Q4 2023 Illinois Tool Works Inc Earnings Call
Okay.
Eric: Good morning, My name is Eric and I'll be your conference operator today.
Speaker Change: At this time I would like to welcome everyone to the I T W fourth quarter earnings Conference call.
Eric: All lines have been placed on mute to prevent any background noise.
Eric: After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Eric: He would like to withdraw your question Press Star one again.
Eric: For those participating in the Q&A you will have the opportunity to ask one question and if needed one follow up question.
Eric: Thank you.
Karen Fletcher Vice President of Investor Relations you May begin your conference.
Karen A. Fletcher: Thank you Eric.
Karen A. Fletcher: Good morning, and welcome to Itw's fourth quarter 2023 conference call.
Karen A. Fletcher: I'm joined by our President and CEO, Chris So herlihy, and senior Vice President and CFO Michael Larsen.
Karen A. Fletcher: Also with US today is Erin Lenahan, who joined our Investor Relations team last month, as Vice President Dan Welcome to ITW.
Karen A. Fletcher: During today's call, we will discuss Itw's fourth quarter and full year 2023 financial results and provide guidance for full year 2024.
Slide two is a reminder, that this presentation contains forward looking statements. Please refer to the company's 2022 Form 10-K, and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.
Karen A. Fletcher: 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.
Karen A. Fletcher: Please turn to slide three and it's now my pleasure to turn the call over to our president and CEO of Crystal Harley.
Crystal Harley: Thank you Karen and good morning, everyone.
Crystal Harley: In Q4, we delivered a solid finish to a year of high quality execution in the face of some pretty unique challenges, including slowing demand for capex.
Crystal Harley: Windstream customer and channel inventory reductions and an automotive industry strike.
Crystal Harley: As a result organic growth was essentially flat in the fourth quarter.
Crystal Harley: Operating margin came in at 24, 8% with 150 basis point contribution from enterprise initiatives.
Crystal Harley: And free cash flow grew almost 40%.
Crystal Harley: GAAP EPS of $2 30 years into the <unk>, one favorable impact to the devaluation of the Argentine currency.
Crystal Harley: Throughout 2023, the ITW team continued to leverage the strength and resilience of the business model and our high quality diversified business portfolio to deliver a year of strong operational and financial performance.
Crystal Harley: Including solid organic growth of 2% on top of a 12% growth in both 2021 and 2022.
Crystal Harley: Operating margin of 25, 1% and operating an improvement year over year of 130 basis points.
Crystal Harley: Income growth of 7% to a record $4 billion.
Crystal Harley: After tax ROIC of more than 30%.
Crystal Harley: 50% plus free cash flow growth and.
Crystal Harley: Our GAAP EPS of $9 74.
Crystal Harley: Yeah.
Crystal Harley: We delivered these results, while investing almost $800 million sustained productivity and accelerate our organic growth initiatives and our highly profitable core businesses.
Crystal Harley: As we outlined at our Investor day, our key strategic priority as we enter this next phase of our enterprise strategy in 2024 is to build above market organic growth.
Crystal Harley: Fueled by customer back innovation into defining ITW strength.
Crystal Harley: On par with our world class financial and operational capabilities.
Crystal Harley: Turning now to our 2024 guidance, we are encouraged by what we're seeing in terms of demand across the majority of our portfolio.
Crystal Harley: Along with some meaningful improvements in both customer and channel partner inventory levels and input cost inflation.
As well as continued progress on customer back innovation.
Crystal Harley: Per our usual process, our organic growth projection for 2024 of 1% to 3%.
Crystal Harley: And our EPS guidance of $10 20 at the midpoint reflect current levels of demand adjusted for seasonality.
Crystal Harley: Operating margin is projected to improve by about 100 basis points at the midpoint to a range of $25 five to 26, 5%.
Crystal Harley: This includes another solid contribution of approximately 100 basis points from enterprise initiatives.
Crystal Harley: Before I turn the call over to Michael to provide more detail on the quarter and full year performance as well as our guidance for 2024 I want to thank my ITW colleagues around the world.
Crystal Harley: <unk> dedication and commitment to serving our customers and executing our strategy with excellence.
Crystal Harley: And for their incredible support as I transition into the CEO role Michael.
Michael M. Larsen: Thank you, Chris and good morning, everyone.
Michael M. Larsen: In Q4, the ITW team delivered a solid finish operationally and financially to a strong year for the company.
Speaker Change: Starting with the topline to soft market demand for Capex that we talked about on our Q3 earnings call continued into the fourth quarter.
Speaker Change: In addition, customer and channel inventory reductions and the automotive industry strike reduced our organic growth rate by approximately one 5%, resulting in essentially flat revenue and organic growth on a year over year basis.
Speaker Change: That said, we finished the year with stable to slightly improving demand on a sales per day basis as evidenced by sequential revenue growth.
Speaker Change: Of plus two 5% from Q3 into Q4 compared to our historical sequential growth of plus one 5%.
Speaker Change: Foreign currency translation added one 2% of revenue and divestitures reduced revenue by <unk>, 4%.
Speaker Change: GAAP EPS was $2 38 and included a <unk> <unk> impact from the devaluation of the Argentine currency.
Speaker Change: On the bottom line operating income was a Q4 record of 988 million and operating margin was flat year over year.
Speaker Change: As enterprise initiatives of 150 basis points.
Speaker Change: And 60 basis points of price cost margin benefit net of year over year inventory revaluations were offset by a combination of growth investments and two in head count adds higher employee related costs, such as wages and benefits as well as increased restructuring expenses year over year.
Speaker Change: Free cash flow grew 39% to a fourth quarter record of $908 million with a conversion to net income of 127%.
Speaker Change: Overall for Q4 solid operational execution and financial performance in a pretty challenging environment.
Speaker Change: Please turn to slide four starting with one of the highlights for Q4 and the year, our free cash flow performance on the left side of the page.
And as you can see our full year free cash flow was up more than $1 billion to a record $3 1 billion.
Speaker Change: As our inventory months on hand metric continued its glide path to pre COVID-19 levels.
Speaker Change: Now, let's move to the segment results, starting with automotive OEM, which led the way with organic growth of 8%, Despite North America being down 9% due to the impact of the automotive strike.
Speaker Change: Meanwhile, Europe organic growth rate was plus 11% and China was up 31% driven by strong market share and penetration gains in the rapidly growing EV market.
Speaker Change: Operating margin was 19, 2%, excluding 160 basis points of headwind from higher 80, 20 front to back restructuring expenses as the automotive OEM team continues to work toward its margin goal in the low to mid Twenty's over the next two to three years as outlined at our Investor day.
Speaker Change: Looking forward, we expect automotive OEM to grow 3% to 5% in 2024 based on an assumption of essentially flat global auto builds year over year, plus our typical penetration gains of 2% to 3%.
Speaker Change: And continued above market organic growth in China.
Speaker Change: Turning to slide five food equipment delivered organic growth of 3%.
Against the tough comparison of plus 17% in Q4 last year.
Speaker Change: Equipment grew 1% and service was very strong up 7% for the quarter.
Speaker Change: By region, North America grew 4% with institutional end markets up in the mid teens retail up mid single digits and restaurants down in the high single digits.
Speaker Change: Europe and Asia Pacific both grew 1%.
Speaker Change: Test and measurement and electronics organic revenue was down 1% due to continued softness in semiconductor related end markets.
Speaker Change: While the test <unk> measurement grew 5% electronics declined 14%.
Speaker Change: Moving on to slide six.
So demand in welding resulted in an organic revenue decline of 7% equipment was down 8% and consumables were down 6%.
Speaker Change: Industrial sales declined 11% versus a tough comparison of plus 23%.
Speaker Change: Commercial was down 2% and oil and gas was down 3%.
Speaker Change: Overall, North America was down 7% and international was down 6%.
Speaker Change: Polymers <unk> fluids organic revenue declined 2% with automotive aftermarket down 3%.
Speaker Change: <unk> grew 6% in fluids was down 7%.
Speaker Change: Operating margin expanded 270 basis points to an all time high.
Speaker Change: Eight 5% for the segment.
Speaker Change: Turning to slide seven.
Speaker Change: In a tough housing market construction products organic revenue declined 4% as North America was essentially flat with residential renovation of flat and commercial construction up 3%.
Speaker Change: International markets have been soft all year and in the fourth quarter Europe was down, 9% and Australia, New Zealand was down 5%.
Speaker Change: Specialty products organic revenue was down 5% as North America was down 6% and international declined 5%.
Speaker Change: <unk> levels were down 10% and equipment revenue grew 8%.
Speaker Change: Moving to slide eight and full year 2023 results and as Chris said throughout the year our colleagues around the world did an exceptional job of delivering for our customers are responding decisively to a challenging and volatile market demand environment.
