Illinois Tool Works Inc.

Welcome and thank you for joining IPW's 2019 First Quarter Earnings Call. My name is Cheryl and I will be your conference operator today. At this time all participants have been placed in a listen-only mode. After the speakers' remarks there will be a question and answer session. For those participating in the Q&A you will have the opportunity to ask one question and if needed one follow-up question. As a reminder this conference call is being recorded. I will now turn the call over to Karen Fletcher, Vice President of Investor Relations. You may begin.

Thank you Cheryl. Good morning everyone and welcome to ITW's First Quarter 2019 call. I'm joined by our Chairman and CEO Scott Santi along with Senior Vice President and CFO Michael Larson. During today's call we will discuss First Quarter financial results and provide an update on our 2019 full year outlook. Slide 2 is a reminder that this presentation contains our financial forecast for the remainder of the year as well as other forward-looking statements identified on this slide. We refer you to the company's 2018 Form 10K for more detail about important risks that could cause actual results to differ materially from our expectations. Also this presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release. So let's turn to slide 3 and I'll turn the call over to our Chairman and CEO Scott Santi.

Thank you Karen and good morning everyone. Overall we had a solid start to the year and the First Quarter played out about as expected with EPS of $1.81 coming in modestly above the midpoint of our guidance. The ITW team continued to execute well on the things within our control delivering 100 basis points of benefits from enterprise initiatives and an operating margin of .3% excluding 70 basis points of margin impact due to accelerated restructuring investments. We delivered .7% after-tax return on invested capital and a 21% increase in free cash flow. Sales started out a little slow across the board in January before picking up the pace in February and March. Organic revenue was down .5% or flat excluding the impact of one last shipping day in the quarter. Our auto OEM sales declined 6% as auto production in North America, Europe and China was down a combined 8%. That being said we are seeing some signs of stabilization in Europe and China auto markets and expect to see some modest improvement in the back half of the year. The 6% decline in auto OEM revenues reduced our Q1 organic growth rate by .5% at the enterprise level. One last shipping day was another .5% and PLS was 70 basis points as expected. As we discussed on the last call we had a pretty heavy restructuring agenda in Q1 as we accelerated our 2019 plans into the first quarter, a significant portion of which was directed at our auto OEM business in Europe in order to adjust our costs to current demand levels. As we also discussed on our January call we knew that the first quarter, in fact the first half had some challenges in terms of year on year comparisons, currency translation, accelerated restructuring, a slightly higher tax rate, one less shipping day, tougher organic growth comps and auto production declines in Europe and China. And that these challenges would dissipate and the operating environment would be much more favorable in the back half of the year. Coming out of Q1 things are playing out largely as we anticipated. We are executing well in our long term enterprise strategy and on our 2019 operating plan and as a result we remain firmly on track to deliver on our full year EPS and margin improvement guidance. I'll now turn the call over to Michael who will provide you with some additional detail on our Q1 performance and our outlook for the balance of the year. Over to you Michael. Thank you Scott and

