ITW - NYSE

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. 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 your conference.

Thank you, Tamika. Good morning, and welcome to Illinois Tool Works Inc.'s fourth quarter 2024 conference call. I'm joined by our President and CEO, Chris O'Hearlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss Illinois Tool Works Inc.'s fourth quarter and full year 2024 financial results and provide guidance for full year 2025. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Harelahe. Chris?

Thank you, Erin. Good morning, everyone. You saw in our press release this morning, in Q4, Illinois Tool Works Inc. delivered a solid finish to the year. We outperformed our underlying end markets with organic growth turning positive excluding pipeline simplification, and we continue to execute well controlling the controllables to expand operating margins and free cash flow to record levels. GAAP EPS improved 7% to $2.54. In end markets that we believe were down in the low to mid-single digits, fourth quarter organic revenue declined half a point, which is a point better than the 1.4% decline in Q3. Excluding the impact of product line simplification, primarily due to strategically positioning for growth, in our Specialty Products segment, organic revenue growth was positive 0.4%. Overall demand was steady in Q4, with some improvement relative to demand levels going into the quarter. Revenue came in approximately two percentage points or $70 million above what they would have been had demand held at the levels we were seeing exiting the third quarter. In addition to outperforming our end markets, the Illinois Tool Works Inc. team did a solid job executing operationally, resulting in operating income of $1.03 billion, an increase of 4% despite total revenues that were down more than 1%. Record operating margin of 26.2% was an increase of 140 basis points with a 120 basis point contribution from enterprise initiatives. As a result of strong working capital management, primarily around inventory, free cash flow increased 10%, with a conversion to net income of 133%. Looking back in 2024, the Illinois Tool Works Inc. team delivered another year of solid operational and financial performance, achieving record financial results, including EPS, margins, and returns as we consistently outperformed underlying end markets, particularly evident in segments such as automotive OEM and construction products. We made continued progress on our next phase key strategic priorities. In 2025, we will build on this momentum and remain laser-focused on building above-market organic growth fueled by customer-back innovation into a defining Illinois Tool Works Inc. strength, on par with our world-class financial and operational capabilities, and deliver differentiated performance in whatever environment we face. We still have some work ahead of us as we position the company to deliver 3% plus CPI yield by 2030, but we are pleased with achieving 2% in 2024, more than double our historical pre-COVID levels. Furthermore, I'm particularly encouraged by the progress we're making on a key leading indicator of CBI yield, patent filings, which increased 18% in 2024. Turning to our guidance, we are very well positioned to continue to execute at a very high level again in 2025, on both the top and bottom line. Our usual revenue guidance approach, our organic growth projection of 1% to 3% excluding TLS reflects current levels of demand adjusted for seasonality. Although there are certainly some positive signals in our businesses, the current reality is that we are not yet seeing these reflected in orders. Having said that, we are very well positioned to capitalize on an improving demand environment if it should materialize. Our EPS guidance midpoint of $10.35 reflects the fact that we are faced with non-operational headwinds including a foreign currency translation impact of $0.30. Our expected operating margin improvement of 100 basis points is powered by another solid contribution from enterprise initiatives independent of volume. In concluding my remarks this morning, I again want to extend my sincere gratitude to our global colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence. Now I'll turn the call over to Michael to provide more detail on the quarter and full year performance as well as our guidance for 2025. Michael?