Speaker Change: As a result of their efforts ITW delivered record financial performance in 2023 with solid organic growth of 2% on top of 12% growth in both 2021 and 2022 best in class margins of more than 25% and after tax return on invested capital of more than 30%.
Speaker Change: And we delivered these results while continuing to fully fund projects to accelerate above market organic growth and sustained productivity at our highly profitable core businesses.
Speaker Change: We raised our dividend, 7% and returned more than 3 billion to shareholders in the form of dividends and share repurchases.
Speaker Change: Move to slide nine and our guidance for full year 2024.
Speaker Change: And looking ahead, we definitely see some positives in terms of moderating headwinds in the external environment from supply chain input cost inflation and customer and channel partner inventory reductions, but there are certainly some challenges, including lower automotive builds that I talked about earlier for example.
Speaker Change: Per our usual process, our topline guidance of revenue growth of 2% to 4% and organic growth of 1% to 3%.
Speaker Change: Is based on current levels of demand adjusted for typical seasonality and incorporate current foreign exchange rates.
Speaker Change: Operating margin is expected to improve by about 100 basis points to a range of 25, 5% to 26, 5%, which includes a 100 basis points contribution from our enterprise initiatives.
Speaker Change: After tax return on invested capital is expected to remain firmly at 30% plus and we expect strong free cash flow is again with conversion greater than net income.
Speaker Change: For 2024, we're projecting GAAP EPS in the range of 10 to $10 40, which includes headwinds of about <unk> <unk> of higher interest expense and 20 of higher income tax expense with an expected tax rate in the range of 24 to $25, 524% to 24, 5%.
Speaker Change: In terms of cadence for the year, we expect our typical first half second half EPS split of 49 and 51%.
Our capital allocation plans for 2024 are consistent with our long standing disciplined capital allocation framework that we discussed at last year's Investor days.
Speaker Change: Our top priority remains internal investments to support the organic growth initiatives associated with the next phase of the enterprise strategy and sustained productivity in our highly profitable core businesses.
Speaker Change: Second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of Itw's total shareholder return model third selective high quality acquisitions that enhance itw's long term profitable growth potential has significant margin improvement opportunity from the application of our proprietary a powerful 80 20 tobacco.
Speaker Change: Methodology and can generate acceptable risk adjusted returns on our shareholders' capital and.
Speaker Change: And finally ITW surplus capital is allocated to an active share repurchase program as we plan to buy back $1 5 billion.
Speaker Change: Of our own shares in 2024.
Speaker Change: Turning to our last slide slide 10 for our 2020 for organic growth projections by segment and.
Speaker Change: And as you can see a five or seven segments combined are projecting organic growth of approximately 4% at the midpoint, partially offset by some unique challenges in construction and specialty products.
Speaker Change: These segment projections are the outcome of the bottom up planning process that we completed in January and a combination of several factors, including current levels of demand deep on the ground market and customer insights from our divisions market share gain expectations and the growing contribution from our customer back innovation efforts and the associated new product launches.
Speaker Change: And every one of our divisions.
Consistent with Itw's continuous improvement never satisfied mindset every segment is projected to improve their operating margin performance again in 2024 with another solid contribution from enterprise initiatives across the board.
Speaker Change: So overall, we're heading into the first year of our next phase enterprise strategy, well positioned to continue to outperform whatever economic conditions emerge as we move through 2024 with.
Speaker Change: With that Karen I'll turn it back to you.
Karen: Okay. Thank you Michael and Eric can you. Please open up the lines for questions.
Eric: 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.
Karen: We will pause for just a moment to compile the Q&A roster.
Karen: Your first question comes from the line of Tami Zakaria with JP Morgan.
Your line is open.
Tami Zakaria: Good morning, Thank you so much.
Tami Zakaria: My first question is when we look at the annual guide organic growth side.
Tami Zakaria: Thanks.
Tami Zakaria: Each segment.
Speaker Change: How should we think about the segment growth rates for the first quarter and it would be similar to the annual guide or do you expect any deviation from that in the first quarter and then maybe improvement throughout the year.
Speaker Change: Well I think you'll see improvement in the year over year organic growth rates as the comparisons get easier as we move through the year, but by and large.
Speaker Change: The projections here track.
Speaker Change: Kind of typical seasonality from Q4.
Speaker Change: Into Q1, and so forth. So there's really nothing unusual there.
Speaker Change: The other thing to keep in mind is while the guidance at the enterprise level.
Speaker Change: Is essentially based on current run rates as we talked about.
Operator: Good morning, my name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Fourth Quarter Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone key.
Speaker Change: More granule granular projection at the at the segment level, which includes also <unk>.
Speaker Change: Significant contribution again from new products.
Speaker Change: As well as our normal pricing less drag from the inventory reduction that we've been talking about really all year.
Speaker Change: And so really give a better kind of number.
As we look at the.
Operator: If you would like to withdraw your question, press star 1. For those participating in the Q&A, you will have the opportunity to ask one question and, if needed, one follow-up. Thanks. Karen Fletcher, Vice President of Investor Relations. You may begin your comments. Good morning, and welcome to ITW's fourth quarter 2023 conference call. I'm joined by our president and CEO, Chris O'Herlihy, and senior vice president and CFO, Michael Larsen. Also with us today is Aaron Linehan, who joined our investor relations team last month as vice president. Aaron, welcome to ITW.
Speaker Change: At the segment. So that's how I would think about it.
Speaker Change: Got it that's very helpful. And then it seems like the implied incremental margin for the year.
Speaker Change: In the 60% to 70% range.
Speaker Change: Probably in the high 60, if my math is right.
Speaker Change: It is normally 35 to 40.
Speaker Change: What's really driving this any specific segment do you want to call out that May drive this overall high incrementals.
Speaker Change: Yeah.
Speaker Change: I mean, we've got.
Speaker Change: Fairly.
Speaker Change: Modest kind of.
Speaker Change: Revenue growth that we're calling for here, 1% to 3%.
Speaker Change: And our incremental margins embedded in the guidance are higher than our typical long term, 35% to 40, which is what I would still use.
Karen A. Fletcher: During today's call, we will discuss ITW's fourth quarter and full year 2023 financial results and provide guidance for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2022 Form 10-K and subsequent reports filed with the SEC 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 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Thank you, Karen, and good morning, everyone.
Speaker Change: In terms of long term modeling the reason why.
Speaker Change: Is the 100 basis points of contribution from enterprise initiatives that give us a higher incremental.
Speaker Change: Margin in 2024.
Speaker Change: Part of our planning process that I. Just described we've now had a chance to go through all the projects and activities.
Speaker Change: That contribute to.
Speaker Change: 100 basis points of enterprise initiatives again in 2024, and I might add these are largely independent of volume so regardless of what volume does we're seeing another.
Speaker Change: Significant contribution here, which is certainly a nice thing to have in Europe.
Speaker Change: Hip pocket in the and what we would describe still has a fairly uncertain and volatile environment.
Speaker Change: Got it thank you so much.
Chris O'Herlihy: In Q4, we delivered a solid finish to a year of high-quality execution in the face of some pretty unique challenges, including Slowing Demand for CapEx, Headwinds from Customer and Channel Inventory Reductions, and an Automotive Industry Strike. As a result, organic growth was essentially flat in the fourth quarter. Operating margin came in at 24.8% with a 150 basis point contribution from Enterprise Initiatives, and free cash flow grew almost 40%. Gap EPS of $2.38 included $0.04 of an unfavorable impact from the devaluation of the Argentine currency. Throughout 2023, the ITW team will continue to leverage the strength and resilience of the business model and our high quality diversified business portfolio to deliver a year of strong operational and financial performance, including solid organic growth of 2% on top of 12% growth in both 2021 and 2022. Operating Margin of 25.1% and Operating Improvement Year-over-Year of 130 Bases, income growth of 7% to a record $4 billion. AfriTax ROAC of more than 30% 50% plus free cash flow growth, and Gap EPS of $9.74.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Steve Volkmann with Jefferies.
Steve Volkmann: Your line is open.
Steve Volkmann: Great. Good morning, everybody I actually wanted to ask excuse me I wanted to ask the margin question, a little bit differently, Michael because if you have 100 basis points from enterprise and Thats kind of the total that we're looking for I suppose there must be some offsets and maybe some other costs or something because we're not really getting underlying incrementals.
Steve Volkmann: We're sort of getting at all from the enterprise initiatives. If you follow me. So just any detail on that would be great.
Michael M. Larsen: Yes, so I think the math is actually pretty simple for 2024, So we've got.
Michael M. Larsen: Some volume leverage at that 2% to 4% revenue growth.
Michael M. Larsen: Maybe you can just round numbers, maybe thats about 50 basis points.
Michael M. Larsen: Enterprise initiatives add about 100 basis points.
Michael M. Larsen: We're entering into what we would describe as a normal.
Price cost environment at this point and so.
Michael M. Larsen: There is like a modest positive contribution from price cost.