good morning. Gap EPS of $1.81 came in above our guidance midpoint of $1.78. As expected, -over-year EPS headwinds included $0.07 of foreign currency impact, $0.06 of higher restructuring costs and $0.03 of higher tax rate which combined for $0.16 unfavorable EPS impact in the quarter. Excluding these headwinds, Q1 EPS would have been $1.97, an increase of 4% over last year. It is important to note that we expect these specific headwinds to significantly moderate as the year progresses. More on that later in my remarks. In addition, as we mentioned on the last call, Q1 also had one less shipping day which was approximately $0.04 unfavorable impact to EPS and .5% reduction to organic growth. As a reminder, we get that shipping day back in Q3. Organic revenue for the quarter was down 1.5%, below our guidance due to the slower start in January and flat on an equal day basis. Sales trends improved in February and March as March organic revenue was up 2% -over-year on an equal day basis. In line with our expectations, PLS impact related to 80-20 activities was 70 basis points this quarter. Operating margin of .6% improved 20 basis points, excluding 70 basis points of accelerated restructuring impact. Once again, strong execution on enterprise initiatives contributed 100 basis points. Another bright spot was stronger pricing and moderating raw material inflation which resulted in better than expected price-cost margin impact in Q1. Cash flow performance was also a highlight as free cash flow increased 21% with a conversion rate of 90% which is seasonally strong for the first quarter. Return on invested capital was .7% and finally we repurchased $375 million of our shares as planned. As Scott said, the ITW team executed really well on the things within our control and Other than the slow start in January, this was a pretty solid quarter for ITW. Moving to slide 4 for some detail on operating margin. Overall, .6% operating margin in Q1 as I mentioned. And on the bottom left of the slide, we laid out the positive price-cost trends that I just referenced. Strong pricing across all segments more than offset moderating raw material costs on a basis resulting in improving price-cost dynamics in Q1 and going forward. On the right side, enterprise initiatives continue to be our most significant and most consistent contributor to margin performance. Our 80-20 initiatives and strategic sourcing efforts combined for 100 basis points of margin improvement. And that impact is broad-based. In the quarter, enterprise initiative benefits ranged from 70 to 130 basis points across each of our seven segments. This quarter, revenues were down resulting in 30 basis points of negative volume leverage, only 10 basis points of margin dilution from price-cost which was our best performance since the fourth quarter 2016, and 40 basis points of other which is primarily related to employee costs, specifically our typical annual salary and wage increases. Going forward, we expect to return to our normal run rate of 10 to 30 basis points for this line item in the remaining quarters of 2019. This brings us to net 20 basis points of margin expansion before adding the impact of 70 basis points from restructuring, which considering the negative volume impact this quarter is pretty solid performance. Even with the higher restructuring, operating margin was strong at .6% and the good news is that we have a significantly more runway for improvement as the year progresses and over the next few years as we shed at our investor day in December. Please turn to slide five for details on segment performance. The table on the left summarizes organic growth both as reported and normalized on an equal days basis. As you can see, six segments have flat to positive organic revenue growth on a worldwide basis despite the slower start to the year with automotive OEM the only segment that declined due to the decline in automotive production this quarter. On a geographic basis, North America organic revenue was up 1% while international was down 1%. For the year, we're expecting low single-digit growth in all major regions based on current run rates and our risk adjusted view of auto build forecasts. On that point, IHS forecasts combined auto build growth for North America, Europe, and China to be plus 4% in the second half. Our risk adjusted view puts those combined builds flat for the second half, four points lower, which is the scenario embedded in our annual guidance. More on that a little later in my remarks. This brings us to the right side of this slide and automotive OEM segment results. Overall, organic revenue was down 6%. IHS data for Q1 build rates in North America, Europe, and China combined showed a decline of 8% in the quarter in what remains a pretty dynamic industry environment. That said, there's some optimism in the industry and amongst our teams on the ground that builds will bottom out in the first half. Again, looking at North America, Europe, and China combined, IHS projects auto production to be down 6% in the first half followed by 4% growth in the second half. As I just mentioned, our current guidance reflects an assumption of only one flat growth in auto production, no growth in auto production in the back half of the year. Our North American business was down 6% with Detroit 3 production down significantly. As expected in the quarter, builds were also down in Europe and China. In Europe, the implementation of the WLTP emissions testing procedures last year continues to cause some auto production disruption although this situation