Q1 2022 Illinois Tool Works Inc Earnings Call
Good morning.
My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the I T. W. Q1, 2022 earnings Conference call Today's conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press the Starkey followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again for.
For those participating in the Q&A, you'll have the opportunity to ask one question and if needed one follow up question, Karen Fletcher Vice President of Investor Relations you May begin your conference.
Thank you David.
Good morning, everyone and welcome to Itw's first quarter 2022 conference call I'm joined by our Chairman and CEO, Scott Santi and senior Vice President and CFO Michael Larsen.
During today's call, we'll discuss Itw's first quarter financial results and update our guidance for full year 2022.
Slide two is a reminder, that this presentation contains forward looking statements. We refer you to the company's 2021 and Form 10-K for more detail about important risks that could cause actual results to differ materially from our expectations.
This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.
Please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO , Scott Santi, Thanks, Karen and good morning, everyone.
We've talked often about the fact that the core focus of our enterprise strategy is to leverage the performance power of the ITW business model.
Assistant we delivered top tier performance in any environment.
And our teams around the world continues to do an exceptional job of doing just that as evidenced by the 11% organic growth.
23% operating margins that they delivered in Q1.
In the quarter, we saw continued strong demand almost across the board while input cost inflation.
Supply chain issues remain challenging to say the least.
Our business has responded.
Across the company, we continue to leverage the advantaged supply capabilities inherent in our 80 20 front to back operating system to support our customers and execute our win the recovery strategy to accelerate profitable market penetration and organic growth across our portfolio.
Many of our businesses continued to receive strong feedback from their customers that their current delivery performance is truly differentiated.
And that they are being awarded additional share as a result.
And despite another step up in input cost inflation in Q1.
More than offset cost increases on a dollar for dollar basis in the quarter.
Looking ahead at the remainder of 2022 based on our first quarter results and projected current demand supply rates and all known cost increases through the balance of the year. We are raising our guidance for full year 2022 organic growth to eight 5% at the midpoint.
GAAP EPS of $9 20 at the midpoint, which is 14% earnings growth year over year.
And would be an all time record for the company.
While the near term environment certainly has its challenges.
We remain focused on delivering differentiated service to our customers.
<unk> financial performance for our shareholders and continue to progress on our path to Itw's full potential.
Now I'll turn the call over to Michael who will provide more detail on the quarter and our full year outlook, Michael Thank you Scott and good morning, everyone.
In Q1 demand was strong across the board and supported by our advantaged supply position ITW grew revenue by 11, 2% to more than $3 9 billion.
Organic growth was 10, 6%.
And the MTS acquisition contributed about $100 million or two 8% to revenue.
Foreign currency translation reduced revenue by two 2%.
GAAP EPS of 211 tied last year's Q1 record.
Foreign currency translation reduced GAAP EPS by <unk> <unk>.
By geography, North America grew 13% International grew 7% with organic growth of 7% in Europe , and China grew 1%.
Six of seven segments delivered positive combined organic growth of 14%.
Automotive OEM was down less than 1%.
Orders remained strong across the board.
And while we're doing significantly better than many of our competitors in terms of lead times and delivery performance. We grew backlogs again in the first quarter.
Sequentially from Q4 to Q1 organic revenue grew 6% on a sales per day basis as compared to our historical sequential of minus 1%.
And while we're on the topic of sequential improvement to GAAP EPS of 211 grew 9% relative to Q4 'twenty one.
Operating margin was 22, 7% 23, 4%, excluding 70 basis points of margin dilution from the recent the MTS acquisition.
Enterprise initiatives contributed contributed 90 basis points.
And as they always do our business teams reacted appropriately to higher cost inflation.
Adjusting selling prices and as a result, we remain positive on a dollar per dollar basis.
Price cost was still dilutive to operating margin by 250 basis points.
After tax ROIC was 27, 6% 29, 8%, excluding the impact of the MTS acquisition.
Free cash flow was $249 million with a conversion rate of 38%, which is below our typical 80% to 85% in the first quarter.