Michael M. Larsen: Efforts and then the offset is really our continued investments in growth, including some.
Michael M. Larsen: Head count.
Michael M. Larsen: Some employee related costs wages and benefits, even though there was.
Chris O'Herlihy: We deliver these results while investing almost $800 million to sustain productivity and accelerate our organic growth initiatives in our highly profitable core businesses. As we outlined at our investor day, our key strategic priority as we enter this next phase of our enterprise strategy in 2024 is to build above-market organic growth, fueled by customer-backed innovation, into defining ITW strength, on par with our world-class financial and operational capability. Turning now to our 2024 guidance, we are encouraged by what we are seeing in terms of demand across the majority of our portfolio, along with some meaningful improvements in both customer and channel partner inventory levels and input cost inflation, as well as continued progress on customer-backed innovation. As per our usual process, our organic growth projection for 2024 of one to three percent and our EPS guidance of $10.20 at the midpoint reflect current levels of demand adjusted for seasonality.
Michael M. Larsen: Costs are moderating in 2023.
Michael M. Larsen: Still has approximately 100 basis points of headwind, which then gets us to that midpoint of 26% in 2024.
Michael M. Larsen: And I might add well on our way to our 30% target here.
Michael M. Larsen: By 2030 that we talked about at Investor day.
Super: Super Okay. Thanks for filling that in and then maybe if I could just follow up the food guide the bottoms up food sort of outlook of $3 to 5% seems like a bit of an acceleration from sort of recent trends and we don't have super easy comps I don't think so what are you seeing in that end market.
Speaker Change: Yeah sure, Steve So on food equipment projecting 3% to 5% growth next year really on the back of a few different aspects firstly as always withstood equivalent delivery startup environment for innovation. So we see several new product launches across all product categories.
Speaker Change: We would expect less channel Destocking food equipment.
Chris O'Herlihy: Operating margin is projected to improve by about 100 basis points at the midpoint to a range of 25.5 to 26.5%. This includes another solid contribution of approximately 100 basis points from Enterprise Initiatives. Before I turn the call over to Michael to provide more detail on the quarter and full year performance, as well as our guidance for 2024, I want to thank my ITW colleagues around the world for their extraordinary dedication and commitment to serving our customers and executing our strategy with excellence, and for their incredible support as I transition into the CEO role.
Speaker Change: In 2024, and also I would say we have.
A continued recovery in service.
Speaker Change: Service is about one third of our revenues in food, where do you only major manufacturer.
Speaker Change: With that captive service business and services business is still in recovery pretty much from Covid equipment has recovered, but we would see it probably the final year of recovery in service in 2024.
Speaker Change: All of that is adding up to a three to five.
Speaker Change: Growth rate in food next year.
Speaker Change: Understood. Thank you.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Andy Kaplowitz with Citigroup your.
Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid finish operationally and financially to a strong year for the company. Starting with the top line, the soft market demand for CapEx that we talked about on our Q3 earnings call continued into the fourth quarter. In addition, customer and channel inventory reductions and the automotive industry strike reduced our organic growth rate by approximately 1.5%, resulting in essentially flat revenue and organic growth on a year-over-year basis. That said, we finished the year with stable to slightly improving demand on a sales per day basis, as evidenced by sequential revenue growth of plus 2.5% from Q3 into Q4, compared to our historical sequential growth of plus 1.5%. Foreign currency translation added 1.2% to revenue, and divestitures reduced revenue by 0.4%. Gap EPS was $2.38 and included a $0.04 impact from the devaluation of the Argentine currency.
Andrew Kaplowitz: Your line is open.
Andrew Kaplowitz: Good morning, everyone.
Andrew Kaplowitz: Good morning.
Andrew Kaplowitz: Michael when we look at your 1% to 8% organic growth forecast for 24, you have a nice acceleration dialed in for Capex businesses, such as welding and TNF.
Andrew Kaplowitz: Youre, saying Youre basing your guidance on current run rates. So obviously you did mentioned some improvement in sequential demand in Q4 could you give us some more color on what youre seeing in these capex businesses, that's allowing you to forecast.
Andrew Kaplowitz: I guess I would imagine youre dialing in improvements in Semicon electronics for instance in PNM, but that goes it's not what you usually do line just curious as to what's Flushing out.
Andrew Kaplowitz: I think like.
Andrew Kaplowitz: Like we've said.
Andrew Kaplowitz: Really most of the year, we've seen some slowing.
Andrew Kaplowitz: Demand for Capex, and certainly in Q3 and Q4.
Andrew Kaplowitz: I think as we go into 2024 as Chris just said, we've got less headwind.
Andrew Kaplowitz: From these customer and channel partner inventory reductions that were a drag of about 1%.
Michael M. Larsen: On the bottom line, operating income was a Q4 record of $988 million, and operating margin was flat year over year, as enterprise initiatives of 150 basis points and 60 basis points of price-cost-margin benefit net of year-over-year inventory revaluations were offset by a combination of growth investments, including headcount ads, higher employee-related costs, such as wages and benefits, as well as increased restructuring expenses year-over-year. Free cash flow grew 39% to a fourth quarter record of $908 million, with a conversion to net income of 127%. Overall, for Q4, solid operational execution and financial performance in a pretty challenging environment. Please turn to slide 4, starting with one of the highlights for Q4 of the year, our free cash flow performance on the left side of the page. And as you can see, our full-year free cash flow was up more than a billion dollars to a record 3.1 billion.
Andrew Kaplowitz: In 2023.
Speaker Change: We have.
Speaker Change: Meaningful contribution and increased contribution.
Speaker Change: From new products, given all the efforts around customer back innovation that we're driving.
Speaker Change: And then we have normal pricing and you put all that together it just.
Speaker Change: Based on I think as you point out was encouraging that.
Speaker Change: We saw a pickup in the sequential revenue per day from Q3 to Q4 that I think tells you that there are certainly some stability here.
Speaker Change: And some of the headwinds I just described are.
Speaker Change: Maybe mostly behind US, we expect still a little bit of a headwind from these inventory reductions as we go through the first half of the year.
Speaker Change: But think of it as we're working through our own inventory levels here.
Speaker Change: We expect to reduce our inventories in the first half we thank our customers and channel partners, maybe doing some of the same but it will be less of a headwind here in 2024. So you put all of that together I think youre, an environment, where things are pretty stable.
Michael M. Larsen: As our Inventory Months on Hand metric continued its glide path to pre-COVID levels, now let's move to the segment results, starting with Automotive OEM, which led the way with organic growth. 8% despite North America being down 9% due to the impact of the automotive strike. Meanwhile, Europe's organic growth rate was plus 11%, and China was up 31%, driven by strong market share and penetration gains in the rapidly growing EV market. Operating margin was 19.2% excluding 160 basis points of headwind from higher 80-20 front-to-back restructuring expenses as the automotive OEM team continues to work toward its margin goal in the low to mid-20s over the next two to three years as outlined in our investor report.
Speaker Change: Test and measurement you mentioned semi.
Speaker Change: It's less than 3% of our revenue of our revenues.
Speaker Change: There is an expectation of a modest.
Speaker Change: Market pick up here in the second half.
Speaker Change: We expect.
Speaker Change: To gain share and launched new products in this space that will grow a little bit faster than market there.
Speaker Change: But overall, we're not expecting.
Speaker Change: A big recovery in demand or the economy to pick up in the second half.
Speaker Change: This is basically based on kind of current run rates.
Speaker Change: The one outlier outlier I'll just reiterate is.
Speaker Change: Automotive we're going from.
Speaker Change: Build environment in 2023 that was up.
Michael M. Larsen: Looking forward, we expect automotive OEM growth of 3% to 5% in 2024 based on an assumption of essentially flat global auto bills year over year, plus our typical penetration gains of 2% to 3% and continued above-market organic growth in China. Turn to slide 5, food equipment delivered organic growth of 3% against a tough comparison of plus 17% in Q4 last year. Equipment grew 1%, and service was very strong, up 7% for the quarter. By region, North America grew 4% with institutional end markets up in the mid-teens, retail up in the mid-single digits, and restaurants down in the high single digits. Europe and Asia-Pacific both grew by 1%.
Speaker Change: The high single digits, we expect that to be about flat and so the growth in automotive is all from penetration gains and continued market share.
Speaker Change: And innovation in.
Speaker Change: In China, which has been an incredible contributor to our overall growth rate.
Speaker Change: We will remain so for the foreseeable future.
Speaker Change: Very helpful color and Michael and then Christopher Michael You mentioned the unique challenges in specialty equipment and construction products, maybe you could elaborate on what youre seeing in these segments.
Speaker Change: Doing more pls in specialty for example.
Speaker Change: The outlook or frame the outlook for 'twenty four.
Michael M. Larsen: Yes, that's correct Andy in terms of especially particularly we're doing some strategic portfolio work there.