Thank you, Chris, and good morning, everyone. In Q4, the Illinois Tool Works Inc. team delivered a solid finish operationally and financially to a record year. Starting with the top line, organic growth was down 0.5%, which included a 0.9% revenue reduction from strategic product line simplification. Foreign currency translation reduced revenue by 1%, and two acquisitions earlier in the year added 0.2%. Total revenues were down 1.3%. Sequentially, revenue growth of plus 3.7% from Q3 to Q4 compared favorably to our historical sequential growth of plus 1.5%. On a geographic basis, organic revenue declined about 1.5% in North America, was down 3%, and Asia Pacific was up 5% with China up 9%. On the bottom line, the Illinois Tool Works Inc. team continued to focus and execute well on the things within our control, as evidenced by an operating margin of 26.2%, an increase of 140 basis points year over year driven by enterprise initiatives, which contributed 120 basis points. Six of our seven segments expanded operating margin, driven primarily by strong execution of enterprise initiatives that contributed between 70 and 190 basis points to each segment. In summary, for Q4, we outperformed our underlying end markets with positive organic growth, achieved record margin performance with a strong contribution from enterprise initiatives, and generated record free cash flow and record GAAP EPS of $2.54. Please start with slide four. Operating cash flow was $1.1 billion, and free cash flow increased 10%, a quarterly record of $1 billion, with a conversion to net income of 133%. Strong working capital management, including inventory, was a meaningful driver of the strong cash in Q4, with further targeted reductions this year. We project free cash flow conversion of greater than 100% for 2025. Now let's move to the segment results starting with automotive OEM, where organic revenue declined 2% in the fourth quarter against the tough comparison of plus 8% in Q4 2023. On a regional basis, North America was down 5%, while Europe was down 10% against a tough comparison of plus 11%. China grew 8% despite a comparison of plus 31% as our China team continues to drive customer-back innovation and gain market share, including in the rapidly growing EV market. For the full year, compared to industry bill data, the segment outperformed relevant bills by our typical 200 to 300 basis points, and we expect similar outperformance in 2025 as we project that automotive OEM will grow 0% to 2%, 1% to 3% excluding PLS, with auto bills in relevant markets that are projected to be down in the low single digits. On the bottom line for the full year, automotive OEM improved margins by 230 basis points to 19.6%, and the segment remains firmly on track to achieve its goal of low to mid-twenties operating margin over the next couple of years. Turn to slide five. Food equipment delivered organic growth of almost 3.5%. Equipment grew 3% and service grew 5%, as the growth investments made in the first half of 2024 to expand capacity and support long-term above-market growth in this very attractive service business are paying off. By region, North America grew 2%, with institutional end markets up in the high single digits, and restaurants essentially flat. The international business was strong with growth of 5%, with Europe up 4%, and Asia Pacific was up 11% due to strong equipment sales. Test and measurement and electronics, organic revenue turned positive for the first time in five quarters, up 2%, with test and measurement essentially flat as electronics grew 6%, the highest growth rate since the fourth quarter of 2022, as semiconductor electronics activity started to pick up. As we've talked about before, because of our focused growth investments, including customer-back innovation, through the cycle, we remain very well positioned to capitalize on a long list of attractive growth opportunities as the semi-electronics recovery begins to take shape. Operating margins expanded by 170 basis points in the quarter to 27%. Moving on to slide six. Organic growth in welding improved as organic revenue was essentially flat after five subsequent quarters of year-over-year declines. Equipment was flat and consumables were down 1%. While North America was down 2%, international grew 9%, with strong growth in China as a result of some very targeted customer-back innovation efforts. Throughout 2024, the welding team continued to benefit from a strong pipeline of new products, contributing more than 3% to growth. In our view, this is a great example of our strategic CBI efforts and the adoption of our next phase CBI framework gives our divisions the ability to gain share and outgrow end markets on a consistent basis. Operating margin of 31.2% was a 160 basis point improvement over the prior year. Polymers and Fluids, organic revenue grew 1% with Polymers up 5%, and Fluids up 1%. Automotive aftermarket, which tends to be more correlated to consumer discretionary spending, was down 1%, which is about two points ahead of end market growth with relevant point of sale data indicating a market that was down 3%. On a geographic basis, North America declined 4%, and international grew 8% with Europe again showing solid demand. Turning to slide seven. Our most interest rate-sensitive segment, construction products, organic growth was down 4% in a tough market as new housing starts were down about 7% globally in Q4. In North America, construction products was down 4%, approximately three points ahead of a market that was down about 7%, with residential renovation down 3% and commercial construction down 9%. Europe was down 3% and Australia and New

Thank you, Michael. Tamika, please open the line for questions.

At this time, if you would like to ask a question, press star one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Steven Bockman with Jefferies.

Great. Good morning, everybody. Thanks for taking the question. Morning. Couple of things here, Michael. I think you gave a range of enterprise initiative benefits on the various segments, but I was too slow to write it down. But can you just maybe call out where this top and bottom kind of impact would be from enterprise initiatives on the appointment level?

Yeah. The largest impact, as you might expect, is I said 190 basis points would be in our automotive OEM segment. You know, we've talked about the margin improvement plan there going back to Investor Day in 2023. And so that's where the largest opportunity probably resides. And then at the lower end, you would expect segments that are already operating margins in the kind of low thirties, maybe something like welding, would be in that maybe 60 basis points plus range. So that's kinda the I think the important point is that every one of our segments has opportunity for further improvement in margins, driven by enterprise initiatives, which, as you know, are independent of volume, which is a great place to be going into a pretty uncertain 2025.

Okay. Great. And then maybe just bigger picture. Thank for the slide on CBI. But that's the one I think it's toughest for us to kind of explain. Wondering if there is a segment or maybe just even a couple of very specific projects that you could call out that kinda illustrate the power of WebCVI.

Yeah. So, Steve, I would say that CBI is well represented across all seven segments. Every division is working on this in a very intentional way. And we have a great pipeline of new products right across the company. But it's called a one where we're seeing some steady impact in 2024. Welding, obviously, we've called on a few on a few different calls here as having made great progress in what has been a very difficult market in welding, we certainly mitigated that market admission by basically coming to us to 3% innovation contribution from welding in 2024, more to come in 2025. But nice increase across the portfolio. The increase you see going into 2025 is broad-based and will impact every segment. But a carload welding specifically in 2024.