As we've talked about before the lower conversion rate is due to intentional working capital investments that support our strong growth momentum mitigate supply chain risk.
Sustained service levels to our key customers.
And down the road once supply conditions begin to normalize so will our working capital needs, resulting in our typical strong cash flow performance.
As planned we repurchased $375 million of our shares in the first quarter and the effect effective tax rate was 23, 1% 70 basis points higher than Q1 last year.
So overall for Q1, an excellent start to the year characterized by strong broad based demand supported by our differentiated supply position as.
As we delivered organic growth of 11% operating margin of 23% and GAAP EPS of $2 11.
Moving to slide four.
We are including an analysis of our current operating margin performance reported Q1 operating margin was 22, 7%, but there are three factors pressuring pressuring our margins in the near term.
Starting with 250 basis points of margin dilution impact from price cost.
At some point in the future when raw material costs begin to normalize we expect the margin impact from price cost to turn positive.
And that we will fully recover the margin differential.
Second Q1 was also the first full quarter of the recent MTS acquisition, which as expected.
Diluted margins by 70 basis points.
As we've talked about before it will take us a few years to fully implement the IP tw business model of MTS.
And get the business growing organically at ITW caliber margins and returns.
Finally, we had slightly higher restructuring associated with 80, 20 front to back projects, which impacted margins by 20 basis points.
And the point here is that our core operating margins are currently running around 26% plus which is closer to what we would expect from ITW in a normal environment and not far from our pre pandemic target of 28% plus.
And also further evidence of our continued progress on enterprise strategy, driven structural margin improvement through the pandemic.
If you recall 2019 pre pandemic margins.
Right around 24% versus 26% on.
On a core run rate basis here in Q1.
And as we've said before we have full confidence in our ability to deliver sustained above market organic growth.
At 30% to 40% incremental margins and as a result, we will continue to expand operating margins as.
As we grow.
Moving on automotive OEM was the only segment that didn't grow this quarter with organic revenue down a little less than 1% much improved compared to being down 16% in Q4 'twenty one.
By geography, North America grew 3% Europe was down 11% and China grew 12%.
You'll remember that the segment is up against a pretty tough comp of plus 8% organic growth in Q1 last year.
As the impact on auto production from chip shortages didn't fully materialize until Q2.
At this point and for guidance purposes.
We do not expect an improvement in the chip shortage situation until 2023.
As a result, our guidance assumes that automotive production and our associated automotive OEM revenues.
Essentially capped at current Q1 levels through the balance of the year.
Turning to slide five for food equipment, which led the way with the highest organic growth rate this quarter at 28%.
North America was up 23% with equipment up 24% and services up 21%.
Restaurants were up over 40%.
With strength across the board.
In institutional growth was almost 10% led by education and lodging.
International growth was strong at 36% with Europe up, 45% and Asia Pacific up 4%.
Both equipment and service revenues increased around 36%.
Okay.
In test and measurement and electronics organic growth was 8% with test and measurement up 10% electronics up 6%.
Strong demand for semiconductor related equipment continue to drive organic growth in the mid teens.
Demand for capital equipment also remains strong with <unk> for example.
Up 6%.
Finally, as expected the MTS acquisition diluted operating margin by about 400 basis points excluding.
Excluding the MTS impact margins were 26% versus.
Versus 26, 4% in Q4 'twenty one.
Moving to slide six welding organic revenue grew 13% with equipment up 10%.
And consumables up 17%.
Industrial grew 14% in the commercial business grew almost 10%.
North America was up 12% and international growth was 17%, including 18% growth in.
In oil and gas.
Europe was up 20% and Asia Pacific was up 15%.
Due to strong operating leverage and a solid contribution from enterprise initiatives welding operating margin was a record 38% an all time quarterly record for.
<unk> thousand ITW segment, and another proof point that as we deliver organic growth with best in class margins. There is plenty of room.
For further margin expansion in all seven segments.
In polymers <unk> fluids organic growth was 13% is automotive aftermarket grew 17%.
