Yahoo Finance Illinois Tool Works Inc. (NYSE:ITW) Q1 2024 Earnings Call Transcript
Illinois Tool Works Inc. (NYSE:ITW) Q1 2024 Earnings Call Transcript April 30, 2024
Illinois Tool Works Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. 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.
Erin Linnihan: Thank you, Krista. Good morning, and welcome to ITW's first quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris O'Herlihy; Senior Vice President and CFO, Mike Larsen, and Vice President of Investor Relations, Karen Fletcher. During today's call, we will discuss ITW's first quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures 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.
Christopher O'Herlihy: Thank you, Erin, and good morning, everyone. While the near-term demand environment across the majority of our segments was certainly challenging as we anticipated, the ITW team delivered a solid start to the year as our first quarter results came in as expected. And we remain solidly on track to deliver on our 2024 performance targets. Starting with the top line. Organic growth was down 0.6% as five of seven segments declined in the face of a tough demand environment and versus some difficult comparisons year-over-year. Those comparisons are more favorable for the balance of the year and based on current levels of demand, we are confident that we will deliver on our full year performance targets, including organic growth of 1% to 3%.
The ITW team continued to execute at a very high level and delivered strong margin and profitability performance in the first quarter. Excluding a one-time inventory accounting item, quarterly operating income grew 4% as operating margin expanded 120 basis points to 25.4%, with a strong contribution from enterprise initiatives of 140 basis points, as we continue to make solid progress towards our goal of 30% operating margin by 2030. GAAP EPS of $2.73 increased 17%, and excluding the one-time item, we grew EPS 5% to $2.44. The free cash flow conversion rate of 68% was in line with normal Q1 levels. Looking ahead, where we did raise our GAAP EPS and margin guidance for the year to account for the one-time item, our operational guidance remains unchanged.
We continue to expect that current levels of demand across the majority of our end markets and favorable year-over-year comparisons will translate to positive organic growth through the balance of the year. Combined with our continued strong margin and profitability performance, we are confident that ITW is firmly on track and well positioned to deliver on our 2024 guidance. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our first quarter performance in more detail as well as our updated full year guidance.
Michael?
Michael Larsen: Thank you, Chris, and good morning, everyone. In Q1, we delivered a solid start to the year with some high-quality execution in a pretty challenging demand environment as expected. Despite an organic revenue decline of 0.6%, operating income grew 4% and operating margin improved 120 basis points to 25.4% as enterprise initiatives contributed 140 basis points. EPS increased 5% to $2.44, excluding a onetime item. Our free cash flow was $494 million, and we repurchased $375 million of our own shares during the quarter as planned. GAAP EPS increased 17% to $2.73, and operating margin expanded 420 basis points to 28.4%. As you saw this morning, our GAAP results include a onetime LIFO inventory accounting change that resulted in a favorable pretax impact of $117 million to cost of revenue equal to $0.29 a share.
In Q1, we made the decision to transition from the LIFO to FIFO inventory accounting method for all of our US businesses because it is a more consistent and simple method for valuing inventory across our operations. In summary, Q1 results were as expected in the current environment, and growth rates are projected to improve as we go through the balance of the year. Our margin and profitability performance continues to be strong, and we're solidly on track to deliver on our guidance, which I will discuss in a few slides. Please turn to Slide 4 for a look at organic growth by geography. As you can see, the 4% decline in North America was partially offset by positive growth internationally, as Europe grew 1% and Asia-Pacific grew 6%, led by China up 15%.
Excluding the 23% growth rate in our Chinese automotive OEM business, organic growth in China was still up 7%. For the full year and for our usual process, which is based on current levels of demand, we expect organic growth of 1% to 3% in both North America and Europe, with Asia-Pacific up in the mid-single digits, led by China. Moving on to segment results and starting with the Automotive OEM segment, which delivered solid organic growth of 3% despite North America being down 6%, as Europe grew 2% and China grew 23%, driven by continued strong penetration and market share gains. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China. Margin and profitability performance was strong as margins improved by 370 basis points to 19.8%, and enterprise initiatives contributed more than 200 basis points.
We continue to make solid progress on the margin enhancement plan in this segment, and we are firmly on track to deliver margins in the low to mid-20s by 2026, which you will recall is what we said we would do at our Investor Day last year. Turning to Slide 5. Food Equipment organic revenue declined 1% as expected against a tough comparison of plus 16% in the first quarter last year. Equipment was down 4%, and service grew 3%. And by region, North America declined 2% due to a particularly difficult comparison of plus 21%. On a positive note, the retail business was up 10%, fueled by new product launches and overall North America order activity in Q1 was pretty encouraging across the board. International revenue was flat with Europe down 1% and Asia-Pacific up 6%.