Your next question comes from the line of Scott Davis from Melis Research.

Hey. Good morning, guys.

Hey. Good morning, Scott.

I'm just kind of amazed that you can increase margins in a down volume environment. I mean, it just doesn't happen very often in our world. Unless you're coming off, like, a really big restructuring or something, which is not really the case, but you guys help us understand. Let's just take auto as an example. When you look at your performance in auto, it's you know, can you kinda parse it down to, you know, mixed benefit, new product benefit, you're getting better price and margin with new products, are you more efficient with your labor or your fixed assets? I mean, if there's any way to kinda break down how this kinda special sauce is working, I think it would be it'd be helpful.

Yeah. So, Scott, I would say in auto specific we kinda call this out somewhat at Investor Day in terms of, you know, the main drivers of margin improvement in auto were gonna be, you know, volume recovery. Obviously, we're not getting a whole lot of that at the moment, but the other main components were enterprise initiatives and then higher margin on CBI. And that's really what's driving, you know, the margins in auto. Enterprise initiative is just kind of how we think about those, and obviously, we've been delivering on those across the an appraisal for a while. But really and it continue to be an important contributor results. Really, these initiatives, which as we called out, are independent of volume, are really an outcome of what we consider to be just this very, very strong continuous improvement mindset that's very much part of Illinois Tool Works Inc.'s DNA and really drives the visual quality of practice in areas like 80/20 front to back and strategic sourcing. These are very much bottom-up initiatives driven by our talented people in our divisions at a very granular level. Most of these projects are less than a half million dollars individually, when you have 84 divisions, they add up to a real meaningful number here. So have a lot of visibility, ownership, and accountability in our divisions around these initiatives. And as a track record, as indicated here, with respect to enterprise initiatives over the last eleven years, our divisions have very much done what they said they would do. So we believe these are all sustainable. On the back of this ownership and accountability, that's fundamental to our culture, strong continuous improvement mindset that we would say is now hardwired into our divisions. And in the case of 80/20 front to back, as you've heard us say on many occasions, this is something that we've never done with. It's the gift that keeps on giving. So with that, we see this contribution continuing. Obviously, Michael's called out called it out again at a hundred basis points in 2025. It's ultimately that that's what makes it sustainable is your continuous improvement mindset that exists across all of our businesses. Not just in auto. In auto, we also have, as we do elsewhere, you know, the whole impact higher margin impact of CBI. And the other aspect that's fundamental to enterprise initiatives is PLS. Which we called out, you know, a number of times in this call. As being fundamentally valuable to us, not just from a growth standpoint in terms of you know, clarifying where to grow, simplifying our portfolio, and simplifying the allocation of resources. But also in terms of the margin pop that we get, from enterprise initiatives around PLS. And a lot of those projects have a payback of a year or less.

Okay. That's helpful. And guys, you didn't mention M&A in your prepared remarks, and I know this stuff can be a little lumpy, but I happen to have a view that you guys can be arguably the quote best owner for lots of different stuff because you've been successful in the past and running lots of different widget businesses and that skill seems to be transferable, I would think. But maybe I'm overstating that. There's just a little color on what's holding you back on M&A? Is it price? Is it the opportunity set? Is it you know, I would think you'd have a fair amount of confidence in your organization that you could integrate and win with a pretty wide set, I guess, is kinda my point.

Yeah. I think if we've outlined, you know, basically, we remain pretty disciplined in terms of M&A, in terms of our portfolio management strategy. You know, we certainly have a clear we would say a clear and well-defined view of what fits our strategy in our financial criteria. So it really is a question of us finding the right opportunities. You know, we're focused on high-quality acquisitions that would extend our long-term growth potential minimum 4% plus, a growth of high quality, and then being able to leverage the business model to improve margins. So I would say we review opportunities on an ongoing basis. We are very selective, you know, given all the organic growth potential we have in our core businesses. But we are pretty active in terms of reviewing opportunities. And to the extent that we find the right opportunities, we'll be appropriately aggressive in pursuing them. And I would say, you know, going back to the MTS example of an opportunity that really ticked all the boxes for us and know, although, you know, in two years in here, we are this is turning into a home run for us. And then that was largely on the basis that you know, it really met all the characteristics that we look at. But rest assured, we're pretty active. We just need to find the right opportunities.

Your next question is from the line of Andrew Kaplowitz with Citigroup.

