Illinois Tool Works Q4 2025 Illinois Tool Works Inc Earnings Call | AllMind AI Earnings | AllMind AI
Q4 2025 Illinois Tool Works Inc Earnings Call
Operator: Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's Fourth Quarter and Full-Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 a second time. For those participating in the Q&A, you will have the opportunity to ask one question and, if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin the conference.
Operator: Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's Fourth Quarter and Full-Year 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 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 a second time. For those participating in the Q&A, you will have the opportunity to ask one question and, if needed, one follow-up question.
Speaker #1: Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to ITW's fourth quarter and full year earnings conference call.
Speaker #1: 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.
Speaker #1: If you'd like to withdraw your question, press star one a second time. For those participating in the Q&A, you will have the opportunity to ask one question, and if needed, one follow-up question.
Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin the conference.
Speaker #1: Thank you. Erin Linnehan, Vice President of Investor Relations, you may begin the
Speaker #1: conference. Thank you, Regina.
Erin Linnihan: Thank you, Regina. Good morning and welcome to our ITW's Q4 2025 conference call. I'm joined by our President and CEO, Christopher O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's Q4 and full-year 2025 financial results and provide guidance for full-year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer 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. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?
Erin Linnihan: Thank you, Regina. Good morning and welcome to our ITW's Q4 2025 conference call. I'm joined by our President and CEO, Christopher O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's Q4 and full-year 2025 financial results and provide guidance for full-year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer 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. 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 #2: Good morning, and welcome to our ITW fourth quarter 2025 conference call. I'm joined by our President and CEO, Chris O'Herlihy, and Senior Vice President and CFO, Michael Larsen.
Speaker #2: During today's call, we will discuss ITW's fourth quarter and full year 2025 financial results, and provide guidance for full year 2026. Slide two is a reminder that this presentation contains forward-looking statements.
Speaker #2: Please refer 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.
Speaker #2: This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.
Please turn to slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?
Speaker #2: Please turn to slide three. It's now my pleasure to turn the call over to our President and CEO, Christopher OHerlihy. Chris?
Speaker #3: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid finish to the year. In the fourth quarter, we outperformed our underlying end markets with revenue growth of more than 4% and delivered a 7% increase in GAAP EPS to $2.72.
Christopher A. O’Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid finish to the year. In Q4, we outperformed our underlying end markets with revenue growth of more than 4% and delivered a 7% increase in GAAP EPS to $2.72. Through disciplined operational execution, we expanded operating income and margins to record levels. Starting with the top line, organic growth of 1.3% marked our best quality performance of the year. Overall, Q4 demand improved, as reflected in higher-than-normal sequential improvement of 4% from Q3. In addition to market outperformance, the ITW team continued to execute at a high level, resulting in operating income of $1.1 billion and an increase of 5%. Segment margins were 27.7%, up 120 basis points, with a 140 basis point contribution from enterprise initiatives.
Christopher O’Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid finish to the year. In Q4, we outperformed our underlying end markets with revenue growth of more than 4% and delivered a 7% increase in GAAP EPS to $2.72. Through disciplined operational execution, we expanded operating income and margins to record levels. Starting with the top line, organic growth of 1.3% marked our best quality performance of the year. Overall, Q4 demand improved, as reflected in higher-than-normal sequential improvement of 4% from Q3. In addition to market outperformance, the ITW team continued to execute at a high level, resulting in operating income of $1.1 billion and an increase of 5%. Segment margins were 27.7%, up 120 basis points, with a 140 basis point contribution from enterprise initiatives.
Speaker #3: Through disciplined operational execution, we expanded operating income and margins to record levels. Starting with the top line, organic growth of 1.3% marked our best quality performance of the year.
Speaker #3: Overall, Q4 demand improved, as reflected in higher-than-normal sequential improvement of 4% from Q3. In addition to market outperformance, the ITW team continued to execute at a high level.
Speaker #3: Resulting in operating income of $1.1 billion and increase of 5%. Segment margins were 27.7%, up 120 basis points. With 140 basis point contribution from enterprise initiatives.
Christopher A. O’Herlihy: Looking back on a challenging external environment in 2025, the ITW team delivered another year of robust financial performance. We consistently outperformed our markets, solidly improved profitability, and made meaningful progress on our next phase key strategic priorities. Throughout the year, we remained laser-focused on building above-market organic growth, fueled by Customer-Back Innovation, or CBI, into a defining ITW strength. We are pleased to have achieved 2.4% CBI-fueled revenue growth in 2025, a 40 basis point improvement, as we track toward our 2030 goal of 3%+. Furthermore, I'm encouraged by a key leading indicator of CBI contribution, or patent filings, which increased by 9% last year following an 18% increase in 2024. Turning to guidance, we enter 2026 with solid momentum. Per our usual approach, our organic growth projection of 1 to 3% reflects current demand levels adjusted for seasonality.
Looking back on a challenging external environment in 2025, the ITW team delivered another year of robust financial performance. We consistently outperformed our markets, solidly improved profitability, and made meaningful progress on our next phase key strategic priorities. Throughout the year, we remained laser-focused on building above-market organic growth, fueled by Customer-Back Innovation, or CBI, into a defining ITW strength. We are pleased to have achieved 2.4% CBI-fueled revenue growth in 2025, a 40 basis point improvement, as we track toward our 2030 goal of 3%+. Furthermore, I'm encouraged by a key leading indicator of CBI contribution, or patent filings, which increased by 9% last year following an 18% increase in 2024. Turning to guidance, we enter 2026 with solid momentum. Per our usual approach, our organic growth projection of 1 to 3% reflects current demand levels adjusted for seasonality.
Speaker #3: Looking back on a challenging external environment in 2025, the ITW team delivered another year of robust financial performance. We consistently outperformed our markets, solidly improved profitability, and made meaningful progress on our next-phase key strategic priorities.
Speaker #3: Throughout the year, we remained laser-focused on building above-market organic growth, fueled by customer-backed innovation, our CBI, into a defining ITW strength. We are pleased to have achieved $2.4% CBI-fueled revenue growth in 2025.
Speaker #3: A 40 basis point improvement. As we track toward our 2030 goal of 3% plus. Furthermore, I'm encouraged by a key leading indicator of CBI contribution, our patent filings.
Speaker #3: Which increased by 9% last year, following an 18% increase in 2024. Turning to guidance, we entered 2026 with solid momentum. Per our usual approach, our organic growth projection of 1% to 3% reflects current demand levels adjusted for seasonality.
Speaker #3: We are well positioned to capitalize on any further improvement in the macro environment. Our EPS guidance midpoint of $11.20 represents 7% growth, and we expect operating margin expansion of about 100 basis points, powered by enterprise initiatives.
Christopher A. O’Herlihy: We are well-positioned to capitalize on any further improvement in the macro environment. Our EPS guidance midpoint of $11.20 represents 7% growth, and we expect operating margin expansion of about 100 basis points powered by enterprise initiatives. Our 2026 forecast ensures we remain firmly on track to deliver on our 2030 performance goals. In closing, I want to sincerely thank our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence each and every day. And with that, I'll turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael.
We are well-positioned to capitalize on any further improvement in the macro environment. Our EPS guidance midpoint of $11.20 represents 7% growth, and we expect operating margin expansion of about 100 basis points powered by enterprise initiatives. Our 2026 forecast ensures we remain firmly on track to deliver on our 2030 performance goals. In closing, I want to sincerely thank our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence each and every day.
Speaker #3: Our 2026 forecast ensures we remain firmly on track to deliver on our 2030 performance goals. In closing, I want to sincerely thank our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence each and every day.
And with that, I'll turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael.
Speaker #3: With that, I'll turn the call over to Michael to provide more detail on the quarter and our guidance for 2026.
Speaker #3: Michael. Thank
Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid operational and financial finish to the year. Organic growth was 1.3%, foreign currency translation added 2.5%, and acquisitions contributed 0.3%, bringing total revenue growth to 4.1%. Notably, our 4% sequential revenue growth from Q3 to Q4 significantly outperformed our historical sequential average of 2%. On a geographic basis, North America grew about 2%, Asia-Pacific was up 3%, while Europe declined 2%. On the bottom line, we achieved a fourth quarter record operating margin of 26.5%, with enterprise initiatives contributing 140 basis points. As noted in our press release, segment operating margin was 27.7%, a 120 basis point increase with incremental margins of more than 50%. All seven segments expanded operating margins driven by enterprise initiatives, which contributed between 80 and 210 basis points per segment.
Michael Larsen: Thank you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid operational and financial finish to the year. Organic growth was 1.3%, foreign currency translation added 2.5%, and acquisitions contributed 0.3%, bringing total revenue growth to 4.1%. Notably, our 4% sequential revenue growth from Q3 to Q4 significantly outperformed our historical sequential average of 2%. On a geographic basis, North America grew about 2%, Asia-Pacific was up 3%, while Europe declined 2%. On the bottom line, we achieved a fourth quarter record operating margin of 26.5%, with enterprise initiatives contributing 140 basis points. As noted in our press release, segment operating margin was 27.7%, a 120 basis point increase with incremental margins of more than 50%. All seven segments expanded operating margins driven by enterprise initiatives, which contributed between 80 and 210 basis points per segment.
Speaker #4: you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid operational and financial finish to the year. Organic growth was 1.3%, foreign currency translation added 2.5%, and acquisitions contributed 0.3%, bringing total revenue growth to 4.1%.
Speaker #4: Notably, our 4% sequential revenue growth from Q3 to Q4 significantly outperformed our historical sequential average of 2%. On a geographic basis, North America grew about 2%, Asia Pacific was up 3%, while Europe declined 2%.
Speaker #4: On the bottom line, we achieved a fourth quarter record operating margin of 26.5% with enterprise initiatives contributing 140 basis points. As noted in our press release, segment operating margin was 27.7%, 120 basis point increase with incremental margins of more than 50%.
Speaker #4: All seven segments expanded operating margins, driven by enterprise initiatives, which contributed between 80 and 210 basis points per segment. Free cash flow conversion to net income was 109% for the quarter.
Michael M. Larsen: Free cash flow conversion to net income was 109% for the quarter. We repurchased $375 million of our shares, and our tax rate was 22.8%. Please turn to slide 4. And as Chris mentioned, CBI is our most impactful driver for organic growth. We're pleased with our 2025 progress, reaching a 2.4% CBI contribution, a 40 basis points year-over-year improvement. We expect meaningful progress again in 2026 on this key strategic initiative as we track toward our longer-term goal. Now let's move to the fourth quarter segment results, starting with Automotive OEM, where revenue increased 6% and organic revenue increased 2%. On a regional basis, North America was up 2%, while Europe was down 1%, and China grew 5%. For the full year 2025, the segment outperformed relevant builds, and we expect our typical 200 to 300 basis points of outperformance in 2026.
Free cash flow conversion to net income was 109% for the quarter. We repurchased $375 million of our shares, and our tax rate was 22.8%. Please turn to slide 4. And as Chris mentioned, CBI is our most impactful driver for organic growth. We're pleased with our 2025 progress, reaching a 2.4% CBI contribution, a 40 basis points year-over-year improvement. We expect meaningful progress again in 2026 on this key strategic initiative as we track toward our longer-term goal. Now let's move to the fourth quarter segment results, starting with Automotive OEM, where revenue increased 6% and organic revenue increased 2%. On a regional basis, North America was up 2%, while Europe was down 1%, and China grew 5%. For the full year 2025, the segment outperformed relevant builds, and we expect our typical 200 to 300 basis points of outperformance in 2026.
Speaker #4: We repurchased $375 million of our shares and our tax rate was 22.8%. Please turn to slide four, and as Chris mentioned, CBI is our most impactful driver for organic growth.
Speaker #4: We're pleased with our 2025 progress, reaching a 2.4% CBI contribution, an improvement of 40 basis points year over year. We expect meaningful progress again in 2026 on this key strategic initiative as we track toward our longer-term goal.
Speaker #4: Now let's move to the fourth quarter segment results, starting with Automotive OEM, where revenue increased 6% and organic revenue increased 2%. On a regional basis, North America was up 2%, while Europe was down 1%, and China grew 5%.
Speaker #4: For the full year, 2025, the segment outperformed relevant builds, and we expect our typical 2 to 300 basis points of outperformance in 2026. Full year margins are a prime example of ITW's do-what-we-say execution.
Michael M. Larsen: Full-year margins are a prime example of ITW's do-what-we-say execution. In 2025, margins improved by 150 basis points to 21.1%, consistent with the goal established during our 2023 Investor Day. Driven by our culture of continuous improvement, we expect to further expand these margins in 2026. Turning to slide 5, Food Equipment delivered revenue growth of 4% with organic growth of 1% as equipment was flat, offset by 3% growth in service. By region, North America was flat, with institutional end markets up in the high single digits, offset by restaurants down also in the high single digits. Retail was a bright spot, up nearly 5%, and the international business grew 2% with Europe up 2%. Test & Measurement and Electronics had a solid quarter, revenue up 6% and organic revenue up 2%. Test & Measurement was up 3%, and electronics was flat against a tough comparison year-over-year.
Full-year margins are a prime example of ITW's do-what-we-say execution. In 2025, margins improved by 150 basis points to 21.1%, consistent with the goal established during our 2023 Investor Day. Driven by our culture of continuous improvement, we expect to further expand these margins in 2026. Turning to slide 5, Food Equipment delivered revenue growth of 4% with organic growth of 1% as equipment was flat, offset by 3% growth in service. By region, North America was flat, with institutional end markets up in the high single digits, offset by restaurants down also in the high single digits. Retail was a bright spot, up nearly 5%, and the international business grew 2% with Europe up 2%. Test & Measurement and Electronics had a solid quarter, revenue up 6% and organic revenue up 2%. Test & Measurement was up 3%, and electronics was flat against a tough comparison year-over-year.
Speaker #4: In 2025, margins improved by 150 basis points to 21.1%, consistent with the goal established during our 2023 Investor Day. Driven by our culture of continuous improvement, we expect to further expand these margins in 2026.
Speaker #4: Turning to slide five, Food Equipment delivered revenue growth of 4%, with organic growth of 1%, as equipment was flat, offset by 3% growth in service.
Speaker #4: By region, North America was flat, with institutional end markets up in the high single digits, offset by restaurants, down also in the high single digits.
Speaker #4: Retail was a bright spot, up nearly 5%, and the international business grew 2% with Europe up 2%. Test and measurement and electronics had a solid quarter.