Michael M. Larsen: Heavier I would say among of product line pruning than we normally expect in a normal maintenance environment.
Michael M. Larsen: Doing quite a bit more especially really to position that segment.
Michael M. Larsen: Our long term growth of 4% plus.
Michael M. Larsen: Test and measurement and electronics, organic revenue was down 1% due to continued softness in semiconductor-related end markets. While tests and measurements grew 5%, electronics declined 14%. Moving on to slide six, slower demand in welding resulted in an organic revenue decline of 7%.
Speaker Change: So that's what's going on there and we're pretty pleased with the progress around that.
Speaker Change: On construction, it's very much a market story obviously.
Speaker Change: All three main markets for US North America, Western Europe, and Australia, New Zealand are all forecasting significantly declines brings in housing does next year.
Speaker Change: W.
Speaker Change: 1% to North America mid single digits in Europe, and high single digits in ANZ.
Speaker Change: It's really what's impacting the construction business.
Speaker Change: Helpful guys. Thank you thank.
Michael M. Larsen: Equipment was down 8%, and consumables were down six. Industrial sales declined 11% versus a top comparison of plus 23%.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from the line of Joe O'dea with Wells Fargo.
Joe Ritchie: Your line is open.
Michael M. Larsen: Commercial was down 2%, and oil and gas was down 3%. Overall North America was down 7%, and international was down 6%. Palmer's and Fluid's organic revenue declined 2%, with the automotive aftermarket down 3%. Palmer grew 6%, and Fluid was down 7%.
Joe Ritchie: Hi, good morning, Thanks for taking my question.
Joe Ritchie: Yes.
Joe Ritchie: So I mean.
Joe Ritchie: You talked about the daily sales rate from Q3 to Q4, it sounds like overall customer tone is perhaps getting a little bit better.
Joe Ritchie: You are talking about adding some head count can you just expand a little bit on customer conversations over the last several months.
Michael M. Larsen: Operating margin expanded 270 basis points to an all-time high of 28.5% for the. Turning to slide seven, in a tough housing market, construction products, organic revenue declined 4%.
To understand a little bit better sort of the verticals, where you see some of that uptick happening.
Joe Ritchie: And then where you are adding head count within the business.
Joe Ritchie: Yes, I mean, I think the tone from customers has been pretty cautious all year, particularly on the Capex side of things is as we talked about.
Michael M. Larsen: As North America was essentially flat, with residential renovation flat and commercial construction up 3%, international markets have been soft all year, and in the fourth quarter, Europe was down 9%, and Australia and New Zealand were down 5%. Specialty Products, Organic Revenue was down 5%, as North America was down 6%, and International declined 5%.
Joe Ritchie: If you go back to our Investor Day last year, we talked a lot about.
Joe Ritchie: Accelerating.
Joe Ritchie: Our efforts.
Joe Ritchie: To drive high quality of above market organic growth, primarily fueled by as Chris said earlier, our customer back innovation efforts and so those are those are the areas all growth.
Joe Ritchie: Related head count adds that we're making to make sure that we have all the capability, we need in terms of innovation and commercial sales and marketing resources to.
Michael M. Larsen: Consumables were down 10%, and equipment revenue grew a... Moving to slide eight and full year 2023 results. And as Chris said, throughout the year, our colleagues around the world did an exceptional job. Delivering for our customers and responding decisively to a challenging and volatile market demand environment. As a result of their efforts, ITW delivered record financial performance in 2023 with solid organic growth of 2%. On top of 12% growth in both 2021 and 2022, best-in-class margins of more than 25%, and after-tax return on invested capital of more than 30%. And we deliver these results while continuing to fully fund projects to accelerate above-market organic growth. Sustain Productivity and our highly profitable Corbett. It raised our dividends by 7% and returned more than $3 billion to shareholders in the form of dividends.
Joe Ritchie: Drive continued progress and deliver on.
Joe Ritchie: Our above market organic growth commitments.
Got it and then on the.
Joe Ritchie: The channel inventory side of things can you just talk about the visibility that you have and any context on.
Joe Ritchie: How may be elevated those inventory levels got during supply chain constraints.
Joe Ritchie: Where you think they are now relative to normal it sounds like you think first half of this year you can still see customers doing a little bit of work to trim inventories.
Joe Ritchie: Yes, I think by and large if you go back historically, we haven't had great visibility to the levels of inventory in the channel and with our customers.
Joe Ritchie: I think we have much better visibility today.
Joe Ritchie: Today, given that we've been talking about it all year overall, it's been a drag of a percentage point.
Joe Ritchie: Our growth rate for the year. It was one 5% in Q3 one.
Joe Ritchie: In Q4, and I think several of our segments.
Joe Ritchie: We are back to kind of normal inventory levels and this is largely behind us.
Michael M. Larsen: Share Repurchase Let's move to slide nine and our guidance for full year 2024. And looking ahead, we definitely see some positives in terms of moderating headwinds in the external environment from supply chain, input cost inflation, and customer channel partner inventory reductions. But there are certainly some challenges, including lower automotive bills that I talked about. For our usual process, our top-line guidance of revenue growth of 2-4% and organic growth of 1-3% is based on current levels of demand, adjusted for typical seasonality, and includes current foreign exchange. Operating margin is expected to improve by about 100 basis points, to a range of 25.5% to 26.5%, which includes 100 basis points of contribution from our enterprise initiatives. After tax return on capital is expected to remain firmly at 30% plus, and we expect strong free cash flows again with conversion greater than net income. For 2024, we're projecting gap EPS in the range of $10 to $10.40, which includes headwinds of about $0.10 of higher interest expense and $0.20 of higher income tax expense, with an expected tax rate in the range of 24 to 24 and a half.
Joe Ritchie: And then there's maybe a few other areas where there might be some continued but certainly less headwind.
As we go into Q1, and Q2 and that I think at that point.
Joe Ritchie: I'll give you an update I think we will be able to say this is now completely behind us.
Joe Ritchie: And so with respect to the growth outlook, there's no real inventory notable inventory headwind within that growth range.
Joe Ritchie: It's a little bit I mean, obviously, if you look at our run rates.
Joe Ritchie: It is included in our run rates at a higher level than what we might reasonably expect so.
Joe Ritchie: If that plays out the way, we expect that would be.
Joe Ritchie: Certainly favorable to two the run rate into the guidance that we just gave you.
Speaker Change: Understood. Thank you.
Speaker Change: Uh huh.
Speaker Change: Your next question comes from the line of Andrew Oldman with Bank of America.
Andrew Oldman: Your line is open.
Andrew Oldman: Hey, Good morning, you have Sabrina I'm sorry, Andrew.
As arena.
Andrew Oldman:
Andrew Oldman: As we think about pricing into 2024 are there any segments or any particular businesses, where on the market youre seeing more competition and pricing competition as costs moderate.
Speaker Change: Well I think it's I mean, we've talked about this before.
Speaker Change: We want to maintain our price premium based on the quality and the customer service. The lead times that ITW is uniquely positioned to provide but we also want to compete and we want to gain market share.
Michael M. Larsen: In terms of cadence for the year, we expect our typical first half and second half EPS split of 49 and 51 percent. Our capital allocation plans for 2024 are consistent with our long-standing disciplined capital allocation framework that we discussed during last year's investigation. Our top priority remains internal investments to support the organic growth initiatives associated with the next phase of the enterprise strategy and sustain productivity in our highly profitable core business. A second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of ITW's total shareholder return model. Third, selective high-quality acquisitions that enhance IGW's long-term profitable growth potential have significant margin improvement opportunities from the application of our proprietary and powerful 80-20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' equity. And finally, our GW surplus capital is allocated to an active share repurchase program as we plan to buy back $1.5 billion of our own shares in 2024.
Speaker Change: That's kind of central to our overall enterprise strategy and the focus I just talked about around organic growth.
Speaker Change: So that's that said I think we expect a.
Speaker Change: Our normal contribution from price here in 2024.
Speaker Change: These inflation driven price increases are now behind us.
Speaker Change: Input cost inflation that big wave, we've been dealing with.
Speaker Change: As we sit here today, we would say is largely behind us and so we're entering into a normal.
Speaker Change: Rising environment across.
Speaker Change: The portfolio I think that is that is a fair statement.
Speaker Change: You just look at <unk>.
Speaker Change: We have now.
Speaker Change: Essentially recovered the margin impact.
Speaker Change: From that price cost.
Speaker Change: The price cost dynamics, and we're entering into a normal environment and in 2024.
Speaker Change: Okay.
Speaker Change: Thanks, and then I just follow up on well Dang, what is driving the reacceleration and growth there from that down.
Speaker Change: Down, 6% and for Kale and how are you thinking about margins in the segment and 2024.
Speaker Change: Given where you are exiting the year.
Speaker Change: Is that a margin recorded in 2023 here.
