ITW - NYSE

Good morning. My name is Lacey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ITW’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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, Chris, and good morning, everyone. In Q1, the ITW team delivered a solid start to the year, both operationally and financially. Starting with the topline, organic growth was down 1.6% as expected. On an equal days’ basis, organic revenue was flat to the prior year, which had one additional shipping day. Foreign currency translation reduced revenue by 1.8% and total revenue was down 3.4%. Product line simplification reduced revenue by 50 basis points in the quarter. Of note, we did not experience a meaningful impact from customers pulling forward orders from Q2 into Q1. On the bottom line, the ITW team continued to focus and execute well on the things that we can control, as evidenced by enterprise initiatives, which contributed 120 basis points and free cash flow of $496 million with a conversion rate of 71%. Operating margin was 24.8% as enterprise initiatives were offset by operating leverage, higher restructuring expenses related to 80/20 Front-to-Back projects and other one-time items. The margin decline year-over-year was due primarily to the non-repeat of a 300 basis points LIFO inventory accounting benefit last year. We are projecting that margins will continue to improve sequentially from here in every segment and at the enterprise level as we go through the year, which is in-line with our historical pattern and supported by meaningful contributions from enterprise initiatives that are volume independent. In summary, demand remains steady in Q1 as we continue to outperform our underlying end markets, delivering flat organic growth on an equal days’ basis, solid margins of 24.8%, free cash flow of approximately $500 million as well as GAAP EPS of $2.38 which was ahead of our planned expectations, primarily due to a lower effective tax rate in the quarter. Please turn to Slide 4, for a look at organic growth by geography. And, on a geographic basis, organic revenue declined about 3% in both North America and Europe, while Asia Pacific was up 7% with China up 12%, driven in part by continued strong performance in the automotive OEM business. As you can see, China represents about 7% of total company revenues, and China grew 9% even when excluding the 14% growth in automotive OEM. Let’s move to the segment results, starting with automotive OEM, where organic revenue declined 1% in the first quarter as product line simplification or PLS efforts reduced revenue by 1%. On a regional basis, North America was down 6% as D3 customer builds were down 10%. Europe was down 6%, while China grew 14% against a tough comparison of plus 23% last year as our local team continues to innovate and gain market share, particularly in the rapidly growing EV market. We expect this strong growth momentum to continue through the balance of 2025, partially offsetting expected weakness in North America. For the full-year and compared to industry build data, we expect that this segment will outperform relevant builds by the usual 200 basis points to 300 basis points as we continue to grow our content per vehicle. We have incorporated recently revised auto builds forecast into our guidance as worldwide auto builds are projected to be down low-single-digits with North American builds down high-single-digits, Europe down low-single-digits and partially offset by China. Overall, our relevant markets are expected to be down in the mid-single-digits in 2025, which compares to a plan of down low-single-digits going into the year. On the bottom line, the Automotive OEM segment delivered operating margin of 19.3% in Q1, which included 80 basis points of restructuring headwind. In other words, margins were 20.1% excluding restructuring. And, it is worth noting that the tariff related costs and margin impacts in this segment are relatively insignificant, primarily because of our “produce where we sell” manufacturing footprint. And, we remain confident that we will continue to expand margins as we go through the year. Turning to Slide 5. Food Equipment organic growth was up a little more than 1% and up 3% on an equal days’ basis. Equipment was flat and Service grew 3%. By region, North America grew 1% with strength in institutional end markets, which were up double-digits. Our International business was up 2%, Europe was up 2% and Asia Pacific was up 1%. In Test & Measurement and Electronics, organic revenue was down 5% due primarily to tough comparisons in the MTS business, which grew 23% in the year ago quarter and was down 19% this quarter. Excluding MTS, this segment was down 2%. Overall, Test & Measurement declined 9% with about half of that decline due to MTS. While on a positive note, Electronics was up 3% with some encouraging signs as semi-related orders were up double-digits in the quarter. Operating margin of 21.4% declined 200 basis points due primarily to negative operating leverage as well as a headwind from higher restructuring costs of 60 basis points. Moving on to Slide 6. Organic growth in Welding was essentially flat and up 2% on an equal days’ basis. Equipment increased 1%, which marked the first positive growth rate in Equipment in two years. Consumables were down 2%, while Industrial sales declined 1% and the Commercial side was down 6%. Overall, North America was down 2% offset by international, which was up 14%, driven primarily by more than 30% growth in China as a result of the success of new product introductions targeted at the energy space. Operating margin of 32.5% was essentially flat year-over-year. Polymers & Fluids organic revenue grew 2% with Polymers up 6%. Both Fluids and Automotive aftermarket were flat. On a geographic basis, North America was flat and International grew 5%. Operating margin improved 70 basis points to 26.5%. Turning to Slide 7, Construction Products. Organic growth was down 7% in tough end-markets. In The U.S, annualized new housing starts were down double-digits compared to year-end, and we estimate that international markets were down in the high-single-digits. As a result, North America was down 10% with Residential Automation down 12% while Commercial Construction was up 2%. In the first quarter, Europe was down 2% and Australia and New

