Q1 2025 Illinois Tool Works Inc Earnings Call
Good morning, My name is Lacey and I'll be your conference facilitator today.
At this time I would like to welcome everyone to the I T W's 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 to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The star followed by the number one key for those participating in the Q&A you will have the opera.
Erinn: Unity to ask one question and if needed one follow up question. Thank you Erinn when a hand, vice President of Investor Relations you May begin your conference.
Erinn: Thank you Lucy good morning, and welcome to Itw's first quarter 2000, and twenty-five conference call today, I'm joined by our President and CEO, Christopher Hurley, and senior Vice President and CFO, Michael Larsen during.
Erinn: During today's call, we will discuss Itw's first quarter financial results and provide an update on our outlook for full year 2025.
Erinn: Slide two is a reminder, that this presentation contains forward looking statements. We refer you to the company's 2024 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.
Erinn: 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.
Speaker Change: Please turn to slide three and it's now my pleasure to turn the call over to our President and CEO Christopher Hurley Chris.
Christopher Hurley: Thank you Erin and good morning, everyone.
Christopher Hurley: As you saw on our press release. This morning, ITW delivered a solid start to the year as we outperformed our underlying end markets with flat organic growth on an equal days basis, and a steady demand environment.
Christopher Hurley: We continued to execute well in controlling the controllable as enterprise initiatives contributed 120 basis points to operating margins of 24, 8%.
Christopher Hurley: In addition, GAAP EPS of $2 30. It came in ahead of our plan expectations.
Christopher Hurley: Importantly, we continue to make progress continue to make progress on our next phase key strategic priorities as we remain laser focused on building above market organic growth fueled by customer back innovation into defining ITW strength on par with our world class financial and operational capabilities.
Christopher Hurley: Okay.
Christopher Hurley: As we've said many times before ITW is built to outperform an uncertain and volatile environments because of the unique advantages that we derive from our.
Christopher Hurley: Our powerful ITW business model, our diversified portfolio of differentiated products and services.
Christopher Hurley: Our decentralized close to the customer structure.
Christopher Hurley: And our considerable financial strength.
Christopher Hurley: In addition, when it comes to tariffs, we believe that ITW is better positioned than most as the tariff impact is largely mitigated by our 90% plus produce where we sell manufacturing strategy.
Christopher Hurley: That said ITW is obviously not immune to tariffs and our people are reading and reacting rapidly and decisively.
Christopher Hurley: Looking closely with our suppliers and customers to mitigate the impact of tariff increases.
Christopher Hurley: These strategic adjustments and ongoing pricing actions are projected to offset the cost impact of tariffs and therefore be EPS neutral or better by year end.
Christopher Hurley: Looking forward and based on what we know today, we are maintaining our EPS guidance for the year.
Christopher Hurley: Without incorporating the upside from our first quarter results and more favorable foreign exchange rates.
Christopher Hurley: What are the impact of tariffs on customer demand is obviously not known at this stage and uncertainties remain.
Christopher Hurley: We will continue to leverage our financial strength to remain invested in the focused execution of our long term strategy.
Christopher Hurley: Including my remarks, I extend my sincere gratitude to our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence.
Christopher Hurley: Now, let's turn the call over to Michael to provide more detail on the quarter I was wondering your guidance for 2025, Michael Thank you, Chris and good morning, everyone.
Michael Larsen: In Q1, the ITW team delivered a solid start to the year, both operationally and financially.
Michael Larsen: Starting with the top line organic growth was down one 6% as expected.
Michael Larsen: On an equal days basis organic revenue was flat to the prior year, which had one additional shipping day.
Michael Larsen: Foreign currency translation reduced revenue by one 8% and total revenue was down three 4%.
Michael Larsen: Product line simplification reduced revenue by 50 basis points in the quarter.
Michael Larsen: Of note, we did not experience a meaningful impact from customers pulling forward orders from Q2 into Q1.
Michael Larsen: On the bottom line the ITW team continued to focus and execute well on the things that we can control as evidenced by enterprise initiatives, which contributed 120 basis points and free cash flow of $496 million with a conversion rate of 71%.
Michael Larsen: Operating margin was 24, 8% as enterprise initiatives.
Michael Larsen: Were offset by operating leverage higher restructuring expenses related to 820 front to back projects and other one time items.
Michael Larsen: The margin decline year over year was due primarily to the non repeat of a 300 basis points LIFO inventory accounting benefit last year.
Michael Larsen: We are projecting that margins will continue to improve sequentially from here in every segment and at the enterprise level as we go through the year, which is in line with our historical pattern and supported by meaningful contributions from enterprise initiatives that are volume independent.