Hey, guys. Close enough. How are you doing? So Chris or Michael, I know you're forecasting your segments based on current run rates for 2025 and Chris mentioned that orders haven't picked up yet. But I was intrigued by your commentary that your sequential growth from Q3 to Q4 was 3.7%, you know, greater than 1.5% in store growth. So but you see through the end of the year better yet through January, any pickup in sales momentum that's worth calling out. You did call out semi recovery. Beginning with the intestine measurement. Do you forecast that to continue? Is there anything else you're seeing?

I think it's a little too early. Probably, I need to call a recovery here for sure. We are seeing some positive signs. We called out semi electronics. You know, going through the fourth quarter, we saw a pretty solid December. What we usually do. And so I think we don't wanna get too far ahead of ourselves here at this point. So we've modeled as we always do based on run rate. And if certainly, if market conditions improve, if demand picks up in the second half. And there are, I should say, certainly some external indicators that would suggest that that is a possibility. You know, we're really well positioned to take advantage of those growth opportunities. And if that turns out to be the case, you know, 1% to 3% organic XPELS you know, would be on the conservative side. But, you know, we don't wanna get too far ahead of ourselves. We're focused on the things that know, we can control. We just talked about the margin improvement from enterprise initiatives. And know, when the inevitable recovery happens, we're gonna be in a great position to continue to outgrow the underlying markets. So that's kinda how we've positioned this.

Helpful, Michael. And could you give us more color into your ability to continue outperform in China? I mean, it's been very impressive. Obviously, it's focused on China automotive. So maybe just talk about that. I think you already said that you expect similar level levels of outperformance in 2025 or is it 2024 in China Automotive? Automotive in general? But maybe talk about what you're doing there. Is it really CVI that's helping you or something else?

Yeah. So, Andy, the performance in China relative to automotive has been going on for quite a while now. And it really speaks to the quality, you know, of the team that we've built in China, the investments we've made in China, over many years. And you're right. CVI is a large part of this, particularly you know, our growth in EV in China has been significant. You saw it again this year where we outperformed builds in China by about 800 basis points. We expect similar outperformance in China next year in automotive really on the back of, you know, the resource base the investments that we've made, the really best in class innovation and business model application that we see in China that's put us in a position not just to outperform on revenues, but even from a margin standpoint, you know, our margin in China are pretty much similar to what they are elsewhere in the world. So you know, it's really a factor of the organization and organizational capabilities we built across the business model innovation, and growth in China.

Appreciate the color, guys.

Thanks, Andy.

Next question is from a line of Jeff Sprague with Vertical Research.

Hey. Thank you. Good morning, everyone. Hey. I just wanted to think about the in a relationship with PLS and CBI. Right? Regardless of how good your margins are, right, there's always gonna be a twenty in your construct. So should we think of you know, CBI also just kinda constantly reloading the PLS opportunity set. And if that's the case, should we just kinda be thinking about it I don't know. Secular 1% headwind on PLS indefinitely as the as the CBI benefits kinda build on the other side of that equation?

Yeah. So maybe just refresh, I think, in terms of, you know, our philosophy and how we think about product identification and, you know, the value that accrues for us. So I would say, Jeff, you know, PLS for us is very much an essential part of the ongoing strategic review and portfolio pruning. That goes on really as a critical part of the implementation of 80/20 front to back in all of our divisions. And, you know, we got pretty much a trade and trusted methodology around this that's deeply embedded and very well understood. It certainly requires discipline, but there is a lot of benefits that our divisions get from proper PLS implementation. And even though there's a short-term kind of revenue impact, here, this has always been positive for us in the long term from a growth standpoint. And that PLS provides strategic clarity, which ultimately will help CBI for sure. But not just clarity, but also execution on our division's most critical customers and products. And effective resource deployment around that, again, which all indirectly helps CBI. Then from a margin improvement standpoint, of course, you know, we get the cost savings from PLS, which ultimately are a meaningful component of the enterprise initiatives. And so I would say with PLS, you know, there's no doubt that the specific way that we execute PLS. It's very much an ongoing kind of value-creating activity for us in our divisions. And like I say, we have a lot of positive experience and expertise on this. So we saw this, you know, very much so, and especially this year, but on our overall business on an ongoing basis. But the clarity that comes out of PLS ultimately will be an enabler around CBI. And Jeff, if I may just add, you know, PLS was a little higher in 2024 than kind of our normal maintenance run rate of about half a point, which was entirely driven by the work that was done in specialty products. And I talked a little about the outcomes and the momentum going into 2025 in that segment. You know, we're a little bit higher this year. As well at a point, primarily in automotive, construction, and then more work to do in specialty products. I think it's too early to tell whether this is kind of a new I think you call it a secular kinda work. Now the runway is about a point. I think it's a little too early to say. Let's get through this year, and then we'll kinda see what it rolls up to next year. But the important thing is as Chris said, this is an outcome of how we run these businesses. We're not trying to manage the PLS number because we know the strategic and financial value that we derive from doing PLS in our businesses.