Speaker #4: Revenue was up 6%, and organic revenue was up 2%. Test and Measurement was up 3%, and Electronics was flat against the tough comparison year over year.
Speaker #4: Notably, we began to see a positive pickup in semiconductor and electronics activity with our semi-related businesses up mid-single digits in the quarter. Operating margins improved by 110 basis points, to 28.1%.
Michael M. Larsen: Notably, we began to see a positive pickup in semiconductor and electronics activity, with our semi-related businesses up mid-single digits in the quarter. Operating margins improved by 110 basis points to 28.1%. Moving on to slide 6, Welding revenue grew 3% with organic growth of 2% in the fourth quarter. Equipment was up 4%, and while consumables were flat, filler metals were up in the high single digits. Regionally, North America was up 4%, while International declined 5% against a tough comparison of 9% last year. Notably, operating margin reached 33.3%, a 210 basis points improvement. Polymers and Fluids had a strong top-line quarter with 5% organic growth, supported by new product launches in automotive aftermarket, which grew 5%. Polymers was up 4% and Fluids grew 6%. On a geographic basis, North America was up 5% and International grew 4%. Operating margin expanded 110 basis points to 29%.
Notably, we began to see a positive pickup in semiconductor and electronics activity, with our semi-related businesses up mid-single digits in the quarter. Operating margins improved by 110 basis points to 28.1%. Moving on to slide 6, Welding revenue grew 3% with organic growth of 2% in the fourth quarter. Equipment was up 4%, and while consumables were flat, filler metals were up in the high single digits. Regionally, North America was up 4%, while International declined 5% against a tough comparison of 9% last year. Notably, operating margin reached 33.3%, a 210 basis points improvement. Polymers and Fluids had a strong top-line quarter with 5% organic growth, supported by new product launches in automotive aftermarket, which grew 5%. Polymers was up 4% and Fluids grew 6%. On a geographic basis, North America was up 5% and International grew 4%. Operating margin expanded 110 basis points to 29%.
Speaker #4: Moving on to slide six, welding revenue grew 3% with organic growth of 2% in the fourth quarter. Equipment was up 4% and while consumables were flat, filler metals were up in the high single digits.
Speaker #4: Regionally, North America was up 4%, while international declined 5% against the tough comparison of 9% last year. Notably, operating margin reached 33.3%, a improvement.
Speaker #4: 210 basis points. Polymers and Fluids had a strong top-line quarter with 5% organic growth, supported by new product launches in automotive aftermarket, which grew 5%.
Speaker #4: Polymers was up 4%, and fluids grew 6%. On a geographic basis, North America was up 5%, and international grew 4%. Operating margin expanded 110 basis points to 29%.
Speaker #4: Turning to slide seven, in construction products, organic growth was down 4%, regionally, North America was down 4% with residential renovation down 5%, while commercial construction was up 5%.
Michael M. Larsen: Turning to slide 7, in Construction Products, organic growth was down 4%. Regionally, North America was down 4%, with residential renovation down 5% while commercial construction was up 5%. Europe was down 5%, and Australia and New Zealand was flat. Despite the top-line challenge, the team successfully expanded margins by 100 basis points to 29%. Specialty Products revenue increased 4% and organic revenue was up 1%. Equipment growth was particularly strong, up 12%, and consumables were down 2% in the quarter. North America was flat and international grew 3%. Moving to slide 8 and full-year 2025 results. Our global teams continue to execute at a high level, enabling us to consistently outperform our end markets and expand margins to deliver solid financial results in a mixed macro environment.
Turning to slide 7, in Construction Products, organic growth was down 4%. Regionally, North America was down 4%, with residential renovation down 5% while commercial construction was up 5%. Europe was down 5%, and Australia and New Zealand was flat. Despite the top-line challenge, the team successfully expanded margins by 100 basis points to 29%. Specialty Products revenue increased 4% and organic revenue was up 1%. Equipment growth was particularly strong, up 12%, and consumables were down 2% in the quarter. North America was flat and international grew 3%. Moving to slide 8 and full-year 2025 results. Our global teams continue to execute at a high level, enabling us to consistently outperform our end markets and expand margins to deliver solid financial results in a mixed macro environment.
Speaker #4: Europe was down 5%, and Australia and New Zealand were flat. Despite the top-line challenge, the team successfully expanded margins by 100 basis points to 29%.
Speaker #4: Specialty products, revenue increased 4% and organic revenue was up 1%. Equipment growth was particularly strong, up 12%, and consumables were down 2% in the quarter.
Speaker #4: North America was flat, and international grew 3%. Moving to slide eight and full year 2025 results. Our global teams continue to execute at a high level, enabling us to consistently outperform our end markets and expand margins to deliver solid financial results in a mixed macro environment.
Speaker #4: Throughout 2025, we maintained our focus on maximizing ITW's growth and performance over the long term as we invested close to $800 million in high return internal projects to accelerate organic growth and sustain productivity in our highly profitable core businesses.
Michael M. Larsen: Throughout 2025, we maintained our focus on maximizing ITW's growth and performance over the long term, as we invested close to $800 million in high-return internal projects to accelerate organic growth and sustain productivity in our highly profitable core businesses. At the same time, we increased our dividend for the 62nd consecutive year and returned a total of $3.3 billion to shareholders. Moving to slide 9 and our guidance for full-year 2026. ITW is well-positioned to deliver meaningful progress on both the top and bottom lines in 2026. Per our usual process, our total revenue projection of 2% to 4% and organic growth projection of 1% to 3% is based on current levels of demand adjusted for typical seasonality. At ITW, growth is high quality, meaning it is delivered at attractive incremental margins in the mid to high 40s for 2026.
Throughout 2025, we maintained our focus on maximizing ITW's growth and performance over the long term, as we invested close to $800 million in high-return internal projects to accelerate organic growth and sustain productivity in our highly profitable core businesses. At the same time, we increased our dividend for the 62nd consecutive year and returned a total of $3.3 billion to shareholders. Moving to slide 9 and our guidance for full-year 2026. ITW is well-positioned to deliver meaningful progress on both the top and bottom lines in 2026. Per our usual process, our total revenue projection of 2% to 4% and organic growth projection of 1% to 3% is based on current levels of demand adjusted for typical seasonality. At ITW, growth is high quality, meaning it is delivered at attractive incremental margins in the mid to high 40s for 2026.
Speaker #4: At the same time, we increased our dividend for the 62nd consecutive year and returned a total of $3.3 billion to shareholders. Moving to slide nine and our guidance for full year 2026.
Speaker #4: ITW is well positioned to deliver meaningful progress on both the top and bottom lines in 2026. Per our usual process, our total revenue projection of 2 to 4% and organic growth projection of 1 to 3% is based on current levels of demand adjusted for typical seasonality.
Speaker #4: At ITW, growth is high quality meaning it is delivered at attractive incremental margins in the mid to high 40s for 2026. In terms of overall profitability, we expect operating margin to improve by approximately 100 basis points to a range of 26.5 to 27.5%.
Michael M. Larsen: In terms of overall profitability, we expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5%. This includes 100 basis points contribution from our enterprise initiatives, which provides margin expansion that is largely independent of volume. We're projecting a GAAP EPS range of $11 to $11.40, representing 7% growth at the $11.20 midpoint. Regarding the cadence for the year, we expect a first-half, second-half EPS split of approximately 47% and 53%, consistent with 2025. Factoring in typical seasonality, Q1 EPS should contribute roughly 23% of the full-year total. Lastly, we expect free cash flow conversion to net income of greater than 100% and plan to buy back approximately 1.5 billion of our shares in 2026.
In terms of overall profitability, we expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5%. This includes 100 basis points contribution from our enterprise initiatives, which provides margin expansion that is largely independent of volume. We're projecting a GAAP EPS range of $11 to $11.40, representing 7% growth at the $11.20 midpoint. Regarding the cadence for the year, we expect a first-half, second-half EPS split of approximately 47% and 53%, consistent with 2025. Factoring in typical seasonality, Q1 EPS should contribute roughly 23% of the full-year total. Lastly, we expect free cash flow conversion to net income of greater than 100% and plan to buy back approximately 1.5 billion of our shares in 2026.
Speaker #4: This includes a 100 basis point contribution from our enterprise initiatives, which provides margin expansion that is largely independent of volume. We're projecting a GAAP EPS range of $11.00 to $11.40, representing 7% growth at the $11.20 midpoint.
Speaker #4: Regarding the cadence for the year, we expect the first half, second half EPS split of approximately 47 and 53% consistent with 2025. Factoring in typical seasonality, Q1 EPS should contribute roughly 23% of the full year total.
Speaker #4: Lastly, we expect free cash flow conversion to net income of greater than 100%, and plan to buy back approximately $1.5 billion of our shares in 2026.
Speaker #4: Turning to our final slide, slide 10, all seven segments are projecting high quality organic growth based on current run rates adjusted for seasonality and every segment is well positioned to outperform its respective end markets again in 2026.
Michael M. Larsen: Turning to our final slide, slide 10, all seven segments are projecting high-quality organic growth based on current run rates adjusted for seasonality, and every segment is well-positioned to outperform its respective end markets again in 2026. Consistent with ITW's continuous improvement, never-satisfied mindset, all segments are also projecting margin improvement, supported by another year of solid contributions from our enterprise initiatives. In summary, all seven segments are heading into 2026 well-positioned to deliver solid organic growth with industry-leading profitability and incremental margins. With that, Erin, I'll turn it back to you.
Turning to our final slide, slide 10, all seven segments are projecting high-quality organic growth based on current run rates adjusted for seasonality, and every segment is well-positioned to outperform its respective end markets again in 2026. Consistent with ITW's continuous improvement, never-satisfied mindset, all segments are also projecting margin improvement, supported by another year of solid contributions from our enterprise initiatives. In summary, all seven segments are heading into 2026 well-positioned to deliver solid organic growth with industry-leading profitability and incremental margins.
Speaker #4: Consistent with ITW's continuous improvement, never-satisfied mindset, all segments are also projecting margin improvement supported by another year of solid contributions from our enterprise initiatives.
Speaker #4: In summary, all seven segments are heading into 2026 well positioned to deliver solid organic growth with industry-leading profitability and incremental margins. With that, Erin, I'll turn it back to you.
With that, Erin, I'll turn it back to you.
Speaker #4: you. Thank you,
Erin Linnihan: Thank you, Michael. Regina, I think we're ready to open the queue for questions, please.
Erin Linnihan: Thank you, Michael. Regina, I think we're ready to open the queue for questions, please.
Speaker #2: Michael: Regina, I think we're ready to open the queue for questions, please.
Speaker #3: At this time, I would like to remind everyone to ask a question, press star, then the number one on your telephone keypad. You'll have the opportunity to ask one question, and if needed, one follow-up question.
Operator: At this time, I would like to remind everyone to ask a question, press star, then the number 1 on your telephone keypad. You'll have the opportunity to ask one question and, if needed, one follow-up question. Our first question will come from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Operator: At this time, I would like to remind everyone to ask a question, press star, then the number 1 on your telephone keypad. You'll have the opportunity to ask one question and, if needed, one follow-up question. Our first question will come from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Speaker #3: Our first question will come from the line of Andy Kapowicz with Citigroup. Please go ahead.
Speaker #3: Our first question will come from the line of Andy Kapowicz with Citigroup. Please go ahead.
Speaker #4: Good morning, everyone. Good Christopher,
Christopher A. O’Herlihy: Good morning, everyone.
Andrew Kaplowitz: Good morning, everyone.
Speaker #5: morning. Good morning, Andy.
Tami Zakaria: Morning.
Christopher O’Herlihy: Morning.
Michael M. Larsen: Morning, Andy. Chris or Michael, so test and measurement within the segment looks like it did improve meaningfully in Q4. You called out the commentary on Semicon. It's been improving for you again, which is good to hear. You've had a couple of, maybe I'll call it, head fakes in Semicon. So are you seeing more definitive turn now, and are you seeing a bit more of an unlock of your CapEx businesses in general in terms of growth?
Michael Larsen: Morning, Andy.
Andrew Kaplowitz: Chris or Michael, so test and measurement within the segment looks like it did improve meaningfully in Q4. You called out the commentary on Semicon. It's been improving for you again, which is good to hear. You've had a couple of, maybe I'll call it, head fakes in Semicon. So are you seeing more definitive turn now, and are you seeing a bit more of an unlock of your CapEx businesses in general in terms of growth?
Speaker #4: Michael, so Tesla measurement within the segment looks like it did improve meaningfully in Q4. You called out the commentary on semicon, it's been improving for you again, which is good to hear.
Speaker #4: You've had a couple of maybe called head fakes in semicon. So, are you seeing more definitive turn-out, and are you seeing a bit more of an unlock of your CapEx businesses in general in terms of growth?
Speaker #6: Yeah. So I see, Andy, in general, as you said, Tesla measurement had a pretty solid quarter. After what was a pretty challenging year, you might remember middle of the year we had pretty much a CapEx freeze related to the China shipments for two quarters.
Christopher A. O’Herlihy: Yeah. So I say, Andy, in general, as you said, test and measurement had a pretty solid quarter. After what was a pretty challenging year, you might remember, middle of the year, we had pretty much a CapEx freeze related to the China shipments for 2 quarters. And so we certainly saw an improvement in bookings in general industrial here in Q4. As Michael mentioned, we also saw an improvement in demand for semi and electronics. Just to context that, I mean, semi is about 15% of test and measurement, so just to give you a perspective. I would say that the semi at this point seems sustainable based on what we see right now. But as you said, we had an uptick in Q2, came back down in Q3, but we've seen a recovery in Q4. And I think this is a part of the market.
Christopher O’Herlihy: Yeah. So I say, Andy, in general, as you said, test and measurement had a pretty solid quarter. After what was a pretty challenging year, you might remember, middle of the year, we had pretty much a CapEx freeze related to the China shipments for 2 quarters. And so we certainly saw an improvement in bookings in general industrial here in Q4. As Michael mentioned, we also saw an improvement in demand for semi and electronics. Just to context that, I mean, semi is about 15% of test and measurement, so just to give you a perspective. I would say that the semi at this point seems sustainable based on what we see right now. But as you said, we had an uptick in Q2, came back down in Q3, but we've seen a recovery in Q4. And I think this is a part of the market.
Speaker #6: And so we certainly saw an improvement in bookings in general industrial here in Q4. As Michael mentioned, we also saw an improvement in demand for semi and electronics.
Speaker #6: Just for context, semi is about 15% of Tesla measurement, so just to give you a perspective. I would say that the semi at this point, it seems sustainable based on what we see right now. But as you said, we had an uptick in Q2, came back down in Q3, but we've seen a recovery in Q4.