Polymers was up 11% with continued strength in MRO and heavy industry applications.
Fluids grew 6%.
On a geographic basis, North America grew 15% and international was up 9%.
On to slide seven.
Construction delivered strong organic revenue growth of 21% as North America grew 32% with residential up 36% and commercial up 15%.
Europe grew 16% in Australia, New Zealand was up 10%.
While construction margins were impacted by rising steel costs operating margin was still a solid 24, 7% with strong volume leverage and a meaningful contribution from enterprise initiatives.
Specialty organic growth was 1% with North America up 7%.
While international was down 9%.
With that let's turn to slide eight for an updated view of our full year 2022 guidance.
And based on our Q1 results and projected current levels of demand through the balance of the year as per our standard approach to guidance.
We are now projecting organic growth of 7% to 10% and total revenue growth of eight five to 11, 5%.
Due to the higher revenue growth projections, we are raising GAAP EPS by <unk> <unk> to a range of 9% to 940.
The midpoint of $9 20 represents 14% earnings growth and puts the company on track for another year of record financial performance.
Operating margin guidance is unchanged with strong volume leverage and a 100 basis points of contribution from enterprise initiatives.
When it comes to price cost our operating teams will continue to more than cover inflation on a dollar for dollar basis.
And as usual our guidance includes all known cost and price increases as we sit here today.
We expect strong free cash flow growth of 10% to 20% year over year with a conversion rate of $85 to 95% of net income.
As we've talked about before this is below our target of 100% plus because of our decision to invest in the working capital necessary to support the companys strong growth mitigate supply chain risk and sustained service levels to our key customers.
Finally, we are pace to repurchase $1 5 billion of our shares.
We continue to expect an effective tax rate of 23% to 24%.
So in summary, Q1 was another quarter of high quality execution in a very challenging environment.
And as a result, we're off to a solid start and raising both our organic growth and EPS guidance for the full year.
So with that Karen I'll turn it back to you okay. Thanks, Michael.
David Let's open up the lines for questions. Please.
Absolutely at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster. We will take our first question from Scott Davis with Melius Research. Your line is open.
Good good good morning, guys.
Good morning.
Thanks for making an uneventful quarter.
What we've seen in some other places.
<unk>.
Okay.
A couple of little things here I mean first.
Your guidance implies.
Perhaps it doesn't apply but you.
We're not forecasting additional inflation does that does that mean that you've seen kind of some plateauing.
Supply chain price increases in materials et cetera.
Well.
So let me just it's a good question. So let me just explain kind of how.
We are modeling price cost because I think there's opportunity there to maybe clarify a few things. So what we are doing consistent with our past approach around price cost as we are including in our guidance today.
All known cost increases.
And all of the associated price increases those are the two things that we know today and based on that.
You saw the actuals of 250 basis points of margin headwind.
In the first quarter, but actually positive on a dollar per dollar basis as we project into the future based on what we know today.
That 250 basis points is going to become less of a drag on a go forward basis, and maybe even turn slightly positive in the back half of the year. Okay. So that's kind of that's what we know what we don't know.
And as to your question what are the additional.
Cost increases going to be.
We don't know as we sit here today, we have not seen anything to really suggests that inflation is slowing down, but we do know that our operating teams will offset any cost increases with price on a dollar for dollar basis, and so therefore, EPS neutral, which is a really important point here, but obviously.
That will create additional top line growth, but it will also put pressure on margins as this additional topline growth comes through.
Had essentially no incremental margin if that makes sense. So hopefully that answers your questions. So thats whats embedded here everything we know as we sit here today is included in our guidance additional inflation will be offset on a dollar for dollar basis.
And to the extent that happens that will put some further pressure.
On margins and so hopefully that.
The answers to your questions.
That's totally fair.
Is there any way to disaggregate the content growth in auto versus kind of potential inventory builds versus sell through et cetera, just any.
Any color that I.
I would say at this point that would be really tough.
Just given all that's going on.
Yes, I agree with that I would just add I mean I think.