Thank you, Michael. Lacey, will you please open the lines for questions?

Yes, ma’am. [Operator Instructions] Okay. Your first question comes from the line of [Vlad Bostreke] (ph). You may go ahead.

Thank you. Your next question comes from the line of Tami

My question is on pricing. So, the organic growth guide 0% to 2%, I think I heard you say it includes some pricing action. So, are you assuming the pricing gain, will be offset by some volume decline and that’s why you’re leaving the full-year organic growth guide intact?

So, Tami, this is Michael. So, the organic growth guidance of 0% to 2% is based on kind of our typical run rates or current levels of demand. We have added to that incremental pricing, which is associated with tariffs. And then, we also updated the forecast for the lower projected auto build forecasts. And I think your question around, could this incremental price be offsetting volume? I think is kind of how we think about it. While we haven’t seen a slowdown in our businesses today, certainly, the uncertainty, it’s not unreasonable to imagine that things could slow a little bit in the second half. And if that’s the case, that volumes come down, then that will be offset by the higher-level of pricing that we’re getting right now in our businesses to help offset the tariff impact.

Understood. That’s very helpful. And, so a quick follow-up on that is, have you already taken pricing in response to tariffs, or you’re waiting to take the pricing when tariffs become effective on May 2 or whatever the latest date is from the administration?

I think as Chris said, this is 84 different discussions, but what I can tell you, every division has a slightly different time line. But I can also tell you everybody impacted by tariffs has already taken decisive action on pricing, as Chris said, based on the announcements that were made back in March. And, some of them have taken action already based on the announcements that were made early April. And so, this is kind of an ongoing process. I think what’s really encouraging, if you look back at how this played out in 2017 and 2018, how it played out in an inflationary environment coming out of COVID, I think we’ve demonstrated we have ample pricing power in these highly differentiated businesses. And so, that’s what gives us the confidence to say that our pricing actions, along with some of the other supply chain actions we talked about, will enable us to offset, the impact of tariffs and be EPS neutral or better by year-end.

That’s wonderful, here. Thank you.

Sure.

Your next question comes from the line of Julian Mitchell with Barclays. You may go ahead.

Your next question comes from the line of Stephen Volkmann with Jefferies. You may go ahead.

Julian kind of teed me up here. I was just going to ask if, Michael, if there’s anything you want to say relative to the second quarter that might be different than normal seasonality just as we model this out?

Well, so obviously, I’ll just say this. We’re operating in a pretty uncertain environment, as you know. We had a pretty solid finish to Q1. We had a pretty good start. April is not completely done yet, but things are tracking pretty good. So, what I’ll maybe offer is that typically from Q1 to Q2, we see about a 2% topline sequential growth. We also benefit from having one more day in Q2 than we did in Q1. So, if you model that out, you’ll see that revenues are about flat from an organic growth standpoint on a year-over-year basis. Pricing may help out a little bit, but that’s kind of the base assumption that the topline is flat year-over-year. Margins, we should see a significant meaningful step up from Q1, primarily as a result of some of these one-time items not recurring and so solid margin improvement from Q1 to Q2. And then, on a year-over-year basis, margin is about flattish and EPS also about flat. So, that would put, I think last year we did $2.54. So if you believe what I just said that would put, EPS kind of in the mid, [$2.50s] (ph). You add our Q1 $2.38 on top of that. And then for the first half, you’ll get to somewhere around $4.90-ish, which would be 48% of the full-year EPS guidance, if you look at it in terms of the midpoint. And that’s pretty close to kind of our historical cadence, [$49.51] (ph). It’s a little bit lower this year as a result of slightly higher restructuring tied to our 80/20 Front-to-Back projects. But, overall, this seems like a pretty reasonable way to think about Q2 first half, second half. And again, I’ll just in case it wasn’t clear, if you go back to our last call when we gave guidance, we highlighted $0.30 of currency headwind. That’s no longer the case based on current rates. As you may recall, we don’t hedge, so these currency moves favorable in this case flow through pretty quickly given the short cycle nature of our business. So, that’s maybe a way to kind of think about Q2 and the balance of the year.