Michael Larsen: In summary demand remained steady in Q1, as we continued to outperform our underlying end markets delivering flat organic growth on an equal days basis solid margins of 24, 8% free cash flow of approximately 500 million as well as GAAP EPS of $2 38, which was ahead of our plan expectation.
Michael Larsen: Primarily due to a lower effective tax rate in the quarter.
Michael Larsen: Please turn to slide four for a look at organic growth by geography.
Michael Larsen: And on a geographic basis organic revenue decline of about 3% in both North America, and Europe, While Asia Pacific was up 7% with China up 12% driven in part by continued strong performance.
Michael Larsen: In the automotive OEM business.
Michael Larsen: As you can see China represents about 7% of total company revenues in China grew 9%, even when excluding the 14% growth.
Michael Larsen: And automotive Oems.
Michael Larsen: Let's move to the segment results, starting with automotive OEM, where organic revenue declined 1% in the first quarter as product line simplification or pls efforts reduced revenue by 1%.
Michael Larsen: On a regional basis, North America was down 6% as.
Michael Larsen: As D three customer builds were down 10%.
Michael Larsen: Europe was down 6%, while China grew 14% against a tough comparison of plus 23% last year.
Michael Larsen: As our local team continues to innovate and gain market share, particularly in the rapidly growing <unk> market.
Michael Larsen: We expect this strong growth momentum to continue through the balance of 2025, partially offsetting expected weakness in North America.
Michael Larsen: For the full year and compared to industry build data. We expect that this segment will outperform relevant builds by the usual two to 300 basis points.
Michael Larsen: As we continue to grow our content per vehicle.
Michael Larsen: We have incorporated recently revised auto builds forecasts into our guidance as worldwide auto builds are projected to be down low single digits with north American builds down high single digits.
Michael Larsen: Down low single digits, and partially offset by China.
Michael Larsen: Overall, our relevant markets I expect it to be down in the mid single digits in 2025, which compares to a plan.
Michael Larsen: Down low single digits going into the year.
Michael Larsen: On the bottom line the automotive OEM segment delivered operating margin of 19, 3% in Q1, which included 80 basis points of restructuring headwind in other words margins were 21% excluding restructuring.
Michael Larsen: And it is worth noting that the tariff related costs and margin impacts in this segment are relatively insignificant primarily because.
Michael Larsen: Of our produce where we sell a manufacturing footprint and we remain confident that we will continue to expand margins as we go through the year.
Michael Larsen: Yes.
Michael Larsen: Turning to slide five food equipment organic growth was up a little more than 1%.
Michael Larsen: And up 3% on an equal days basis equipment was flat and service grew 3%.
Michael Larsen: By region, North America grew 1% with strength and institutional end markets, which were up double digits.
Michael Larsen: Our international business was up 2% Europe was up 2% and Asia Pacific was up 1%.
Michael Larsen: In test and measurement and electronics organic revenue was down 5% due primarily to tough comparisons and the MTS business.
Michael Larsen: Which grew 23% in the year ago quarter and was down 19% this quarter.
Michael Larsen: Excluding MTS this segment was down 2%.
Michael Larsen: Overall test and measurement declined 9% with about half of that decline due to MTS.
Michael Larsen: While on a positive note electronics was up 3% with some encouraging signs as semi related orders were up double digits in the quarter.
Michael Larsen: Operating margin of 21, 4% declined 200 basis points due primarily to negative operating leverage as well as a headwind from higher restructuring costs of 60 basis points.
Moving on to slide six organic growth in welding was essentially flat.
Michael Larsen: And up 2% on an equal days basis.
Michael Larsen: Equipment increased 1%, which mark the first positive growth rate in equipment in two years.
Michael Larsen: Consumables were down 2%, while industrial sales declined 1% and the commercial side was down 6%.
Michael Larsen: Overall, North America was down 2% offset by international.
Michael Larsen: Which was up 14% driven primarily by more than 30% growth in China.
Michael Larsen: As a result of the success of new product introductions targeted at the energy space.
Michael Larsen: Operating margin of 32, 5% was essentially flat year over year.
Michael Larsen: Yeah.
Michael Larsen: Polymers <unk> fluids organic revenue grew 2% with polymers up 6%.
Michael Larsen: Both fluids and automotive aftermarket were flat.
Michael Larsen: On a geographic basis, North America was flat and international grew 5%.
Michael Larsen: Operating margin improved 70 basis points to 26, 5%.
Michael Larsen: Turning to slide seven construction products organic growth was down <unk>.
Michael Larsen: 7% in tough end markets in the U S annualized new housing starts were down double digits compared to year end and.
Michael Larsen: And we estimate that international markets were down in the high single digits.
Michael Larsen: As a result, North America was down 10% with residential renovation down 12, while commercial construction was up 2%.