Speaker #6: And I think this is a part of the market where we have very strong competitive advantages, particularly as it relates to semi manufacturing testing equipment.
Christopher A. O’Herlihy: We have very strong competitive advantages, particularly as it relates to semi manufacturing testing equipment. So whatever happens, we're well-positioned. We're particularly well-positioned to take share as the end markets continue to improve in semi.
We have very strong competitive advantages, particularly as it relates to semi manufacturing testing equipment. So whatever happens, we're well-positioned. We're particularly well-positioned to take share as the end markets continue to improve in semi.
Speaker #6: So, whatever happens, we're well positioned. We're particularly well positioned to take share as the end markets continue to improve in semi.
Speaker #5: Yeah. And maybe just to add beyond that, Andy, the general industrial orders are also improving. In Tesla measurement, as well as you've seen the improvement in revenues and our growth rates on the equipment side in welding.
Michael M. Larsen: Yeah. And I'll maybe just add beyond that, Andy, the general industrial orders are also improving in test and measurement, as well as you've seen the improvement in revenues and growth rates on the equipment side in welding. So all of that suggests that we are certainly seeing, I would say, a little bit more than green shoots at this point and meaningful improvement, not just in sales, but also orders. And backlog is looking pretty good at this point. And so we got some pretty good momentum going into 2026, as reflected in the guidance that we gave for those two segments.
Michael Larsen: Yeah. And I'll maybe just add beyond that, Andy, the general industrial orders are also improving in test and measurement, as well as you've seen the improvement in revenues and growth rates on the equipment side in welding. So all of that suggests that we are certainly seeing, I would say, a little bit more than green shoots at this point and meaningful improvement, not just in sales, but also orders. And backlog is looking pretty good at this point. And so we got some pretty good momentum going into 2026, as reflected in the guidance that we gave for those two segments.
Speaker #5: So all of that suggests that we are certainly seeing, I would say, a little bit more than green shoots at this point. And meaningful improvement, not just in sales, but also orders and backlog is looking pretty good at this point.
Speaker #5: And so we got some pretty good momentum going into 2026 as reflected in the guidance that we gave for those two
Speaker #5: segments. Yeah, that's great to hear, guys.
Christopher A. O’Herlihy: Yeah. That's good to hear, guys. And then when we think about margin expansion across your businesses in 2026, I know you expect it in all segments. Normally, I would think we just model higher incrementals where you're modeling higher growth. But you, for instance, had really good margin performance in construction again in Q4. And there is some metals inflation out there. So any more advice on how to think about margin performance across the segments?
Andrew Kaplowitz: Yeah. That's good to hear, guys. And then when we think about margin expansion across your businesses in 2026, I know you expect it in all segments. Normally, I would think we just model higher incrementals where you're modeling higher growth. But you, for instance, had really good margin performance in construction again in Q4. And there is some metals inflation out there. So any more advice on how to think about margin performance across the segments?
Speaker #4: And then when we think about margin expansion across your businesses in '26, I know you expected an all segments. Normally, I would think we just model higher incrementals where you're modeling higher growth, but you, for instance, had really good margin performance in construction again in Q4.
Speaker #4: And there is some metals inflation out there. So any more advice on how to think about margin performance across the segments?
Speaker #6: Yeah, I would just say I'll go back to kind of our prepared remarks here, Andy. We expect, based on bottoms-up planning with our segments, based on having a chance to review the enterprise initiative savings and the actual projects, for 2026.
Michael M. Larsen: Yeah. I would just say I'll go back to kind of our prepared remarks here, Andy. We expect, based on bottoms-up planning with our segments, based on having a chance to review the enterprise initiative savings, the actual projects for 2026, we expect every segment to improve their operating margins in 2026. And the biggest driver, as I think you pointed out, will be the enterprise initiatives again. So about 100 basis points from initiatives. And then also, there is some positive operating leverage at incremental margins that, at this point, are quite a bit higher than what we put up historically, as I said, kind of in that mid- to high 40s. So maybe that's a way to think about the margin improvement for each one of the segments in 2026. Now, I will say this. We do have 3 segments now that are above 30%.
Michael Larsen: Yeah. I would just say I'll go back to kind of our prepared remarks here, Andy. We expect, based on bottoms-up planning with our segments, based on having a chance to review the enterprise initiative savings, the actual projects for 2026, we expect every segment to improve their operating margins in 2026. And the biggest driver, as I think you pointed out, will be the enterprise initiatives again. So about 100 basis points from initiatives. And then also, there is some positive operating leverage at incremental margins that, at this point, are quite a bit higher than what we put up historically, as I said, kind of in that mid- to high 40s. So maybe that's a way to think about the margin improvement for each one of the segments in 2026. Now, I will say this. We do have 3 segments now that are above 30%.
Speaker #6: We expect every segment to improve their operating margins in 2026. And the biggest driver, as I think you pointed out, will be the enterprise initiatives again.
Speaker #6: So about 100 basis points from initiatives and then also there is some positive operating leverage at incremental margins that at this point are quite a bit higher than what we put up historical historically, as I said, kind of in that mid to high 40s.
Speaker #6: So maybe that's a way to think about the margin improvement for each one of the segments in 2026. Now, I will say this: we do have three segments now that are above 30%.
Speaker #6: And so maybe you'll see a little bit less improvement in those segments relative to the ones like Auto that have been putting up some meaningful operating margin improvement, Tesla measurement as well.
Michael M. Larsen: Maybe you'll see a little bit less of improvement in those segments relative to the ones like auto that have been putting up some meaningful operating margin improvement, Test and Measurement as well, that still have a ways to go to get to Test and Measurement to that high 20s, 30% level.
Maybe you'll see a little bit less of improvement in those segments relative to the ones like auto that have been putting up some meaningful operating margin improvement, Test and Measurement as well, that still have a ways to go to get to Test and Measurement to that high 20s, 30% level.
Speaker #6: That's still have a ways to go to get to Tesla measurement to that high 20s, 30%
Speaker #6: Level. And improve CBI is the other, yeah.
Christopher A. O’Herlihy: Improved CBI is the other driver of increased margins as well.
Christopher O’Herlihy: Improved CBI is the other driver of increased margins as well.
Speaker #5: driver of increased margins.
Michael M. Larsen: Yeah. As you know, as we've talked about, the CBI progress is really encouraging, obviously, not just as a contributor to growth, but all of these new products that are coming in are coming in at higher margins. And so that's really the key to unlocking margin improvement on a go forward basis, particularly in places like Automotive OEM.
Michael Larsen: Yeah. As you know, as we've talked about, the CBI progress is really encouraging, obviously, not just as a contributor to growth, but all of these new products that are coming in are coming in at higher margins. And so that's really the key to unlocking margin improvement on a go forward basis, particularly in places like Automotive OEM.
Speaker #6: As you know, as we've talked about, the CBI progress is really encouraging. Obviously, not just as a contributor to growth, but all of these new products that are coming in are coming in at higher margins.
Speaker #6: And so, that's really the key to unlocking margin improvement on a go-forward basis, particularly in places like Automotive.
Speaker #6: OEM. Appreciate all the color,
Christopher A. O’Herlihy: Appreciate all the color, guys.
Andrew Kaplowitz: Appreciate all the color, guys.
Speaker #4: guys. Our next
Speaker #6: Thank you.
Michael M. Larsen: Thank you.
Michael Larsen: Thank you.
Operator: Our next question will come from the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Operator: Our next question will come from the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Speaker #3: question will come from the line of Joe Ritchie with Goldman Sachs. Please go
Speaker #3: ahead. Hey,
Sabrina Lee Abrams: Hey, guys. Good morning.
Joe Ritchie: Hey, guys. Good morning.
Speaker #7: guys. Good morning. Good morning,
Michael M. Larsen: Good morning, Joe.
Michael Larsen: Good morning, Joe.
Speaker #5: Joe.
Speaker #7: Hey. Can we just can we touch on the price-cost dynamics? So I think in the slides, you had mentioned that price-cost is expected to be positive in 2026.
Sabrina Lee Abrams: Hey. Can we just touch on the price-cost dynamic? So, I think in the slides, you had mentioned that price-cost is expected to be positive in 2026. Can you elaborate on that a little bit? And then also, seeing that resin prices have continued to come down, at this point, what percentage of your COGS is resin?
Joe Ritchie: Hey. Can we just touch on the price-cost dynamic? So, I think in the slides, you had mentioned that price-cost is expected to be positive in 2026. Can you elaborate on that a little bit? And then also, seeing that resin prices have continued to come down, at this point, what percentage of your COGS is resin?
Speaker #7: Can you elaborate on that a little bit? And then also, seeing that resin prices have continued to come down, at this point, what percentage of your COGS is resin?
Speaker #6: Well, let me start with the first part. I think on price-cost, we've been talking about this for a while in terms of this having kind of normalized after the wave of tariff-related increases we saw last year.
Michael M. Larsen: Well, let me start with the first part. I think on price cost, we've been talking about this for a while in terms of this having kind of normalized after the wave of tariff-related increases we saw last year. So at this point, we're back to kind of where we used to be around price cost, which is slightly favorable for full-year 2026 but not a big driver of the margin improvement. Really, the efforts, particularly related to tariffs, have really been centered around not just price but also supply chain and making sure we do everything we can to mitigate some of these increases so we don't have to pass them on to our customers. So that's maybe one way to think about price cost. I'm not sure I have the resin number right in front of me. It's pretty small.
Michael Larsen: Well, let me start with the first part. I think on price cost, we've been talking about this for a while in terms of this having kind of normalized after the wave of tariff-related increases we saw last year. So at this point, we're back to kind of where we used to be around price cost, which is slightly favorable for full-year 2026 but not a big driver of the margin improvement. Really, the efforts, particularly related to tariffs, have really been centered around not just price but also supply chain and making sure we do everything we can to mitigate some of these increases so we don't have to pass them on to our customers. So that's maybe one way to think about price cost. I'm not sure I have the resin number right in front of me. It's pretty small.
Speaker #6: So at this point, we're back to kind of where we used to be around price-cost, which is slightly favorable for full year 2026. But not a big driver of the margin improvement.
Speaker #6: Really, the efforts particularly related to tariffs have really been centered around not just price, but also supply chain and making sure we do everything we can to mitigate some of these increases so we don't have to pass them on to our customers.
Speaker #6: So that's maybe one way to think about price-cost. I'm not sure I have the resin number right in front of me. It's pretty small.
Speaker #6: I think here, again, I'm not quite sure where you were going with the question, but to the extent that there are increases or decreases in resin costs, those will be reflected in the pricing actions that are taken, again, at the division level, where this is more of a meaningful driver of their material costs.
Michael M. Larsen: I think here, again, I'm not quite sure where you were going with the question. But to the extent that there are increases or decreases in resin cost, those will be reflected in the pricing actions that are taking, again, at the division level where this is more of a meaningful driver of their material costs.
I think here, again, I'm not quite sure where you were going with the question. But to the extent that there are increases or decreases in resin cost, those will be reflected in the pricing actions that are taking, again, at the division level where this is more of a meaningful driver of their material costs.
Speaker #7: Yeah. No, appreciate the comments. Michael, I guess I was thinking back in the, I don't know, call it 2016 timeframe when you guys saw some deflation in resin and I remember it being like 10 to 15 percent of your COGS back then.
Sabrina Lee Abrams: Yeah. No, appreciate the comments. Michael, I guess I was thinking back in the, I don't know, call it 2016 time frame when you guys saw some deflation in resin. And I remember it being 10% to 15% of your COGS back then. Obviously, that's a long time ago. But there were areas like Polymers and Fluids, areas in auto, like injection molding, and gas caps, like plastic fasteners where you guys did see a benefit. So I was just really trying to think back at that time frame where you had some deflation in your cost structure, but then you have these longer-term contracts in the auto business where you can get some pricing. And so I was just trying to understand whether that was going to be potentially a meaningful mover to the 2026 bridge.
Joe Ritchie: Yeah. No, appreciate the comments. Michael, I guess I was thinking back in the, I don't know, call it 2016 time frame when you guys saw some deflation in resin. And I remember it being 10% to 15% of your COGS back then. Obviously, that's a long time ago. But there were areas like Polymers and Fluids, areas in auto, like injection molding, and gas caps, like plastic fasteners where you guys did see a benefit. So I was just really trying to think back at that time frame where you had some deflation in your cost structure, but then you have these longer-term contracts in the auto business where you can get some pricing. And so I was just trying to understand whether that was going to be potentially a meaningful mover to the 2026 bridge.
Speaker #7: Obviously, that's a long time ago. But there were areas like polyfluid, areas in auto, like injection molding and gas caps, like plastic fasteners where you guys did see a benefit.
Speaker #7: So just really trying to think back at that timeframe where you had some deflation in your cost structure, but then you have these longer-term contracts in the auto business where you can get some pricing.
Speaker #7: And so I was just trying to understand whether that was going to be potentially a meaningful mover to the 2026.
Speaker #7: bridge. Yeah.
Christopher A. O’Herlihy: Yeah. So Joe, I said the longer-term contract dynamic is still there, but the percentage is considerably less than I think if it was 10 to 15 back then, I would say it's much less.
Christopher O’Herlihy: Yeah. So Joe, I said the longer-term contract dynamic is still there, but the percentage is considerably less than I think if it was 10 to 15 back then, I would say it's much less.
Speaker #5: So, Joy, I’d say the longer-term dynamic, longer-term contract dynamic is still there, but the percentage is less—considerably less—than, I think, if it was 10 to 15 back then. I would say it was...
Speaker #6: It's a lot less, yeah. And we have a very small portion of our business in specialty products that's indexed to resin costs. In automotive, there are typically ART adjustments made on the way up or on the way down, as you're well aware.
Michael M. Larsen: It's a lot less. Yeah. And we have a very small portion of our business in Specialty Products that's indexed to resin costs. In Automotive, there typically aren't adjustments made on the way up or on the way down, as you're well aware. So not something that's on our radar here in a meaningful way just because it's not going to be material to the overall performance of the company this year as we sit here today, so.
Michael Larsen: It's a lot less. Yeah. And we have a very small portion of our business in Specialty Products that's indexed to resin costs. In Automotive, there typically aren't adjustments made on the way up or on the way down, as you're well aware. So not something that's on our radar here in a meaningful way just because it's not going to be material to the overall performance of the company this year as we sit here today, so.