seems to be normalizing. And in China, auto retail sales were down double digits in the quarter. Automotive operating margin declined 350 basis points this quarter. As planned, restructuring related to adjusting our cost structure in Europe and EFNC acquisition reduced margins by 190 basis points. Despite the fact that we're beginning to trend positive on price in this segment and actually getting positive price in the first quarter, price cost reduced margins by 110 basis points. Just stepping back for a minute from some of these near-term challenges in the auto market, our new program wins remain strong as does our new product pipeline. Our annual new program win targets equate to 2 to 3% of above market organic growth and we have met or exceeded those targets for each of the last three years and expect to do so again in 2019. Overall, we have a strong and focused business operating in a well-defined, highly value-added niche in the auto market and we deliver a ton of value to our customers in serving that niche as reflected in both our level of profitability and in our organic growth rate over the last five years. As you all know, this is an industry that is going through significant change and in our view, the trends and changes that will play out in the auto industry over the next decade or so only add to the significant future profitable growth potential that ITW has in this space. There's no question that we're at a challenging point in time with regard to the auto market and we are taking the appropriate steps to adjust our cost structure accordingly. In fact, we're performing quite well in the current auto down cycle as reflected in our ability to maintain auto OEM segment operating margins well above 20% despite a meaningful -over-year revenue decline over the past two quarters. We will continue to manage our way through these near-term demand challenges but our focus remains on acting and investing to position ITW to take full advantage of the significant long-term profitable growth potential that we have ahead of us in our niche of the auto market. Moving on to slide six, food equipment organic growth was up 3% on an equal days basis which followed the best quarter in four years. You'll recall that Q4 organic growth was up 5%. In North America organic growth was 2% with equipment flat and service up a strong 4%. Growth in independent restaurants and QSR was solid partially offset by decline in institutional where we had a tough comp of 10% growth in the prior year quarter. Food retail was a bright spot of double digit and we're encouraged to see a sequential recovery taking shape there. Overall, current run rates coupled with new product introductions support our view that sales trends will improve from here as the year progresses. With respect to international markets, Europe grew mid-single digits primarily on strong performance in our wear wash division. Operating margin was almost 25% with enterprise initiatives and volume leverage offsetting the impact from restructuring activity in this segment. Test and measurement and electronics had a solid quarter with organic revenue up 1% on an equal days basis against a tough comp of 8% organic growth in the prior year. As expected, test and measurement was down 2% on lower sales to semiconductor equipment manufacturers. Excluding semiconductor, test and measurement was up 5%. Electronics was up 1% with strong sales in equipment assembly and contamination control partially offset by a decline in electronic components where we had a 9% growth comp last year. Operating margin expanded 70 basis points to .1% with enterprise initiative benefits to main driver. Onto slide 7. Welding had a solid quarter despite the fact that organic growth was off to a slow start in January, in part as our main operations in Wisconsin were shut down for two days due to weather. Welding ended up 5% on an equal day basis against a tough comp of 8% last year. As you can see on the slide, organic growth was fairly consistent across the board with equipment and consumables both up in the -4% range. North America industrial was up 3% against a comp last year of 15% and commercial was up 5%. International growth was particularly strong in China up more than 20% while oil and gas was essentially flat. Based on current run rates, we continue to expect organic growth of -6% this year against a tough 2018 comp of 10%. Operating margin was .1% of 40 basis points in the quarter. Polymers and fluids organic growth was up 1% on an equal days basis. As we talked about on the last call, we expected auto aftermarket to be down following strong 7% growth in the fourth quarter driven by a new product launch. Polymers was up 2% while fluids was up 1% and operating margin expanded 40 basis points in this segment as well. Let's turn to slide 8. Construction organic revenue was flat on an equal days basis. North America was down 3% due primarily to a tough comp with Q1 last year up 7%. Residentially model sales were essentially flat while new construction was impacted by softness in US housing starts. Commercial construction was down 4%. Recent sales trends support our view here that we expect sales to improve going forward as comparisons ease and new products are introduced. Europe grew a strong 5% with robust demand across the board. Australia and New Zealand sales were down 6%, similar to the fourth quarter with some continued softness in the economy. Specialty organic growth was flat on an equal days basis with solid organic growth of 6% in the equipment businesses offset by softness