Michael Larsen: In the first quarter Europe was down 2% in Australia, and New Zealand was down 9%.
Michael Larsen: Operating margin of 29, 2% was essentially flat with another significant contribution.
Michael Larsen: Enterprise initiatives.
Michael Larsen: Specialty products organic revenue was up 1% against.
Michael Larsen: Against the comparison of plus 6% in the year ago period, with North America up 2% and international down.
Michael Larsen: 1%.
Michael Larsen: The reduction in revenue from strategic Pls was 130 basis points.
Michael Larsen: Of note equipment orders were up double digits with continued strength.
Michael Larsen: In the aerospace and packing equipment businesses.
Michael Larsen: Operating margin improved 120 basis points to 39% with another solid contribution from enterprise initiatives.
Michael Larsen: With that let's turn to slide eight for an update on our full year 2025 guidance.
Michael Larsen: Which is unchanged.
Michael Larsen: Looking ahead to the balance of the year, we firmly believe that we're better positioned than most as the impact of tariffs is largely mitigated by our 90% plus produce where we sell a manufacturing strategy and our unmatched ability to read and react in a highly decentralized operating culture.
Michael Larsen: Yeah.
Michael Larsen: We are well positioned to outperform our end markets and deliver organic growth of zero to 2% based on our usual topline guidance process, which is based on current levels of demand adjusted for typical seasonality.
Michael Larsen: The incremental pricing associated with tariffs and updated for the most recent automotive build projections that we talked about earlier.
Michael Larsen: As you saw in our press release this morning, we're maintaining.
Michael Larsen: Our previous guidance, including GAAP EPS in the range of 10% to 15% to $2 55.
Michael Larsen: And given the uncertainty in the global demand and buyer environment, we decided to not incorporate the EPS upside from our above planned results in Q1 as well as approximately 30.
Michael Larsen: Of tailwind from foreign exchange at current rates.
Michael Larsen: We fully expect to continue to execute at a high level on the most important profitability drivers that are within our control.
Michael Larsen: As our ongoing pricing and supply chain actions that as Chris said.
Michael Larsen: <unk> to offset tariff costs, and therefore be EPS neutral or better.
Michael Larsen: As well as our enterprise initiatives, which we now expect will contribute 100 basis points or more of margin expansion independent of volume.
Michael Larsen: So to wrap things up we're confident that the strength and resilience of the ITW business model.
Michael Larsen: Our high quality diversified business portfolio and.
Michael Larsen: And our people put us in a strong position to deal decisively and effectively with the effects of the announced tariffs. However, they play out from here.
Michael Larsen: While remaining focused on executing our long term enterprise strategy.
Erinn: So with that Erinn I'll turn it back to you.
Speaker Change: Thank you Michael <unk>.
Speaker Change: <unk> will you. Please open the lines for questions.
Speaker Change: Yes ma'am.
Speaker Change: At this time I would like to remind everyone.
Speaker Change: A question. Please press Star then the number one on your telephone keypad.
Speaker Change: We will pause for just one moment to compile the Q&A roster.
Yes.
Speaker Change: Okay. Your first question comes from the line of Vlad the streak you May go ahead.
Speaker Change: Good morning, guys. Thanks for taking my questions here.
Speaker Change: Good morning.
Speaker Change: Okay.
So I know you talked about offsetting.
Speaker Change: Offsetting potential tariff headwinds with pricing I guess can you just talk about any color on how youre thinking about overall pricing expectations for the year now versus coming into 'twenty five.
Speaker Change: And then just along with that I know historically, you've looked to offset.
Speaker Change: Inflationary pressures on a dollar for dollar basis, but you are maintaining the margin outlook here. So is there.
Speaker Change: Some different approach this time around.
Speaker Change: Yes, so sorry that I was.
At a high level the strategy is to offset tariffs with appropriate pricing.
Speaker Change: As we've said.
Speaker Change: On many occasions, we're able to get pricing due to high levels of differentiation.
Speaker Change: Across our business.
Speaker Change: So we expect the price cost equation to be were pretty manageable based on what we know today, we expect the tariff cost impact to be EPS neutral or better.
Speaker Change: I'd say that pricing in general I mean, any comments that we make on pricing should be considered in the context that we have 84 different divisions.
Speaker Change: And obviously the context is different in each one but overall, we expect the price cost impacts from tariffs to be EPS neutral or better we'll do better than that in some businesses. We allow our businesses who are very close to our customers.
Speaker Change: Make these decisions with some overarching guidance from us, but business or close to their customers. They know their customers very well they understand the competitive intensity.
Speaker Change: Price volume dynamics relative to their particular markets.