Speaker #6: So, not something that's on our radar here in a meaningful way, just because it's not going to be material to the overall performance of the company this year, as we sit here today.
Speaker #6: so. Okay.
Sabrina Lee Abrams: Okay. Great. Thank you. I'll get back in queue. Appreciate it.
Joe Ritchie: Okay. Great. Thank you. I'll get back in queue. Appreciate it.
Speaker #7: Great. Thank you.
Speaker #7: I'll get back in queue. Appreciate it. Thank you.
Michael M. Larsen: Thank you, Joe.
Michael Larsen: Thank you, Joe.
Speaker #5: you, Joe.
Speaker #3: Our next
Operator: Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Operator: Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Speaker #3: The question comes from the line of Julian Mitchell with Barclays. Please go ahead.
Speaker #8: Hi. Good
Christopher A. O’Herlihy: Hi. Good morning.
Julian Mitchell: Hi. Good morning.
Speaker #8: Good morning. Maybe I just wanted to—good morning. Maybe I just wanted to, first off, see if you could flesh out any sense of seasonality for this year, anything unusual or untoward, and maybe remind us what we should typically expect for the first quarter.
Michael M. Larsen: Good morning.
Michael Larsen: Good morning.
Christopher A. O’Herlihy: Good morning. I just wondered, first off, if you could flesh out any sense of kind of seasonality for this year, anything unusual or untoward, and maybe remind us what we should expect typically for the first quarter, please.
Christopher O’Herlihy: Good morning.
Julian Mitchell: I just wondered, first off, if you could flesh out any sense of kind of seasonality for this year, anything unusual or untoward, and maybe remind us what we should expect typically for the first quarter, please.
Speaker #8: please. Sure, Julian.
Michael M. Larsen: Sure, Julian. So I'd say there's really nothing unusual going on this year. We expect the year to unfold in line with typical seasonality. It looks a lot like last year in terms of the quarterly splits. We kind of laid out the first-half, second-half EPS split, 47, 53. That's what we did last year. As you know, Q1 always starts out down a few points of sequential revenue drop from Q4 to Q1. Like last year, that's about $100 million in revenue from Q4 2025 to Q1 2026. Margins also drop a little bit in Q1. And we typically end up around 23% of the full-year EPS here in the first quarter. Now, I will say this, that every quarter and then in Q2, we see a pickup again in margins from Q1 to Q2. Revenues pick back up again.
Michael Larsen: Sure, Julian. So I'd say there's really nothing unusual going on this year. We expect the year to unfold in line with typical seasonality. It looks a lot like last year in terms of the quarterly splits. We kind of laid out the first-half, second-half EPS split, 47, 53. That's what we did last year. As you know, Q1 always starts out down a few points of sequential revenue drop from Q4 to Q1. Like last year, that's about $100 million in revenue from Q4 2025 to Q1 2026. Margins also drop a little bit in Q1. And we typically end up around 23% of the full-year EPS here in the first quarter. Now, I will say this, that every quarter and then in Q2, we see a pickup again in margins from Q1 to Q2. Revenues pick back up again.
Speaker #7: So I'd say there's really nothing unusual going on this year. We expect the year to unfold in line with typical seasonality. It looks a lot like last year, in terms of the quarterly splits.
Speaker #7: We kind of laid out the first half, second half EPS split, 47, 53. That's what we did last year. As you know, Q1 always starts out down a few points of sequential revenue drop from Q4 to Q1.
Speaker #7: Like last year, that's about $100 million. In revenue, from Q4, 25 to Q1, 26. Margins also drop a little bit in Q1. And we typically end up around 23% of the full-year EPS here in the first quarter.
Speaker #7: Now, I will say this, that every quarter, and then in Q2, we see a pickup again in margins from Q1 to Q2. Revenues pick back up again and every quarter, this year, if you model this on a run-rate basis, you'll see pretty meaningful revenue growth on a year-over-year basis in line with the guidance that we're giving and that 2 to 4 percent revenue growth.
Michael M. Larsen: Every quarter this year, if you model this on a run-rate basis, you'll see pretty meaningful revenue growth on a year-over-year basis in line with the guidance that we're giving in that 2 to 4% revenue growth. Every quarter is projected to have margin improvement on a year-over-year basis, including in Q1, maybe a little bit more modest in Q1, but then it picks up as we go through the year in Q2, Q3, and Q4. Earnings per share grows in line with kind of the guidance range we're giving you here, which is 7% of the midpoint. And so that's kind of how it typically plays out. Free cash flow tends to improve as we go through the year. So that's maybe as much as I can give you here.
Every quarter this year, if you model this on a run-rate basis, you'll see pretty meaningful revenue growth on a year-over-year basis in line with the guidance that we're giving in that 2 to 4% revenue growth. Every quarter is projected to have margin improvement on a year-over-year basis, including in Q1, maybe a little bit more modest in Q1, but then it picks up as we go through the year in Q2, Q3, and Q4. Earnings per share grows in line with kind of the guidance range we're giving you here, which is 7% of the midpoint. And so that's kind of how it typically plays out. Free cash flow tends to improve as we go through the year. So that's maybe as much as I can give you here.
Speaker #7: Every quarter, it's 's projected to have margin improvement on a year-over-year basis. Including in Q1, maybe a little bit more modest in Q1, and then it picks up as we go through the year in Q2, 3, and 4.
Speaker #7: Earnings per share grows in line with kind of the guidance range we're giving you here, which is 7% at the midpoint. And so that's kind of how it typically plays out.
Speaker #7: Free cash flow tends to improve as we go through the year. So that's maybe as much as I can give you here.
Speaker #8: That's extremely helpful. Thank you, Michael. And maybe my follow-up, just to understand, you talked about CBI, I think at 2.4% contribution to sales. In 2025, and that was 40 bips better than the prior year.
Christopher A. O’Herlihy: That's extremely helpful. Thank you, Michael. And maybe my follow-up, just to understand, you talked about CBI, I think, a 2.4% contribution to sales in 2025. And that was 40 bps better than the prior year. Maybe sort of flesh out a little bit the progress there in 2026, what we should expect, and any thoughts on the product lifecycle management side, sorry, the product line simplification side. Thank you. Yeah. So on CBI, as you mentioned, Julian, strong momentum here in 2025, encouraged by the progress that we're making across the company, and particularly encouraged, I think, by the increased strength of our pipeline of new products. And it's really one of the reasons we believe we're outperforming our end markets. A lot of successful product launches this year across the company, I would say most particularly in welding, test and measurement, food equipment, automotive.
Julian Mitchell: That's extremely helpful. Thank you, Michael. And maybe my follow-up, just to understand, you talked about CBI, I think, a 2.4% contribution to sales in 2025. And that was 40 bps better than the prior year. Maybe sort of flesh out a little bit the progress there in 2026, what we should expect, and any thoughts on the product lifecycle management side, sorry, the product line simplification side. Thank you.
Speaker #8: Maybe sort of flesh out a little bit the progress there in 2026, what we should expect. And any thoughts on the product lifecycle management side?
Speaker #8: Sorry, the product line simplification side. Thank you.
Christopher O’Herlihy: Yeah. So on CBI, as you mentioned, Julian, strong momentum here in 2025, encouraged by the progress that we're making across the company, and particularly encouraged, I think, by the increased strength of our pipeline of new products. And it's really one of the reasons we believe we're outperforming our end markets. A lot of successful product launches this year across the company, I would say most particularly in welding, test and measurement, food equipment, automotive.
Speaker #5: Yeah, so on CBI, as you mentioned, Julian, strong momentum here in '25, encouraged by the progress that we're making across the company. And particularly encouraged, I think, by the increased strength of our pipeline of new products.
Speaker #5: And it's really one of the reasons we believe we're overperforming our end markets. A lot of successful product launches this year across the company—I would say most particularly in welding, test and measurement, food equipment, and automotive.
Speaker #5: Good progress, 40 base points of improvement in 2025, with continued incremental improvement here in 2026. Well on the path to get to 3-plus by 2030.
Christopher A. O’Herlihy: Good progress, 40 basis points of improvement in 2025, with continued incremental improvement here in 2026. Well on the path to get to 3+ by 2030, particularly encouraged, I think, by patent filings. I mean, patent filings were up 18% in 2024, up another 9% in 2025. And why that's particularly important is because at ITW, this is a really leading indicator of progress on CBI. Our patent filings are more often than not protecting customer solutions. And so an increase in patent activity is often pretty well correlated with future revenue growth. So really encouraged by everything we're seeing, more progress in 2026. It can be a bit lumpy. You can get ups and downs on this. But the trajectory is certainly on its way up. And we're very, very confident at this point that the 3%+ target is well within our reach.
Good progress, 40 basis points of improvement in 2025, with continued incremental improvement here in 2026. Well on the path to get to 3+ by 2030, particularly encouraged, I think, by patent filings. I mean, patent filings were up 18% in 2024, up another 9% in 2025. And why that's particularly important is because at ITW, this is a really leading indicator of progress on CBI. Our patent filings are more often than not protecting customer solutions. And so an increase in patent activity is often pretty well correlated with future revenue growth. So really encouraged by everything we're seeing, more progress in 2026. It can be a bit lumpy. You can get ups and downs on this. But the trajectory is certainly on its way up. And we're very, very confident at this point that the 3%+ target is well within our reach.
Speaker #5: Particularly encouraged, I think, by patent filings. I mean, patent filings were up 18% in 2024, up another 9% in 2025. And why that's particularly important is because at ITW, this is a really leading indicator of progress on CBI.
Speaker #5: We're often—our patent filings are more often than not protecting customer solutions. And so, an increase in patent activity is often pretty well correlated with future revenue growth.
Speaker #5: So really encouraged by everything we're seeing, more progress in 2026. It can be a bit lumpy. You can get ups and downs on this, but the trajectory is certainly on its way up, and we're very, very confident at this point that the 3% plus target is well within our reach.
Speaker #5: I would not make the—I think PLS, to me, is a different kind of a conversation. I don't really see a correlation between them.
Christopher A. O’Herlihy: I think PLS, to me, is a different kind of a conversation. I don't really see a correlation between them. The only overlap between PLS and CBI is that they're both focused on differentiation. PLS is about ensuring that we prioritize and prune around differentiation. And CBI, of course, is pursuing differentiation in a product development context. But PLS, for us, in 2026, we see as more of a maintenance level, 30 to 50 basis points. That's lower than 2025. But it's very much a bottom-up number. It's really decided on at the divisional level. As we've said before, it's a fundamental part of 80/20 Front to Back, and the ongoing strategic review portfolio pruning that goes on in our divisions. And we have, obviously, a very highly developed methodology around this.
I think PLS, to me, is a different kind of a conversation. I don't really see a correlation between them. The only overlap between PLS and CBI is that they're both focused on differentiation. PLS is about ensuring that we prioritize and prune around differentiation. And CBI, of course, is pursuing differentiation in a product development context. But PLS, for us, in 2026, we see as more of a maintenance level, 30 to 50 basis points. That's lower than 2025. But it's very much a bottom-up number. It's really decided on at the divisional level. As we've said before, it's a fundamental part of 80/20 Front to Back, and the ongoing strategic review portfolio pruning that goes on in our divisions. And we have, obviously, a very highly developed methodology around this.
Speaker #5: The only way they're both focused on overlap between PLS and CBI is that differentiation. PLS is about ensuring that differentiation, and CBI, of course, is pursuing differentiation. We product line prune or own in a product development context.
Speaker #5: But PLS for us in '26, we see as more of a maintenance level, 30 to 50 basis points. That's lower than 2025. But it's very much a bottom-up number.
Speaker #5: It's really decided on at the divisional level. As we've said before, it's a fundamental part of 80/20 front to back. And the ongoing strategic review and portfolio pruning that goes on in our divisions, and we have, obviously, a very highly developed methodology around this.
Speaker #5: But we get a lot of benefit from PLS implementation when we do it. We get benefit in terms of growth from the standpoint of strategic clarity.
Christopher A. O’Herlihy: But we get a lot of benefit from PLS implementation when we do it. We get benefit in terms of growth from the standpoint of strategic clarity, ensuring that we're executing on our most important customers and products, and then effectively deploying resources on the back of that. And then, of course, from a margin improvement standpoint, the cost savings from PLS are a meaningful contributor to the enterprise initiatives that we generate every year. And a lot of these projects have a payback of less than a year. So I think I would not really connect them that much. They're both very active in the company. PLS is a little lower this year but all steam ahead on CBI.
But we get a lot of benefit from PLS implementation when we do it. We get benefit in terms of growth from the standpoint of strategic clarity, ensuring that we're executing on our most important customers and products, and then effectively deploying resources on the back of that. And then, of course, from a margin improvement standpoint, the cost savings from PLS are a meaningful contributor to the enterprise initiatives that we generate every year. And a lot of these projects have a payback of less than a year. So I think I would not really connect them that much. They're both very active in the company. PLS is a little lower this year but all steam ahead on CBI.
Speaker #5: Ensuring that we're executing on our most important customers and products. And then effectively deploying resources on the back of that. And then, of course, from a margin improvement standpoint, the cost savings from PLS are a meaningful contributor to the enterprise initiatives that we generate every year.
Speaker #5: And a lot of these projects have a payback of less than a year. So I think I would not really connect them that much.
Speaker #5: They're both very active in the company. PLS is at a lower this year, but all steam ahead on CBI. Yeah. So PLS. A little bit lower year-over-year and CBI contribution to revenue a little bit higher on a year-over-year basis.
Michael M. Larsen: Yeah. So PLS, a little bit lower year-over-year, and CBI, contribution to revenue a little bit higher on a year-over-year basis. So that's what's supporting the top-line guidance that we're giving you today.
Michael Larsen: Yeah. So PLS, a little bit lower year-over-year, and CBI, contribution to revenue a little bit higher on a year-over-year basis. So that's what's supporting the top-line guidance that we're giving you today.
Speaker #5: So that's what's supporting the top-line guidance that we're giving you
Speaker #1: Our
Operator: Our next question will come from the line of Scott Davis with Melius Research. Please go ahead.
Operator: Our next question will come from the line of Scott Davis with Melius Research. Please go ahead.
Speaker #1: next question will come from the line of Scott today. Davis with MELIUS Research. Please go
Speaker #1: ahead. Okay.
Sabrina Lee Abrams: Hey. Good morning, guys.
Scott Davis: Hey. Good morning, guys.
Speaker #4: Good morning. Guys.
Speaker #5: Good morning,
Michael M. Larsen: Good morning, Scott.
Michael Larsen: Good morning, Scott.
