Illinois Tool Works Inc. — 2024 Q1

Thank you, Jamie.

I think that was 4 questions in one, Jamie. Well, I'm going to try...

I'm going to try my best here. So the comment on Food Equipment. I think for many of our segments, if you take a step back, these growth rates are a little unusual for us, which is really driven, as we said, by these really significant challenging comparisons that we're dealing with, including in Food Equipment.

No. I would just, I guess, accentuate the point of differentiation aspect of the service business within food with unique captive manufacturer. And this is a necessary investment at this point to capitalize on what is an undoubtedly stellar growth opportunity on the service side for us.

And then on Specialty, the organic growth rate here was really driven by large equipment orders and the timing around those in 2 of our businesses in Europe. What we're trying to articulate on a go-forward basis is that we still expect meaningful PLS, product line simplification, as we move forward and strategically reposition this business for 4% plus growth on a consistent basis. And so we still expect a meaningful impact from that as we move forward.

Thanks, Jamie.

Thanks, Tami.

So Tami, as you know, we don't give quarterly guidance. What I will tell you to try and help you out here a little bit is that if you model kind of current levels of demand or run rate, as we call them, into Q2, what we're typically seeing is a step-up in revenues in the low single digits from Q1 to Q2. And in Automotive OEM, actually a meaningful improvement in the builds from Q1 to Q2, an increase in the low to mid-single digits there as well. So you will see slightly higher revenues in Q2.

Well, what I would say, Tami, is that we're really pleased with our first quarter operational performance here, as you saw in the margin rates. And if you exclude the onetime item, 140 basis points from initiatives, 120 basis points of overall margin expansion, and margins at 25.4% is a pretty significant accomplishment here for the first quarter. And we do expect, as we typically do going through the year, that margins improved sequentially from here on out. So you should see a modest improvement sequentially from Q1 to Q2, and then again into Q3 and Q4.

Thank you.

Yes. I think as you pointed out, Steve, the big driver is obviously our Automotive OEM business, up 23%. And the team there is doing a great job growing content on new vehicles, including on the EV side, and gaining market share. Even excluding those, as I said, China was still up 7% year-over-year.

Yes. I mean, I think, I wouldn't expect a lot of regression from where we are. These are absolutely sustainable here in the 19%-plus range. And I think that's probably where we'll end up for the year, maybe a little bit better in the back half. Some of that depends on the build assumptions. There might be a little bit of restructuring here in the second quarter. But big picture, I'd say, Automotive, really solid progress here on a year-over-year basis. We expect full year margins in the 19%, almost 20% range, an improvement of 240 basis points on a year-over-year basis, and lots of room to go as we work through our margin enhancement plan.

Yes. And Steve, I suppose just to support that, I mean, this is very much an improvement plan that's on track to get back to the low to mid-20s margins by 2026, as we outlined at our Investor Day, largely through a combination of, over that time, volume recovery, enterprise initiatives, and higher-margin innovation. So both in '23 and again in '24, we're very much tracking on that cadence with respect to what we outlined at our Investor Day last year.

Yes. So nothing unusual in terms of the margins in Q1, and sustainable, but lots of room for improvement from here.

Thanks, Andy.

I think, Andy, you're right. We don't want to update our guidance for the segments every quarter. And what I will tell you is, given our portfolio, there's always going to be some puts and takes. And I think that's, again, I just talked about the competitive advantage with being as diversified as we are geographically. And the same is true when you look at this portfolio of businesses. You're always going to have some things that maybe are a little more pressured from a market standpoint in the short term. And those are typically offset by segments that are performing a little bit better. And it all kind of evens out to that 1% to 3% organic growth guidance.

Yes. I think the big driver here is really the comparisons year-over-year. That's driving the growth rates as we go forward. And so just like I said, for the total company, for Welding, it's also true that as we go through the year, these comparisons get easier. 10% growth in Welding in the first quarter last year is obviously not a sustainable growth rate. And so it wasn't really a big surprise that organic revenue was down 3%.

You have Sabrina Abrams on for Andrew Obin. Congratulations, Karen.

Thanks, Sabrina.

On the margin side, are there any changes to how you're thinking about volume leverage, price cost, maybe like the reinvestment in enterprise initiatives, as we move through the year? Maybe we could like walk through the different buckets and how they relate to the full year guide?

Yes. I think there's not a lot of change from what we talked about on the last call. We are maintaining our operational guidance here kind of big picture at 1% to 3% organic growth. There is some positive operating leverage. We expect slightly more than 100 basis points of enterprise initiatives, which is based on the strong performance here in Q1 at 140 basis points.

And then what are you guys seeing in terms of electronics demand? And what are you hearing from your customers? Because this market has been pressured for 5 or 6 quarters now, but clearly, the comps are getting easier. Has this started to bottom out yet?

Well, so I think it's a little bit of a mixed picture there. I think last year, we talked a lot about the challenges in the semi-related businesses. Last year, those were down order of magnitude 20% to 25%. Now -- we're talking about just to kind of size things. These businesses represent about 15% of the Test & Measurement and Electronics segment, 3% of total ITW revenues. So just to kind of put things in context.

Thanks, Mig.

I mean the big driver in Europe here from a dollar standpoint was the Specialty Products, these 2 equipment businesses here, and the timing around some of those orders, as Specialty was up 20% here in the first quarter. But overall, I'd say pretty stable. Automotive was up 2%, Test & Measurement and Electronics up 5%, Food Equipment about flat. That's a little bit of an anomaly that will return to more positive growth as we go through the year.

Yes. I think overall, actually, if you think about Construction, the performance in North America I think is a good example of illustration of how the business is outperforming in a very challenging down market. Only to be down 3% in a market that, if you look at all the key metrics, is certainly down a lot more than that is pretty impressive. Residential/remodel, we said down 1%. I mean the home centers are actually down a little bit more than that.

And I think we'll take one more question, please.

This is Matthew Pan from Julian Mitchell's team at Barclays. Just one, if you could dial in on the TME margins, they were down year-over-year. Can they expand in 2024 overall?

The short answer is yes. And I think one of the reasons, as I said in the prepared remarks that Test & Measurement margins were down in the first quarter is really the strong performance of the MTS business, which grew at 20% plus organic, which is certainly great performance. But due to the fact that we're only 2 years in, in terms of implementing the ITW business model, margins are in the mid-teens in that business. And so there's a negative mix effect that diluted the margins in Test & Measurement by about 250 basis points.

Yes. In Test & Measurement and Electronics, I would just add that there's an extremely fertile environment for innovation, which will underpin margin progression going forward in that segment.

Yes.

Got it. And just a quick follow-up. The free cash flow was down year-over-year in Q1. Is that just a working capital build? And then what are your thoughts on Q2? Is that up year-over-year?

Yes. I think if you look at the free cash flow conversion, it's actually pretty close to kind of normal seasonality. Working capital, if you look at the inventory, it's certainly a decline on a year-over-year basis. It looks like an increase from year-end in Q1. You have to factor out this LIFO inventory accounting change, which added $117 million of inventory in the first quarter. If you do that, you'll see that inventory was actually flat in the quarter relative to year-end, when typically we see a 5% increase or about $85 million of inventory increase in the first quarter, which the team was able to offset.