It's a tough number and it doesn't make a lot of sense on a quarterly basis I think in terms of long term.
We're highly confident that we're outgrowing the underlying market by two to three percentage points, what exactly that was in one quarter versus the others is a little bit more difficult to ascertain especially in the current environment, but on a full year basis certainly the way. These plans are set up is four 2% to three percentage points of outgrowth on an annual basis.
Okay sounds good. Thank you guys I appreciate the color that's it I'm sure. Thank you.
Next we will go to Tami Zakaria with Jpmorgan. Your line is open.
Hi, good morning, Thanks, Good morning my questions.
So I wanted to get some clarity on the improved organic growth guidance, you're raising it by a point.
And is that a reflection of better than expected first quarter performance versus your internal expectations or does it embed improved organic growth you are seeing quarter to date and if the latter which segments are driving that and is it solely coming from incremental pricing or are you expecting volume improvement as well.
Yes, so Tim.
Our.
Growth projection.
Based on the Q1 actual results.
That we that we are reporting today.
And then we're projecting based on historical run rates into <unk>.
Through the balance of the year, So theres really no assumption here.
No economic forecasts.
Or.
The underlying assumption that things are going to get better in the back half or worse in the back half of the year. It's based on again revenue per day.
In Q1 and projected into through the balance of the year.
Got it and so you're not embedding any pricing.
Benefit into the updated guidance.
No I think the only pricing that is included in our guidance is what we know as of today. So we know what price increases we have actions and announced and so that is that is known but any further increases beyond that would not be included.
In our guidance as we sit here today.
Got it Super helpful. If I can ask one more follow up.
Seen any slowdown or impact in your business in the European markets since the why in Ukraine drove.
Asked and asked another way have you do you feel the demand environment has changed since then.
So I think in Q1 in Europe .
Was up 7% I think we're seeing.
We saw some pressure.
So if you look at the automotive numbers.
Sales numbers, we saw a lot of strength.
On the food equipment side.
To offset that I think and if you kind of look at the projections for the balance of the year.
I think it adds up to somewhere in the low single digit type growth rate in in Europe .
Just to maybe comment already down I think so far through April .
<unk> appears to be on track, including Europe .
Great. Thank you so much.
Sure.
Next we will go to Joe Ritchie with Goldman Sachs. Your line is open.
Hi, Thanks, good morning EBIT.
Morning, Joe.
I guess my first question.
I wanted to touch on China, I know, it's a relatively small part of your business and saw that it grew double digits.
And the auto business, but maybe maybe just provide some color on what youre seeing on the ground there, but with the Covid shutdowns and backing the business if at all.
Yes, I mean, I think just to kind of dimensionalize, the China and about 8% of our revenues.
And.
I think we.
At this point, we've not seen we're obviously not immune to what's going on in China, but like I said, so far through April .
Everything appears to be on track, including in China.
Okay. Good to know and then I guess just a follow on question you guys price cost.
Negative <unk> FTE.
But only down 100 basis points for the year.
It's fair to say I think like where you're seeing the most acute pressure then in the auto OEM segment. So I guess this may be.
Confirm that that's correct.
Mark Youre seeing other pressure across other parts of your business as well and then I guess.
In that improvement that you're seeing how much of it is already baked into the pricing of those auto contracts that come through as the year progresses.
So everything that we know is baked in Joe.
<unk>.
And I think it's fair to say that the inflationary pressures are.
Our real across all seven segments, there are a little more pronounced.
As you can see it in the margins in auto.
Maybe construction this quarter I mentioned that.
As well as polymers and fluids I think.
There is a little bit of a.
We're still catching up to some extent, so the 250 basis points of headwind.
We will be better starting in Q2 based on what we know today somewhere.
<unk> 200, and then from there in the back half.
Things stay the way they are like I said earlier, we're starting to turn positive and we're beginning I think the important point is we are beginning.
To recover the margin impact that we've had.
Over the last four or five quarters now so I think once we get through this.
Cycle like I said in the prepared remarks, and when things do begin to normalize down the road from our supply chain and from a cost standpoint.