Michael M. Larsen: Turn to our last slide, slide 10, for 2024 Organic Growth Projections by Segment. And as you can see, five of seven segments combined are projecting organic growth of approximately 4% at the midpoint, although partially offset by some unique challenges in construction and specialty products.
Speaker Change: Well I think welding.
Speaker Change: We're not counting on a market acceleration distribute clear. This is if you look at in a normal.
Speaker Change: <unk> environment, just assume for a minute, let's assume the market is flat.
Speaker Change: The contribution from new products and normal price very quickly gets you to something in the low single digits.
Speaker Change: I just wanted to be clear around that.
Michael M. Larsen: These segment productions are the outcome of the bottom-up planning process that we completed in January and a combination of several factors, including current levels of demand, deep underground market and customer insights from our divisions, market share gain expectations, and the growing contribution from our customer-backed innovation efforts, and the associated new product launches in every one of our divisions. Consistent with ITW's continuous improvement, never satisfied mindset, every segment is projecting to improve its operating margin So overall, we're heading into the first year of our next phase enterprise strategy, well-positioned to continue to outperform in whatever economic conditions emerge as we move through 2024. With that, Karen, I'll turn it back to you.
The other thing I would say.
Speaker Change: Just on the margins.
Speaker Change: We talked a lot about the year over year inventory revaluations thats, what caused the margins to drop.
Speaker Change: In in the fourth quarter are below 30%.
Speaker Change: And we expect that to be back.
Speaker Change: Above 30% here in the first quarter is as at one time kind of year over year inventory impact is behind us. So we would expect margins to kind of remain in that.
Speaker Change: 30% plus as we go through 2024, and as I said earlier, everyone and that's not that's not unusual.
Speaker Change: Unusual every one of our segments told us as part of this bottoms up bottom up planning process that they are on target to improve their operating margin performance in 2024.
Speaker Change: Thanks, I'll pass it on.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Steven Fisher with UBS.
Steven Fisher: Your line is open.
Steven Fisher: Thanks. Good morning. This has been asked in a few ways about the segments, but really just trying to think about the 1% to 3% organic growth in the context of your 4% to 7% CAGR through 2000 2030.
Karen A. Fletcher: Okay. Thank you, Michael. Eric, can you please open up the lines for questions? At this time, I would like to remind everyone, in order to ask a question, press the star, then the number one on your telephone keypad.
Operator: I'll pause for just a moment to compile the Q&A. Your first question comes from the line of Tami Zakaria, J.P. Morgan, and Linus. Hello, good morning.
Steven Fisher: I guess what's.
Steven Fisher: The buildup of market growth and price versus market penetration and customer back innovation again, there's lots of different segment dynamics here, but when you roll. It all up are you basically assuming that it is kind of like flat market.
Michael M. Larsen: Thank you. So my first question is, when we look at the annual guide, the Organic Growth Guide for 2024, for each segment, how should we think about these segment growth rates for the first quarter? Should they be similar to the annual guide, or do you expect any deviation from that in the first quarter and then maybe in the second quarter? throughout the year.
Steven Fisher: A couple of points of penetration and innovation is that the way to think about it yes.
Steven Fisher: Yes.
Speaker Change: I think it is I mean, as we said.
Speaker Change: In our 4% to seven calculus that we outlined at Investor Day, you have a contribution from market contribution from market penetration and the largest contribution is actually from customer back innovation and that's what we're seeing here in 2024.
Michael M. Larsen: Well, I think you'll see improvement in the year-over-year organic growth rates as the comparisons get easier as we move through the year. But by and large, the projections here track kind of typical seasonality from Q4 into Q1 and so forth. So there's really nothing unusual there.
Speaker Change: Really across most of our businesses.
Speaker Change: As we usually think about growth, 2% growth last year on top of 21, 12% growth in 'twenty one 'twenty two.
Speaker Change: Im targeting 1% to three here on the path to four plus.
Michael M. Larsen: You know, the other thing to keep in mind is while the guidance at the enterprise level is as well as our normal pricing, less drag from the inventory reduction that we've been talking about really all year, and so really gives a better kind of number as we look at the segments. So that's how I would think about it. Got it. That's very helpful.
Speaker Change: It's going to hold or outlining this and I would say that.
Speaker Change: Its a target on a goal that we're very confident on the basis that it's where the bulk of our divisions are spending their time.
Speaker Change: We're making progress certainly more to do.
Speaker Change: But given the portfolio and given the fact that we've got plenty of room to grow in each segment.
Speaker Change: Given the investments that Michael has been talking about that we've been making over quite a few years in strategic marketing and innovation.
Michael M. Larsen: And then it seems like the implied incremental margin for the year is in the 60 to 70% range, probably in the high 60s if my math is right versus normally 35 to 40, so what's really driving this? Any specific segment you want to call up that may drive this overall high incrementals for the year? Yeah, I think Tami you know we've got a fairly modest kind of revenue growth that we're calling for here, 1% to 3%. And the incremental margins embedded in the guidance are higher than our typical long-term 35% to 40%, which is what I would still use. In terms of long-term modeling, the reason why is the 100 basis points of contribution from enterprise initiatives that give us a higher incremental margin in 2024.
Speaker Change: We're really putting ourselves in building the muscle here.
Speaker Change: To get into position, where we will grow 4% plus over the entirety of this next phase I think in terms of just capability build if you think about this in the way that.
Speaker Change: The way, we leaned into front about 80 20.
Speaker Change: In the last phase of our strategy. That's the way we're leaning into innovation in the next phase of our strategy.
Speaker Change: Same level of rigor scoop and capability building that we apply to frontier back 80, 20, and the first phase we are now applied.
Speaker Change: Turning to customer back innovation here in this next phase and I would say, we're very encouraged by the progress that we've seen on innovation.
Speaker Change: Over the last couple of years, it was a 1% contributor or five years ago. It's now at 2% contributor on its way to 3% and beyond and again very encouraged by the progress that we're seeing across many of our divisions in terms of the quantitative work theyre doing on innovation, but also in terms of the quantity of the innovation pipeline across all seven segments.
Michael M. Larsen: As part of the planning process that I just described, we've now had a chance to go through all the projects and activities that contribute to 100 basis points of enterprise initiatives again in 2024. And, I might add, these are largely independent of volume. So regardless of what volume does, we're seeing another significant contribution here, which is certainly a nice thing to have in your hip pocket in what we would still describe as a fairly uncertain and volatile environment.
Speaker Change: That's really helpful and just a follow up.
Speaker Change: Sort of the macro level the pace of economic growth seems to be diverging between Europe, and North America and increasingly so can you just give us a sense of what you factored in on a European economy, and how youre thinking about that are you talking about the construction side, but and I guess similarly on China. How are you thinking about China in 'twenty.
Speaker Change: Sure.
Speaker Change: Sort of a net positive for you I think in 2003.
Michael M. Larsen: Thank you. Sure. Your next question comes from the line of Steve Volkmann with Jeffreys, Airline. Good morning, everybody. I actually wanted to ask the marketing question a little bit differently, Michael, because if you have 100 basis points from enterprise, and that's kind of the total that we're looking for, I suppose there must be some offsets in maybe some other costs or something, because we're not really getting underlying incrementals; we're sort of getting it all from the enterprise initiatives, if you understand me. So just any detail on that would be great.
Speaker Change: May be different for some other companies. So how are you thinking about that in 'twenty four.
Speaker Change: Yes, I think in our overall guidance here of 1% to three organic that's where you will find all the major geographies So North America.
Speaker Change: In that low single digit 1% to 3% range.
Speaker Change: And Europe kind of similar.
Speaker Change: To North America definitely.
Speaker Change: We've seen some challenges on the construction side as you pointed out but kind of you put it altogether.
Speaker Change: That's one to three range.
Speaker Change: And then the China is more positive, but thats really driven by the automotive business, which is more than half of our.
Michael M. Larsen: Yeah, so I think the math is actually pretty simple for 2024. So we've got some volume leverage at that two to 4% revenue growth. Maybe you just round the numbers, maybe that's about 50 basis points.
Revenues in China, So we expect another.
Speaker Change: Double digit type growth for the auto business.
Speaker Change: In China, and that takes China to kind of the mid single digit range.
Michael M. Larsen: The Enterprise Initiatives add about 100 basis points. You know, we're entering into what we would describe as a normal price-cost environment at this point, and so there's a modest positive contribution from our price-cost environment. And then the offset is really our continued investments in growth, including some headcount, some employee-related costs, wages, and benefits.
Speaker Change: In 2024.
Speaker Change: Very helpful. Thank you so much.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Julian Mitchell with Barclays.
Speaker Change: Your line is open.
Speaker Change: <unk>.
Julian Mitchell: Thanks, very much and good morning.
Julian Mitchell: Good morning, maybe apologies from.
Julian Mitchell: Re trading some some worn ground already but just trying to understand on the revenue outlook again, because it sounds like you had.
Julian Mitchell: Suffered from some destocking in 2023.
