Q1 2024 Illinois Tool Works Inc Earnings Call

Good morning, My name is Christa and I will be your conference operator today at this time I would like to welcome everyone to the I T. W. First quarter earnings conference call. 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 would like.

Krista: Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

Krista: 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 the star, followed by the number one on your telephone keypad. And if you would like to withdraw your question, press the star 1 again. For those participating in Q&A, you will have the opportunity to ask one question and, if needed, one follow-up question. Thank you. Erin Linenhan, Vice President of Investor Relations. You may begin your conference.

To ask a question during this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question.

The star one again.

Speaker Change: For those participating in Q&A, you will have the opportunity to ask one question and if needed one follow up question. Thank you Aaron Lennon Hern, Vice President of Investor Relations you May begin your conference.

Speaker Change: Thank you Krista good morning, and welcome to Itw's first quarter 2024 conference call today, I'm joined by our President and CEO, Christopher Hurley Senior Vice President and CFO, Michael Larsen and Vice President of Investor Relations Karen Fletcher.

Erin Linnihan: Good morning, and welcome to ITW's first quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris OHerlihy, Senior Vice President and CFO, Michael Larsen, and Vice President of Investor Relations, Karen Fletcher.

Erin Linnihan: During today's call, we will discuss ITW's first quarter financial results and provide an update on our outlook for full year 2024. Slide two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 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 as contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our President and CEO, Chris OHerlihy.

During today's call, we will discuss Itw's first quarter financial results and provide an update on our outlook for full year 'twenty 'twenty four.

Speaker Change: Slide two is a reminder, that this presentation contains forward looking statements. We refer you to the company's 2023 Form 10-K, and subsequent reports filed with the FCC 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 President and CEO Christopher Harley.

Christopher A. OHerlihy: Thank you, Erne, and good morning, everyone. While the near-term demand environment across a majority of our segments was certainly challenging, as we anticipated, the ITW team delivered a solid start to the year as our first quarter results came in as expected, and we remain solidly on track to deliver on our 2024 performance target. Starting with the top line, organic growth was down 0.6%, as five of seven segments declined in the face of a tough demand environment and against some difficult comparisons year over year.

Christopher Harley: Thank you Aaron and good morning, everyone.

Christopher Harley: While the near term demand environment across the majority of our segments was certainly challenging as we anticipated the ITW team delivered a solid start to the year as our first quarter results came in as expected.

Christopher Harley: We remain solidly on track to deliver on our 2020 for performance targets.

Christopher Harley: Starting with the top line organic growth was down <unk>, 6% as five of seven segments declined in the face of a tough demand environment and versus some difficult comparisons year over year.

Christopher A. OHerlihy: Those comparisons are more favorable to the balance of the year, and based on current levels of demand, we are confident that we will deliver on our full year performance targets, including organic growth of 1 to 3 percent. The ITW team continued to execute at a very high level and delivered strong margin and profitability performance in the first quarter. Excluding a one-time inventory accounting item, quarterly operating income grew 4% as operating margin expanded 120 basis points to 25.4% with a strong contribution from enterprise initiatives of 140 basis points, as we continue to make solid progress towards our goal of 30% operating margin by 2030. Gap EPS of $2.73 increased 17%, and excluding the one-time item, we grew EPS 5% to $2.44. The free cash flow conversion rate of 68% was in line with normal Q1 levels.

Christopher Harley: Those comparisons are more favorable for the balance of the year and based on current levels of demand. We are confident that we will deliver on our full year performance targets, including organic growth of 1% to 3%.

Christopher Harley: Yeah.

Christopher Harley: The ITW team continued to execute at a very high level and delivered strong margin and profitability performance in the first quarter.

Speaker Change: Excluding a onetime inventory accounting item.

Speaker Change: Operating income grew 4% as operating margin expanded 120 basis points to 25, 4% with a strong contribution from enterprise initiatives of 140 basis points.

Speaker Change: As we continue to make solid progress towards our goal of 30% operating margin by 2030.

Speaker Change: Okay.

Speaker Change: GAAP EPS of $2 73 increased 17% and excluding the one time item, we grew EPS, 5% to $2 44.

Speaker Change: The free cash flow conversion rate of 68% was in line with normal Q1 levels.

Speaker Change: Looking ahead, while we did raise our GAAP EPS and margin guidance for the year to account for the one time item our operational guidance remains unchanged.

Christopher A. OHerlihy: Looking ahead, while we did raise our gap EPS and margin guidance for the year to account for the one-time item, our operational guidance remains unchanged. We continue to expect that current levels of demand across the majority of our end markets and favorable year-over-year comparisons will translate to positive organic growth through the balance of the year. Combined with our continued strong margin and profitability performance, we are confident that ITW is firmly on track and well-positioned to deliver on our 2024 guidance.

Speaker Change: We continue to expect that current levels of demand across the majority of our end markets and favorable year over year comparisons will translate to positive organic growth through the balance of the year.

Speaker Change: Combined with our continued strong margin and profitability performance. We are confident that ITW is firmly on track and well positioned to deliver on our 2020 for guidance.

Speaker Change: In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts.

Christopher A. OHerlihy: In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our first quarter performance in more detail as well as our updated full year guidance. Michael. Thank you, Chris.

Speaker Change: And for their dedication to serving our customers with excellence and driving continuous progress on our path to itw's full potential.

Speaker Change: I will now turn the call over to Michael to discuss our first quarter performance in more detail as well as our updated full year guidance Michael.

Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q1, we delivered a solid start to the year with some high-quality execution in a pretty challenging demand environment, as expected. Despite an organic revenue decline of 0.6%, operating income grew 4%, and operating margin improved 120 basis points to 25.4% as Enterprise Initiative contributed 140 basis points. EPS increased 5% to $2.44, excluding a one-time item. Our free cash flow was $494,000,000, and we repurchased $375,000,000 of our own shares during the quarter.

Michael M. Larsen: Thank you, Chris and good morning, everyone.

Michael M. Larsen: In Q1, we delivered a solid start to the year with some high quality execution in a pretty challenging demand environment as expected.

Michael M. Larsen: Spite, an organic revenue decline of 0.6% operating income grew 4% and operating margin improved 120 basis points to 25, 4% as enterprise initiatives contributed 140 basis points.

Michael M. Larsen: EPS increased 5% to $2 44, excluding a one time item.

Michael M. Larsen: Our free cash flow was $494 million, and we repurchased 375 million of our own shares during the quarter as planned.

Michael M. Larsen: Gap EPS increased 17% to $2.73, and Operating Margin expanded 420 basis points to 28.4%. As you saw this morning, our GAAP results include a one-time LIFO inventory accounting change that resulted in a favorable pre-tax impact of $117 million on cost of revenue equal to $0.29 a share. In Q1, we made the decision to transition from the LIFO to the FIFO inventory accounting method for all of our U.S. businesses because it is a more consistent and simpler method for valuing inventory across our operations.

Michael M. Larsen: GAAP EPS increased 17% to $2 73.

Michael M. Larsen: And operating margin expanded 420 basis points to 28, 4%.

Michael M. Larsen: As you saw this morning, our GAAP results include a onetime LIFO inventory accounting change that resulted in a favorable pre tax impact of $117 million to cost of revenue.

Michael M. Larsen: <unk> 29 a share.

Michael M. Larsen: In Q1, we made the decision to transition from the LIFO to FIFO inventory accounting method method for all of our U S businesses.

Michael M. Larsen: Because it is a more consistent and simpler method for valuing inventory across our operations.

Michael M. Larsen: In summary, Q1 results were as expected, and the current environment and growth rates are projected to improve as we go through the balance of the year. Our margin and profitability performance continues to be strong, and we're solidly on track to deliver on our guidance, which I will discuss in a few slides. Please turn to slide 4 for a look at Organic Growth by Geography.

Michael M. Larsen: In summary, Q1 results were as expected in the current environment and growth rates are projected to improve as we go through the balance of the year.

Michael M. Larsen: Our margin and profitability performance continues to be strong and we're solidly on track to deliver on our guidance, which I will discuss in a few slides.

Michael M. Larsen: Please turn to slide four for a look at organic growth by geography.