That is when the.
Margin recovery begins and so we're taking to some extent this as well.
We've described it as a near term pressure here in Q1.
And over time, we will begin to recover those margins again.
Okay.
That's helpful. Thank you.
Next we'll go to Jeff Sprague with vertical research your line is open.
Thank you good day everyone.
First on auto Scott or Michael.
Is the idea that youre capped here what youre hearing directly from your customers what you can see on.
No kind of forward build schedules or is this just.
For lack of a better term a dose of caution given the uncertainty.
It's a combination of things.
I think Jeff if you go back to our last call.
The what was baked into our guidance at the time was.
Half of the IHS growth.
Build forecast of 9% so we were basically.
At somewhere around 4% to 5% builds and Thats, where IHS is today. So I think there's actually not a big change relative to where we were.
Three months ago.
And what we are basically based on various data inputs, including from our customers.
We thought the best way to.
Updated kind of forecast the auto business is to say that revenue stay where they are which is somewhere around $760 million.
In Q1, and that's what we've assumed for Q2 Q3 and Q4, So and then ultimately we still believe that down the road.
When these supply chain issues get resolved and automotive production recovers. This segment is going to be.
Very well set up as a strong contributor to the overall organic growth rate of the of the enterprise, but we just think it's going to take a little bit longer based on everything that we are.
Seeing and hearing from our customers.
Understood and then just back on <unk>.
Price understanding that what you know is embedded in the guide, but if we go back.
At this point in addition to the organic growth guide.
Suspect all of that maybe even more than a 100% of it is price could you just give us a little color on that.
I think you tried this on the last call to.
To get me to tell you a little bit more about price versus volume so.
And just to reiterate.
These are our best estimates so I can't give you a lot of detail other than I can tell you that.
The there is volume leverage on the 1% revenue growth increase.
And Thats really the 10% 10 cents a share that we're adding to our guidance. Okay. So it is not.
From that you can infer it's not oil price, it's a combination of things.
Okay understood. Thank you for Taylor.
Sure.
Thank you next we'll go to Andy Kaplowitz with Citigroup. Your line is open.
Good morning, everyone.
Andy.
Scott or Michael So I know you probably don't want to update us on your segment revenue growth expectations.
Outside of auto where you already gave specific guide it looks like food equipment and construction accelerated versus your run rate specialty products. Maybe we can debate is that a fair characterization of where revenue growth is moving versus your original forecast and can you give a little more color regarding what you're seeing in specialty products, that's maybe holding down that business a bit.
Segment.
<unk>.
I heard your first part was the second part was what did you say slowdown, especially in specialty I think specialty is really more of a timing issue.
Related to some specific equipment.
Projects.
In Europe and.
A few project in China, So I think thats really more of a timing issue.
Than anything else I think if you just kind of take a step back I think you pointed out the right ones in terms of a lot of strength in.
Certainly food equipment.
But also welding.
Test and measurement, there's some up against some difficult comps.
Construction Theres certainly a lot of positive momentum really across the board and what does not come across.
And we've talked about this before we're not a backlog driven company, but in the.
The segments that are more exposed to the capital equipment.
Space. So that would include test <unk> measurement welding food equipment, we are building significant backlog and really.
Despite the fact that we are performing.
As I said at a high level relative to our competitors. We are building substantial backlog, that's not showing up obviously yet.
In our revenues.
And Michael you, obviously had a large number in construction.
Specifically, you mentioned North American renovation I think up in the low 30% range, that's been going on for a while here, but this is a.
A big number and getting stronger despite sort of concerns about rising rates are you taking share there or is it just a lot of activity and sort of visibility going forward here in 'twenty two.
But I think as you know I mean, there is still a lot of strength in the in the U S housing market.
That's where you saw these residential remodel numbers up 36%.
And included in that is also.
Some meaningful share gains.
Based on based on what we're seeing in portions of that business, where it's difficult to.
Supply the market, we are taking advantage of our supply position to take share.