Speaker Change: And these are decisions that are taken in our businesses on an ongoing basis not just in response to a to a tariff environment. So there's a lot of market specific expertise within our divisions as the hole to get price and where to get price, but in general as I said, we sell differentiated products and services, we get paid for our value and I would say so far.
Speaker Change: We're also a very good start in terms of getting price based on the tariffs that were introduced in early March.
Chris: That's helpful. Chris appreciate it and then.
Chris: Just stepping back can you talk about how youre thinking about potential contingency plans, if we see the demand environment materially slow over the course of 'twenty five.
Chris: I recall in the Covid and post Covid era, you were very focused on winning the recoveries. So can you talk about how youre thinking about a potential recession recovery playbooks today.
Chris: Sure. So I would say that in terms of contingency obviously.
Chris: And the fortunate position that we have I would say a lot of self help in the context of enterprise initiatives in the first.
Chris: Insurance divisions.
Chris: The spirit of continuous improvement our divisions are always looking at supply chains alternative suppliers as a matter of course, that's very much consistent with our continuous improvement approach from a recession kind of posture response standpoint.
Chris: Clearly, it's a pretty fluid environment, but I would say that our overall posture in a short term recession will be to wherever possible.
Chris: Invested in our growth initiatives and these really highly profitable businesses.
Chris: We're long term focused company, we have the financial resources to do that obviously during the pandemic are or when the recovery approach helped US number one take care of customers number to gain share and so we look at taking a somewhat similar approach and again I come back to the point that we said that enterprise initiatives, which would certainly help us protect margins.
Chris: The downturn.
Chris: The other point I would make that's pretty specific to ourselves is that as we've often noted.
Chris: Fundamental element to be 80, 20 is that we've got a very flexible cost structure and we typically engage in the higher value added parts.
Chris: The manufacturing process and outsource those are the parts that maybe maybe lower on the value chain. So this makes the cost structure for us a very flexible and this would be a real benefit in a recessionary scenario.
Chris: Great appreciate it Chris Thanks sure of that.
Thank you. Your next question comes from the line of.
Chris: Zakaria with J P. Morgan you May go ahead.
Speaker Change: Hey, good morning. Thank you. So my morning, Mike My question is on pricing.
Chris: So the organic growth guide here to 2%.
Chris: I think I heard you say it includes some pricing action. So are you are you assuming the pricing gain.
Chris: We will be offset by some volume decline and that's why you are leaving our full year organic growth guide intact.
Michael Larsen: So Jamie this is Michael so.
Michael Larsen: The organic growth guidance of zero to 2% is based on kind of our typical run rates our current levels of demand.
Michael Larsen: We have.
Michael Larsen: Added to that incremental pricing, which is associated.
Michael Larsen: With tariffs and then we also updated.
Michael Larsen: The forecast for the lower <unk>.
Michael Larsen: Projected auto build forecasts and I think.
Michael Larsen: Your question around could this incremental price be offsetting volume I think is kind of how we think about it there and while we haven't seen a slowdown.
Michael Larsen: In our businesses today.
Michael Larsen: Certainly the uncertainty.
Michael Larsen: It's not unreasonable to imagine that things could slow a little bit in the second half and if thats. The case that volumes come down then that will be offset.
Michael Larsen: By the higher level of pricing that we're getting right now in.
Michael Larsen: In our businesses to help offset the.
Michael Larsen: The tariff impact.
Michael Larsen: Understood that's very helpful and a quick follow up on that is.
Michael Larsen: Have you already taken pricing in response to tariffs or you're waiting to take the pricing when titles to become effective on may two of whatever the latest date is from the administration.
Christopher Hurley: I think as Chris said this is.
Speaker Change: 84 different discussions, but what I can tell you every division.
Speaker Change: Has a slightly different timeline, but I can also tell you everybody impacted by tariffs has already taken.
Speaker Change: Decisive action.
Speaker Change: Pricing as Chris said based on the announcements that were made back in March.
Speaker Change: Our.
Speaker Change: And some of them have taken action already based on the announcements that were made early April and so this is kind of an ongoing.
Speaker Change: Process I think whats really encouraging if you look back at kind of how this played out in 2017 and 18, how it played out in an inflationary environment coming out of Covid I think we've demonstrated we have ample priced.
Speaker Change: Pricing power in these highly differentiated businesses and so that's what gives us the confidence to say that.
Speaker Change: Our pricing actions along with some of the other supply chain actions.
Speaker Change: We talked about will enable us to offset.
Speaker Change: The impact of tariffs and be EPS neutral.
Speaker Change: Or better by year end.
Speaker Change: That's wonderful thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Julian Mitchell with Barclays.
Speaker Change: You May go ahead.
Julian Mitchell: Hi, good morning.
