we're known for being disciplined. We will continue to be disciplined in our approach. We just announced the Blakers acquisition, which is pretty interesting when you think we're in the middle of a spin to do that. But it's because it fits so well with the strategy that we have. We recognize as a company we need to get our sea legs, we need to operate closely together as a team. But we have businesses here that -- these core businesses that were largely untouched by the spinoff. So to some degree they were impacted. You had IT systems and other things that needed to be split, but they've been running and operating their businesses as they always have. So that whole cadence that's out there and along with that looking at acquisitions, that doesn't change. So we'll continue on that same path that we've had. We've been building our -- in looking at the list of acquisitions of things that might interest us, in the areas we shared with you today. Some of the areas that are potential areas of interest for us. And so we're doing that work and getting that outline because we do want to get, eventually, into a regular routine and momentum associated with that. But we've got some time to get there. We're not in any hurry. We just need to be disciplined, and we'll continue to be disciplined as we always have.

Unknown Executive

I think we have a time for one more question.

Denise L. Ramos

Everybody must be hungry. It's 12:30. All right. Well thank you, everyone, for joining us today. And please, enjoy some lunch, and we'll be talking with you soon.

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Source: ITT Corporation - Analyst/Investor Day

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