Speaker #5: Scott, congrats on turning the corner here on the
Sabrina Lee Abrams: Congrats on turning the corner here on the top line. I have to ask, the buyback is great, but I have to ask because you didn't mention M&A at all in the prepared remarks. And is that kind of off the table for 2026, or you didn't mention it just because it's more opportunistic?
Scott Davis: Congrats on turning the corner here on the top line. I have to ask, the buyback is great, but I have to ask because you didn't mention M&A at all in the prepared remarks. And is that kind of off the table for 2026, or you didn't mention it just because it's more opportunistic?
Speaker #4: top line. I have to ask, the buyback is great, but I have to ask because you didn't mention M&A at all on the prepared remarks.
Speaker #4: And is that kind of off the table for '26, or you didn't mention it just because it's more—
Speaker #4: opportunistic? It's the latter,
Christopher A. O’Herlihy: It's the latter, Scott. It's certainly on the table for the right companies. So as we've often said, we're focused on high-quality acquisitions that really will extend our long-term growth potential while being able to leverage the business model to improve margins. And we review opportunities all the time on an ongoing basis. We're pretty selective given that we genuinely believe we have a pretty compelling organic growth opportunity. But we're also pretty active in terms of reviewing opportunities, and to the extent that we find the right opportunities while acknowledging, I think, the challenging valuation trends that we're seeing right now, then we will be appropriately aggressive in pursuing them. We obviously did the MTS deal 3 or 4 years ago. It turned out to be a great acquisition, met all of our kind of criteria.
Christopher O’Herlihy: It's the latter, Scott. It's certainly on the table for the right companies. So as we've often said, we're focused on high-quality acquisitions that really will extend our long-term growth potential while being able to leverage the business model to improve margins. And we review opportunities all the time on an ongoing basis. We're pretty selective given that we genuinely believe we have a pretty compelling organic growth opportunity. But we're also pretty active in terms of reviewing opportunities, and to the extent that we find the right opportunities while acknowledging, I think, the challenging valuation trends that we're seeing right now, then we will be appropriately aggressive in pursuing them. We obviously did the MTS deal 3 or 4 years ago. It turned out to be a great acquisition, met all of our kind of criteria.
Speaker #5: Scott, it's certainly on the table for the right companies. So, as we've often said, we're focused on high-quality acquisitions that really will extend our long-term growth potential.
Speaker #5: While being able to leverage the business model to improve margins. And we review opportunities all the time on an ongoing basis. We're pretty selective given that we genuinely believe we have a pretty compelling organic growth opportunity.
Speaker #5: But we're also pretty active in terms of reviewing opportunities, and to the extent that we find the right opportunities—while acknowledging, I think, the challenging valuation trends that we're seeing right now—then we would be appropriately aggressive in pursuing them.
Speaker #5: Obviously, the MTS deal at three or four years ago turned out to be a great acquisition, met all of our kind of criteria. Similarly, in the quarter just past, we had won bolt-on acquisition in the semi-manufacturing space.
Christopher A. O’Herlihy: Similarly, in the quarter just past, we had one bolt-on acquisition in the semiconductor manufacturing space, which has all the high-quality growth attributes that we look for. We're certainly very open to doing more deals like this. I would say we're actively prospecting around these deals. But we got to find them. When we find them, we will do them.
Similarly, in the quarter just past, we had one bolt-on acquisition in the semiconductor manufacturing space, which has all the high-quality growth attributes that we look for. We're certainly very open to doing more deals like this. I would say we're actively prospecting around these deals. But we got to find them. When we find them, we will do them.
Speaker #5: Which is all the high-quality growth attributes that we look for. And we're certainly very open to doing more deals like this. And I would say we're actively prospecting around these deals.
Speaker #5: But we’ve got to find them. When we find them, we will do them. Yeah. I would just add, I agree with everything Chris said.
Michael M. Larsen: Yeah. I would just add, I agree with everything Chris said. I think it's not necessarily an easy time to be a disciplined acquirer. Often, the challenge is really around valuation. We're not going to do deals that don't make sense to ITW, which means we're not going to do deals where we can't generate a reasonable risk-adjusted rate of return for our shareholders. That's kind of been our long-term positioning here. That part of it is not going to change on a going forward basis. We agree with you that the buyback is a great way to allocate surplus capital to our shareholders. It also contributes, frankly, $0.20 a share or 2% EPS growth on an annual basis. That will remain an active share repurchase program. It will remain an important part of our capital allocation strategy on a going forward basis.
Michael Larsen: Yeah. I would just add, I agree with everything Chris said. I think it's not necessarily an easy time to be a disciplined acquirer. Often, the challenge is really around valuation. We're not going to do deals that don't make sense to ITW, which means we're not going to do deals where we can't generate a reasonable risk-adjusted rate of return for our shareholders. That's kind of been our long-term positioning here. That part of it is not going to change on a going forward basis. We agree with you that the buyback is a great way to allocate surplus capital to our shareholders. It also contributes, frankly, $0.20 a share or 2% EPS growth on an annual basis. That will remain an active share repurchase program. It will remain an important part of our capital allocation strategy on a going forward basis.
Speaker #5: I think it's not necessarily an easy time to be a disciplined acquirer, and often the challenge is really around valuation. We're not going to do deals that don't make sense to ITW, which means we're not going to do deals where we can't generate a reasonable risk-adjusted rate of return for our shareholders.
Speaker #5: And so that's kind of been our long-term positioning here, and that part of it is not going to change on a go-forward basis. And we agree with you that the buyback is a great way to allocate surplus capital to our shareholders.
Speaker #5: Also contributes frankly 20 cents a share or 2% EPS growth. On an annual basis. And so that will remain an active share repurchase program will remain an important part of our capital allocation strategy on a go-forward
Speaker #5: basis. That's
Sabrina Lee Abrams: That's a good answer. Guys, I don't want to beat a dead horse. The CBI stuff is pretty interesting. What does it take to get to 3%? Is it spending more or getting more out of what you have? The reason why I ask that question is that up 18% and even up 9% patents, that's pretty big growth. Do you have to spend more to get to that 3%? Kind of what's the gating factor of bridging that gap?
Scott Davis: That's a good answer. Guys, I don't want to beat a dead horse. The CBI stuff is pretty interesting. What does it take to get to 3%? Is it spending more or getting more out of what you have? The reason why I ask that question is that up 18% and even up 9% patents, that's pretty big growth. Do you have to spend more to get to that 3%? Kind of what's the gating factor of bridging that gap?
Speaker #4: be a dead horse. The CBI stuff is a good answer. Guys, I don't want to pretty interesting. And what does it take to get to 3%?
Speaker #4: Is it spending more or getting more out of what you have? And the reason why I ask that question is that up 18% and even up 9% patents are that's a pretty big growth.
Speaker #4: But do you have to spend more to get to that 3%? Kind of what's the gating factor of bridging that gap?
Speaker #5: Yeah. It's not spending more, Scott. I think we've been meaningfully investing in a very focused way now for a number of years to build up the muscle around this.
Christopher A. O’Herlihy: Yeah. It's not spending more, Scott. I think we've been meaningfully investing in a very focused way now for a number of years to build up the muscle around this. And really, what's moving the needle is very much a similar approach to what we took on 80/20 Front to Back 10 years ago. And we saw the results that accrued from that. But really, it's about a much higher level of leadership, time, and focus. It's certainly continuing to invest and build capabilities as we have been doing for the last four or five years. And on that basis, we've seen innovation contribution more than double over the last five years. The capability build that we're doing is at the segment level, but also in our divisions. We have lots of great innovation practice around the company.
Christopher O’Herlihy: Yeah. It's not spending more, Scott. I think we've been meaningfully investing in a very focused way now for a number of years to build up the muscle around this. And really, what's moving the needle is very much a similar approach to what we took on 80/20 Front to Back 10 years ago. And we saw the results that accrued from that. But really, it's about a much higher level of leadership, time, and focus. It's certainly continuing to invest and build capabilities as we have been doing for the last four or five years. And on that basis, we've seen innovation contribution more than double over the last five years. The capability build that we're doing is at the segment level, but also in our divisions. We have lots of great innovation practice around the company.
Speaker #5: And really what's moving the needle and is very much a similar approach to what we took on 80/20 front to back 10 years ago.
Speaker #5: And we saw the results that accrued from that. But really it's about a much higher level of leadership time and focus.
Speaker #4: It's certainly continuing to invest and build capability as we have been doing for the last four or five years. And on that basis, we've seen innovation contribution more than double over the last five years.
Speaker #4: The capability that build that we're doing is at the segment level, but also in our divisions. We have lots of great innovation practice around the company.
Speaker #4: And as we've mentioned on prior calls, we really codify this into a very effective and holistic innovation framework. And we launched that framework in the second half of 2024.
Christopher A. O’Herlihy: As we've mentioned on prior calls, we really codify this into a very effective and holistic innovation framework. We launched that framework in the second half of 2024. Again, this is the exact approach that we took on 80/20 Front to Back. All that's certainly taken root. We see it in the patent filings. We see it in the yield. We're well on track here to do the 3%+. I think all the pieces are in place. It's no question of just building momentum and ensuring we get that consistently high quality of practice in every part of the company. That will get us to more than 3 for sure.
As we've mentioned on prior calls, we really codify this into a very effective and holistic innovation framework. We launched that framework in the second half of 2024. Again, this is the exact approach that we took on 80/20 Front to Back. All that's certainly taken root. We see it in the patent filings. We see it in the yield. We're well on track here to do the 3%+. I think all the pieces are in place. It's no question of just building momentum and ensuring we get that consistently high quality of practice in every part of the company. That will get us to more than 3 for sure.
Speaker #4: Again, this is the exact approach that we took in 80/20 front to back. So all that's certainly taken root. We see it in the patent filings.
Speaker #4: We see it in the yield. We're well on track here to do the 3% plus. But I think all the pieces are in place.
Speaker #4: And it's no question of just building momentum and ensuring we get that consistently high-quality of practice in every part of the company. And that will
Speaker #4: get us to more than three for sure. Yeah.
Michael M. Larsen: Yeah. And I might just add that we've added the CBI metric as one of the key elements in our incentive plans on a go forward basis. So if you look at the long-term incentive plans here at ITW, in addition to margins, returns, EPS growth, we've added or the board has added CBI yield just in alignment with the overall strategic importance of this metric and this initiative on a go forward basis.
Michael Larsen: Yeah. And I might just add that we've added the CBI metric as one of the key elements in our incentive plans on a go forward basis. So if you look at the long-term incentive plans here at ITW, in addition to margins, returns, EPS growth, we've added or the board has added CBI yield just in alignment with the overall strategic importance of this metric and this initiative on a go forward basis.
Speaker #5: And I might just add, that we've added the CBI metric as one of the key elements in our incentive plans on a go-forward basis.
Speaker #5: So if you look at the long-term incentive plans here, at ITW, in addition to margins, returns, EPS growth, we've added or the board has added CBI yield just in alignment with the overall strategic importance of this metric and this initiative on a go-forward basis.
Speaker #4: Helpful. Interesting. Thank you, guys. Best of luck this
Sabrina Lee Abrams: Helpful. Interesting. Thank you, guys. Best of luck this year. Pass it on.
Scott Davis: Helpful. Interesting. Thank you, guys. Best of luck this year. Pass it on.
Speaker #4: year. Pass it on.
Michael M. Larsen: Thank you.
Michael Larsen: Thank you.
Speaker #6: Thank you, Thank you.
Christopher A. O’Herlihy: Thank you, Scott.
Christopher O’Herlihy: Thank you, Scott.
Speaker #6: Scott.
Speaker #1: Our next question comes from the line of Tammy Zakaria with JP Morgan. Please go ahead.
Operator: Our next question comes from the line of Tammy Zakaria with JPMorgan. Please go ahead.
Operator: Our next question comes from the line of Tami Zakaria with JPMorgan. Please go ahead.
Speaker #7: Hi. Good morning. Thank you so much.
Tami Zakaria: Hi. Good morning. Thank you so much. So the auto segment growth in China was, I think, about 5%. I think, granted, builds were also slower in Q4 in China. But anything else to call out there? And how are you thinking about growth in autos in China as you look into 2026?
Tami Zakaria: Hi. Good morning. Thank you so much. So the auto segment growth in China was, I think, about 5%. I think, granted, builds were also slower in Q4 in China. But anything else to call out there? And how are you thinking about growth in autos in China as you look into 2026?
Speaker #5: Good morning,
Speaker #5: Tammy. So the auto segment
Speaker #7: Growth in China was, I think, about 5%. I think granted bills were also slower in the fourth quarter in China. But anything else to call out there?
Speaker #7: And how are you thinking about growth in autos in China as you look into
Speaker #7: 2026? Yeah.
Christopher A. O’Herlihy: Yeah. So we see strong growth in China in auto in 2026, largely on the basis of the satisfactory work that we've done on really penetrating the EV space. Electric vehicles, for us, are very much a source of innovation and growth, what we're seeing from our customers. We've been generally leveraging that EV growth through new product innovation. We made significant investments over the last number of years targeting and building up our presence in EV. China still represents about 65% of worldwide EV builds. And we're growing very nicely there with a very strong position with Chinese OEMs, which is now over 70% of the market. So really well positioned. We see the growth in China in auto as being very sustainable, really on the back of the work we've done on EV, in particular around CBI related to EV.
Christopher O’Herlihy: Yeah. So we see strong growth in China in auto in 2026, largely on the basis of the satisfactory work that we've done on really penetrating the EV space. Electric vehicles, for us, are very much a source of innovation and growth, what we're seeing from our customers. We've been generally leveraging that EV growth through new product innovation. We made significant investments over the last number of years targeting and building up our presence in EV. China still represents about 65% of worldwide EV builds. And we're growing very nicely there with a very strong position with Chinese OEMs, which is now over 70% of the market. So really well positioned. We see the growth in China in auto as being very sustainable, really on the back of the work we've done on EV, in particular around CBI related to EV.
Speaker #5: growth in China in auto in So we see strong 2026, largely on the basis of the satisfactory work that we've done on really penetrating the EV space.
Speaker #5: Electric vehicles for us are very much a source of innovation and growth. We're seeing from our customers we've been generally leveraging that EV growth through new product innovation.
Speaker #5: We made significant investments over the last number of years, targeting and building up our presence in EV. China still represents about 65% of worldwide EV builds.
Speaker #5: And we're growing very nicely there. We're in a very strong position with Chinese OEMs, which is now over 70% of the market, so really well positioned.