Speaker Change: Good morning.
Speaker Change: Start ups.
Speaker Change: <unk>.
Speaker Change: Food equipment.
Speaker Change: Business.
Speaker Change: So that doesn't get a lot of air time, but you get a very good update on also in test and measurement.
Speaker Change: Comes through equipment, because we've seen some.
Speaker Change: Fairly lacklustre updates from some larger customers.
Speaker Change: And that sort of quick serve channel, whether it's Starbucks KFC or whoever in the last 24 hours.
Speaker Change: Wondered if you're seeing any shift in customer behavior.
Speaker Change: Food equipment yourself, what's your confidence in the sort of continued spending by those customers and the balance of the year.
Julian Mitchell: Yeah, So Julian I overall, I think our confidence in food equipment is very high this is a highly differentiated business for us.
Julian Mitchell: It also contains about one third of the businesses service related and that's very unique because we are the only major equipment manufacturer with that captive service business and as you've seen from what Michael reported earlier the service business continues to grow nicely.
Julian Mitchell: On the equipment side.
Julian Mitchell: Given the end markets that we are.
Julian Mitchell: About 40% 40 years of our business goes to institutional.
Julian Mitchell: Customers and that continues to be very strong.
Julian Mitchell: For us food.
Julian Mitchell: Food equipment in the aggregate as an extremely FERC innovation environment.
Julian Mitchell: We have new product launches in all product categories. This year in food or some real tangible things to innovate around like energy and water savings, which really matter.
Julian Mitchell: Matter to our customers. So we feel very good about food equipment is a very fertile innovation space because of our end market mix being more skewed towards <unk>.
Julian Mitchell: Institutional that is helping US right now and obviously, we have the big service business, which is a huge differentiator for us.
So we see broad based strength in food equipment, North America, China, and Latin America also expected to be strong geographically.
Speaker Change: That's very helpful. Thank you and then.
Julian Mitchell: Just to understand.
Julian Mitchell: On the tariff points from sort of segment standpoint in phasing through the year.
Julian Mitchell: Is the assumption that all segments.
Julian Mitchell: Should be sort of tariff dollars.
Julian Mitchell: Neutral for 2025, as a whole and is there any kind of <unk>.
Julian Mitchell: Pressure in a given quarter ITW enterprise wide from tariffs in terms of EBIT dollars or EBIT.
Julian Mitchell: <unk> right that you'd highlight to us.
Julian Mitchell: Julian historically.
Julian Mitchell: If you go back to 2017 and 18, there was a little bit of a lag between when tariffs were enacted in when pricing kicked in I think we learned some things I think we've become.
Julian Mitchell: Faster in terms of.
Julian Mitchell: Reacting to these tariff increases and so we really don't expect a whole lot of.
Julian Mitchell: Quarterly impact here in the short term.
Julian Mitchell: From from.
Julian Mitchell: From a lag between price cost I think all segments.
Julian Mitchell: Have I would say the tariff impact is pretty broad based a little bit less in automotive, which is a good thing.
Julian Mitchell: Because as you know it takes a little bit longer to get price there, but everywhere else all of our divisions all segments are working actively.
Julian Mitchell: Offsetting these tariff costs with with supply chain and pricing actions and ultimately that's what's going to enable us to be EPS neutral or better.
Julian Mitchell: By the time, we get to year end, but there really shouldnt be a lot of pressure here in the short term.
Julian Mitchell: That's great. Thank you.
Julian Mitchell: Sure.
Speaker Change: Your next question comes from the line of Stephen Volkmann with Jefferies. You May go ahead.
Julian Mitchell: Yeah.
Stephen Volkmann: Good morning, guys. Thank you good morning Julien.
Speaker Change: Allianz kind of Teed me up here I was just going to ask if Michael if theres anything you want to say relative to the second quarter that might be different than normal seasonality just as we model this out.
Speaker Change: Well, so obviously I will just say this we are operating in a pretty uncertain environment as you know.
Speaker Change: We had a pretty solid finish to Q1, we had a pretty good start.
Speaker Change: April is not completely done yet but.
Things are tracking pretty good so.
Speaker Change: What I'll maybe offer is that typically.
Speaker Change: From Q1 to Q2.
Speaker Change: We see about a 2% top line.
Speaker Change: Sequential growth, we also benefit from having one more day in.
Speaker Change: In Q2 than we did.
Speaker Change: In Q1, so if you model that out.
Speaker Change: Youll see that revenues are about flat from an organic growth standpoint on a year over year basis.
Speaker Change: Pricing may help out a little bit, but thats kind of the base assumption that at the top line is flat year over year margins, we should see a significant meaningful step up from Q1.