Michael M. Larsen: As you can see, the 4% decline in North America was partially offset by positive growth internationally as Europe grew 1% and Asia-Pacific grew 6%, led by China, up 15%. Excluding the 23% growth rate in our Chinese automotive OEM business, organic growth in China was still up 7%. For the full year, and per our usual process, which is based on current levels of demand, we expect organic growth of one to 3% in both North America and Europe, with Asia-Pacific up in the mid-single digits, led by China.

Michael M. Larsen: As you can see the 4% decline in North America was partially offset by positive growth internationally as Europe grew 1% and Asia Pacific grew 6% led by China up 15%.

Michael M. Larsen: Excluding the 23% growth rate in our Chinese automotive OEM business organic growth in China was still up 7%.

Michael M. Larsen: For the full year and per our usual process, which is based on current levels of demand, we expect organic growth of 1% to 3% in both North America, and Europe with Asia Pacific up in the mid single digits led by China.

Michael M. Larsen: Moving on to segment results and starting with the automotive OEM segment, which delivered solid organic growth of 3%, Despite North America being down 6% as Europe grew 2% in China grew 23% driven.

Michael M. Larsen: Moving on to segment results and starting with the automotive OEM segment, which delivered solid organic growth of 3% despite North America being down 6%, as Europe grew 2%, and China grew 23%, driven by continued strong penetration and market share. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2-3% and continued outgrowth in China.

Michael M. Larsen: Driven by continued strong penetration and market share gains.

Michael M. Larsen: For the full year, we continue to expect solid above market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China.

Michael M. Larsen: Margin and profitability performance was strong as margins improved by 370 basis points to 19, 8%.

Michael M. Larsen: Margin and profitability performance was strong as margins improved by 370 basis points to 19.8%, and Enterprise Initiatives contributed more than 200. We continue to make solid progress on the Margin Enhancement Plan in this segment, and we are firmly on track to deliver margins in the low to mid-20s by 2026, which you will recall is what we said we would do at our investor day last year. Turn to slide 5, Food Equipment Organic Revenue declined 1% as expected against a tough comparison, plus 16% in the first quarter last year.

Michael M. Larsen: In enterprise initiatives contributed more than 200 basis points.

Michael M. Larsen: We continue to make solid progress on the margin enhancement plan in this segment and we are firmly on track to deliver margins in the low to mid <unk> by 2026.

Michael M. Larsen: You will recall is what we said we would do at our Investor day last year.

Michael M. Larsen: Turning to slide five food equipment organic revenue declined 1% as expected against the tough comparison of plus 16% in the first quarter last year.

Michael M. Larsen: Equivalent was down 4% and service grew 3% and by region North America declined 2% due to a particularly difficult comparison of plus 21%.

Michael M. Larsen: Equipment was down 4%, and service grew 3%, and by region, North America declined 2% due to a particularly difficult comparison of plus 21%. On a positive note, the retail business was up 10% fueled by new product launches. And overall, North American order activity in Q1 was pretty encouraging across the board. International revenue was flat, with Europe down 1% and Asia Pacific up 6%.

Michael M. Larsen: On a positive note the retail business was up 10% fueled by new product launches and overall North America order activity in Q1 was pretty encouraging across the board.

Michael M. Larsen: International revenue was flat with <unk> down, 1% and Asia Pacific up 6%.

Michael M. Larsen: While five of our seven segments improved their margins in Q1 food equipment margins declined modestly to 26% as a result of focused capacity investments to support and accelerate continued above market organic growth in our <unk>.

Michael M. Larsen: While five of our seven segments improved their margins in Q1, food equipment margins declined modestly to 26% as a result of focused capacity investments to support and accelerate continued above-market organic growth in our very attractive service. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to test and measurement and electronics, organic revenue was down modestly as test and measurement grew 2% despite a tough comparison of plus 12%. Electronics was down 8% due to challenging near-term demand trends in electronic assembly.

Michael M. Larsen: Very attractive service business.

Michael M. Larsen: Looking forward, we expect margins to continue to improve sequentially as.

Michael M. Larsen: As we go through the year.

Michael M. Larsen: Turning to test and measurement and electronics organic revenue was down modestly as test <unk> measurement grew 2%. Despite a tough comparison of plus 12%.

Michael M. Larsen: Electronics was down 8% due to challenging near term demand trends and electronic assembly.

Michael M. Larsen: The recent MTS acquisition continues to perform well and grew more than 20%.

Michael M. Larsen: The recent MTS acquisition continues to perform well and grew more than 20%. With margins that are improving but still in the mid-teens, this created a mixed headwind for the segment and diluted segment margins by about 250 basis points. Looking ahead, we expect test and measurement and electronics margins to improve from here as we go through the balance of the year.

Michael M. Larsen: With margins that are improving but still in the mid teens. This created a mix headwind for the segment and.

Michael M. Larsen: And diluted segment margins by about 250 basis points.

Michael M. Larsen: Looking ahead, we expect test and measurement and electronics margins to improve from here as we go through the balance of the year.

Michael M. Larsen: Moving on to slide six and as expected welding face faced a tough demand environment and year over year comparison of plus 10%, which resulted in a decline of 3% in Q1.

Michael M. Larsen: And as expected, welding faced a tough demand environment and year-over-year comparison, plus 10%, which resulted in a decline of 3% in Q1. Equipment declined 2%, and consumables were down 6%. Industrial sales declined 1% versus an 18% comparison and the commercial side was down six. By region, North America declined 3%, compared with plus 10%, and international declined 8%. On a positive note, operating margin improved 80 basis points to 32.7% with a solid contribution from Enterprise. Organic revenue in Palmazo Fluids declined modestly as the automotive aftermarket was down 2%; both fluids and polymers were essentially flat in the. On a geographic basis, North America declined 5% and international grew 5%, led by China.

Michael M. Larsen: Equipment declined, 2% and consumables were down 6%.

Michael M. Larsen: Industrial sales declined 1% versus an 18% comparison in the commercial side was down 6%.

Michael M. Larsen: By region, North America declined 3% as the comparison of plus 10% and international declined 8%.

Michael M. Larsen: On a positive note operating margin improved 80 basis points to 32, 7% with a solid contribution from enterprise initiatives.

Michael M. Larsen: Organic revenue in polymers <unk> fluids declined modestly as automotive aftermarket was down 2% and both fluids and polymers were essentially flat in the quarter.

Michael M. Larsen: On a geographic basis, North America declined, 5% and international grew 5% led by China.

Michael M. Larsen: Operating margins improved 140 basis points to 25, 8%.

Michael M. Larsen: Operating margins improved 140 basis points to 25.8%. Turn to slide 7, near-term demand trends in construction products continue to be challenging on a global basis, and organic revenue declined 7% in Q1. North America was down 3% as the residential and renovation business was down 1%, and international markets remain soft as Europe was down 11% and Australia and New Zealand was down 12%.

Michael M. Larsen: Turning to slide seven near term demand trends in construction products continue to be challenging on a global basis.

Michael M. Larsen: As organic revenue declined 7% in Q1.

Michael M. Larsen: North America was down 3% as the residential and the renovation business was down 1%.

Michael M. Larsen: And in international markets remained soft as Europe was down 11% in Australia, and New Zealand was down 12%.

Michael M. Larsen: On a positive note operating margin improved 190 basis points to 29, 4% driven primarily by another solid contribution from enterprise initiatives.

Michael M. Larsen: On a positive note, operating margin improved 190 basis points to 29.4%, driven primarily by another solid contribution from Enterprise Initiative. Finally, specialty products. Organic revenue growth was up 6%, due primarily to the timing of large equipment orders in two European businesses. As a result, International was up 19%, and North America was down 1%.

Michael M. Larsen: Finally in specialty products organic revenue growth was up 6% due primarily to the timing of large equipment orders in two European businesses.

Michael M. Larsen: As a result international was up 19%.

Michael M. Larsen: And North America was down 1%.

Michael M. Larsen: As we have talked about before, we're working to reposition the specialty segment for consistent above-market organic growth, which involves some strategic portfolio work and more significant product line simplification as we go forward. Operating margin improved 410 basis points to 29.7%, driven by operating leverage and a solid contribution from enterprise initiatives. With that, let's move to slide eight for an update on our full year 2024 guide.

Michael M. Larsen: As we have talked about before we're working to reposition the specialty segment.

Michael M. Larsen: Consistent above market organic growth, which involves some strategic portfolio work.

Michael M. Larsen: And more significant product line simplification as we go forward.