Michael M. Larsen: Even though those costs are moderating in 2023, that still is approximately 100 basis points of headwind, which then gets us to that midpoint of 26% in 2024. I might add, well on our way to our 30% target here by 2030, that we talked about it yesterday. Super.
Julian Mitchell: Assuming that Destocking continues Q1, and Q2 or you are seeing that destocking to continue as we speak.
Julian Mitchell: But you sound confident on the sort of sell through I, suppose and so the guidance Embeds youll sell in re couples upwards to sell through in the second half. So I just wanted to make sure is that the right way of thinking about it and when Youre thinking about sell through right. Now is your sense from your salespeople.
Michael M. Larsen: Okay, thanks for filling that in. And then maybe I could just follow up on the food guide, the bottom-up food sort of outlook of three to 5% seems like a bit of an acceleration from sort of recent trends. And we don't have super easy comps, I don't think.
Julian Mitchell: And the bottom up what you mentioned that the sell through in most of your markets is sort of better now than a few months ago, just trying to understand that please.
Michael M. Larsen: So what are you seeing in the market? Yeah, sure, Steve. So on food equipment, you're projecting three to 5% growth next year, really, on the back of a few different aspects. Firstly, as always, with food equipment, it's a very fertile environment for innovation. So we see several new product launches across all product categories. We expect less channeled stocking in food equipment in 2024.
Julian Mitchell: I'd say, it's about the same Julien I mean, I think we.
Julian Mitchell: As Chris said, we just delivered.
Julian Mitchell: 2% organic growth.
Julian Mitchell: <unk> 23 in a pretty challenging environment as we talked about and that includes <unk>.
Julian Mitchell: A point of inventory reduction impact.
Julian Mitchell: And I might add a point of drag from semi since it came up earlier so.
Julian Mitchell: If those two don't repeat which is what we're.
Julian Mitchell: Saying then you go from two to four pretty quickly so.
Speaker Change: And we're not saying that.
Michael M. Larsen: And also, I would say we have a continued recovery in service. As you know, service is about one third of our revenues in food. We're the only major manufacturer with that captive service business.
Speaker Change: Destocking continues at the same level in the first half, which I think is what you said.
Speaker Change: We do expect it to be less of a drag in the first half. We also said the comps year over year are certainly more challenging.
Speaker Change: In the first half than they are in the second half.
Speaker Change: So.
Speaker Change: But I think we're confident because when we look at everything going on inside the company.
Michael M. Larsen: And service is a business that's still in recovery pretty much from COVID. Equipment has recovered, but we will probably see the final year of recovery in service in 2024. And all that is adding up to a three to five. Growth, Wealth, and Food. I understand. Thank you. Your next question comes from the line of Andy Kaplowitz with City. Linus: Good morning, everyone.
Speaker Change: And this focus on driving above market organic growth a big focus on customer back innovation, we look at the pipeline of new products that are <unk>.
Speaker Change: <unk> launched in every one of our divisions across the company, we look at it kind of a normal pricing environment.
Speaker Change: We feel pretty confident based on what we're seeing.
Speaker Change: As we sit here today now we also said this is a pretty.
Speaker Change: Uncertain.
Michael M. Larsen: Michael, when we look at your one to 3% organic growth forecast for 24, you have a nice acceleration dialed in for your CapEx businesses, you know, such as welding and TNM. You're saying you're basing your guidance on current run rates. So, you obviously did mention some improvement in sequential demand in Q4. Could you give us more color on what you're seeing in these CapEx businesses that's allowing you to forecast, you know, what you're forecasting? I would imagine you're dialing in improvements in semiconductors and electronics, for instance, in TNM, but, you know, that goes, it's not what you usually do. I'm just curious as to what's flushing.
Speaker Change: And volatile environment things can change quickly.
Speaker Change: And so the thing that we have a lot of confidence is our ability to continue to read and react to whatever.
Speaker Change: Conditions are divisions are dealing with on the ground.
And deliver.
Speaker Change: Our strong performance as we go through 2024 so.
Speaker Change: We're not economists, we're not trying to forecast where the global economy is going where kind of basing our guidance on all the things. We just talked about so that's how we ended up in that one to three range.
Speaker Change: For 2024, which to us doesn't seem like.
Speaker Change: A moonshot based.
Speaker Change: Based on everything we just talked about.
Speaker Change: That's helpful. Thank you and then maybe switching away from the top line.
Speaker Change: Yes.
Speaker Change: On the margin front I think in an earlier question reply, you mentioned sort of higher investments offsetting.
Michael M. Larsen: Well, I think, like we've said, really most of the year we've seen some slowing in demand for CapEx, and certainly in Q3 and Q4. I think as we go into 2024, as Chris just said, we've got less headwind from these customer and channel partner inventory reductions that were a drag of about 1% in 2023. We have a meaningful contribution and increased contribution from new products given all the efforts around customer-backed innovation that we're driving. And then we have normal pricing, and you put all of that together just based on, I think, as you point out, it was encouraging that, you know, we saw a pickup in the sequential revenue per day from Q3 to Q4. That, I think, tells you that there's certainly some stability here, and some of the headwinds I just described are, you know, maybe mostly behind us.
Speaker Change: Enterprise initiatives.
Speaker Change: So it's a couple of things on margin one was.
Speaker Change: Are we seeing a big increase in R&D and <unk> Capex this year and any color on those as a sort of external benchmark for that reinvestment rate and then price cost I think a big first half tailwind for you maybe on margins. This year, just wanted to sort of any sense of scale for that.
Speaker Change: Yes price cost I think we are.
Speaker Change: Kind of in a normal environment for 2024, it's not going to be a material driver of our performance it will be a modest contribution to margins.
Speaker Change: And EPS in 2024 based on everything that we know today from a pricing.
Speaker Change: And then inflation standpoint in terms of the investments I think.
Speaker Change: Our.
Speaker Change: Investments grow in line with.
Michael M. Larsen: We expect a little bit of headwind from these inventory reductions as we go through the first half of the year. Think of it as, you know, we're working through our own inventory levels here, and we expect to reduce our inventories in the first half. We think our customers and channel partners may be doing some of the same, but it will be less of a business. Market pickup will come here in the second half. We expect to gain share and launch new products in this space that will grow a little bit faster than the market there. But overall, we're not expecting a big recovery in demand or the economy to pick up in the second half. This is basically based on kind of current run rates. The one outlier I'll just reiterate is...
Speaker Change: Our sales over time and that's true both for.
Speaker Change: Core customer back innovation, that's also true.
Speaker Change: For our capacity Capex improvements that are all of these investments about $800 million.
Speaker Change: 2024 are geared.
Speaker Change: Centered around.
Speaker Change: Driving above market organic growth in every one of our divisions.
Speaker Change: And the biggest.
Speaker Change: Headwind I think to margins this year was not so much the investments.
Speaker Change: Necessarily not just in growth, but we saw inflation in our employee related costs, just like everybody else, including wages and benefits and we expect that that part of the equation.
Michael M. Larsen: Automotive, you know, we're going from a build environment in 2023 that was up in the high single digits. We expect that to be about flat. And so the growth in automotive is all from penetration gains and continued market share and innovation in China, which has been an incredible contributor to our overall growth rate and will remain so for the foreseeable future. Very helpful color, Michael.
Speaker Change: To moderate here in 2024 based on some of the actions, we're taking to manage those costs in 2024, so thats not going to be.
Speaker Change: An increased headwind as we as we go forward.
Speaker Change: Thanks, very much sure.
Speaker Change: The next question comes from the line of Mig <unk> with Baird.
Michael M. Larsen: And then, Chris or Michael, you mentioned unique challenges in specialty equipment and construction products. Maybe you could elaborate on what you're seeing in these segments, doing more PLS and specialty, for example. What's the outlook or, you know, the friendly outlook for 2021? Yeah, that's correct, Andy, in terms of especially particularly, you know, we're doing some strategic portfolio work there, a heavier, I would say, amount of product line pruning than we normally expect in a normal maintenance environment. We're doing quite a bit more, especially to position that segment for long-term growth of 4% plus. So that's what's going on here.
Mig: Your line is open.
Mig: Thank you for taking my question good morning.
Mig: Good morning Mig.
Mig: On the topic of outgrowth is sounds like you are.
Mig: Being about 2% this year.
Mig: Aiming for maybe three percentage points.
Mig: Guess, what I am curious when your when Youre looking at your portfolio.
Mig:
Mig: Presumably we don't have this outgrowth notion being sort of evenly distributed.
Mig: Portions of your portfolio are generating our growth at the pace that debt.
Mig: Did you need it to be and where where else do we need to see further investment.
Mig: The adjustments needed to be made.
Speaker Change: Yes, so I think I would say that.
Speaker Change: We're probably seeing a growth across most of our portfolio I would use auto as an example of the clinical flat bills in 2024, we're talking about three to five on auto as an example.