Great. Thanks for that perspective. And then maybe just a little tactical one on auto, right, in region four region, but you know, even in region. Right? US, Canada, Mexico, Mexico, could be a lot of scrambling going on in the supply chain, maybe a reprieve here this week. But you know, are you seeing any, like, unusual change in order patterns? People trying to, you know, get in front of maybe just the expiration of this thirty-day cooling-off period. You know, just any other kind of tariff-related noise that you might be seeing would be interesting.

Yeah. Jeff, to be honest, I would say it's too early to tell. I mean, obviously, it's been a pretty choppy week on the tariff front. But look, all I would say is that we're really well positioned here to read and react. To whatever comes along, and we're confident that this is not really a state EPS for us. This year. Right. And we, you know, we have assets in all these geographies where uniquely positioned to take care of customers and that's gonna be our priority as we manage through this.

Your next question is from the line of Jamie Cook with Truist Securities.

Good morning. I guess just two questions. You know, one, just back on auto again. Another question just obviously, auto has been a great content story for you. If we shift back more to ICE versus EV, just wondering what the potential headwind could be for the auto business given just been such a great growth driver. And then my second question, Chris, to you. Obviously, you know, under you, CBI seems to be I don't wanna say more important, but it's definitely getting more press or you're talking about it more, I would say, relative to your predecessors. But just trying to think about the 30% plus margin target. We do get some, you know, criticism that that might be too high or maybe it gets pushed out as we're focused on CBI. So just anything you can say about your confidence level there is it just a function of volumes or anything you wanna say on that target? Thank you.

Yes. So let me start with the CBI and margin impact. First, Jamie, if I could. You know, we would say that actually seeing CBI is likely to be an on margins because ordinarily, when we invent differentiated new products, margins tend to be higher. And with respect to the whole organic growth versus margin question, which I think you're posing, you know, from our perspective, organic growth and margin go hand in hand. And I would even say that historically, our fastest-growing business have often been our highest margin businesses. And I think we also demonstrated, you know, coming out of the pandemic where we had both healthy growth and margin expansion. Right? Over that period, we are investing, you know, in a very focused way in resources like innovation and strategic marketing to position us to grow at 4% plus. Percent in the long term. So for us, I mean, you know, it really comes down to as we often talk about in Illinois Tool Works Inc., the quality of organic growth. You know, the fact that we can deliver organic growth at these high incrementals, which is really a natural outcome of applying our business model to this high-quality portfolio of businesses. Yeah. So the math is pretty simple. You know, given our margin is 26% with growth at 35% plus incrementals, then, you know, we expand margin. And in fact, the path of 30%, as we have pointed out, is much more paved with operating leverage than structural cost reduction. And then this is why effectively. It's a that our primary road to 30% in 2030. You know, given the high levels of differentiation in our portfolio, you know, we have very healthy gross margins. This provides more than enough investment firepower to appropriately invest in our business to help drive CBI and growth while still delivering very healthy incremental margins. And on the back of that, of course, continued expansion in operating margins. And then I think, Jamie, you asked about kind of the transition the pace of the transition from ICE to EV and you know, I think for us, at this point, our content per vehicle, ICE versus EV is about the same. Our margin profile is about the same. And so we are fairly agnostic to any mix in ICE versus EV at this point. Obviously, we've been as we've talked about many times on this call, really well positioned, particularly in China where the growth has been and the content, the vehicle growth has been really terrific. So at this point, we don't see this as a major issue for the company.

Thank you. Your next question is from the line of Joe Ritchie with Goldman Sachs.

Hey, guys. Good morning.

Hey.

So just talking about PLS and because back innovation. I guess on the PLS side, yeah, how much is PLS how much has that been contributing to the margin expansion? Like, much they contribute in 2024 and the expectation from 2025? And then your commentary on CVI is very, very interesting. I'm just curious, like, which segments are furthest maybe, behind or in the earlier stages of implementing it.

Yes. So the generic ask answer to your question in terms of the contribution margin contribution with PLS in the overall context of enterprise initiatives, it varies from year to year, Joe, but I'd say, you know, directionally, it's in the 50/50 range, I would say. On CBI, like I said, you know, we have, you know, broad-based kind of improvement on CBI across the portfolio. All seven segments are working on this and making improvements. If I was to call out ones that are probably further ahead, I referenced welding already. You know, automotive, you know, obviously, necessarily so given the level of disruption that we see in automotive markets right now. Food equipment, obviously, a very fertile space for innovation on the back of energy and water savings. And then test measurement electronics, another area where you know, significant change in those end markets around increasing stringency in innovation standards, in quality control standards. Obviously, new materials being developed require new test methods. That's another area where we've had a lot of early success, I would say. But rest assured, all seven segments, you know, we'll see an improvement in innovation contribution as we go forward.