Speaker #5: We see the growth in China in auto as being very sustainable, really on the back of the work we've done on EV in particular around CBI-related to EV.
Speaker #5: So I might just add, Chris, that China has been a great growth story for ITW over the years. Driven primarily by the auto OEM business, which, as you said, grew 5% in Q4 but 12% for the full year.
Michael M. Larsen: So I might just add, Chris, that China has been a great growth story for ITW over the years, driven primarily by the auto OEM business, which, as you said, grew 5% in Q4 but 12% for the full year. And the expectation remains the same in terms of outgrowing builds in China fueled by CBI and content growth with the Chinese OEMs, as Chris said. So we'd expect growth in China auto OEM in that mid to high single digits. I'd just make a comment overall on China, up 9% for the full year. Again, strong growth in China within the auto business, but also test and measurement up high single digits, welding up mid-teens.
Michael Larsen: So I might just add, Chris, that China has been a great growth story for ITW over the years, driven primarily by the auto OEM business, which, as you said, grew 5% in Q4 but 12% for the full year. And the expectation remains the same in terms of outgrowing builds in China fueled by CBI and content growth with the Chinese OEMs, as Chris said. So we'd expect growth in China auto OEM in that mid to high single digits. I'd just make a comment overall on China, up 9% for the full year. Again, strong growth in China within the auto business, but also test and measurement up high single digits, welding up mid-teens.
Speaker #5: And the expectation remains the same in terms of outgrowing bills in China, fueled by CBI and content growth with the Chinese OEMs as Chris said.
Speaker #5: So we'd expect growth in China auto OEM in that mid to high single digits. I'll just make a comment overall on China. Up 9% for the full year, again, strong growth in China.
Speaker #5: But in the auto business, but also test and measurement, up high single digits. Welding up mid-teens. And so the expectation for this year, '26, is that China, which is now about a 1.2 billion, 8% of our revenues, will grow in the mid maybe even in the high single digits based on what we're seeing for 2026.
Michael M. Larsen: And so the expectation for this year, 2026, is that China, which is now about $1.2 billion, 8% of our revenues, will grow in the mid, maybe even in the high single digits based on what we're seeing for 2026. And I might just add lastly that margins in China, as you know, are the same as everywhere else around the world. And as Chris said, we'll continue to invest in China and repatriate cash efficiently to the US as we've done over many years.
And so the expectation for this year, 2026, is that China, which is now about $1.2 billion, 8% of our revenues, will grow in the mid, maybe even in the high single digits based on what we're seeing for 2026. And I might just add lastly that margins in China, as you know, are the same as everywhere else around the world. And as Chris said, we'll continue to invest in China and repatriate cash efficiently to the US as we've done over many years.
Speaker #5: And I might just add lastly that margins in China as you know are the same as everywhere else around the world. And as Chris said, we'll continue to invest in efficiently to the US as we've done over many years.
Speaker #7: That is fantastic to hear. Thank you. And staying on the same topic, thanks for all the color on China. How are you thinking about growth in the US or America's versus Europe as it relates to the 1 to 3% organic growth outlook for the
Tami Zakaria: That is fantastic to hear. Thank you. And staying on the same topic, thanks for all the color on China. How are you thinking about growth in the US or Americas versus Europe as it relates to the 1% to 3% organic growth outlook for the year?
Tami Zakaria: That is fantastic to hear. Thank you. And staying on the same topic, thanks for all the color on China. How are you thinking about growth in the US or Americas versus Europe as it relates to the 1% to 3% organic growth outlook for the year?
Speaker #7: year? Yeah.
Michael M. Larsen: Yeah. So I think one of the things that was certainly encouraging here in Q4 was the organic growth rate in North America, up 2%+. And we expect about the same, maybe a little bit better than that based on run rates in 2026. Europe, certainly a little bit more challenging. We don't expect much improvement in Europe. And then Asia-Pacific was up 6% last year, primarily China. And we expect, like you said, another kind of meaningful contribution from Asia-Pacific and China in the mid-single-digit range. So North America, really, I'd say pretty encouraging. Europe stays about the same. And Asia-Pacific up kind of in the mid-single digits. China up in the mid, maybe high single digits. And so that's how you get to that 1% to 3% organic growth.
Michael Larsen: Yeah. So I think one of the things that was certainly encouraging here in Q4 was the organic growth rate in North America, up 2%+. And we expect about the same, maybe a little bit better than that based on run rates in 2026. Europe, certainly a little bit more challenging. We don't expect much improvement in Europe. And then Asia-Pacific was up 6% last year, primarily China. And we expect, like you said, another kind of meaningful contribution from Asia-Pacific and China in the mid-single-digit range. So North America, really, I'd say pretty encouraging. Europe stays about the same. And Asia-Pacific up kind of in the mid-single digits. China up in the mid, maybe high single digits. And so that's how you get to that 1% to 3% organic growth.
Speaker #5: So I think one of the things that was certainly encouraging here in the fourth quarter was the organic growth rate in North America—up 2% plus. And we expect about the same, maybe a little bit better than that, based on run rates in 2026.
Speaker #5: Europe is certainly a little bit more challenging. We don't expect much improvement in Europe. And then Asia Pacific was up 6% last year, primarily China, and we expect, like you said, another kind of meaningful contribution from Asia Pacific and China in the mid-single-digit range.
Speaker #5: So, North America, really, I'd say pretty encouraging. Europe stays about the same. And Asia Pacific, up kind of in the mid-single digits. China, up in the mid, maybe high single digits.
Speaker #5: And so that's how you get to that 1% to 3% organic growth. And like we said earlier, again, more contribution from CBI, less of a headwind to top line from PLS, then you get to that 1% to 3% organic, 2% to 4% revenue for the full—
Michael M. Larsen: And like we said earlier, again, more contribution from CBI, less of a headwind to top line from PLS. And you get to that 1% to 3% organic, 2% to 4% revenue for the full year.
And like we said earlier, again, more contribution from CBI, less of a headwind to top line from PLS. And you get to that 1% to 3% organic, 2% to 4% revenue for the full year.
Speaker #5: year. Great.
Tami Zakaria: Great. Thank you.
Tami Zakaria: Great. Thank you.
Speaker #7: Thank you.
Michael M. Larsen: Sure.
Michael Larsen: Sure.
Speaker #1: Our next question will come from the line of Sure. Jamie Cook with Truist Securities. Please go ahead.
Operator: Our next question will come from the line of Jamie Cook with Truist Securities. Please go ahead.
Operator: Our next question will come from the line of Jamie Cook with Truist Securities. Please go ahead.
Speaker #8: Hi, good morning. Two questions. I guess just my first one—the sequential revenue growth in the quarter, the 4% relative to normally 2%. Just some color on that.
Erin Linnihan: Hi. Good morning. 2 questions. I guess just my first one, the sequential revenue growth in the quarter, the 4% relative to normally 2%. Just color around that. Do you think that's more ITW-specific, i.e., CBI is getting more traction, or would you say it's probably more just industrial markets getting better with PMI readings starting to get better above 50 last month? And then my second question, Michael, just on the incremental margins for 2026, obviously implied very strong. You said mid to high 40s. That's above your 35% to 40% medium-term target on okay organic growth. So I'm just wondering if there's an underappreciated margin story or incremental margins can be structurally higher. Maybe it's CBI. But just trying to piece that above-average incremental margins versus your target on 1.5% organic growth. I don't know.
Jamie Cook: Hi. Good morning. 2 questions. I guess just my first one, the sequential revenue growth in the quarter, the 4% relative to normally 2%. Just color around that. Do you think that's more ITW-specific, i.e., CBI is getting more traction, or would you say it's probably more just industrial markets getting better with PMI readings starting to get better above 50 last month? And then my second question, Michael, just on the incremental margins for 2026, obviously implied very strong. You said mid to high 40s. That's above your 35% to 40% medium-term target on okay organic growth. So I'm just wondering if there's an underappreciated margin story or incremental margins can be structurally higher. Maybe it's CBI. But just trying to piece that above-average incremental margins versus your target on 1.5% organic growth. I don't know.
Speaker #8: Do you think that's more ITW-specific, i.e., CBI is getting more traction, or would you say it's probably more just industrial markets getting better, with PMI readings starting to get back above 50 last month?
Speaker #8: And then my second question, Michael, just on the incremental margins for 2026. Obviously, implied very strong. You said mid to high 40s. That's above your 35 to 40% medium term target.
Speaker #8: On okay organic growth. So I'm just wondering if there's an underappreciated margin story, or if incremental margins can be structurally higher—maybe it's CBI—but just trying to piece together that above average incremental margins versus your target.
Speaker #8: On one and a half percent organic growth? I don't know. It just seems better than what I was expecting.
Erin Linnihan: It just seems better than what I was thought.
It just seems better than what I was thought.
Michael M. Larsen: Pretty good, right? So yeah. Thanks. Let me talk about incrementals. I'm glad you asked, by the way. So I think historically, we've been in that 35% to 40% range. That's what kind of our long-term TSR algorithm is based on, 35 to 40. If you look at kind of what we've been putting up over the last few quarters with limited growth, frankly, starting to improve. And when we look at kind of the plan for 2026, that's where we get to the mid- to high 40s. We can't really think of a reason why this wouldn't be sustainable over the long term. I mean, we've done a lot of work around the portfolio, over a decade of enterprise initiatives. So the margin profile, variable margin, gross margin, all of those things, the quality of the portfolio has never been better than it is today.
Michael Larsen: Pretty good, right? So yeah. Thanks. Let me talk about incrementals. I'm glad you asked, by the way. So I think historically, we've been in that 35% to 40% range. That's what kind of our long-term TSR algorithm is based on, 35 to 40. If you look at kind of what we've been putting up over the last few quarters with limited growth, frankly, starting to improve. And when we look at kind of the plan for 2026, that's where we get to the mid- to high 40s. We can't really think of a reason why this wouldn't be sustainable over the long term. I mean, we've done a lot of work around the portfolio, over a decade of enterprise initiatives. So the margin profile, variable margin, gross margin, all of those things, the quality of the portfolio has never been better than it is today.
Speaker #5: Yeah, let me talk about incrementals. I'm glad you asked, by the way. So, I think historically we've been in that 35 to 40% range.
Speaker #5: That's what our kind of our long-term TSR algorithm is based on 35 to 40. If you look at kind of what we've been putting up over the last few quarters with limited growth, frankly, starting to improve, and when we look at kind of the plan for 2026, that's where we get to the mid to high 40s.
Speaker #5: We can't really think of a reason why this wouldn't be sustainable over the long term. I mean, we've done a lot of work around the portfolio over a decade of enterprise initiatives.
Speaker #5: So the margin profile, variable margin, gross margin, all of those things the quality of the portfolio has never been better than it is today.
Speaker #5: And then you add on top of that accelerating contribution from new products that all are coming in at higher margins. And then maybe most importantly, as Chris said, and I mentioned in my remarks, we are doing all of this while we are investing in ITW to kind of maximize the long-term performance from a growth and profitability standpoint.
Michael M. Larsen: And then you add on top of that accelerating contribution from new products that all are coming in at higher margins. And then maybe most importantly, as Chris said, and I mentioned in my remarks, we are doing all of this while we are investing in ITW to kind of maximize the long-term performance from a growth and profitability standpoint. So about $800 million this year in our organic growth initiatives, in our kind of productivity initiatives, and the enterprise initiatives. And so it's not like we're holding back on investments. All of this is happening. These incrementals in the mid- to high 40s are happening while we're fully funding all the quality projects that we have available to us inside the company. So I think that's anything else on the market?
And then you add on top of that accelerating contribution from new products that all are coming in at higher margins. And then maybe most importantly, as Chris said, and I mentioned in my remarks, we are doing all of this while we are investing in ITW to kind of maximize the long-term performance from a growth and profitability standpoint. So about $800 million this year in our organic growth initiatives, in our kind of productivity initiatives, and the enterprise initiatives. And so it's not like we're holding back on investments. All of this is happening. These incrementals in the mid- to high 40s are happening while we're fully funding all the quality projects that we have available to us inside the company. So I think that's anything else on the market?
Speaker #5: So about 800 million dollars this year in our organic growth initiatives in our kind of productivity initiatives, the enterprise initiatives. And so it's not like we're holding back on investments.
Speaker #5: All of this is happening these incrementals in the mid to high 40s are happening while we're fully funding all the quality projects that we have available to us inside the company.
Speaker #5: So, I think that's it. Anything else on the market?
Speaker #2: Yeah. No, I agree with everything Michael said. I would just highlight, Jamie, this is one of the side benefits of PLS is this you do PLS for enough time what happens is you get an improvement in the quality of the portfolio.
Christopher A. O’Herlihy: Yeah. No, I agree with everything Michael said. I would just highlight, Jamie, this is one of the side benefits of PLS. Now is this: you do PLS for enough time. What happens is you get an improvement in the quality of the portfolio. PLS is effectively a portfolio pruning exercise. And so what's really driving these incrementals and the reason we fundamentally believe they're now sustainably in the mid-40s comes from improvement in the quality of our portfolio from many years of thoughtful PLS coupled with a continuous improvement in the practice of the business model against that portfolio. So you got those two things working together. And that's ultimately why this incremental zone shifted from what was mid-30s to what we now believe to be mid-40s.
Christopher O’Herlihy: Yeah. No, I agree with everything Michael said. I would just highlight, Jamie, this is one of the side benefits of PLS. Now is this: you do PLS for enough time. What happens is you get an improvement in the quality of the portfolio. PLS is effectively a portfolio pruning exercise. And so what's really driving these incrementals and the reason we fundamentally believe they're now sustainably in the mid-40s comes from improvement in the quality of our portfolio from many years of thoughtful PLS coupled with a continuous improvement in the practice of the business model against that portfolio. So you got those two things working together. And that's ultimately why this incremental zone shifted from what was mid-30s to what we now believe to be mid-40s.
Speaker #2: PLS is effectively a portfolio pruning exercise. And so what's really driving these increments and the reason we fundamentally believe there are no sustainability in the mid 40s comes from improvement in the quality of our portfolio from many years of thoughtful PLS coupled with a continuous improvement in the practice of the business model against that portfolio.
Speaker #2: So, you got those two things working together, and that's ultimately why this incremental has now shifted from what was mid-30s to what we now believe to be in the mid-40s.
Speaker #5: Right. And then I think, Jamie, on your other question on the sequentials from Q3 to Q4, it was pretty broad-based—nothing really stood out—which suggests that this is really kind of maybe a little bit of tailwind from the markets after a long time, years of headwinds.