Michael M. Larsen: And we're pretty pleased with the progress around that. And on construction, it's very much a market story. I mean, obviously, you know, all three main markets for us, North America, Western Europe, and Australia and New Zealand, are all forecasting significantly declines in housing costs next year. 11% in North America, mid single digits in Europe, and high single digits in ANZ. So that's really what's impacting the construction. Helpful guys. Thank you. Your next question comes from the line of Joe O'Dee with Wells Fargo. You learned it as, " Hi, good morning."
Speaker Change: Historically or grown in food equipment.
Speaker Change: I think as we think you know if you look at some of the comparisons and so on.
Speaker Change: Also with <unk>.
Speaker Change: Welding and with construction.
Speaker Change: Large drone market here in 2023 which we all grew so so we have the capacity to grow across most of our segment and with respect to investments I think we've been making these focused targeted investments for some time now this is not new news, it's something we've been doing for a few years to really position ourselves to grow at 4% plus.
Michael M. Larsen: Thanks for taking my question. Good morning. So, I mean, you talked about the daily sales rate from Q3 to Q4. It sounds like overall, it is perhaps getting a little bit better. You're talking about adding some headcount. Can you just expand a little bit on, you know, customer conversations over the last several months? to understand a little bit better, sort of the verticals where you have some of that uptick happening and then where you are adding.
Speaker Change: Across the enterprise over over this next phase and I think the big driver of that as we said a few times is customer back innovation as the lead in on customer back innovation.
Speaker Change: We've been working on for a couple of years and will accelerate over this next few years and Thats really what will drive the <unk> growth.
Going forward.
Speaker Change: That customer back innovation opportunity rich.
Speaker Change: <unk> in every segment on the basis of the level of differentiation in every segment.
Speaker Change: Sure runway opportunity we have in every segment. So we would expect every segment in time to meaningful meaningfully contributed to that 4% plus organic growth, yes, I would just add to that.
Michael M. Larsen: Yeah, I mean, the tone from customers has been pretty cautious all year, particularly on the CapEx side of things, as we talked about. You know, if you go back to our investor day last year, we talked a lot about accelerating our efforts to drive high-quality, above-market organic growth, primarily fueled by, as Chris said earlier, our customer-backed innovation efforts. And so those are the areas, you know, all growth related headcount ads that we're making to make sure that we have all the capability we need in terms of innovation, commercial sales, and marketing resources to drive continued progress and deliver on our above market organic growth commitment. I got it.
Speaker Change: We've talked a lot about the individual segments today I think you got to look at it.
Speaker Change: Tw as the beneficiary of a highly diversified high quality portfolio all of our segments with margins in the high Twenty's, we're working through automotive and so you're always going to have some puts and takes which is what we're talking about.
Speaker Change: This portfolio really gives us a level of of resilience.
And a real competitive advantage relative to others and puts us in a great position to do.
Speaker Change: Perform continue to perform at a high level.
Speaker Change: In any type of demand environment over the long term that we never said that we were going to be the fastest grower. There is always going to be a certain end market trends, whether it would be.
Speaker Change: Aerospace, our electrification or whatever it may be but you put this portfolio together in its totality, we have all the firepower that we need to deliver 4% plus.
Michael M. Larsen: And then on the channel inventory side of things, talk about the visibility that you have and how maybe elevated those inventory levels got during the supply chain, where you think they are now relative to normal for this year. Yeah, I think by and large, if you go back historically, we haven't had great visibility into the levels of inventory in the channel and with our customers. I think we have much better visibility today, given that we've been talking about it all year. Overall, it's been a drag of a percentage point on our growth rate for the year, it was one and a half percent in Q3. Thank you, and I think several of our segments are back to kind of normal inventory levels, and this is largely behind us. And then there's maybe a few other areas where there might be some continued but certainly We'll give you an update.
Speaker Change: The average annual organic growth as we go forward.
Speaker Change: And Oh by the way five of our segments are doing that as we said earlier in.
Speaker Change: In 2024 so.
Speaker Change: Shouldn't lose sight of the fact that we're a business model centric company and a huge beneficiary of this high quality.
Speaker Change: Diverse diversified portfolio.
Speaker Change: Understood and then my follow up.
Speaker Change: Maybe a question on M&A, Chris I'd love to get your thoughts on that.
Speaker Change: Sure.
Chris Soherlihy: Maybe how you think about using M&A as a potential tool to generate.
Outgrowth that you're talking about.
Chris Soherlihy: Yes sure makes it so effectively we are very much sticking to our disciplined portfolio management strategy, which is very consistent in terms of.
Chris Soherlihy: We're certainly interested in high quality acquisitions, where we can find them that extend our long term growth potential.
Chris Soherlihy: So at a minimum 4% loss in high quantity. That's the primary lens, we look at acquisitions.
Chris Soherlihy: <unk> been able to leverage the business model to improve margins and so.
We certainly review opportunities on an ongoing basis, but we're pretty selective acquisitions given the fact that we believe we've got a lot of organic growth potential that we were going to execute on here over the next few years.
Michael M. Larsen: I think we'll be able to say this is now completely behind us. And so with respect to the growth outlook, there's no real notable inventory. Well, there's a little bit. I mean, obviously, if you look at our run rates, it is included in our run rates at a higher level than what we might reasonably expect. So if that plays out the way we expect, that would certainly be favorable to the run rate and to the guidance that we just gave you. I understand. Thank you.
Chris Soherlihy: If we think about MTS is an example of that.
Chris Soherlihy: Typical.
Chris Soherlihy: It's attractive candidate we look at.
Chris Soherlihy: Ticked all the boxes in terms of strategic attraction in terms of.
Chris Soherlihy: Differentiation solving customer pain points.
Chris Soherlihy: Opportunity to leverage the business model to improve margins and having owned that business now for just over two years, because we stopped to the characteristics.
Michael M. Larsen: Mm-hmm. Your next question comes from the line of Andrew Obin with Bank of America. Hey, good morning. You have Shabrina Abrams on for Andrew Obin. Hey, Sabrina.
Chris Soherlihy: We believe and with respect to acquisitions. This is an acquisition is turning out to be a homerun.
We will be a great ITW business in the long term. So it's a good blueprint for how we think about acquisitions and how we'll be thinking about acquisitions going forward.
Michael M. Larsen: As we think about pricing into 2024, are there any segments or any particular businesses where, on the margin, you're seeing more competition and pricing competition as costs moderate? Well, I think we've talked about this before. You know, we want to maintain our price premium based on the quality and the customer service, and the lead times that ITW is uniquely positioned to provide. But we also want to compete, and we want to gain market share. You know, that's kind of central to our overall enterprise strategy and the focus I just talked about around organic growth. So, you know, that said, I think we expect a normal contribution from prices here in 2024. You know, these inflation-driven price increases are now behind us; input cost inflation, that big wave we've been dealing with, as we sit here today, we'd say is largely behind us.
Speaker Change: I appreciate it thank you.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Thank you for participating in today's conference call all lines may disconnect at this time.
[music].
Speaker Change: Okay.
Michael M. Larsen: And so we're entering into a normal pricing environment across the portfolio. I think that is a fair statement. If you just look at, you know, we've now essentially recovered the margin impact from that Price, Cost, Savings. The Price-Cost Dynamics, and we're entering into a normal environment in 2020. Thanks.
Speaker Change: Okay.
Michael M. Larsen: And then as a follow-up on welding, what is driving the reacceleration and growth there from the down 6% in 4Q? And how are you thinking about margins in the segment in 2024? Given, you know, where you're exiting the year and the sort of margins you reported in 2023 here, Well, I think welding, so we're not counting on a market acceleration, just to be clear. This is because if you look at in a normal market environment, just assume for a minute, let's assume the market's flat, the contribution from new products and normal price very quickly gets you to something in the low single digits. So I just want to be clear about that.
Speaker Change: [music].
Okay.
Michael M. Larsen: The other thing I'd say, just on the margins, you know, we talked a little about the year-over-year inventory revaluations that caused the margins to drop in the fourth quarter below 30%. And we expect that to be back above 30% here in the first quarter, as that one-time kind of year-over-year inventory impact is behind us. So we would expect margins to kind of remain in that 30% plus as we go through 2024. And as I said earlier, every one of – and that's not unusual – every one of our segments told us that. It's part of this bottom-up planning process that they are on target to improve their operating margin performance by 2024. Thanks, I'll pass it on.
Michael M. Larsen: Yep, thank you. The next question comes from the line of Stephen Fisher with UBS. Thanks. Good morning.
Michael M. Larsen: This has been asked in a few ways about the segment, but really just trying to think about the one to 3% organic growth in the context of your four to 7% CAGR through 2030. I guess what's the buildup of market growth and price? Market Penetration and Customer Back Innovation. I know, again, there's lots of different segment dynamics here, but when you roll it all up, are you basically assuming that it's kind of like flat markets and a couple of points of penetration and innovation. Is that the way to think about it? Yeah, I think it is.