Speaker Change: Primarily as a result of some of these onetime items not recurring and so.
Speaker Change: Solid margin improvement from Q1.
Speaker Change: Two Q2.
Speaker Change: And then on the year over year basis.
Speaker Change: Margins about flattish and EPS also about flat so that would put.
Speaker Change: I think last year, we did $2 54. So if you believe what I, just said that would put EPS kind of in the mid <unk>.
Speaker Change: 200 <unk> you.
Speaker Change: You add our Q1 238 on top of that.
Speaker Change: And then for the first half youll get to somewhere around 490 ish.
Speaker Change: Which would be 48% of the full year.
Speaker Change: Yes, guys.
Speaker Change: Our guidance if you look at it in terms of the mid point and Thats pretty close to our kind of our historical cadence $49 51, it's a little bit lower this year.
Speaker Change: As a result of slightly higher restructuring tied to our 2020 front to back projects, but.
Speaker Change: Overall, this seems like a pretty reasonable way to think about Q2 first half second half and again I'll just.
Speaker Change: In case it wasn't clear.
Speaker Change: If you would go back to our last.
Speaker Change: Call. It when we gave guidance, we highlighted 30 <unk> of currency headwind.
Speaker Change: Headwind, that's no longer the case.
Speaker Change: Based on current rates as you may recall, we don't hedge. So these currency moves favorable in this case flow through pretty quickly given the short cycle nature.
Speaker Change: Of our business. So that's maybe a way to kind of think about Q2, when the balance of the year.
Speaker Change: Great very thorough and I definitely do believe you.
Speaker Change: Just.
Speaker Change: Anything on the tax rate I know that was a little benefit in the first quarter.
Speaker Change: So I think this was a pretty standard kind of tax.
Speaker Change: Transaction and so we are.
Speaker Change: Modestly lowering our guidance for the full year.
Speaker Change: For the tax rate to 24% I think it was 24 and a quarter prior to that so.
Speaker Change: And Thats if you if you do the math that's about <unk>.
Speaker Change: And typically.
Speaker Change: While we would have done in a normal environment.
Speaker Change: As flow through the benefit of the lower tax rate and.
Speaker Change: Current foreign exchange rates.
Speaker Change: And just given the environment that we're in it.
Speaker Change: We decided to not do that and so to some extent.
Speaker Change: Derisked our guidance for the full year, whether that'll be.
Speaker Change: Enough or not remains to be seen.
Speaker Change: As I said earlier things can change quickly we are operating in a pretty uncertain environment and we'll just go back to what Chris said is that we really believe we're better positioned than most to deal with.
Speaker Change: This level of volatility and uncertainty.
Speaker Change: Thank you very much sure.
Speaker Change: Your next question comes from the line of Jamie Cook with true Security you May go ahead.
Jamie Cook: Hi, Good morning, just a question on I think last quarter, you had a slide in there on CDI and the contribution to revenue for 2025.
Speaker Change: Okay, especially contributed $2 three to two 5% of growth and I'm just wondering if.
Jamie Cook: If we take that slide out for a reason or.
Jamie Cook: In this environment.
Jamie Cook: Okay.
Speaker Change: Thanks for that and then just my last follow up question Pls is that just still assumed.
Jamie Cook: <unk> had a headwind thank you.
Jamie Cook: Yes, so on CVI, Jimmy we're very encouraged by the progress that we're making across the business grip pipeline of new products every segment contributing.
Jamie Cook: One of the reasons, we would say we're outperforming our end markets right.
Jamie Cook: Several product launches across the business. This year again across all segments and I would say that with respect to our target of two three to $2 five for the full year in terms of CVI contribution than we are well on track to do that based on our performance here in Q1, and I think what we'd rather not do Jamie and it's a fair question is kind of give you an update on what the.
Jamie Cook: CVI number is every quarter.
Jamie Cook: It can be a little lumpy, but as Chris said, we are definitely tracking it and based on what we've seen so far we are.
Jamie Cook: We are on track to deliver on our full year.
Jamie Cook: Target.
Jamie Cook: The Pls we're still.
Jamie Cook: Targeting a 100 basis points of Pls, primarily.
Jamie Cook: In the specialty products segment in the automotive segment.
Jamie Cook: As well as on the construction side. So those are kind of the three.
Jamie Cook: Larger ones.
Jamie Cook: And again this is all kind of.
Jamie Cook: The strategic repositioning of these businesses to improve the growth rate on a go forward basis. So.
Jamie Cook: That's all on track.
Jamie Cook: Okay.
Jamie Cook: Your next question comes from the line of Joe O'dea with Wells Fargo. You May go ahead.
Joe O'dea: Hi, good morning.
Speaker Change: Good morning.