Michael M. Larsen: Right. And then I think, Jamie, on your other question on the sequentials from Q3 to Q4. So it was pretty broad-based. Nothing really stood out, which suggests that this is really kind of maybe a little bit of tailwind from the markets after a long time, years of headwinds. It was more pronounced in the segments that have a higher contribution from CBI. That is true. We didn't talk about Polymers and Fluids, but high contribution from new products in the automotive aftermarket, but also in the fluids business that's the part of that business that's really centered around biopharma. And then on the performance polymer side, it was growth in China, again, taking advantage of the EV growth that Chris talked about earlier. So Test and Measurement also seeing a pickup here, sequential from Q3 to Q4. They typically do maybe a little bit more pronounced than usual.
Michael Larsen: Right. And then I think, Jamie, on your other question on the sequentials from Q3 to Q4. So it was pretty broad-based. Nothing really stood out, which suggests that this is really kind of maybe a little bit of tailwind from the markets after a long time, years of headwinds. It was more pronounced in the segments that have a higher contribution from CBI. That is true. We didn't talk about Polymers and Fluids, but high contribution from new products in the automotive aftermarket, but also in the fluids business that's the part of that business that's really centered around biopharma. And then on the performance polymer side, it was growth in China, again, taking advantage of the EV growth that Chris talked about earlier. So Test and Measurement also seeing a pickup here, sequential from Q3 to Q4. They typically do maybe a little bit more pronounced than usual.
Speaker #5: It was more pronounced in the segments that have a higher contribution from CBI. That is true. We didn't talk about polymers and fluids, but high contribution from new products in the automotive aftermarket, but also in the fluids business—that's the part of that business that's really centered around biopharma.
Speaker #5: And then in the Performance Polymer side, it was growth in China again, taking advantage of the EV growth that Chris talked about earlier. So, Tesla measurement also seeing a pickup here sequentially from Q3 to Q4.
Speaker #5: They typically do maybe a little bit more pronounced than usual. And I think that's part of the semi pickup that we talked about. We saw that start to come through not just in order activity, but also in actual sales.
Michael M. Larsen: I think that's part of the semi-pickup that we talked about. We saw that start to come through not just in order activity, but also in actual sales here in Q4. It feels pretty good. Good momentum going into 2026 and off to a pretty good start so far.
I think that's part of the semi-pickup that we talked about. We saw that start to come through not just in order activity, but also in actual sales here in Q4. It feels pretty good. Good momentum going into 2026 and off to a pretty good start so far.
Speaker #5: Here in the fourth quarter, so it feels pretty good. Good momentum going into 2026, and off to a pretty good start so far.
Speaker #8: Thank
Speaker #8: You. Our next question comes from the—
Operator: Thank you. Our next question comes from the line of Stephen Fisher with UBS. Please go ahead.
Operator: Thank you. Our next question comes from the line of Steven Fisher with UBS. Please go ahead.
Speaker #1: line of Steven Fisher with UBS. Please go
Speaker #1: ahead. Thanks.
Michael M. Larsen: Thanks. Good morning. If I take out the 100 basis points of enterprise initiatives, it seems like the margins are maybe really only flattish. I'm curious why they wouldn't be higher with the positive organic growth and the high incrementals you're talking about. Maybe the incrementals are a function of the enterprise initiatives. But why isn't the margins higher with that positive organic growth? Yeah. That's a good question, Stephen. So first, let me just say it's hard to quibble with margins, I think, that are in that 26% to 27% range to begin with. But if you look at 2026, there's definitely some positive operating leverage given the midpoint of our revenue guidance here in that 3% range, 2% organic. We're getting about 100 basis points from the enterprise initiatives. Price-cost is slightly favorable.
Steven Fisher: Thanks. Good morning. If I take out the 100 basis points of enterprise initiatives, it seems like the margins are maybe really only flattish. I'm curious why they wouldn't be higher with the positive organic growth and the high incrementals you're talking about. Maybe the incrementals are a function of the enterprise initiatives. But why isn't the margins higher with that positive organic growth?
Speaker #2: Good morning. If I take out the 100 basis points of enterprise initiatives, it seems like the margins are maybe really only flattish. I'm curious why they wouldn't be higher with the positive organic growth and the high incrementals you're talking about.
Speaker #2: Maybe the incrementals are a function of the enterprise initiatives, but why isn't the margins higher with that positive organic growth?
Christopher O’Herlihy: Yeah. That's a good question, Stephen. So first, let me just say it's hard to quibble with margins, I think, that are in that 26% to 27% range to begin with. But if you look at 2026, there's definitely some positive operating leverage given the midpoint of our revenue guidance here in that 3% range, 2% organic. We're getting about 100 basis points from the enterprise initiatives. Price-cost is slightly favorable.
Speaker #5: Yeah. That's a good question. So I'd say first, let me just say it's hard to quibble with margins. I think that are in that 26 to 27% range to begin with.
Speaker #5: But if you look at 2026, there's definitely some positive operating leverage given the midpoint of our revenue guidance here in that 3% range, 2% organic.
Speaker #5: We're getting about 100 basis points from the enterprise initiatives. Price cost is slightly favorable. And then what you're seeing is an offset which is primarily inflation in some of our employee-related costs.
Michael M. Larsen: And then what you're seeing is an offset, which is primarily inflation in some of our employee-related costs. So these are wages, health, and welfare benefits. And there's also some investment that Chris talked about to really accelerate the organic growth rate inside the company and maintain high levels of productivity inside the company. So those are really; we've talked about this category before. And so that's the offset to what we're giving you. And I might just say we're giving you a range on margins, right? So 26.5 to 27.5, about 100 basis points of improvement. And if we get this short-cycle demand recovery really materializes and we get organic growth rates moving up in our range here at the incrementals we're talking about, you're absolutely right. We should expect to see higher margins in 2026. Super helpful.
And then what you're seeing is an offset, which is primarily inflation in some of our employee-related costs. So these are wages, health, and welfare benefits. And there's also some investment that Chris talked about to really accelerate the organic growth rate inside the company and maintain high levels of productivity inside the company. So those are really; we've talked about this category before. And so that's the offset to what we're giving you. And I might just say we're giving you a range on margins, right? So 26.5 to 27.5, about 100 basis points of improvement. And if we get this short-cycle demand recovery really materializes and we get organic growth rates moving up in our range here at the incrementals we're talking about, you're absolutely right. We should expect to see higher margins in 2026. Super helpful.
Speaker #5: So these are wages, health and welfare benefits, and there's also some investment that Chris talked about to really accelerate the organic growth rate inside the company and maintain high levels of productivity inside the company.
Speaker #5: So those are really we've talked about this category before. And so that's the offset to what we're giving you. And I might just say, we're giving you a range on margins, right?
Speaker #5: So 26 and a half to 27 and a half, about 100 basis points of improvement. And if we get if this short cycle demand recovery really materializes, and we get organic growth rates moving up in our range here, at the incrementals we're talking about, you're absolutely right.
Speaker #5: We should expect to see higher margins in
Speaker #5: 2026.
Speaker #4: Super helpful. And then just
Michael M. Larsen: And then just maybe a clarification. Did I hear you say that commercial side of construction in North America was up in the quarter? And I guess if so, how surprised were you to see that? Were you already seeing that in your run rates at the start of the quarter, or is that something that changed? And are you seeing that carry forward? I mean, you do have a pretty big inflection in construction in 2026. Yeah. I'd say it's a fairly small portion of our business. If you look at North America, it's about 20% of our sales are into the commercial side of things. So they can be a little bit lumpy. There was some pickup in activity, as you might expect, related to things like data centers, for example, which sounds very exciting. But keep in mind what I just said.
Michael Larsen: And then just maybe a clarification. Did I hear you say that commercial side of construction in North America was up in the quarter? And I guess if so, how surprised were you to see that? Were you already seeing that in your run rates at the start of the quarter, or is that something that changed? And are you seeing that carry forward? I mean, you do have a pretty big inflection in construction in 2026.
Speaker #4: maybe a clarification. Did I hear you say that commercial side of construction in North America was up in the quarter? And I guess if so, how surprised were you to see that?
Speaker #4: Were you already seeing that in your run rates at the start of the quarter, or is that something that changed—and are you seeing that carry forward?
Speaker #4: I mean, you do have a pretty big inflection in construction in
Speaker #4: I mean, you do have a pretty big inflection in construction in '26. Yeah.
Christopher O’Herlihy: Yeah. I'd say it's a fairly small portion of our business. If you look at North America, it's about 20% of our sales are into the commercial side of things. So they can be a little bit lumpy. There was some pickup in activity, as you might expect, related to things like data centers, for example, which sounds very exciting. But keep in mind what I just said.
Speaker #5: I'd say it's a fairly small portion of our business in if you look at North America, it's about 20% of our exposure or sales.
Speaker #5: Are into the commercial side of things. So they can be a little bit lumpy. There was some pickup in activity, as you might expect, related to things like data centers, for example.
Speaker #5: Which sounds very exciting, but keep in mind what I just said. This is a pretty small part of the company. But certainly encouraging to see a pickup on the commercial side.
Michael M. Larsen: This is a pretty small part of the company. But certainly encouraging to see a pickup on the commercial side. While the residential side, perhaps our most interest-rate-sensitive business, remains really kind of stuck in some pretty challenging end markets. Housing starts down in the mid-single digits. But perhaps 2026 could be the year this really turns around on the residential side. That's not included in our guidance. But if it were to happen, we'd be really well-positioned to take advantage of that.
This is a pretty small part of the company. But certainly encouraging to see a pickup on the commercial side. While the residential side, perhaps our most interest-rate-sensitive business, remains really kind of stuck in some pretty challenging end markets. Housing starts down in the mid-single digits. But perhaps 2026 could be the year this really turns around on the residential side. That's not included in our guidance. But if it were to happen, we'd be really well-positioned to take advantage of that.
Speaker #5: While the residential side are most perhaps our most interest rate sensitive business remains really kind of stuck in some pretty challenging end markets, housing starts down in the mid single digits.
Speaker #5: But perhaps 2026 could be the year this really turns around on the residential side. That's not included in our guidance, but if it were to happen, we would be really well positioned to take advantage of that.
Speaker #2: Yeah. The improvement drivers for '26 are more related to less PLS and more CBI.
Christopher A. O’Herlihy: Yeah. The improvement drivers for 2026 are more related to less PLS and more CBI.
Christopher O’Herlihy: Yeah. The improvement drivers for 2026 are more related to less PLS and more CBI.
Speaker #5: Right. Okay.
Michael M. Larsen: Right. Okay. Perfect. Thank you.
Michael Larsen: Right. Okay. Perfect. Thank you.
Speaker #4: Perfect. Thank you.
Speaker #1: Our next question comes from the line of Sabrina Abrams with Bank of America. Please go ahead.
Operator: Our next question comes from the line of Sabrina Abrams with Bank of America. Please go ahead.
Operator: Our next question comes from the line of Sabrina Abrams with Bank of America. Please go ahead.
Speaker #1: ahead.
Speaker #6: Hey. Good morning,
Sabrina Lee Abrams: Hey. Good morning, everyone.
Sabrina Abrams: Hey. Good morning, everyone.
Speaker #5: Good morning. everyone.
Christopher A. O’Herlihy: Morning.
Christopher O’Herlihy: Morning.
Speaker #7: Morning.
Michael M. Larsen: Morning.
Michael Larsen: Morning.
Speaker #6: I wanted to follow up on something that I believe you said in response to Julian's question. If every quarter we have revenue growing 2 to 4%, I think the FX tailwind just based on the DXY FX tailwind is pretty material in Q1, and then it tails off quite a bit in the remaining quarters of the year.
Sabrina Lee Abrams: I wanted to follow up on something that I believe you said in response to Julian's question. If every quarter we have revenue growing 2% to 4%, I think the FX tailwind, just based on the DXY, FX tailwind is pretty material in Q1, and then it tails off quite a bit in the remaining quarters of the year. So would it be fair to think that the organic portion of growth accelerates as we move through the year? And just trying to think if that assumption is correct and what's underlying the assumption. Thank you.
Sabrina Abrams: I wanted to follow up on something that I believe you said in response to Julian's question. If every quarter we have revenue growing 2% to 4%, I think the FX tailwind, just based on the DXY, FX tailwind is pretty material in Q1, and then it tails off quite a bit in the remaining quarters of the year. So would it be fair to think that the organic portion of growth accelerates as we move through the year? And just trying to think if that assumption is correct and what's underlying the assumption. Thank you.
Speaker #6: So would it be fair to think that organic growth, the organic portion of growth, accelerates as we move through the year? And just trying to think if that assumption is correct and what's underlying the assumption?
Speaker #6: Thank you.
Speaker #5: Yeah. I think there's definitely, as you point out, a little bit more currency tailwind here in the first quarter. There is positive organic growth in Q1, but it's not as high as it is in Q2, 3, and 4.
Michael M. Larsen: Yeah. I think there's definitely, as you point out, a little bit more currency tailwind here in the first quarter. There is positive organic growth in Q1, but it's not as high as it is in Q2, Q3, and Q4. So maybe that's a way to think about it.
Michael Larsen: Yeah. I think there's definitely, as you point out, a little bit more currency tailwind here in the first quarter. There is positive organic growth in Q1, but it's not as high as it is in Q2, Q3, and Q4. So maybe that's a way to think about it.
Speaker #5: So maybe that's a way to think about it.
Speaker #5: it. Thank
Speaker #6: And then I don't think anyone asked on this segment, but Polymers and Fluids had a nice surprise to the upside, at least relative to what I was modeling.
Sabrina Lee Abrams: Thank you. Then I don't think anyone asked on this segment, but polymers and fluids had a nice surprise to the upside, at least relative to what I was modeling. It seems that it was pretty broad-based across the aftermarket, auto aftermarket, and the fluids and polymer side. Anything to call out there that you're seeing from an end-market demand standpoint that may be trending differently versus expectations? It seems that the guide for 1% to 3% next year would be quite conservative given the run rate of what we saw in Q4. So just any color there would be great. Thank you.
Sabrina Abrams: Thank you. Then I don't think anyone asked on this segment, but polymers and fluids had a nice surprise to the upside, at least relative to what I was modeling. It seems that it was pretty broad-based across the aftermarket, auto aftermarket, and the fluids and polymer side. Anything to call out there that you're seeing from an end-market demand standpoint that may be trending differently versus expectations? It seems that the guide for 1% to 3% next year would be quite conservative given the run rate of what we saw in Q4. So just any color there would be great. Thank you.