Michael M. Larsen: Operating margin improved 410 basis points.

Michael M. Larsen: To 29, 7% driven by operating leverage and a solid contribution from enterprise initiatives.

Michael M. Larsen: With that let's move to slide eight for an update on our full year 2020 for guidance.

Michael M. Larsen: With Q1 results that were right in line with our expectations. We're solidly on track to deliver on our 2020 for performance targets and guidance.

Michael M. Larsen: Q1 results that were right in line with our expectations were solidly on track to deliver on our 2024 performance targets and guidance. Looking ahead and starting with the top line, we do see some positives in terms of stable demand, more favorable comparisons year over year as we move forward. Normalized Pricing and Inflationary Environment, New Product Launches, and No Meaningful Headwind from Inventory Destock.

Michael M. Larsen: <unk> ahead, and starting with the top line, we do see some positives in terms of stable demand.

Michael M. Larsen: More favorable comparisons year over year as we move forward.

Michael M. Larsen: Normalized pricing and inflationary environment, new product launches.

Michael M. Larsen: And no meaningful headwind from inventory Destocking.

Michael M. Larsen: Per our usual process, our organic growth guidance of 1% to 3% is based on current run rates adjusted for typical seasonality.

Michael M. Larsen: Operating margin is expected to improve by 140 basis points at the midpoint to a range of 26% to 27%, which includes more than 100 basis points contribution from enterprise initiatives and 50 basis points from the one time item in Q1.

Michael M. Larsen: Per our usual process, our organic growth guidance is one to three percent based on current run rates, adjusted for typical seasonality. Operating margin is expected to improve by 140 basis points at the midpoint to a range of 26 to 27 percent, which includes more than 100 basis points of contribution from enterprise initiatives and 50 basis points from the one-time item in Q1. As I mentioned in our last call, every segment is projecting to improve its operating margin performance again in 2024 with another solid contribution from enterprise initiatives across the board.

Michael M. Larsen: Yes.

Michael M. Larsen: As I mentioned on our last call every segment is projected to improve their operating margin performance again in 2024 with another solid contribution from enterprise initiatives across the board.

Michael M. Larsen: After tax return on capital is expected to remain firmly above 30% and we expect strong free cash flows again with conversion greater than net income.

Michael M. Larsen: As you saw this morning, we raised our full year GAAP EPS guidance to a new range of $10 30 to $10 70, which now includes 30.

Michael M. Larsen: After tax return on capital is expected to remain firmly above 30%, and we expect strong free cash flows again with conversion greater than net income. As you saw this morning, we raised our full year gap EPS guidance to a new range. $10.30 to $10.70, which now includes $0.30 of EPS from the Q1 Inventory Accounting. Setting that item aside, our operational guidance remains essentially unchanged, as we expect a combined headwind of about 30 cents from Higher Interest Expense.

Michael M. Larsen: Of EPS from Q1 inventory accounting change setting.

Michael M. Larsen: Setting that item aside our operational guidance remains essentially unchanged as we expect a combined headwind of about 30.

Michael M. Larsen: From higher interest expense currency and income taxes with an expected tax rate in the range of 24% to 24, 5%.

Michael M. Larsen: In terms of cadence for the year, we expect our first half second half EPS split to be about 50 50. This year as we factor in the one time item in the first quarter.

Michael M. Larsen: Currency and income taxes with an expected tax rate in the range of 24 to 24 and a half. In terms of cadence for the year, we expect our first half and second half EPS split to be about 50-50 this year as we factor in the one-time item in the first quarter, which compares to our typical split of 49-51, slightly less back-end loaded than usual.

Michael M. Larsen: Which compares to our typical split of 49, 51, so slightly less backend loaded than usual.

Michael M. Larsen: To wrap things up as expected the ITW team continues to execute at a very high level and a challenging near term demand environment, which we anticipate will improve as we go through the balance of the year based on current levels of demand and more favorable comparisons.

Michael M. Larsen: To wrap things up, as expected, the ITW team continues to execute at a very high level in a challenging near-term demand environment, which we anticipate will improve as we go through the balance of the year based on current levels of demand and more favorable comparisons. In addition, our first quarter results came in as expected, and we are solidly on track to deliver on our 2024 guide. On a separate note, today is Karen Fletcher's last earnings call with ITW.

Michael M. Larsen: In addition, our first quarter results came in as expected and we are solidly on track to deliver on our 2020 for guidance.

Michael M. Larsen: On a separate note today is Karen Fletcher is last ITW earnings call.

Karen A. Fletcher: Over the last six years, Karen has been instrumental in articulating ITW is unique and differentiated competitive advantages and our plan to leverage them to their full potential to you the investment community in a clear and compelling manner.

Michael M. Larsen: In doing so she has helped US position ITW is one of the world's highest quality best performing and most respected industrial company. Please join Chris and me in thanking Karen.

Michael M. Larsen: Over the last six years, Karen has been instrumental in articulating ITW's unique and differentiated competitive advantages and our plan to leverage them to their full potential to you, the investment community, in a clear and compelling manner. In doing so, she has helped us position ITW as one of the world's highest quality, best performing, and most respected industrial companies. Please join Chris and me in thanking Karen for her many contributions to ITW and wishing her all the best in retirement. It's been a privilege to do so. Thank you, Karen. And with that, Aaron, I'll turn it back to you.

Karen A. Fletcher: For her many contributions to ITW and wishing her all the best.

Michael M. Larsen: In retirement.

Michael M. Larsen: My God that means a lot.

Michael M. Larsen: It's been a privilege to do that.

Aaron: Thank you Kara and with that Erinn I'll turn it back to you.

Aaron: Thank you Michael Crystal will you. Please open the line for questions.

Aaron: At this time I would like to remind everyone 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.

Aaron: Please as a reminder, limit yourself to one question and a follow up.

Michael M. Larsen: Your first question comes from Jamie Cook from <unk> Securities. Please go ahead. Your line is open.

Michael M. Larsen: Thank you, Michael. Krista, will you please open the line for questions?

Speaker Change: Hey, good morning, and congrats Karen and thanks for all your help over the past six years.

Krista: At this time, I would like to remind everyone that to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster, and please, as a reminder, limit yourself to one question and a follow-up. Your first question comes from Jamie Cook from Truist Securities. Please go ahead. Your line is open.

Jamie Lyn Cook: Thanks for taking my first my Thanks, Karen My first question on the food equipment side I think Michael you noted some positive order activity in North America. If you could just speak to what Youre seeing there and then how much of a margin headwind was the capacity investments that you spoke about and then my follow up question just on specialty I know you.

Jamie Lyn Cook: You spoke to taking portfolio actions in Pls, if you could just give a little more color there.

Jamie Lyn Cook: Hey, good morning, and congratulations, Karen, and thanks for all your help over the past six years. Thanks, Jamie. So I guess my first...

Jamie Lyn Cook: What were you taking actions and how much of how much is that how much is pls I guess, a headwind to organic growth within specialty after the year. Thank you.

Jamie Lyn Cook: Thanks, Karen. My first question on the food equipment side, Michael, you noted some positive order activity in North America. Could you just speak to what you're seeing there, and then how much of a margin headwind were the capacity investments that you spoke about? And then my follow-up question, just on specialty, I know you spoke about taking portfolio actions. What, where are you taking actions? And how much of how much is that? How much is PLS? I guess a headwind to organic growth within specialty for

Jamie Lyn Cook: I think that was four questions in one it's Amy well done but I'll try.

Jamie Lyn Cook: Water, so I get it.

Speaker Change: Im going to try my best here so.

Jamie Lyn Cook: The comment on food equipment I think.

Jamie Lyn Cook: For many of our segments it could take a step back these growth rates.

Jamie Lyn Cook: Or a little unusual for us, which is really driven as we said <unk>.

Jamie Lyn Cook: Really significant comparisons challenging comparisons that were dealing with including in food equipment. So the additional color, even though we're not necessarily a backlog driven company.

Jamie Lyn Cook: It was directed around the order activity in North America, which grew double digit.

Michael M. Larsen: I think that was four questions in one, Jamie. Well done. I know, but I've got three quarters, so I get more. I'm going to try my best here.

Jamie Lyn Cook: In the first quarter here, and which I think.

Michael: I'll give some additional credibility to what we're saying is that we are expecting a return to more typical growth rates here.