in consumables, specifically a few division internationally including graphics and appliances. Overall, international was down 6% and North America grew 2%. Operating margin was essentially flat at 26.5%. Moving on to slide 9 and an update on 2019 guidance. As you saw this morning, we are reiterating our full year EPS guidance range of 790 to 820 which represents 4 to 8% growth year by year. We now expect organic growth in the range of 0.5 to .5% given the slow start in January. Our guidance is based on current demand run rates and a risk adjusted second half forecast for auto builds as we talked about. This compares to prior guidance for organic growth of 1 to 3% and other than the slow start of the year, our outlook for organic growth for the rest of the year is essentially unchanged. As we talked about on the last call, we fully expected going into 2019 that the first half of the year was going to be more challenging for a number of specific reasons and that many of these challenges would dissipate such that the operating environment would be more favorable in the back half of the year. As Scott mentioned, this dynamic is playing out pretty much as expected and our current view of the year is pretty much in line with the organic revenue guidance ranges by segment and the EPS bridge that we provided on our last call. Because the first half of 2019 will be a little more challenging than what is typical for us in terms of -over-year comparisons, I'll spend a minute describing how we expect some of these challenges to play out as the year progresses. On slide 3, we size the EPS impact in Q1 from foreign currency translation impact, restructuring cost and tax rate for a total of 16 cents -over-year. For Q2, we expect currency impact at current rates of about 6 cents and higher restructuring activity of about 3 cents for a total of 9 cents in Q2, which adds up to about 25 cents per share for the first half of 2019. These three items are still headwinds -over-year in the second half, but only to the tune of 5 to 10 cents. In other words, we expect to see an improvement to second half EPS of 15 to 20 cents versus the first half on currency restructuring and tax. Now, let's talk about organic growth. First, in terms of sales comparisons -over-year, we have one more challenging organic growth comparison ahead of us in Q2 and then comps get significantly easier in the second half. Second, there's one extra shipping day in the third quarter, which as I mentioned, adds one and a half percentage points to a Q3 organic growth rate. Third, auto builds for the combined regions, North America, Europe and China, are expected to improve significantly in the second half. As I mentioned earlier, IHS forecasts builds in these combined regions will be up 4% and our guidance has risk adjusters this down to builds being flat. Therefore, based on current run rates, easier comps, the extra shipping day and our risk adjusted view of auto builds, we expect organic growth in the second half will be in the range of 3 to 4%. Finally, on the margin side, we talked about much improved price cost dynamics with stronger pricing and more favorable raw material costs. At this point, price cost margin impact is essentially neutral and on a dollar basis, price remains significantly higher than the raw material costs. In addition, we expect that restructuring benefits related to the projects that we accelerated into the first half will start to deliver benefits in the second half of the year. The average payback on the projects we approved in the first half are less than a year and the savings projected for the second half on these projects are expected to be in the $25 to $30 million range. The most significant and consistent driver of margin improvement remains the enterprise initiatives where we have clear line of sight to projects and activities that support at least 100 basis points of improvement every quarter going forward and for the full year. And as I said earlier, we're off to a strong start on free cash flow and expect conversion above 100% of net income for the year. And as you know, we've allocated $1.5 billion to share repurchases in 2019. Before I wrap up my prepared comments, just a few words on our portfolio management activities. Overall, we are on track to complete approximately half of our planned divestitures in 2019, pending board approval. Given the quality of these ITW businesses, we're seeing solid interest and attractive valuations. As we complete the project schedule for 2019, they will trigger some pretty significant gains on sale and cash proceeds, all of which are excluded from our current guidance. As we have stated before, the divestiture of these long-term growth challenge divisions when completed by the end of 2020 are expected to be accretive, favorable to our overall organic growth rate and margins to the tune of half a point of organic growth and 100 basis points of margin expansion. And as a reminder, we're committing to making sure that the divestitures are EPS neutral and we plan to offset any EPS dilution with incremental share repurchases above the $1.5 billion in our plan today. In summary, as we have for the past six plus years, we delivered on our quarterly commitments, despite some near-term challenges that we continue to expect will dissipate in the back half of the year. Overall, we're set up for a stronger second half in terms of delivering solid organic growth with -in-class margins and returns, accelerating earnings growth and strong free cash flows. With that, Karen, back to you.