Speaker #6: And it seems that it was pretty broad-based across the aftermarket, auto aftermarket, and the fluids and polymer side. Anything to call out there that you're seeing from an end market demand standpoint that maybe trended differently versus expectations?
Speaker #6: And it seems that the guide for 1 to 3% next year would be quite conservative, given the run rate of what we saw in Q4.
Speaker #6: So just any color there would be great. Thank you.
Speaker #5: Yeah, so Sabrina, we did actually talk about this a couple of minutes ago, but just real quick—so a big contribution from CBI, new products in the automotive aftermarket, specifically in the car care business. If you're in the market for wiper blades—Ranex wiper blades—we're up meaningfully here in the fourth quarter with the launch of a new wiper blade in that space.
Michael M. Larsen: Yeah. So we did actually talk about this a couple of minutes ago, but just real quick. So a big contribution from CBI, new products in the automotive aftermarket, specifically in the car care business. If you're in the market for wiper blades, Rain-X wiper blades were up meaningfully here in Q4 with the launch of a new wiper blade in that space. In China, specifically, polymers continues to gain share on the automotive EV side of things, up double digits, more than 10% in Q4. And then the reagents business that's part of fluids, which is really focused around biopharma, was up more than 20%. And again, so what you're seeing is more CBI, a little less PLS. And we're expecting more of the same here as we go into 2026.
Michael Larsen: Yeah. So we did actually talk about this a couple of minutes ago, but just real quick. So a big contribution from CBI, new products in the automotive aftermarket, specifically in the car care business. If you're in the market for wiper blades, Rain-X wiper blades were up meaningfully here in Q4 with the launch of a new wiper blade in that space. In China, specifically, polymers continues to gain share on the automotive EV side of things, up double digits, more than 10% in Q4. And then the reagents business that's part of fluids, which is really focused around biopharma, was up more than 20%. And again, so what you're seeing is more CBI, a little less PLS. And we're expecting more of the same here as we go into 2026.
Speaker #5: In China, specifically polymers, continues to gain share. On the automotive, EV side of things, up double digits—more than 10% in the fourth quarter.
Speaker #5: And then the reagents business that's part of fluids, which is really focused around biopharma was up more than 20%. And again, so what you're seeing is more CBI, a little less PLS, and we're expecting more of the same here as we go into 2026.
Speaker #6: Got it. I guess just as a quick follow-up then, just want to understand why guiding for deceleration from Q4 next year.
Sabrina Lee Abrams: Got it. I guess just as a quick follow-up then, just want to understand why guiding for deceleration from Q4 next year?
Sabrina Abrams: Got it. I guess just as a quick follow-up then, just want to understand why guiding for deceleration from Q4 next year?
Speaker #5: Well, I'm not sure that's really the case. I mean, I think we're guiding 1 to 3. If you look at the performance for the full year this year, in polymers and fluids, it was a little bit different than the fourth quarter.
Michael M. Larsen: Well, I'm not sure that's really the case. I mean, I think we're guiding 1 to 3 if you look at the performance for the full year this year in Polymers and Fluids. It was a little bit different than Q4. And then, obviously, we're not going to launch the same amount of new products every quarter. So maybe Q4 was a little bit higher from a CBI standpoint than kind of the typical run rate. So maybe that's a way to think about it.
Michael Larsen: Well, I'm not sure that's really the case. I mean, I think we're guiding 1 to 3 if you look at the performance for the full year this year in Polymers and Fluids. It was a little bit different than Q4. And then, obviously, we're not going to launch the same amount of new products every quarter. So maybe Q4 was a little bit higher from a CBI standpoint than kind of the typical run rate. So maybe that's a way to think about it.
Speaker #5: And then, obviously, we're not going to launch the same amount of new products every quarter, so maybe the fourth quarter was a little bit higher.
Speaker #5: From a CBI standpoint, that's kind of the to think about typical run rate. So maybe that's a way it.
Speaker #6: Thank
Speaker #6: you. Our final question will
Operator: Thank you. Our final question will come from the line of David Russo with Evercore. Please go ahead.
Operator: Thank you. Our final question will come from the line of David Raso with Evercore. Please go ahead.
Speaker #1: You come from the line of David Rosso with Evercore. Please go ahead.
Speaker #7: Hi. I wonder if you'd help us. We're all sort of dancing around the organic cadence. How was January playing out versus the 1 to 3% guide?
David Russo: Hi. I wonder if you'd help us. We're all sort of dancing around the organic cadence. How is January playing out versus the 1 to 3% guide? It just feels like there's a lot of from filler metals up high single-digit, semis up mid-single. It feels like you're off to a relatively strong start to the year based off those cyclical trends exiting. Am I misreading? The Q1 organic is at the full-year guide or even above. Any color in January would be great. In the company inventory, it went down a little bit sequentially. I mean, it moves around a lot. I appreciate that. But it went down to where it wasn't even up year-over-year more than sales. And to me, that could be a little tell if, hey, if we think things are picking up, you'd be building some inventory.
David Raso: Hi. I wonder if you'd help us. We're all sort of dancing around the organic cadence. How is January playing out versus the 1 to 3% guide? It just feels like there's a lot of from filler metals up high single-digit, semis up mid-single. It feels like you're off to a relatively strong start to the year based off those cyclical trends exiting. Am I misreading? The Q1 organic is at the full-year guide or even above. Any color in January would be great. In the company inventory, it went down a little bit sequentially. I mean, it moves around a lot. I appreciate that. But it went down to where it wasn't even up year-over-year more than sales. And to me, that could be a little tell if, hey, if we think things are picking up, you'd be building some inventory.
Speaker #7: It just feels like there's a lot of filler metals up, high single digits. Semis up, mid single. It feels like you're off to a relatively strong start to the year based off those cyclical trends exiting.
Speaker #7: Am I misreading the first quarter organic? Is at the full year guide or? Even above at any color in January would be great. And the company inventory, it went down a little bit sequentially historically.
Speaker #7: I mean, it moves around a lot. I appreciate that. But it went down to where it wasn't even up year over year more than sales.
Speaker #7: And to me, that could be a little tell if, hey, if we think things are picking up, you'd be building some together. Thank you.
Speaker #7: inventory. So just trying to square all that
David Russo: So just trying to square all that together. Thank you.
So just trying to square all that together. Thank you.
Speaker #5: Yeah.
Michael M. Larsen: Yeah. Thanks, David. So I think just on the inventory, that's kind of the typical cadence. Levels of inventory do come down towards the year-end. I can tell you there's nothing going on in terms of lowering inventory levels because we expect lower growth. I think, as a matter of fact, if you go back to kind of the middle of the year, we, in some cases, like test and measurement, as Chris talked about with some of the tariffs, to mitigate the risk from a supply chain standpoint, we actually added inventory in a few segments to mitigate that risk. So nothing unusual, really, from an inventory standpoint in the Q4. I'd say January is off to – we are – I can say this. We're right on track to where we thought we were going to be.
Michael Larsen: Yeah. Thanks, David. So I think just on the inventory, that's kind of the typical cadence. Levels of inventory do come down towards the year-end. I can tell you there's nothing going on in terms of lowering inventory levels because we expect lower growth. I think, as a matter of fact, if you go back to kind of the middle of the year, we, in some cases, like test and measurement, as Chris talked about with some of the tariffs, to mitigate the risk from a supply chain standpoint, we actually added inventory in a few segments to mitigate that risk. So nothing unusual, really, from an inventory standpoint in the Q4. I'd say January is off to – we are – I can say this. We're right on track to where we thought we were going to be.
Speaker #5: Thanks, David. So I think just on the inventory, that's kind of the typical cadence. Inventory levels of inventory do come down towards the year-end.
Speaker #5: I can tell you there's nothing going on in terms of lowering inventory levels because we expect lower growth. I think as a matter of fact, if you go back to kind of the middle of the year, we in some cases like test and measurement, as Chris talked about with some of the tariffs, to mitigate the risk from a supply chain standpoint, we actually added inventory in a few segments to mitigate that risk.
Speaker #5: So nothing unusual really from an inventory standpoint in the fourth quarter. I'd say January is off to where we are I can say this, we're right on track to where we thought we were going to be.
Speaker #5: I did say that our revenue growth guide for this year, if you look at it on a quarterly basis, we will be up if things stay the way they are.
Michael M. Larsen: I did say that the revenue growth guide for this year, if you look at it on a quarterly basis, we will be up if things stay the way they are. And obviously, it's a pretty dynamic environment in that 3 to 4% range. The organic growth rate is slightly lower in Q1 relative to Q2, Q3, and Q4. That's typical seasonality. Based on what we know today, so it's not going to be 3 to 4% organic growth in Q1 based on current run rates, but it will be positive organic growth. We have a little bit more tailwind from currency at the beginning of the year, just kind of how the comparisons work out. And so that's how you get to a revenue growth rate in Q1 that's maybe closer to the other quarters, even though organic is lower.
I did say that the revenue growth guide for this year, if you look at it on a quarterly basis, we will be up if things stay the way they are. And obviously, it's a pretty dynamic environment in that 3 to 4% range. The organic growth rate is slightly lower in Q1 relative to Q2, Q3, and Q4. That's typical seasonality. Based on what we know today, so it's not going to be 3 to 4% organic growth in Q1 based on current run rates, but it will be positive organic growth. We have a little bit more tailwind from currency at the beginning of the year, just kind of how the comparisons work out. And so that's how you get to a revenue growth rate in Q1 that's maybe closer to the other quarters, even though organic is lower.
Speaker #5: And obviously, it's a pretty dynamic environment in that three to 4% range. The organic growth rate is slightly lower in the first quarter relative to Q2, Q3, Q4.
Speaker #5: That's typical seasonality. Based on what we know today, it's not going to be 3% or 4% organic growth in the first quarter based on current run rates, but it will be positive organic growth.
Speaker #5: We have a little bit more tailwind from currency at the beginning of the year, just kind of how the comparisons work out. And so that's how you get to a revenue growth rate in Q1 that's maybe closer to the other quarters, even though organic is lower.
Speaker #5: Does that make sense to
Michael M. Larsen: Does that make sense to you?
Does that make sense to you?
Speaker #5: you? Yeah.
David Russo: Yeah. No, that's helpful. And semi, I know you said 15% of the business. I think it used to be a little bit bigger, but obviously, it's been slower. That incremental margin, I feel like historically, when that starts moving, the incrementals, to be fair, the T&M margins were better than I was modeling for the quarter. Is semi a big part of that incremental margin improvement, or am I overstating the impact when semi comes in?
David Raso: Yeah. No, that's helpful. And semi, I know you said 15% of the business. I think it used to be a little bit bigger, but obviously, it's been slower. That incremental margin, I feel like historically, when that starts moving, the incrementals, to be fair, the T&M margins were better than I was modeling for the quarter. Is semi a big part of that incremental margin improvement, or am I overstating the impact when semi comes in?
Speaker #7: No, that's helpful. And semi—I know you said 15% of the business. I think it used to be a little bit bigger, but obviously, it's been slower.
Speaker #7: That incremental margin, I feel like historically when that starts moving, the incrementals, to be fair, the T&M margins were better than I was modeling for the quarter.
Speaker #7: Is semi a big part of that incremental margin improvement, or am I overstating the—
Speaker #7: Impact when semi comes? No, that is correct.
Michael M. Larsen: No, that is correct. I mean, the positioning has always been we know this is a cyclical space. And when we are at the bottom of the cycle, we want to be profitable, very profitable. And when things are going well, motors are picking up, revenues are picking up, the incrementals come through at above-average levels and above-average levels of profitability. So that's a reasonable assumption. Now, it's 15% of test and measurement. It's 3% of ITW. But it is a space, as you know, when these cycles start to pick up, you can see some really above-average meaningful growth rates for a period of time. And it's too early to tell whether that's what's going on here. But if you look at fab utilization, you look at the order activity, you look at +5% attractive margins in Q4, it's looking pretty promising as we just start 2026.
Michael Larsen: No, that is correct. I mean, the positioning has always been we know this is a cyclical space. And when we are at the bottom of the cycle, we want to be profitable, very profitable. And when things are going well, motors are picking up, revenues are picking up, the incrementals come through at above-average levels and above-average levels of profitability. So that's a reasonable assumption. Now, it's 15% of test and measurement. It's 3% of ITW. But it is a space, as you know, when these cycles start to pick up, you can see some really above-average meaningful growth rates for a period of time. And it's too early to tell whether that's what's going on here. But if you look at fab utilization, you look at the order activity, you look at +5% attractive margins in Q4, it's looking pretty promising as we just start 2026.
Speaker #5: I mean, this is the positioning has always been we know this is a cyclical space. And when we are at the bottom of the cycle, we want to be profitable, very profitable.
Speaker #5: And when things are going well, mortars are picking up, revenues are picking up, the incrementals come through at above average levels and above average levels of profitability.
Speaker #5: So that is a reasonable assumption. Now, it's 15% of test and measurement. It's 3% of ITW. So but it is a space, as you know, when these cycles start to pick up, you can see some really above average meaningful growth rates for a period of time.
Speaker #5: And it's too early to tell whether that's what's going on here. But if you look at fab utilization, you look at the order activity, you look at plus 5% attractive margins in Q4, it's looking pretty promising as we just start 2026.
Speaker #5: I mean, we're one month in. I'll just caution that things can change quickly in this environment. But we feel really good about where we're at.
Michael M. Larsen: I mean, we're one month in. I'll just caution that things can change quickly in this environment. But we feel really good about where we're at. We feel confident in our guidance and well-positioned to deliver some solid results here, both operationally and financially, in 2026.
I mean, we're one month in. I'll just caution that things can change quickly in this environment. But we feel really good about where we're at. We feel confident in our guidance and well-positioned to deliver some solid results here, both operationally and financially, in 2026.
Speaker #5: We feel confident in our guidance and well positioned to deliver some solid results here, both operationally and financially, in 2026.
Speaker #7: All right. Thank you for the time. Appreciate it.
David Russo: All right. Thank you for the time. Appreciate it.
David Raso: All right. Thank you for the time. Appreciate it.
Speaker #5: Sure. Thank you. And
Michael M. Larsen: Sure. Thank you.
Michael Larsen: Sure. Thank you.
Operator: That concludes our question-and-answer session and our call today. Thank you all for joining. You may disconnect at this time.
Operator: That concludes our question-and-answer session and our call today. Thank you all for joining. You may disconnect at this time.