While 5 of our subsegments improved their margins in Q1, Food Equipment margins declined modestly to 26% as a result of focused capacity investments to support and accelerate continued above-market organic growth in our very attractive service business. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to Test & Measurement and Electronics. Organic revenue was down modestly as Test & Measurement grew 2% despite a tough comparison of plus 12%. Electronics was down 8% due to challenging near-term demand trends in electronic assembly. The recent MTS acquisition continues to perform well and grew more than 20%. With margins that are improving, but still in the mid-teens, this created a mix headwind for this segment and diluted segment margins by about 250 basis points.
Looking ahead, we expect Test & Measurement and Electronics margins to improve from here as we go through the balance of the year. Moving on to Slide 6. And as expected, Welding faced a tough demand environment and year-over-year comparison of plus 10%, which resulted in a decline of 3% in Q1. Equipment declined 2% and consumables were down 6%. Industrial sales declined 1% versus an 18% comparison and the commercial side was down 6%. By region, North America declined 3% against the comparison of plus 10% and international declined 8%. On a positive note, operating margin improved 80 basis points to 32.7% with a solid contribution from enterprise initiatives. Organic revenue in Polymers & Fluids declined modestly as automotive aftermarket was down 2%, and both Fluids and Polymers were essentially flat in the quarter.
On a geographic basis, North America declined 5% and international grew 5%, led by China. Operating margins improved 140 basis points to 25.8%. Turning to Slide 7. Near-term demand trends in Construction Products continue to be challenging on a global basis as organic revenue declined 7% in Q1. North America was down 3% as the residential and renovation business was down 1%. And international markets remained soft as Europe was down 11% and Australia and New Zealand was down 12%. On a positive note, operating margin improved 190 basis points to 29.4%, driven primarily by another solid contribution from enterprise initiatives. Finally, Specialty Products. Organic revenue growth was up 6%, due primarily to the timing of large equipment orders in two European businesses.
As a result, international was up 19% and North America was down 1%. As we have talked about before, we're working to reposition the Specialty segment for consistent above-market organic growth, which involves some strategic portfolio work and more significant product line simplification as we go forward. Operating margin improved 410 basis points to 29.7%, driven by operating leverage and a solid contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2024 guidance. With Q1 results that were right in line with our expectations, we're solidly on track to deliver on our 2024 performance targets and guidance. Looking ahead and starting with the top line, we do see some positives in terms of stable demand, more favorable comparisons year-over-year as we move forward, a normalized pricing and inflationary environment, new product launches and no meaningful headwind from inventory destocking.
Per our usual process, our organic growth guidance of 1% to 3% is based on current run rates adjusted for typical seasonality. Operating margin is expected to improve by 140 basis points at the midpoint to a range of 26% to 27%, which includes more than 100 basis points contribution from enterprise initiatives, and 50 basis points from the onetime item in Q1. As I mentioned on our last call, every segment is projecting to improve their operating margin performance, again, in 2024 with another solid contribution from enterprise initiatives across the board. After-tax return on capital is expected to remain firmly above 30%, and we expect strong free cash flows, again, with conversion greater than net income. As you saw this morning, we raised our full year GAAP EPS guidance to a new range of $10.30 to $10.70, which now includes $0.30 of EPS from the Q1 inventory accounting change.
Setting that item aside, our operational guidance remains essentially unchanged as we expect a combined headwind of about $0.30 from higher interest expense, currency and income taxes with an expected tax rate in the range of 24% to 24.5%. In terms of cadence for the year, we expect our first half, second half EPS split to be about 50/50 this year as we factor in the onetime item in the first quarter, which compares to our typical split of 49/51, so slightly less back-end loaded than usual. To wrap things up, as expected, the ITW team continues to execute at a very high level, in a challenging near-term demand environment, which we anticipate will improve as we go through the balance of the year based on current levels of demand and more favorable comparison.
In addition, our first quarter results came in as expected, and we are solidly on track to deliver on our 2024 guidance. n a separate note, today is Karen Fletcher's last ITW earnings call. Over the last six years, Karen has been instrumental in articulating ITW's unique and differentiated competitive advantages and our plan to leverage them to their full potential to you, the investment community in a clear and compelling manner. In doing so, she has helped us position ITW as one of the world's highest quality, best performing and most respected industrial companies. Please join Chris and me in thanking Karen, for her many contributions to ITW and wishing her all the best in retirement.
Karen Fletcher: Thank you, Michael. That means a lot, and it's been a privilege to do that.
Michael Larsen: Thank you, Karen. And with that, Erin, I'll turn it back to you.
Erin Linnihan: Thank you, Michael. Krista, will you please open the line for questions?
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