That's helpful, Chris. And if I could maybe just follow-up with one more. I recognize you're planning to do, you know, the billion and a half in buyback this year. You take a look at your balance sheet right now. It's in a good position. If you wanted to lever up another turn, would be pretty easy for you to do a more aggressive buyback. I'm just curious, like, under what scenario would you maybe consider doing maybe a little bit more and be a little bit more aggressive buying back your shares?

Yeah, Joe. So the $1.5 billion that we've penciled in for this year is our best estimate of what the surplus capital is gonna be for the company this year. So, you know, once we've fully funded our internal investments for growth and productivity, once we've paid the dividend any acquisitions, and then what's left is allocated to share repurchases. And obviously, to the extent that the performance of the company exceeds kind of the guidance we gave you today, whether it's top line or margins or we still have opportunity on working capital, as I said in my remarks, and that $1.5 billion goes higher than typically, what we would do is allocate that excess surplus capital also to the share buyback program. So maybe one way to think about the $1.5 billion is it's at least $1.5 billion. And to the extent the company performs, you know, better than what we laid out for you today, the number could be higher than that. I think in terms of capital structure, if I may, without getting too technical here, I think we've made some really good adjustments over the last few years in response to a higher interest rate environment. And I'll just point to our interest rate. Our interest expense in the fourth quarter being down year over year, our projection for 2025 is flat to maybe even down slightly. Despite the fact that interest rates are significantly higher. I think if you just look at kinda what other peers are talking about, I think that would compare pretty favorably. And so in terms of capital structure, we would say we're in a pretty optimal place at this point in time. And do not foresee any major changes in terms of capital structure or capital allocation for that matter as we enter into 2025.

Your next question is from the line of Tami

Hi. Good morning. Thank you so much. Hi. Starting back on the tariff topic, I appreciate that it's too early to tell. But can you remind us of your exposure to direct imports from countries like Mexico and also the EU and Canada? The reason I asked last time in 2018, you did provide some numbers around imports from China and how that would impact the P&L. Which was very helpful. So anything you're able to or willing to share now?

Yeah. I think with all the usual caveats, I'll just I'll give you kinda a way to think about this, Tami. The combined imports from China, Canada, and Mexico account for less than 10% of our domestic spend here in the US. So China, it's kind of in the mid-single digit 5%. Five, six percent range. Canada, 2%, Mexico, 2%. So and then, obviously, you know, Europe, slightly different equation there. But that's for those three. So you add that up, and do kinda know, back at the let's just pick China for a moment. Okay? So roughly $250 million of imports from China 10% increase is $25 million. Which means we have to go get price of at least $25 million. And probably a little bit more than that to recover the margin impact as well. So you know, I think the and this is a $16 billion company. So I think that's kinda why combined with our produce where we sell strategy, you know, our ability to read and react at the divisional level, you know, we feel like as we sit here today, this is a manageable equation. We've got a game plan in place that will cover tariff-related material cost inflation with price actions based on, you know, some pretty positive experience doing the same thing coming out of 2017, 2018, and by the way, a very inflationary period coming out of COVID, given the differentiated nature of our businesses, our ability to execute and take care of customers, we feel very good about our ability to offset, you know, those tariff-related cost increases. So pretty much in any scenario that we can think of as we sit here today, we feel like we're in a good spot.

Got it. So a quick follow-up. Minus any tariff-related noise, what is the expectation for price cost for this year that's embedded in the guide?

Yeah. I think Tami, we're kinda back in kind of a normal price cost environment. Historically, we have offset cost increases with price on a dollar basis and also it's been slightly favorable from a margin standpoint as well. So, you know, keep in mind that you know, given the performance and the value of the product and services that we offer. You know, we're in a good position here to get price to offset any potential cost increases.

Your next question is from the line of Julian Mitchell with Barclays.

Hey, Julian. Hi. Good afternoon.

Hey. Good morning.

Maybe just the first question around the top line sort of cadence. You know, understood, Michael, what you said about Q1. Yeah. The first half share of earnings. Anything you'd call out on the sort of top line movement through the year and anything on sort of any segments we should bear in mind when looking at the slide eleven weightings.