The commercial side.
15, Thats, a smaller part of the business and then really on a geographic basis, it's not just North America, but it's also Europe .
Up 16% and for example, the UK up 20% and then Australia, New Zealand and still delivering a solid 10%. So it's pretty broad based and again, we're modeling based on run rates and so we.
Sure.
Have not seen anything to suggest that the market is slowing down at this point.
I appreciate the color sure.
Next we'll go to Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning, and finally, leaving less time for good morning.
Actually great gift.
So much time to Q&A. So thanks, I wish I was coming to do this.
So I know you don't like to talk about price.
I know, Jeff took a crack at the question, but if I if I just pick through the margin dilution from price costs and a seamless neutral then I get to.
<unk>, 910% type price impacts.
Is that the kind of scale of pricing, we've seen Han and is the message that pricing gets better from here through the year.
Well, what does get better.
From here if things stay the way they are is price cost as we talked about.
And so we're going for.
From significant.
Margin dilution here in Q1 of 250 basis points too.
Maybe even slightly positive in the second half of the year, so that so and thats based on everything that we know today.
And Nigel it's not dead.
We don't want to so the issue around price is that.
It is an estimate as at best and it is not especially.
With.
In such a dynamic environment it would be very difficult to sit here and give you a number with a high degree of confidence and we've not done that historically.
I think we talked about on the last call, we're not going to go down that path of breaking out price versus volume.
Any further.
So that's the best I can do here for you.
Okay, No that's fine and then just turning to page four as my follow up the margin bridge.
Enterprise was I think 90 bps of tailwind. So if we put that in as a sort of a tailwind to that bridge that would've been 90 bps elsewhere. So.
Offset so I'm, assuming that's productivity in the plants et cetera.
Is that fair Michael.
And how do you see sort of productivity labor productivity et.
Et cetera, improving through the year.
Well I think thats productivity I'm not sure exactly how you get there I mean I think the.
There is 90 basis points of enterprise initiatives, that's not on here that's embedded in the <unk> in the in the 2006, one and so as the any.
Any other productivity gains.
The a couple of things that are not in here is there is.
Some margin dilution from increased sales commissions when you grow your revenues double digit Europe , new commissions are going to go up but broadly speaking what we try to do is give you.
A fairly accurate representation of these near term pressures and therefore, what our core operating margins are running at which is somewhere around 26% plus in the current environment and as we just talked about these price cost pressure has normalized.
That's where we that's where we would expect margins to head as we continue on our path to our target of 28% plus.
No that's great. Thank you very much sure.
Thank you next we'll go to Mitch <unk> with Baird. Your line is open.
Good morning, everyone.
So Michael a question for you.
If I heard you mentioned that in the second quarter.
The price cost headwind moderates to the tune of about 50 basis points.
So when we're thinking about year over year margin at each store to store and Bob roughly 200 basis points of year over year compression in Q2, and then things get better in the back half basically.
Yes, I think that is that's what I said, yes, I think that's that's a base.
Based again.
With the caveat that we are in a very dynamic and uncertain environment, but to the extent.
Based on what we know today that that would be correct.
Okay.
And then.
Sorry to keep.
Beating up this popping up on price.
But.
This environment.
Now something I haven't counted in my career, well frankly before.
When we're looking at PPI data I mean, we're seeing some pretty material increases in food equipment and welding and.
I'm sort of wondering if your business.
Keeping up with industry data as well or is there some urgency that we need to be aware of it.
We've seen that most of the growth is really coming from pricing non volume.
Volume growth at all in 2020.
Yes, I mean, we wouldn't share that view, yet we don't agree with that one two I am not quite sure what you're what data youre looking at so it's a little bit difficult for me to comment.
All I can do is report the actual results for.
Our food equipment business for example, and I think we give you a fair bit of detail, including bi.
By end market.
And beyond that I can't really like I said before we don't report price versus volume and so im not sure I can help you.