Speaker Change: Just looking to understand the tariff price cost dynamic a little bit more I think.
Speaker Change: Michael last quarter, you talked about $250 million of imports roughly from China.
Speaker Change: Can you just run math on that and 145% tariff and take like three quarters of the year.
Speaker Change: You're going to need maybe one five points of price to offset it and then we have some of them are cyclical tariffs as well and so not sure if 2% price reasonable kind of benchmark to be thinking about required to offset cost and be dollar neutral, but really just any color you can provide on that.
Speaker Change: Costs associated with the different tariffs that are in place.
Speaker Change: I think Joe the kind of the back of the envelope math Youre doing is.
Speaker Change: Is not completely unreasonable I mean as you said we've talked about this on our last call.
Speaker Change: Terms of the imports into the U S from China.
Speaker Change: Being.
Speaker Change: About 5% of our total domestic spend so.
As you can tell from that.
Speaker Change: Small that number as we never pursued a low cost country.
Speaker Change: Okay.
Speaker Change: Manufacturing strategy, its always been kind of produce where we sell as you said that.
Speaker Change: That $250 million, that's an that's an annualized number.
Speaker Change: Once we get through inventory, we're almost halfway through the year.
Speaker Change: So the potential impact is for the full year 'twenty five is less than that.
Speaker Change: We're as Chris said actively working to offset the impact with supply chain actions.
Speaker Change: <unk> actions.
Speaker Change: And therefore.
Speaker Change: Due to our better which is exactly what we did the last time around in 17.
Speaker Change: And <unk> as well as post Covid. So we're confident we can do that.
Speaker Change: And I'll just say it again I think we believe we are better positioned here than most and like we said on the call last time.
Speaker Change: These tariffs from a cost standpoint are certainly manageable obviously whats.
Speaker Change: Unknown at this point is what the impact might be from a demand standpoint in the second half, but I think at this point.
Speaker Change: With the visibility we have we feel like.
Speaker Change: We're in a really good spot, let's get through Q2, and then we'll kind of update all the analytics and we will give you an update in terms of how we.
Speaker Change: View of the year on our next call.
Speaker Change: Okay.
Speaker Change: And then just in terms of the contingency that's embedded within the guide.
Speaker Change: Such tariffs as price cost neutral.
Speaker Change: Then the FX I think the revenue guide for the year now Embeds.
Speaker Change: That FX environment.
Speaker Change: But that can flow through and flow through.
Speaker Change: And so is that kind of contingency versus the unknown on the macro or just how youre approaching embedding kind of contingency, yes, and yes. So we updated the revenue.
Speaker Change: The number but we didn't update EPS. So that's that's a good way to look at it it's part of the contingency if you want to call it that for the for what might happen to volume in the back half of the year, even though we haven't really seen it yet.
Speaker Change: And in automotive, we have already factored that into our guidance as we sit here today based on the most recent build projections, which by the way is really more of a North America challenge at this point I think we feel very good about our.
Speaker Change: Our China business being able to sustain the type of growth rates that they are putting up.
Speaker Change: That's really driven mostly by the.
Speaker Change: The EV market and production growing at some pretty staggering numbers in China, and that which is projected to.
Speaker Change: Continue as we go through the year and then Europe as we sit here today is is kind of down low single digits.
Speaker Change: With auto builds and all of that is like I said factored into.
Speaker Change: The updated guidance that we're giving you here today.
Speaker Change: And so just big picture when you think about kind of the elevated uncertainty we're dealing with.
Speaker Change: Parts of the business are you watching most closely for vulnerabilities, which parts of the business are you looking at.
Speaker Change: Insulate from some of those vulnerabilities.
Speaker Change: Yes.
Speaker Change: At a high level in terms of uncertainty overall.
Speaker Change: We always say, we're built for uncertainty based on a number of attributes that we have across the company I think.
Speaker Change: The resilience provided by our diverse portfolio across the seven segments, we're always going to have a mixture of headwinds and <unk>, but with little or no concentration risk and the fact that the portfolio is very much built around sustainable differentiation. This provides a really strong ability to recover price I think the strength of the business model to help us control the controllable and provide self help.
Speaker Change: Opportunities.
Speaker Change: Like enterprise initiatives, and then I think the very important one is the nimbleness of our decentralized closer to the customer structure.
Speaker Change: Which really enables our ability to read and react to whatever we can control. So we can we can mitigate the impact and I think all of these attributes position ITW to outperform.
Speaker Change: Particularly well in uncertain environments, if we're going to hit on any particular segment that I think we've been we've seen some challenges for a long time now in terms of the Capex markets.
Speaker Change: Likely to continue obviously with the interest rate environment being kind of where it is.