Yeah. I think, Julian, typically, I'll refer to kind of the typical seasonality. And so what usually happens from Q4 to Q1 revenues sequentially declined by kinda 3% ish with a little bit more than that last year. In 2024 and in 2023. If that happens, that's about a little over $100 million. That's organic growth that's down about one. And then foreign currency with rates as we sit here today adds another three points of pressure. So now you got revenues kinda down in that three to five range. Margins typically start out at the lower end in Q1 and kind of progress from there as we go through the year. Just like top line, by the way, goes up Q1 to Q2. Q2 Q3 is about flat, and then there's another pickup again from Q3 to Q4. And then we have these non-operational headwinds beyond currency, including, you know, somewhat higher restructuring in the first half of 2025. All related to 80/20 front to back project, the TADA. These are projects less than a year payback that are feeding the enterprise savings to margin improvement that we are putting up every quarter, that will be more weighted towards the first and the second quarter, and we have a little bit of headwind on the tax rate as well in the first half. So you add all that up, know, just relative to Q4, EPS $2.54. Revenue's probably ten cents of EPS headwind. Going into Q1 and then maybe another ten cents of headwind from the combination of higher restructuring expense and a higher tax rate. So that's that 22% of the full year number that we gave you for the first quarter. So hopefully, that's helpful.

Okay. That's great. Thank you, Michael. And maybe just wanted to focus perhaps on specialty products for a second. You know, that was one segment that definitely caught the eye the first quarter, few quarters of last year, seems to be, you know, normalizing somewhat on sales in the fourth quarter. So how are we thinking about margins in specialty for the year ahead? There's a lot going on there with PLS and restructuring or reorganization there, it looks like. Maybe just kinda flesh out what the plan is in specialty and any more details on the year ahead there, please.

Yeah. So as you pointed out, Julian, very solid year in specialty in 2024. You know, some strength in areas like aerospace and then strong demand in areas like food and beverage packaging equipment and so on. And then as we called out, you know, all through the year, this has all been done at a time when we were doing some strategic portfolio repositioning for long-term growth. And that's certainly, you know, with a significant impact in Q4 as you saw both hundred basis points. There's some carryover on this in 2025. But we expect growth in specialty in 2025 despite the PLS. We also expect margin improvement in specialty in 2025. And the objective here is to make this segment a 4% grower in the long term. And based on 2022 to 2024 performance, we're certainly well on our way to doing that.

Great. Thank you.

Sure. Sure.

Your next question is from the line of Nigel Cole with Research?

Oh, good morning. Thanks for the question. Just wanted to talk about the 90 bps of margin expansion at the midpoint, x items. In general sense on where you see. Know you don't provide margin guidance by segment, but if you could just make any comments the best opportunities for, Omex and we're perhaps you know, those below the bar. And in particular, I just wanted to try and dig into the auto margins just given, you know, first half relatively depressed. And that the extra rate close to 20%. So just wondering you're seeing in auto specifically.

Yeah. So Nigel, you're right. We don't really give margin guidance by segment, but what I can tell you is that we expect based on kind of the bottom-up projection that we received, from our segments at Plantheim, we expect every one of our segments to improve margins in 2025. And that's based on what they told us, not what Chris and I would like to see. You know? And so I think, obviously, the businesses that are the segment that are a little further along in terms of the journey towards 30%. So if you think about welding, I think those you know, it can be a little bit more challenging. You know, if you without getting too detailed, just look at the growth at five, forty percent incrementals, you get less of margin improvement in welding than you do, for example, in automotive. Now in automotive, you're right. We're not counting on a lot of lift here from in fact, we're counting on a market that's down in the low single digits. And the big driver here in 2025 is the enterprise initiatives. And so that's really that's what's fueling the margin improvement in that you know, call it a hundred basis points of margin improvement in automotive in 2025. So we still you know, we've got a lot of things that are still within our control from a margin improvement standpoint. Independent of volume, that's a great place to be. We'd love to see some operating leverage. And if you just look at it as an example. If you we try to call it specialty products, you know, a little you know, 3% growth and suddenly margins are up, you know, more than 300 basis points. And that's so they're the incrementals when this growth starts to come through. At least in the near term, I'm gonna be you know, quite a bit higher than our kinda historical 35% to 40% incremental margins. And that's really from there, that's where the margin improvement really accelerates. So hopefully, that's helpful, Nigel.

It is, Michael. Yeah. Thanks. And just I just wanna double click into that one key restructuring. This is fifteen cents. I think it's fifty-five, sixty million dollars of pretax investments. Just given that you don't disclose restructuring by setting and any help in terms of where you see the heaviest impacts across portfolio?

I'd rather not get into that level of detail now. So we'll call it out when we report. Q1. You'll be able to see kind of we've got that schedule in the back of the press release that laid out the restructuring. Suffice it to say that, you know, there's opportunity for, you know, further margin improvement in every one of these segments. And know, I'd rather not get into the specifics in terms of by segment for the first half. Now just to be clear, the EPS headwind on a year-over-year basis that we called out from restructuring and the tax rate was fifteen to twenty cents. Per share. About half of that is tax and the other half is restructuring. And eighty percent of that restructuring is gonna is planned for the first half of 2025. So it'll be a little bit of a challenging start to the year in terms of the headline numbers. And, you know, we'll help with calling out kind of those non-operational headwinds as we go through the year. But just from a modeling standpoint, we wanna make sure everybody was kinda clear on how the year might unfold.