Michael M. Larsen: So the comment on food equipment, I think... For many of our segments, if you take a step back, these growth rates are a little unusual for us, which is really driven, as we said, by these really significant comparisons, challenging comparisons that we're dealing with, including food equipment. So the additional color, even though we're not necessarily a backlog-driven company, was directed around the order activity in North America, which grew double-digits in the first quarter here, and which I think, you know, gives some additional credibility.

Michael M. Larsen: <unk> in food equipment.

Michael M. Larsen: As we go forward.

Michael M. Larsen: The margin pressure.

Michael M. Larsen: The margin impact.

Michael M. Larsen: It's about 100 basis points and food equipment here in Q1, and Q2 and it's really as a result of taking advantage of a huge growth opportunity that's sitting right in front of us in our service business. So what we're talking about is adding.

Michael M. Larsen: A significant number of service technician to help us meet the demand and one of the most attractive parts of our food equipment business and as you know.

Michael M. Larsen: We are the only captive OEM with the with our service business, which is a huge competitive advantage for us.

Michael M. Larsen: What we're saying is that we are expecting a return to more typical growth rates here, including in food equipment, as we go forward. The margin pressure, the margin impact is about 100 basis points in food equipment here in Q1 and Q2.

Michael M. Larsen: In this segment, so I think that where those were the two questions around.

Speaker Change: Food equipment I don't know if you want to add anything to that Chris No I, just I guess since <unk>.

Christopher A. OHerlihy: And it's really a result of taking advantage of a huge growth opportunity that's sitting right in front of us, in our service business. So what we're talking about is adding a significant number of service technicians to help us meet the demand in one of the most attractive parts of our food equipment business. And as you know, we're the only captive OEM with a service business, which is a huge competitive advantage for us in this segment. So I think those were the two questions around food equipment. I don't know if you want to add anything to that, Chris? No, I just, I guess...

Michael M. Larsen: Essentially at the point of differentiation aspect of the service business within food with unique captive manufacturer and this is a necessary investment at this point to capitalize on what is undoubtedly set our growth opportunity on the service line for us.

Speaker Change: And then on specialty.

Speaker Change: The organic growth rate here.

Chris: Was really driven by.

Speaker Change: Equipment large equipment orders that.

Chris: And the timing around those in two of our businesses.

Chris: In Europe.

Chris: What we're trying to articulate is on a go forward basis is that we still expect.

Chris: Meaningful pls.

Michael M. Larsen: I guess accentuate the point of the differentiation aspect of the service business within food with unique captive manufacturers, and this is a necessary investment at this point to capitalize on what is an undoubtedly stellar growth opportunity on the service side for us.

Chris: Product line simplification as we move forward and strategically repositioning this business for 4% plus growth on a consistent basis and so we still expect.

Chris: A meaningful impact from that as we move forward and I think the kind of what we're saying is don't count on 6% organic growth as we move forward, we had guided to this segment.

Michael M. Larsen: And then on specialty, you know, the organic growth rate here was really driven by equipment, large equipment orders that and the timing around those in two of our businesses in Europe. What we're trying to articulate on a go-forward basis is that we still expect meaningful PLS, Product Line Simplification, as we move forward and strategically reposition this business for 4% plus growth on a consistent basis. So we still expect a meaningful impact from that as we move forward, and I think what we're saying is, don't count on 6% organic growth as we move forward. We guided to this segment and our last call to be down 1 to 3, and so please keep that in mind.

Michael M. Larsen: Last quarter would be down one to three.

Michael M. Larsen: And so please keep that in mind.

Michael M. Larsen: And the same is true for the margins I mean, I think with what Youre seeing here on the margins is.

Michael M. Larsen: What we what happens when we get some growth in these businesses and the operating leverage here.

Michael M. Larsen: Attributing in a meaningful way.

Michael M. Larsen: 229, 7% operating margins in the specialty segment.

Michael M. Larsen: I think that is not on a go forward basis.

Michael M. Larsen: Q1, both growth rate and margins a little bit of an anomaly and I think we expect to return to more still vary.

Michael M. Larsen: Profitable margins kind of in the high Twenty's, but maybe not.

Michael M. Larsen: Something that starts with a 29.

Speaker Change: Thank you and congrats again Gary.

Speaker Change: Thanks, Jamie.

Michael M. Larsen: Your next question comes from the line of Tami Zakaria from Jpmorgan. Please go ahead. Your line is open.

Michael M. Larsen: And the same is true for the margins. I think what you're seeing here on the margins is what happens when we get some growth in these businesses and the operating leverage here contributes in a meaningful way to 29.7% operating margins in the specialty segment. I think that is not, on a go-forward basis, that's Q1. Both growth rates and margins are a little bit of an anomaly, and I think we expect to return to more still very profitable margins kind of in the high 20s, but maybe not. Something that starts with a 29. Thank you.

Speaker Change: Hi, good morning.

Speaker Change: And stuff to Karen and I will definitely Miss you, but I wish you all the best of luck and.

Speaker Change: Welcome aboard and looking forward to working with you.

Speaker Change: Thanks, Mike.

Speaker Change: Of course, so my first question is.

Speaker Change: Just wanted to get a little color here I think you expect organic growth to be positive throughout the balance of the year does that mean, you expect <unk> organic growth to be within that full year range of 1% to 3% growth.

Jamie Lyn Cook: Thank you and congrats again, Karen.

Krista: Your next question comes from the line of Tami Zakaria from J.P. Morgan. Please go ahead; your line is open.

Tami Zakaria: So Tammy as you know, we don't give quarterly.

Tami Zakaria: Hi, good morning. First off, to Karen. I'll definitely miss you, but I wish you all the best of luck and welcome aboard, Erin. I am looking forward to working with you. Thank you. Of course. So my first question is, I just wanted to get a little color here. I think you expect organic growth to be positive throughout the balance of the year. But does that mean you expect too little organic growth to be within that full year range of 1 to 3% growth?

Tami Zakaria: Guidance, what I will.

Tami Zakaria: What I will tell you to try to help you out here a little bit is that if.

Tami Zakaria: If you model kind of current levels of demand or run rate as we call them.

Tami Zakaria: Into Q2, and what we're typically seeing is a step up in revenues in the low single digits from Q1 to Q2.

Tami Zakaria: And in automotive OEM actually a meaningful improvement in the <unk>.

Michael M. Larsen: So Tami, as you know, we don't give quarterly guidance. What I will tell you to try to help you out here a little bit is that if you model kind of current levels of demand or run rate, as we call it, Q2. And what we're typically seeing is a step up in revenues in the low single digits from Q1 to Q2. And in the automotive OEM, actually a meaningful improvement in the builds from Q1 to Q2, an increase.

Tami Zakaria: Builds from Q1 to Q2 an increase in.

Michael M. Larsen: In the low to mid single digits, there as well so you will see.

Michael M. Larsen: A slightly higher revenues in.

Michael M. Larsen: In Q2, and given that the comparison gets easier on a year over year basis, you were up 5% in Q1 last year up 3% in Q2.

Speaker Change: You. It is certainly possible that we will see slight.

Michael M. Larsen: Slightly positive organic growth here in Q2, but the more meaningful step up really starts.

Michael M. Larsen: In the low to mid single digits there as well, so you will see, you know, slightly higher revenues. Q2. And given that the comparison gets easier on a year-over-year basis, you were up 5% in Q1 last year, up 3% in Q2, it is certainly possible that we'll see slightly positive organic growth here in Q2, but the more meaningful step up really starts in the second half of the year, which is kind of what's implied in our guidance here. So think about it maybe as kind of flat ish.

Michael M. Larsen: In the second half of the year, which is kind of what's implied in our guidance here. So think about it maybe as kind of flattish.

Michael M. Larsen: In the first half may be slightly positive in Q2, and then an improvement in the second half of the year as the comparisons year over year improved by four points relative to the first half of the year. So in the second half last year revenues were essentially flat and at current run rates you would expect to see.

Michael M. Larsen: In the first half, maybe slightly positive in Q2, and then an improvement in the second half of the year. The comparisons year-over-year improved by four points relative to the first half of the year. So in the second half last year, revenues were essentially flat, and at current run rates, you'd expect to see positive organic growth rates in the low single digits. In the second half, and I might just add, for those keeping track, that there are two, In the second half this year compared to the second half last year, which at least mathematically should provide some additional revenue growth for us.