Chris O'Herlihy: I mean, as we said yesterday, in our four to seven calculus that we outlined yesterday, you have a contribution from the market, a contribution from market penetration, and the largest contribution is actually from customer-driven innovation. And that's what we're seeing here in 2024, really across most of our businesses. As we think about growth, 2% growth last year on top of 12% growth in 2021 and 2022, and targeting one to three here on the path to four plus, is kind of how we're outlining this. And I would say that it's a target and a goal that we're very confident about on the basis that it's where the bulk of our divisions are spending their time. We're making progress; there is certainly more to do.
Chris O'Herlihy: But given the portfolio, given the fact that we've got plenty of room to grow in each segment, given the investments that Michael has been talking about that we've been making over quite a few years in strategic marketing and innovation, we're really putting ourselves and building the muscle here to get into a position where we will grow 4% plus over the entirety of this next phase. And I think in terms of just capability building, if you think about this in the way that, you know, the way we leaned into front to back 80-20 in the last phase of our strategy, that's the way we're leading into innovation in the next phase of our strategy. The same level of rigor, scope, and capability building that we applied to front-to-back 80-20 in the first phase, we are now applying to customer-backed innovation in this next phase. And I would say we're very encouraged by the progress that we've seen in innovation over the last couple of years. It was a 1% contributor five years ago.
Chris O'Herlihy: It's now a 2% contributor on its way to 3% and beyond. And again, I'm very encouraged by the progress that we're seeing across many of our divisions in terms of the qualitative work they're doing on innovation, but also in terms of the quality of the innovation pipeline across all seven sites. That's really helpful.
Michael M. Larsen: And just to follow up, sort of the macro level of the pace of economic growth seems to be diverging between Europe and North America, increasingly so. Give us a sense of what you've factored in for the European economy and how you're thinking about that. You talked about the construction side, but, and I guess similarly about China, how are you thinking about China in 24, sort of a net positive for you, I think, in 23, maybe different for some other companies. So how are you thinking about that in 24?
Michael M. Larsen: Yeah, I think in our overall guidance here of 1 to 3 organic, that's where you'll find all the major geographies. So North America, you know, in that low single-digit, 1 to 3% range. And Europe, kind of similar to North America.
Michael M. Larsen: Definitely, we've seen some challenges on the construction side, as you pointed out, but kind of when you put it all together, it's in that 1 to 3 range. And then China is more positive, but that's really driven by the automotive business, which is more than half of our revenues in China. So we expect another double-digit growth for the auto business in China, and that takes China to kind of the mid-single-digit range in 2024. Really helpful. Thank you so much.
Michael M. Larsen: Sure. Your next question comes from the line of Julian Mitchell with Barclays. Your line is open.
Michael M. Larsen: Thanks very much and good morning, somewhat retreading some worn ground already, but just trying to understand the revenue outlook again because it sounds like you had suffered from some de-stocking in 2023. Are you assuming that de-stocking continues in Q1 and Q2, or are you seeing that de-stocking continues, the? But you sound confident on the sort of sell-through, I suppose, and so the guidance embeds your sell-in and recouples upwards to sell-through in the second half. So I just wanted to make sure, is that the right way of thinking about it? And when you're thinking about sell-through right now, your sense from your sales people and the bottom up is that sell-through in most of your markets is better now than a few months ago. Just trying to understand that. I'd say it's about the same, Julian.
Michael M. Larsen: I mean, as Chris said, we just delivered, you know, 2% organic growth in a pretty challenging environment, as we talked about, and that included a point of inventory reduction impact, and I might add a point of drag from SEMI since it came up earlier. So if those two don't repeat, which is what we're saying, then you go from two to four pretty quickly. And we're not saying that... You know, de-stocking continues at the same level in the first half, which I think is what you said. But we do expect it to be less of a drag in the first half.
Michael M. Larsen: We also said that comps year over year are certainly more challenging in the first half than they are in the second half. So, you know, but I think we're confident because when we look at everything going on inside the company, and this focus on driving above-market organic growth, a big focus on customer-backed innovation, we look at the pipeline of new products that are being launched in every one of our divisions across the company, and we look at a kind of normal pricing environment. We feel pretty confident based on what we're seeing as we sit here today. Now, we also said this is a pretty uncertain and volatile environment; things can change quickly. And, you know, and so the thing that we have a lot of confidence in is our ability to continue to read and react to whatever conditions our divisions are dealing with on the ground and deliver strong performance as we go through 2024. So you know we're not economists. We're not trying to forecast where the global economy is going.
Michael M. Larsen: We're kind of basing our guidance on all the things we just talked about. So that's how we end up in that one to three range for 2024, which to us doesn't seem like a moonshot based on everything we just talked about. That's helpful. Thank you.
Michael M. Larsen: And then maybe switching away from the top line. You know, on the margin front, I think in an earlier question..., you mentioned sort of higher investments offsetting the Enterprise Initiative. So here's a couple of things on margin. One was, you know, are we seeing a big increase in R&D and or CapEx this year and any color on that as a sort of external benchmark for that reinvestment rate? And then price cost, I think a big first half tailwind for you maybe on margins this year, just wanted to sort of get a sense of scale. Yeah, no price cost.
Michael M. Larsen: I think we're kind of in a normal environment for 2024. It's not going to be a material driver of our performance; it'll be a modest contribution to margins and EPS in 2024 based on everything that we know today from pricing and a, and Andreas Lange. Our investments grow in line with our sales over time, and that's true both for customer-backed innovation and for our capacity, and CapEx improvements. All of these investments, about $800 million in 2024, are geared and centered around driving above-market organic growth in every one of our divisions. And the biggest... You know, headwind, I think, to margins this year was not so much the investments but an increased headwind as we go forward. Thanks very much.
Chris O'Herlihy: Sure. Your next question comes from the line of Mig Dobre with Baird. Linus, Good morning, Meg.
Chris O'Herlihy: So, on the topic of... and Yeah, so I would say that we're probably seeing growth across most of our portfolio. I would use, you know, auto as an example, think about flat bills in 2024. We're talking about, you know, three to five, you know, on auto as an example. We've historically outgrown in food equipment, I think, as I think, if you look at some of the comparisons and so on.
Chris O'Herlihy: And also, you know, with welding and with construction. So we've been able to grow across much of our segment. And with respect to investments, I think we've been making these focused, targeted investments for some time now. This is not new news.
Chris O'Herlihy: This is something we've been doing for a few years to really position ourselves to grow at 4% plus, you know, across the enterprise over this next phase. And I think the big driver of that, as we've said a few times, is customer-backed innovation, the leaning on customer-backed innovation that we've been working on for a couple of years and will accelerate over this next phase. And that's really what will drive growth going forward. And that customer-backed innovation opportunity resides in every segment on the basis of the level of differentiation in every segment, the share runway opportunity we have in every segment. So we would expect every segment, you know, in time, to meaningfully contribute to that 4% plus organization.
Chris O'Herlihy: Yeah, I would just add to that, Meg, you know, we've talked a lot about the individual segments today. I think you have to look at ITW as the beneficiary of a highly diversified, high quality portfolio; all of our segments with margins in the high 20s, you know, we're working through automotive. And so you're always going to have some puts and takes, which is what we're talking about. But you know, this portfolio really gives us a level of resilience and a real competitive advantage relative to others and puts us in a great position to, you know, perform, and continue to perform at a high level in any type of demand environment over the long term. But we never said that we were going to be the fastest grower.
Michael M. Larsen: You know, there's always going to be certain end market trends, whether it be aerospace or electrification or whatever it may be. But you put this portfolio together in its totality, we have all the firepower that we need to deliver a 4% plus, average annual organic growth as we go forward. And oh, by the way, five of our segments are doing that, as we said earlier, in 2024. So I wouldn't lose sight of the fact that, you know, we are we're business model centric company and a huge beneficiary of this high quality, diverse, diversified portfolio, on my follow-up. , , , , , maybe how you think about Yeah, sure. So effectively, we are very much sticking to our disciplined portfolio management strategy, which is, you know, very consistent in terms of, you know, we are certainly interested in high quality acquisitions, where we can find them that extend our long term growth potential, you know, to grow at a minimum 4% plus at high quality, that's the primary kind of lens we look at acquisitions, we have been able to leverage the business model to improve margins.
Michael M. Larsen: And so, you know, we certainly review opportunities on an ongoing basis, but we're pretty selective here about acquisitions given the fact that we believe we've got a lot of organic growth potential that we're going to execute on here over the next few years. And, you know, if I think about MTS as an example of the typical attractive candidate we look at, it ticked all the boxes in terms of strategic attraction, in terms of differentiation, and solving customer pain points. Q&A: Thank you for participating in today's conference call. All lines may disconnect at this time.