Your next question is from the line of Joe O'Dea with Wells Fargo.

Hi. Good morning. Michael, your comment about, you know, your position to take advantage of an inevitable recovery is encouraging. You know, just curious as you look at the end markets and I think about kind of volumes and cycles, know, what you're looking at, whether it's kinda re or whether it's end market and segment, but, you know, where you think you're gonna see things get better earliest and any perspective from a volume standpoint in terms of, you know, how depressed some of these markets are?

Yeah. Joe, I wish I could help you there. I mean, I think my crystal ball is not any better than yours. You know, I think the reference to, you know, taking advantage of the recovery was specific to what we're seeing in semi and electronics. I think if you look at some of you know, so that's one cycle that certainly, you know, for two years has been pretty challenged. I think the same could be said for some of our capex driven businesses. Test and measurement, you know, the Instron business, positive growth in Q4, but not the typical kinda five, six, seven organic that you would expect in that business over the long run. You know, welding certainly encouraged that the business is now, you know, flat. Ish in Q4 and down low single digits for the full year. That's a cycle know, typically, those cycles last six to eight quarters, and that's kinda where we're at right now. So the only thing I can just give these are just kinda anecdotal thoughts on where things go from here. But things change quickly. This is you know, we're operating in a pretty fluid and pretty dynamic demand environment with you know, things change pretty quickly here. We, as you know, are more short cycle oriented. So our focus is really on how do we make sure we position ourselves for long-term above-market organic growth in these businesses, continue to invest through these cycles, leveraging our financial position to do so, and then when these recoveries come, we're gonna be in a great spot to compete and gain share and grow with new product. So really the focus that we're talking about.

No. I appreciate the call appreciate that color. And then on tariffs and pricing and how you manage the uncertainty, the question is just how quickly you can implement pricing through the system and I'm sure that's not a one size fits all kind of answer, but, you know, living in an environment where you can have such headline whiplash, kind of how you approach that and how long it takes to get pricing in response to, you know, what you would anticipate tariffs could be.

Yeah. So, Joe, you're correct. It's not really a one size fits all answer because we have, obviously, 84 divisions and 84 different kind of circumstances and opportunity profiles around pricing. But what I can assure you is that, you know, given the decentralized nature of the company, given the fact that decisions are made very close to our customers, then, you know, our nimbleness means that we are quicker to read and react more than most. So there's not a huge lag with us for that reason. Not a whole lot of approvals that are needed to implement pricing. It's done on the ground in the division, close to the customer, relative to the circumstantial opportunity profile that the division sees.

Your next question is from the line of Andrew Obin with Bank of America.

Yes. Good morning. Good morning. Just to follow-up on short cycle industrial names. So just TMM and E and welding. So just to confirm, we're not modeling any ramp of organic growth this year. And more structurally, once again, just to confirm, if PMI is sustainably over fifty, how fast can these businesses grow, and should we think sort of high single digits as possible in a robust cyclical recovery?

I think, Andrew, that's that it's impossible to answer that question. I mean, I think we have models based on current levels of demand. We are not modeling a recovery in any of these end markets, including welding and test and measurement. If that indeed happens, you know, we will take full advantage of the growth opportunities. You know, historically, coming out of cycles like this, it's not uncommon to see quarterly growth rates in kind of the mid and maybe even high single digits, but every recovery, as you know, is different. And you know, as we'd like to say, we're not economists here. You know, we are so there's no incentive for us to try to forecast where things go just given the short cycle nature of our businesses. So I'm sorry I can't help you.

No. No. That's a great answer. Thank you. And just on food equipment, you know, solid growth in fourth quarter. Right? 3% plus versus the kind of third quarter. Guidance for 1% to 3% organic growth. So why would things decelerate from the fourth quarter? Are you seeing pressure anywhere?

No. We're not seeing pressure. It's basically again based on, you know, sequential run rates over time, not just the fourth quarter. We are very encouraged about food generally. I would say, you know, we've seen this continued recovery in service. Still not quite back at pre-pandemic levels here. We hope just to refresh we are the only major manufacturer in captive service business and this it's a real differentiator for us. Because it used to be a very first iteration environment in food equipment, as I said earlier around things like water and energy savings. We see continued end market strength in areas like institutions. And then, geographically, I think China and Latin America are expected to be solid geographically. But that's the kind of the view on food equipment. We expect a solid 2025 on the back of a solid 2024. So, Andrew, I'd say we share your optimism, and we'll pass that on to the team that runs the business. Okay. And we'll see how they do this year. But, you know, 1% to 3% further margin improvement, service business is really performing at a good level now given the investments that we talked about. And so we're really feeling good about how we're positioned going into 2025 in food equipment.