Michael M. Larsen: Positive organic growth rates in the low single digits in the second half and I might just add for those keeping track that there are two extra shipping days.

Michael M. Larsen: In the second half this year compared to the second half last year, which at least mathematically should provide some additional.

Michael M. Larsen: Our revenue growth for us.

Speaker Change: Got it that's very helpful. My second question is similar to the first one back on the margin side I think that in the first quarter, you had 117 million tailwind.

Michael M. Larsen: It's about 70 basis points tailwind for the full year, but you raised the full year guide by about <unk> 50, and the first quarter margin also came in a little better than what most people on the street. We're modeling just trying to understand the think about the next three quarters is there any incremental cost pressures are.

Tami Zakaria: Got it. That's very helpful. My second question is similar to the first one, but on the margin side. I think that in the first quarter, you had a 117 million tailwind. That's about 70 basis points of tailwind for the full year, but you raised the full year guide by only 50. And the first quarter margin also came in a little better than what, you know, most people on the street were modeling. Just trying to understand, as we think about the next three quarters, are there any incremental cost pressures or maybe price cost headwinds than originally thought? Or is it just pure conservatism that you raised the full-year guide by only 50 basis points?

Tami Zakaria: Or maybe price cost headwind than originally thought.

Tami Zakaria: Is it just conservatism that you raised the full year guide by only 50 basis points.

Speaker Change: What I would say Tammy is that we're really pleased with our first quarter.

Tami Zakaria: Operational performance here as you saw on the margin rates.

Tami Zakaria: And if you exclude.

Tami Zakaria: The one time item.

Tami Zakaria: Third 40 basis points from initiatives 120 basis points.

Michael M. Larsen: Well, what I would say, Tami, is that we're really pleased with our first quarter operational performance here, as you saw in the margin rates. And if you exclude the one-time item, 140 basis points from initiatives, 120 basis points of Overall Margin Expansion, and margins at 25.4% is a pretty significant accomplishment here for the first quarter. And we do expect, as we typically do going through the year, that margins will improve sequentially from here on out.

Tami Zakaria: <unk>.

Michael M. Larsen: Overall margin expansion in margins at 25% to 4%.

Michael M. Larsen: Is is a pretty significant accomplishment here for the first quarter and we do expect.

Michael M. Larsen: As we typically do going through the year that margins improved sequentially from here on out so.

Speaker Change: You should see a.

Michael M. Larsen: Modest improvement.

Michael M. Larsen: Question from Q1 to Q2, and then again into Q3 and Q4.

Michael M. Larsen: The only thing I would highlight as you think about the second quarter is as we typically.

Michael M. Larsen: So you should see a modest improvement sequentially from Q1 to Q2, and then again into Q3 and Q4. The only thing I would highlight as you think about the second quarter is, as we typically, similar to last year, we do expect some higher restructuring expenses in the second quarter. And these are all projects that are tied to a typical 80-20 front to back. These are not tied to any concerns around volume growth whatsoever.

Michael M. Larsen: As similar to last year, we do expect.

Michael M. Larsen: Some higher restructuring expense in the second quarter.

Michael M. Larsen: And these are all projects that are tied to a typical 80 20, a front to back.

Michael M. Larsen: Projects. These are not tied to any concerns around volume growth whatsoever. I don't want you to think that this is pure.

Michael M. Larsen: Planned restructuring for the second quarter, so and as I said.

Michael M. Larsen: Just real quick on Q1 again five of seven segments improved margins in the current environment.

Michael M. Larsen: I don't want you to think that this is pure planned restructuring for the second quarter. So, and as I said, you know, just real quick on Q1, again, five or seven segments improved margins in the current environment, including with revenues down in five or seven segments. And we expect, consistent with our bottom-up planning process here for the full year, that every segment will improve margins as we go through the year and on a year-over-year basis.

Michael M. Larsen: Including with revenues down five.

Michael M. Larsen: <unk>, 5% to seven segments, and we expect based on.

Michael M. Larsen: Consistent with our bottom up planning process here for the full year that every segment will improve margins.

Michael M. Larsen: As we go through the year and on a year over year basis.

Speaker Change: Great. Thank you. This is very helpful sure Youre welcome.

Michael M. Larsen: Okay.

Michael M. Larsen: Your next question comes from Steve Volkmann with Jefferies. Please go ahead. Your line is open.

Speaker Change: Great. Good morning, everybody Karen can add my congratulations and we will Miss you and Aaron welcome and I'm impressed that you already have karen's cadence down so well so.

Tami Zakaria: Great. Thank you. This was very helpful.

Krista: Your next question comes from Steve Volkmann with Jeffreys. Please go ahead. Your line is open.

Krista: Okay.

Stephen Edward Volkmann: Great, good morning everybody. Karen, I can add my congratulations, and we will miss you. Aaron, welcome, and I'm impressed that you already have Karen's cadence down so well. Thank you. Can I ask you a little bit about China? That seemed to be a bit of an outlier there. I guess quite a bit of that is automotive, but even without that, things seem to be relatively good. Can we get any color you can give us on that?

Stephen Edward Volkmann: Thank you.

Stephen Edward Volkmann: Can I ask a little bit about China.

Stephen Edward Volkmann: China that seem to be a bit of an outlier there I guess quite a bit of that automotive, but even without that things seem to be relatively good any color you can give us on that.

Speaker Change: Yes, I think as you pointed out Steve the big the Big driver is obviously, our automotive OEM business up 23%.

Michael M. Larsen: Yeah, I think, as you point out, Steve, the big driver is obviously our automotive OEM business, which is up 23 percent. And the team there is doing a great job.

Stephen Edward Volkmann: And the team there is doing a great job.

Michael M. Larsen: Sure.

Michael M. Larsen: Growing content, new vehicles, including on the EV side.

Speaker Change: And gaining market share even excluding those as I said, China was still up 7% year over year.

Michael M. Larsen: Growing content on new vehicles, including on the EV side and gaining market share. Even excluding those, as I said, China was still up 7% year over year, with strong contribution from polymers and fluids.

Michael M. Larsen: <unk> contribution from polymers <unk> fluids. Some of that is tied also to market share gains.

Michael M. Larsen: On the EV side of things and the bonding of some of these batteries.

Michael M. Larsen: Some of that is tied also to market share gains on the EV side of things and the bonding of some of these batteries in the assembly process, where we have a really unique and differentiated product, specialty products, also contributed test and measurement, growth, and food equipment. So across the board, really solid performance in China. And moving forward, we'd say that that looks pretty sustainable as we go into Q2. And then the second half becomes a little bit more difficult.

Michael M. Larsen: In the assembly process, where we haven't really unique and differentiated product.

Michael M. Larsen: Specialty products also a contributor to test <unk> measurement grew in food equipment, so across the board really.

Michael M. Larsen: Solid performance in China.

Michael M. Larsen: And moving forward, we'd say that looks pretty sustainable as we go into Q2, and then the second half the comps get a little bit more difficult, but as I've said for the full year, China should be up in the mid to high single digits here, which is certainly encouraging.

Michael M. Larsen: And again I think speaks to kind of.

Michael M. Larsen: The benefit of being as diversified GR.

Michael M. Larsen: From a geography standpoint, as we are and so certainly some challenges in the first quarter, North America, but offset in Europe and in China, which is really.

Michael M. Larsen: A big benefit for us.

Michael M. Larsen: But as I said, for the full year, China should be up in the mid to high single digits, which is certainly encouraging. And again, I think speaks to kind of the benefit of being as diversified from a geography standpoint as we are, and so certainly some challenges in the first quarter in North America, but offset in Europe and in China, which is really a big benefit for us.

Super: Super Thanks, and then the follow up is on automotive margins, obviously going well there and I think you said 200 basis points or better than 200 basis points of enterprise, there and I'm just trying to get a sense of how we should think of the cadence in auto margins as the year progresses, and I don't know maybe the exit rate.

Michael M. Larsen: Aid or the total year enterprise.

Speaker Change: Yes, I mean I think.

Stephen Edward Volkmann: Super. Thanks.

Michael M. Larsen: I wouldn't expect a lot of regression from where we are these are absolutely sustainable here in the 19% plus range.