Speaker Change: A little bit of uncertainty in automotive, but some of that's already baked in based on the build numbers coming down, but I would say that across the company, we're pretty well positioned based on the overall posture and attributes that we have to really help us manage these uncertain times.
Speaker Change: I appreciate it thank you.
Speaker Change: Sure.
Speaker Change: Our next question comes from the line of.
Speaker Change: You May go ahead.
Speaker Change: Hi, good morning, guys.
Speaker Change: Sure.
Speaker Change: As we think about the margin progression for the rest of the year I know you expect margins improve as the year goes on.
Speaker Change: But when are you expecting price cost would be more favorable.
Speaker Change: And would it be like Q2 with higher pricing coming in sooner than when the cost center.
Speaker Change: Pricing.
Speaker Change: Good luck.
Speaker Change: Youre progresses.
Speaker Change: Yes.
Speaker Change: You were breaking up a little bit, but if I understood. Your question correctly I would say.
Speaker Change: We went into the year kind of assuming.
Speaker Change: Normal.
Speaker Change: Price cost environment, which.
Speaker Change: For us typically is.
Speaker Change: Slightly favorable.
Speaker Change: Margins.
Speaker Change: We are not expecting anything unusual on a quarterly basis as we go through the year I think there was a question earlier about.
Speaker Change: The potential lag between price and cost and we feel like we're better positioned.
Speaker Change: At this time around so.
Speaker Change: I think what always happens.
Speaker Change: On the road.
Speaker Change: Most good companies will recover the margin impact.
Speaker Change: Whether that happens by year end or into next year that remains to be seen but.
Speaker Change: If there is some pressure it's short term.
Speaker Change: And.
Speaker Change: Again, it's as we sit here today, we'd say, it's it's manageable so.
Speaker Change: Okay got it.
Speaker Change: And it's possible you already addressed to some extent.
Speaker Change: But just as you think about the kind of 2%.
Speaker Change: Demand weakening.
Speaker Change: Would you expect that to be more from a weaker macro impacting end market or more from.
Speaker Change: Higher prices and price sensitivity there.
It would be all end market related I think you got to factor in that.
Speaker Change: Our divisions their competitors are dealing with the same challenges that we are and they are less favorably position than we are I think is a fair comment so in.
Speaker Change: In terms of driving above market organic growth.
Speaker Change: With the new product pipeline with the share gain opportunities.
Speaker Change: In front of US and you are seeing that in a number of places and so you can look at complete segments, whether it's food equipment or welding.
Speaker Change: Whether our.
Speaker Change: Comparison comparable is out there or even automotive where we are.
Speaker Change: Outgrowing underlying markets by two to 300 basis points. So this is going to be all about end market demand.
Speaker Change: And we're confident that we'll continue to outperform these underlying end markets.
Speaker Change: As we go through the remainder of the year.
Speaker Change: Okay that makes sense appreciate the time sure.
Speaker Change: Your final question comes from the line of Nicole <unk> with Deutsche Bank You May go ahead.
Speaker Change: Thanks, Good morning, guys good morning.
Speaker Change: Just with respect to the mechanics of the price increases that sorry to beat this dead horse, but are you guys going after this with more of like a surcharge mentality, where the pricing would that come off if tariffs were kit go away or is it an actual list price increase which is obviously more sticky.
Speaker Change: Yes, so on the call it's very much a mixture of both and again it goes back to the individual circumstance in each business the relative competitive intensity I would say that the price volume dynamics that are going on in all these businesses. So that's a decision that we allow our businesses to make.
Speaker Change: It's surcharge or a price increase.
Speaker Change: Obviously theres a lot of as I said before market specific expertise in these businesses is the how would you get price, whether it's our charger or increase and where to get it but in general I think the level of differentiation that we have really enables us to do it but.
Speaker Change: These are decisions that are taken at the division level like I said and it's a mixture of both surcharge and price increase.
Speaker Change: Okay understood and then with respect to the restructuring actions that you guys are taking this year has there been any shift in the total amount of restructuring, especially considering a weaker volume environment and do you still expect to incur 80% of those charges in the first half.
Speaker Change: Yes, Nicole that's still the case I think these are the restructuring projects that are being done are all tied to our 80 20, a front to back.
Speaker Change: Process and are identified kind of going into the year as part of the planned process.
Speaker Change: And obviously, we will see kind of how things play out from here, but.
Speaker Change: It's still the same assumption for the full year and still assuming that.
Speaker Change: About 80% of the total spend this year will happen in Q1 and Q2.
Speaker Change: Got it thank you.
Speaker Change: Alright, thank you.
Speaker Change: Yes.
Speaker Change: Thank you for participating in today's conference call all lines may disconnect at this time.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.