Great. Very thorough, and I definitely do believe you. Just anything on the tax rate? I know that was a little benefit in the first quarter.

Yes. So, I think this was a pretty standard kind of tax transaction. And so, we are modestly lowering our guidance for the full-year, for the tax rate to 24%. I think it was [24.25%] (ph) prior to that. So and that’s if you do the math, that’s about $0.05. And typically, what we would have done in a normal environment is flow through the benefit of the lower tax rate and current foreign exchange rates. And just given the environment that we’re in, we decided to not do that. And so to some extent, we’ve derisked our guidance for the full-year. Whether that will be enough or not remains to be seen. As I said earlier, things can change quickly. We’re operating in a pretty uncertain environment. And, we’ll just go back to what Chris said is that we really believe we’re better positioned than most to deal with this level of volatility and uncertainty.

Thank you very much.

Sure.

Your next question comes from the line of Jamie Cook with Truist Security. You may go ahead.

Yes. And I think what we’d rather not do, Jamie, and it’s a fair question, is kind of give you an update on what the CBI number is every quarter. It can be a little lumpy, but as Chris said, we are definitely tracking it. And based on what we’ve seen so far, we are on track to deliver on our full-year target. In terms of PLS, we’re still targeting 100 basis points of PLS, primarily in the Specialty Products segment, in the Automotive segment as well as on the Construction side. So, those are kind of the three larger ones. And again, this is all kind of strategic repositioning of these businesses to improve the growth rate on a go-forward basis. So, that’s all on track.

Our next question comes from the line of [Abi Yorosilowicz] (ph). You may go ahead.

Just as we think about the margin progression for the rest of the year, I know you expect margins to improve as the year goes on, but when are you expecting price cost would be most favorable? Would it be like Q2 with higher pricing coming in sooner than when the cost fit, or would pricing more be in-line with cost as the year progresses?

Yes. So Abi, you’re breaking up a little bit, but if I understood your question correctly, I’d say, we went into the year kind of assuming a normal price cost environment, which for us typically is slightly favorable to margins. We are not expecting anything unusual on a quarterly basis as we go through the year. I think there was a question earlier about the potential lag between price and cost, and we feel like we’re better positioned this time around. So, I think what always happens down the road, most good companies will recover their margin impact. Whether that happens by year-end or into next year, that remains to be seen. But, if there is some pressure, it’s short-term, and again, it’s, as we sit here today, we’d say it’s manageable, so.

Okay. Got it. And, it’s possible you already addressed this to some extent, but just as you think about the kind of risk to potential demand weakening, would you expect that to be more from a weaker macro impacting end markets or more from higher prices and price sensitivity there?

It would be all end-market related. I think you got to factor in that our divisions, their competitors are dealing with the same challenges that we are, and they are less favorably positioned than we are, I think, is a fair comment. So, in terms of driving above market organic growth, with the new product pipeline, with the share gain opportunities in front of us, and you are seeing that in a number of places. And so, you can look at complete segments, whether it’s Food Equipment or Welding, where there are comparables out there or even automotive, where we are outgrowing underlying markets by 200 basis points to 300 basis points. So, this is going to be all about end-market demand, and we’re confident that we’ll continue to outperform these underlying end-markets as we go through the remainder of the year.

Okay. That makes sense. Appreciate the time.

Sure.

Your final question comes from the line of Nicole DeBlase with Deutsche Bank. You may go ahead.

Good morning.

Okay. Understood. And then, with respect to the restructuring actions that you guys are taking this year, has there been any shift in the total amount of restructuring, especially considering a weaker volume environment? And do you still expect to incur 80% of those charges in the first half?

Yes. Nicole, that’s still the case. I think these are the restructuring projects that are being done are all tied to our 80/20 Front-to-Back process and are identified kind of going into the year as part of the planned process. And obviously, we’ll see kind of how things play out from here, but it’s still the same assumption for the full-year and still assuming that about 80% of the total spend this year will happen in Q1 and Q2.

Got it. Thank you.

All right. Thank you.