Michael M. Larsen: And then the follow-up is on automotive margins, which are obviously going well there. And I think you said 200 basis points is better than 200 basis points of enterprise there. And I'm just trying to get a sense of how we should think of the cadence in auto margins as the year progresses. I don't know, maybe the exit rate or the total year enterprise, something.

Michael M. Larsen: And I think that's probably where we'll end up.

Michael M. Larsen: For the year.

Michael M. Larsen: Maybe a little bit better in the back half some of that depends on.

Michael M. Larsen: The build assumptions there might be a little bit of restructuring here in the second quarter, but big picture I would say automotive.

Michael M. Larsen: Really solid progress here on a year over year basis, we.

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

Michael M. Larsen: We expect full year margins in that 19, almost 20% range and improvement of 240 basis points.

Michael M. Larsen: On a year over year basis, and lots of room to go as we worked through our margin enhancement plan, yes, anaesthesia I suppose just to support that I mean this is very much.

Michael M. Larsen: An improvement plan that is on track to get back to the low to mid Twenty's margins by 2026, as we outlined at our Investor day, largely through a combination of orbit ethane volume recovery enterprise initiatives and higher margin innovations so aboard in 'twenty, three and again in 'twenty four we're pretty much tracking.

Michael M. Larsen: On that cadence with respect to what we outlined at Investor Day last year. So nothing unusual in terms of the margins in Q1 and sustainable with lots of room for improvement from here.

Michael M. Larsen: So nothing unusual in terms of the margins in Q1, and sustainable with lots of room for improvement from here.

Speaker Change: Super Thank you.

Stephen Edward Volkmann: Super, thank you. You're welcome.

Michael M. Larsen:

Krista: Your next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Your line is open. Good morning, everyone.

Stephen Edward Volkmann: Your next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Your line is open hey, good morning, everyone and congratulations we will Miss you.

Andrew Alec Kaplowitz: Hey, good morning, everyone. Karen, congratulations. We'll miss you. Hey, thanks, Andy.

Andrew Alec Kaplowitz: Hey, Thanks, Andy.

Andrew Alec Kaplowitz: So Michael probably I'm guessing you don't want to reset your organic growth guide through segments every quarter, but just higher level you had construction specialty forecast to be down I think one to three while the other segments were projected to be up between two and 405 specialty was actually much better.

Andrew Alec Kaplowitz: So, Michael, probably, I'm guessing you don't want to reset your organic growth guides for your segments every quarter, but, you know, just at a higher level, you had construction specialty, you know, forecast to be down, I think, one to three, while the other segments were projected to be up, you know, between two and four and three and five. Specialty was actually much better. Does that change the segment's outlook at all? I know you talked about a little bit of a pull-forward in some equipment orders. And were any of the other segments like weaker than you thought?

Andrew Alec Kaplowitz: Does that change the segments outlook at all I know you talked about a little bit of a pull forward on some equipment orders and where any of the other segments like weaker than you thought to start.

Michael: Andy you're right, we don't want to update our guidance for the segments every quarter and what I will tell you is.

Andrew Alec Kaplowitz: Given our portfolio there is always going to be some puts and takes.

Andrew Alec Kaplowitz: And I think Thats again.

Michael M. Larsen: At the end of your right, we don't want to update our guidance for the segments every quarter. And what I will tell you is, you know, given our portfolio, there's always going to be some puts and takes. And I think that's, again, you know, I just talked about the, [inaudible] I'm not really going to go segment by segment here, but I'd say there's definitely some puts and takes, but overall, not too far off from what we talked about on the last call. And certainly, our full year guidance, we're firmly on track to deliver on that.

Andrew Alec Kaplowitz: Talk about the.

Michael M. Larsen: Our competitive advantage with being as diversified as we are geographically and the same is true. When you look at this portfolio of businesses Youre always going to have some things that maybe.

Michael M. Larsen: Or maybe are a little more pressured from a market standpoint in the short term.

Michael M. Larsen: And those are typically offset by.

Michael M. Larsen: The segments that are performing a little bit better.

Michael M. Larsen: And it all kind of evens out to that 1% to 3% organic growth guidance. So.

Michael M. Larsen: I'm not really going to go through segment by segment here, but I'd say there is definitely some puts and takes but overall.

Michael M. Larsen: Not too far off from what we talked about on the last call.

Michael M. Larsen: Certainly our full year guidance.

Michael M. Larsen: We're firmly on track to deliver on that.

Michael M. Larsen: Michael, that's helpful. And then, you know, just in welding, maybe give us a little more color on what you see going on there. There was some destock, you know, end of last year, maybe a little bit still early this year. But, you're getting past that, and, you know, differences between industrial and commercial markets, sort of, what do you see going forward there?

Speaker Change: Michael that's helpful. And then just didn't welding, maybe give us a little more color into what you see going on there there was some destocking.

Michael M. Larsen: End of last year, maybe a little bit still early this year like you're getting past that and differences between industrial and commercial markets sort of what do you see going forward there.

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

Michael M. Larsen: Yes, I think the big driver here is really the the comparisons year over year.

Michael M. Larsen: From a that's driving the growth rates as we go forward and so just like I said for the total company for welding. It's also true that as we go through the year these comparisons get easier.

Michael M. Larsen: 10% growth in welding.

Michael M. Larsen: The first quarter last year is obviously not a sustainable growth rate and so it wasn't really a big surprise that organic revenue was down 3% I'd say on a positive note and this is true not just in welding, but across the board.

Michael M. Larsen: I'd say on a positive note, and this is true not just in welding but across the board, last year we dealt with some meaningful headwinds from excess inventory at our customers and in the channel, to the point of quantum magnitude, you know, a percentage point of drag on the organic growth rate last year. But that is essentially behind us at this point. So that's kind of positive news across the board, including in welding.

Michael M. Larsen: Last year, we dealt with some meaningful headwind from.

Michael M. Larsen: Excess inventory.

Michael M. Larsen: At our customers and in the channel.

Michael M. Larsen: And to the point to point of magnitude a percentage point of drag on the organic growth rate last year that is essentially behind us at this point, so thats kind of the positive news across the board, including in welding and then we're back to a normal pricing environment. We've got an exciting lineup in terms of new products that are <unk>.

Michael M. Larsen: And then we're back to a normal pricing environment. We've got an exciting lineup in terms of new products that are being launched here in the near term. And so you put all of that together, and we feel really good about the outlook here, in welding. Top line, obviously, but maybe I will just... Highlight the margin performance again, you know, the fact that with revenues down, margins at 32% plus operating margins are really strong and speaks to the focus that we have on quality of growth over quantity of growth, and the team is executing well on that plan.

Michael M. Larsen: <unk> launched here in the near term and so you put all of that together, we feel really good about the outlook here.

Michael M. Larsen: In welding <unk>.

Michael M. Larsen: <unk>, obviously, but maybe.

Michael M. Larsen: I will just.

Michael M. Larsen: Highlight the margin performance again, the fact that.

Michael M. Larsen: With revenues down.

Michael M. Larsen: Margins at 32% plus operating margins is.

Michael M. Larsen: Really strong and speaks to the focus that we have on really quality of growth over quantity of growth.

Michael M. Larsen: And the team is executing well on that plan agreed.

Speaker Change: Agreed on the margin performance Thanks, Michael.

Andrew Alec Kaplowitz: Agreed on the margin performance. Thanks, Michael.

Michael: You're welcome.

Andrew Alec Kaplowitz: Your next question comes from Andrew <unk> with Bank of America. Please go ahead. Your line is open.

Krista: Your next question comes from Andrew Obin with Bank of America. Please go ahead. Your line is open.

Krista: Hi, Sabrina Abrams on for Andrew Good.

Sabrina Lee Abrams: Hi, you have Sabrina Abrams on for Andrew Obin. Good morning, and congratulations Karen. Thanks, Sabrina. On the margin side, are there any changes to how you're thinking about volume leverage, price cost, maybe like the reinvestment and enterprise initiatives as we move through the year? Maybe we could, like, walk through the different buckets and how they relate to the full year guide.

Speaker Change: Good morning, and congratulations Karen.

Speaker Change: Thanks <unk>.

Sabrina Lee Abrams: On the margin side are there any changes to how you're thinking about volume leverage price cost maybe like the reimbursement of enterprise initiatives.