Understood and maybe one last follow up I am curious as to how youre thinking about about this pricing dynamic longer term because to your point eventually we're going to start to see material costs coming down do you expect to be able to keep the pricing gains that you have had in this environment or is it fair to assume some pressure as we think about <unk>.
Thank you.
Well.
I think let me just start by saying that.
Our customer relationships, our strategic long term relationships, we're not trying to maximize price we're trying to serve our customers and make sure that we get paid for offering a really differentiated product service or solution. So we've always had pricing power.
In these businesses.
I think ultimately.
These are going to be discussions with customers when costs start to normalize and there might be a few exceptions, but by and large we expect to hold onto these price increases to recover the margins like I said earlier. So that's typically what happens if you go back and look in time.
Can I end up.
With a period where.
We recover.
That margin percentage and we don't expect the current cycle to be any different.
Okay. Thank you.
Sure.
Next we'll go to Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
Maybe just wanted to just try and understand the sort of earnings framework for the year a little bit.
So it looks like sort of operating margins are set to go up by about 300 basis points between kind of Q1 and Q4 with a flattish dollar revenue is that all simply the price cost.
Removal of the headwind is there any other kind of major moving part and also to that point are you sticking to that kind of $47 53 first half second half EPS split.
Yes, So let me let me address that I mean, I think we're still in that.
46% to 47% in the first half and the balance in the second half and the Big driver really is what we've talked about it feels like.
For a while here is price cost beginning to.
I will turn positive based again on the assumptions that we're making in our guidance. So that's the that's the drive now historically, we do 49 51. So it's a couple of percentage points, but it is a little bit more backend loaded.
Expect that as we go through the year.
Sequentially, starting in Q2 margins will improve.
And so will our revenues.
And Thats, just based again on kind of historical run rates.
So we expect a steady kind of improvement in Q2, Q3 and in Q4, including on the margin side, whether it's exactly the number you laid out I can't really comment, but directionally that's.
That is the right way to look at it.
Yeah.
Thanks, Michael and then switching to the.
Balance sheet, which I don't think its been touched on yet.
And make them customer element as well, but your inventories are up I think almost sort of 50% year on year.
10% plus sequentially in Q1.
Just kind of trying to understand.
When do you think that starts to level out and.
This.
Major sort of inventory build that you're seeing how sure are you that youre not seeing the same phenomenon across your customers and channel partners.
As well with obviously some risk to that if we do see final demand slowdown.
Well, so I think if you look at our inventory levels were running at about three months on hand.
Historical is two months and so we have an extra month of inventory on hand, and we I think we've been very clear about why that is it's to mitigate supply chain risk it should take care of our customers and ultimately to win this recovery.
And take share at a point, where our competitors are maybe not able to.
Service our customers. So that's the vast majority of these inventory increases just kind of maybe a little housekeeping. If you look at our conversion rate here in Q1, the difference between the 38% in the 80% to 85 is about $300 million of working capital very intentional.
Investments, we believe are really smart use of use of our balance sheet and you saw the topline growth rate of.
11% organic.
This quarter that I would argue would not have happened if we had not taken this approach starting with the last year to make a.
Our conscious decision to invest in inventory and then obviously receivables will go up as you grow.
Double digit ultimately.
We don't see any reason why structurally when supply chain begins to normalize.
Both from an availability standpoint, and also from a cost standpoint that we will we will go back to two months on hand.
And at that point that happens Youll see these free cash flow numbers.
We will deliver above average performance until we're back to kind of normal levels. So we view this really as a temporary.
Okay.
<unk>.
The increase in working capital how quickly that will come down depends on a lot of things, including what you were talking about.
Which is.
Inventory in the channel, where we really don't have a lot of visibility other than I can tell you for the most part the channel.
<unk> does not carry a lot of inventory because they are used to the fact that we will take care of them when they need product.
No incentive for them to carry a lot of extra inventory so.
So that's probably the best I can give you Julien.
That's perfect. Thank you.
That concludes today's question and answer session and thank you for your participating in today's conference call. All line lines may now disconnect.
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Okay.
Okay.
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Okay.
Yes.
Thank you.