Sabrina Lee Abrams: As we move through the year, maybe we could like walk through the different buckets and how they relate to the full year guide.

Michael M. Larsen: Yeah, I think there's not a lot of change from what we talked about on the last call. You know, we are maintaining our operational guidance here. You know, kind of the big picture, at 1 to 3 percent organic growth, there is some positive operating leverage. We expect slightly more than 100 basis points of enterprise initiatives, which is based on the strong performance here in Q1 at 140 basis points. Price-cost has essentially normalized at this point, so there's some moderate, modest favorability from price-cost as we go through.

Speaker Change: Yes, I think there is.

Michael M. Larsen: Not a lot of change from what we talked about on the last call.

Michael M. Larsen: We are maintaining our operational guidance here.

Michael M. Larsen: Kind of big picture at 1% to 3% organic growth there is some positive.

Michael M. Larsen: Operating leverage we expect.

Michael M. Larsen: Slightly more than a 100 basis points of enterprise initiatives, which is based on the strong performance here in Q1 of 140 basis points.

Michael M. Larsen: Price cost has.

Michael M. Larsen: Essentially normalized at this point so there is some moderate.

Michael M. Larsen: Modest favorability from price cost as we go through.

Michael M. Larsen: You know, maybe a little bit more in Q1 versus the back end of the year, and then we have done a good job, as we talked about in the last call, managing some of the cost pressures from an inflationary standpoint around employee-related cost benefits. You know, that used to be a headwind by orders of magnitude. We used to talk about 150 200 basis points, and that's right around 100 basis points of margin headwind now. So factoring in the life of kind of changing Q1, that's how you get to that hundred and forty basis points of Margin Improvement for the full year and the new range of 26 to 27.

Michael M. Larsen: The year, maybe a little bit more in Q1 versus the back end of the year.

Michael M. Larsen: And then we have done a good job as we talked about on the last call managing.

Michael M. Larsen: Some of the cost pressures from an inflationary standpoint around employee related.

Michael M. Larsen: Cost benefits that used to be a headwind order of magnitude. We used to talk about 150 200 basis points and that's right around 100 basis points of margin headwind now.

Michael M. Larsen: And then the last thing that I would add is just the accounting change so factoring in the LIFO accounting change in Q1, that's how you get to that 140 basis points of <unk>.

Michael M. Larsen: Margin improvement for the full year, and the new range of 26% to 27%.

Michael M. Larsen: Yeah.

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

Speaker Change: Thank you.

Michael M. Larsen: And then what are you guys seeing in terms of electronics demand and what are you hearing from your customers.

Sabrina Lee Abrams: This market has been pressured for five or six quarters now, but clearly the comps are getting easier has it started to bottom out yet.

Michael M. Larsen: Well, so I think it's a little bit of a... A mixed picture there. I think last year we talked a lot about the challenges in the semi-related businesses. Last year, those were down by orders of magnitude 20 to 25 percent. Now, we're talking about just the right size things. These businesses represent about 15 percent of the test and measurement electronic segment, 3 percent of total ITW revenues.

Speaker Change: Well, so I think it's a little bit of.

Michael M. Larsen: A mixed picture there I think.

Michael M. Larsen: Last year, we talked a lot about.

Michael M. Larsen: Challenges in the semi related businesses.

Michael M. Larsen: Last year, those were down order of magnitude 20% to 25%.

Michael M. Larsen: Now we're talking about just to kind of size things. These businesses represent about 15% of the test and measurement electronics segment.

Michael M. Larsen: 3% of total ITW revenues, so just to kind of put things in.

Michael M. Larsen: So just to kind of put things in context, the positive news is that the semi-markets appear to have bottomed out. So this is no longer a drag on the overall growth rate of the segment. They were actually, maybe slightly positive, here in Q1. But the inevitable recovery has been deferred, and so when exactly that will come, whether that's in the second half or next year is hard to tell. It's not factored into our guidance, as we told you today.

Michael M. Larsen: In context, the positive news is that the semi markets.

Michael M. Larsen: Appear to have bottomed out. So this is no longer a drag on the overall growth rate of the segment that we're actually maybe slightly positive here.

Michael M. Larsen: In Q1.

Michael M. Larsen: But the inevitable recovery has been deferred and so.

Michael M. Larsen: When exactly that will come whether that's in the second half or next year.

Michael M. Larsen: It's hard to tell it's not factored into our guidance as we told you today and then we're seeing.

Michael M. Larsen: And then we're seeing a little bit of what I said in the script, a little bit of pressure on the electronic assembly side of things. So this is maybe more tied to consumer electronics. And that's what drove electronics being down 8% here in the first quarter.

Speaker Change: Little bit of what I said in the script.

Michael M. Larsen: A little bit of pressure in the electronic assembly side of things. So this is maybe more tied to consumer electronics and Thats, what drove electronics being down.

Michael M. Larsen: 8% here in the first quarter.

Speaker Change: Thank you.

Michael M. Larsen: Sure.

Michael M. Larsen: Your next question comes from Mig <unk> with Baird. Please go ahead. Your line is open.

Krista: Your next question comes from Meg Dobre with Baird. Please go ahead. Your line is open.

Mircea Dobre: Thank you, and I'll join the chorus here. Karen, all the best in retirement. Thank you. I appreciate all the help. Thanks, Meg.

Mircea Dobre: Thank you and I'll join the chorus here at Cara and all the best in retirement.

Mircea Dobre: Appreciate it.

Mircea Dobre: Thanks, Nick.

Mircea Dobre: One question I had was about EMEA, which came in a little bit better than I would have guessed. I guess one of the themes during this earnings season has been that Europe, frankly, has not been that great. So I'm kind of curious what you're seeing there. Is this just a function of the specialty kind of one-time items that might have helped Europe in a quarter, or is there kind of more green shoots to talk about in Europe?

Mircea Dobre: One question I had was with <unk>.

Mircea Dobre: Which.

Mircea Dobre: Frankly came in a little bit better than I would've guessed I guess wanted to theme.

Mircea Dobre: During this earnings season has been that Europe, frankly has not been that great. So I'm kind of curious what youre seeing there.

Mircea Dobre: Just a function of the specialty.

Mircea Dobre: Kind of one time items that might help Europe in the quarter or is there kind of more to talk about in Europe.

Mircea Dobre: The big driver.

Michael M. Larsen: Well, I mean, the big driver in Europe here from a dollar standpoint was the specialty products, you know, these two equipment businesses here and the timing around some of those orders. Those specialty products were up 20% here in the first quarter. But overall, I'd say pretty stable.

Mircea Dobre: In Europe here from a dollar standpoint was the specialty products. These two equipment businesses.

Michael M. Larsen: Here in.

Michael M. Larsen: And the timing around some of those orders is.

Michael M. Larsen: Those specialty was up 20%.

Michael M. Larsen: Here in the first quarter.

Michael M. Larsen: You know, automotive was up two, test and measurement electronics up five, and food equipment about flat. That's a little bit of an anomaly that will return to more positive growth as we go through the year. And then, you know, smaller businesses, welding down a little bit and polymers of fluids down a little bit. But overall, and then construction, obviously remains, you know, the drag internationally, as it has been for well over a year at this point. So construction was still down double digits here in the first quarter. But overall, 1% positive organic growth in the first quarter in Europe.

Michael M. Larsen: I'd say pretty stable automotive was up two test and measurement electronics up five food equipment about flat, that's a little bit of an anomaly that will return to more positive growth as we go through the year.

Michael M. Larsen: And then smaller businesses welding down a little bit in polymers, <unk> fluids down a little bit, but overall and then construction obviously remains.

Michael M. Larsen: The.

Michael M. Larsen: A drag.

Michael M. Larsen: Internationally as it has been for well over a year at this point. So construction was still down double digits here in the first quarter, but overall, 1% positive organic growth.

Michael M. Larsen: In the first quarter.

Michael M. Larsen: In Europe.

Michael M. Larsen: Yeah, I think overall, actually, if you think about construction, the performance in North America, I think it's a good example of how the business is outperforming in a very challenging down market. It's only to be down 3% in a market that, if you look at all the key metrics, is certainly down a lot more than that is pretty impressive. Residential remodel, we said down 1%. The home centers are actually down a little bit more than that. And on the commercial side...

Speaker Change: Understood and since you mentioned construction that was going to be my follow up there.

Michael M. Larsen: How do you sort of think about.

Michael M. Larsen: This segment can progress through the year here is there some sort of stocking effect that we need to be aware of and Claire.

Speaker Change: Clarify a little bit what youre seeing in North America, you talked about resi Im curious what youre seeing on it and onward.

Michael M. Larsen: Yes, I think overall actually if you think about construction the performance in North America. I think is a good example of illustration of how the business is outperforming.

Michael M. Larsen: In a very challenging down market <unk> only to be down 3% in a market that if you look at all the key metrics is certainly down a lot more than that is pretty impressive residential remodel.

Michael M. Larsen: We said down 1% in the home centers are actually down a little bit more than that.

Michael M. Larsen: And on the commercial side, to answer your question, that continues to be soft. You know, the commercial side is down.

Speaker Change: And on the commercial side to your question. Yeah. That's that continues to be soft the commercial side is down I mean, it's fairly small part of the overall business.

Michael M. Larsen: I mean, it's a fairly small part of the overall business, about 20% of the global business, maybe even a little bit less than that. That business was down, in the low teens here in the first quarter. But overall, pretty resilient performance in a challenging market, and we expect that, frankly, to remain that way as we go through the balance of the year. If you look at our guidance. Last time we were together, you know, we said we expected construction to be down one to three, and I'll certainly put them in that category. And then what's really helping drive some of the performance here is the margin performance. Again, you know, for a construction business to be delivering 29% plus margins is pretty remarkable without any volume.

Michael M. Larsen: About.

Michael M. Larsen: 20% of the global business, maybe even a little bit less than that that business was down.

Michael M. Larsen: In the in the low teens here in the first quarter, but overall pretty resilient.

Michael M. Larsen: Performance in a challenging market and we expect that frankly to remain that way as we go through the balance of the year. If you look at our guidance.

Michael M. Larsen: Last time, we were together.

Michael M. Larsen: Third we expect the construction to be down 1% to three and I would certainly put them in that category and then what's really helping drive some of the performance here as the the margin performance.

Michael M. Larsen: Again.

Michael M. Larsen: Our construction business to delivering 29% plus margins.

Michael M. Larsen: Is is pretty remarkable without any volume leverage.

Speaker Change: Alright, thank you.

Michael M. Larsen: And I think we will take one more question, please. Your next question comes from Julian Mitchell with Barclays. Please go ahead, your line is open.

Speaker Change: Youre welcome.

Michael M. Larsen: And I think we will take one more question. Please.

Michael M. Larsen: Your next question comes from Julian Mitchell with Barclays. Please go ahead. Your line is open.

Michael M. Larsen: Hi, Good morning. This is Matthew Pan from Julian Mitchell's team at Barclays.

Krista: Your next question comes from Julian Mitchell with Barclays. Please go ahead.

Julian C.H. Mitchell: Just one on if you could dial in on the <unk> margins they were down year over year can they expand in 2024 overall.

Julian C.H. Mitchell: The short answer is yes, and I think one of the reasons, as I said in the prepared remarks that test and measurement margins were down in the first quarter was really the strong performance of the MTS business, which grew at 20% plus organic. This is certainly great performance, but due to the fact that we're only two years in terms of implementing the ITW business model, margins are in the mid-teens in that business, and so there's a negative mixed effect that diluted the margins in test and measurement by about 250 basis points.

Julian C.H. Mitchell: The short answer is yes, and I think one of the reasons.

Julian C.H. Mitchell: As I said in the prepared remarks that test <unk> measurement margins.

Julian C.H. Mitchell: We're down in the first quarter is really the strong performance of the MTS business, which grew at 20% plus organic.

Julian C.H. Mitchell: Which is certainly great performance and.

Julian C.H. Mitchell: But due to the fact that we're only two years in terms of implementing the ITW business model margins.

Julian C.H. Mitchell: In the mid teens in that business and so there is a negative mix effect that diluted the margins in test and measurement.

Julian C.H. Mitchell: By about 250 basis points now as we go forward.

Julian C.H. Mitchell: Now, as we go forward, starting, you know, Q2 and then through the balance of the year, we do expect that margins will improve. From here in the Test and Measurement Electronics segment, if you just look at kind of where we were historically, you know, we're kind of, we're going to be back to kind of the mid-twenties here for the full year, which is the current expectation. So, like in every segment

Julian C.H. Mitchell: Starting.

Julian C.H. Mitchell: Q2, and then through the balance of the year, we do expect that margins will improve.

Julian C.H. Mitchell: I'm here in the test and measurement electronics segment. If you just look at kind of where we were historically.

Julian C.H. Mitchell: We're kind of we're going to be back to kind of the mid twenty's here.

Julian C.H. Mitchell: For the full year is the current expectation so like in every segment.

Michael M. Larsen: Including intestinal measurement electronics, we expect to improve margins year-over-year. In terms of electronics, I would just add that there's an extremely fertile environment for innovation, which will underpin margin progression going forward. And just a quick follow-up, free cash flow is down in European countries. Is that just the working capital build, and then what are your... Yeah, I think if you look at the free cash flow conversion, it's actually pretty close to kind of normal seasonality.

Julian C.H. Mitchell: Including in test and measure of electronics, we expect to improve margins on a year over year basis. So.

Michael M. Larsen: Yes.

Michael M. Larsen: I would just add that.

Michael M. Larsen: Streaming FERC <unk> environment for innovation, so, which will underpin margin progression going forward in that segment.

Speaker Change: Got it and just a quick follow up the free cash flow was down year over year. In Q1 is that just a working capital build and then what are your thoughts on Q2 is that up year over year.

Speaker Change: Yes, I think.

Michael M. Larsen: If you look at the free cash flow conversion, it's actually pretty close to kind of normal seasonality.

Michael M. Larsen: Working capital, if you look at inventory, it looks like it's certainly a decline on a year-over-year basis, but it looks like an increase from year-end in Q1. You have to factor out this LIFO inventory counting change, which added $117 million of inventory in the first quarter. If you do that, you'll see that inventory was actually flat in the quarter relative to year-end, when typically we see a 5% increase or about $85 million of inventory increase in the first quarter, which the team was able to offset. Now, that said, our months on hand are still elevated relative to pre-COVID levels. And so, before COVID, we were in the low-twos months on hand.

Michael M. Larsen: Working capital if you look at inventory it looks certainly a decline on a year over year basis. It looks like an increase from year end.

Michael M. Larsen: In Q1, you have to factor out this LIFO inventory accounting change, which added $117 million of inventory.

Michael M. Larsen: In the first quarter, if you do that Youll see that inventory was actually flat in the quarter relative to year end when typically we see a 5% increase of about $85 million of inventory increase in the first quarter, which the team was able to offset now now that said.

Michael M. Larsen: Our months on hand are still.

Michael M. Larsen: Elevated relative to pre COVID-19 levels, and so pre COVID-19, we were in the low twos months on hand, we're in the we're right around three certainly some improvement, but we believe that there.

Michael M. Larsen: We're right around three, certainly some improvement, but we believe that there is a lot more opportunity here to drive those inventory levels back to kind of pre-COVID levels, given that the supply chain has normalized. And so as a result of that, you should expect continued strong free cash flow performance as we go through the year. And that's consistent with the guidance we gave today, which is a conversion of 100% plus for the full year.

Michael M. Larsen: Is a lot more opportunity here to drive those inventory levels back to kind of pre COVID-19 levels, given that supply chain has normalized and so as a result of that.

Michael M. Larsen: You should expect continued strong free cash flow performance as we go through the year.

Michael M. Larsen: And thats consistent with the guidance, we gave today, which is a conversion.

Michael M. Larsen: A 100% plus for the full year so.

Michael M. Larsen: So I think overall, kind of typical performance in Q1 and more to come as we go through the balance of the year in terms of reducing our inventory levels, which will result in strong free cash flow, as you've come to expect from ITW.

Michael M. Larsen: Overall kind of typical performance in Q1 and more more to come as we go through the balance of the year in terms of reducing our inventory levels, which will result in.

Michael M. Larsen: Strong free cash flow as you've come to expect from ITW.

Speaker Change: Perfect. Thank you very much.

Michael M. Larsen: Welcome.

Unknown Executive: That concludes our question and answer session, and with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Speaker Change: That concludes our question and answer session and with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.

Unknown Executive: [music].