Karen D'Alessio Okay, thanks, Michael. We're going to open up the lines for questions and just as a reminder, please limit yourself to one question and one follow-up question. Cheryl, back to you. Cheryl Thank you very

much. And please press star one in order to enter the queue. Coordinator Our first question comes from Andy Kaplewitz. Your line is open.

Andy Kaplewitz Hey, good morning,

guys. Michael Good morning.

Andy Kaplewitz Scott or Mike, I think you mentioned international being down a percent. What was Europe specifically in last quarter you mentioned? Basically, you were just seeing some isolated weakness in Europe, mostly in auto. Is that still what you're seeing in Europe and what do you expect for the year there?

Michael Yeah, I mean, in Europe, the biggest, you know, so Europe overall was down 2 percent. As you point out, the biggest decline by far was the automotive OEM business. If you take that out, we're actually positive in Europe. We're seeing some pretty good performance. I mentioned construction products up 5 percent, food equipment up 4. And like I said, the biggest delta was really the automotive business.

Scott Okay, that's helpful. Maybe just stepping back. I mean, you know, we like to follow your CapEx driven businesses like Test and Measurement, X Semi-Con and Welding. They do seem to be hanging in there well and you mentioned some improvement in March sales. Did these businesses generally just sort of do well throughout the quarter? Do you have good visibility, you think, still in the sort of core Test and Measurement of Welding businesses as you move forward?

Michael Yeah, I mean, I think we saw pretty consistently across the board a slower start to the year as we talked about in January. But from there on, Welding, Test and Measurement, food equipment, you know, really improved in February and March and are on track to deliver on the organic growth guidance that we provided on the last call. So food equipment up 3 to 5 for the year. Test and Measurement, Tough Comp up 1 to 3 and Semi-Con is a 2 percentage point drag. As you know, we risk adjusted our Semi-Con exposure and hopefully have a pretty conservative view for Test and Measurement. Welding up 10% last year. We expect to be up, you know, 3 to 6% this year. So the CapEx businesses that you point out are performing well. I'd add maybe to that from a pricing standpoint, that's also the case.

Michael I think the only thing I would add is they are, to your visibility question, Andy, is these are book and ship businesses. So these are not long leave time businesses. So we are certainly seeing pretty steady performance right now. But these are not businesses where we have long leave times associated with them. So conditions on the ground right now seem to be hanging in there pretty well.

Thank you. Our next question comes from Joe Ritchie from Goldman Sachs. Your line is open.

Joe?

First half versus second half. I know that in the queue we'll get more information around price cost.

We were cut off from you for the starting part of your question. Can you back up to the beginning please?

Oh yeah, sure. Sure, no problem. I'll start by again saying good morning. And so I said that Michael had provided some really good color on the first half, second half. And I was getting to my question which was really around price cost. And I know that this will come in the queue. But maybe if you could just provide a little bit more color around where you're seeing price cost, what you saw in the segments this quarter, and then how you see that progressing. You know, are there other certain segments that are going to be better than others as we progress through 2019?

I'd say across the board, Joe, we saw positive price in all segments, including for the first time in a while in the automotive business. So pricing was slightly ahead of our expectations for Q1. And similarly on the cost side, we talked about last year moderating raw material cost. That certainly played out in Q1. And so last year, if you recall, total price cost was 50 basis points of margin impact, even though we were certainly positive on dollar basis. We just did 10 basis points here of negative margin impact in Q1. And these price cost dynamics are trending positive for the balance of the year. In terms of by segment, I would just point out, I mean, auto, as you know, even though positive on price, it can be a little challenging. It takes a little longer, as we've talked about before, to get price there. But really, all the other segments across the board, really strong pricing performance.

I think maybe the other color I would add is essentially what the environment was seeing across the board is moderating raw material cost inflation. And the impact of prior price moves ultimately continue to play out in terms of the year over year comps. So there's always a lag between the cost and the pricing response. And so if given that things continue to stay stable from the input cost standpoint, we are picking up some added benefit on the price side. And that's, I think, what we saw in Q1 and sitting here today, what we would expect to see through the balance of the year.

OK, got it. That's helpful. And then maybe just two real quick clarifications. Michael, you talked about flat auto builds as your assumption in the second half of the year. Is there still an outgrowth assumption embedded in your forecast? And then the second quick question clarification was really around corporate. That number was lower than we expected this quarter. How should we think about that then for the rest of the year?

Can you just repeat the second part,

Joe? Yeah, the second one was around corporate. The second question. Yeah, the corporate number was lower than we expected this quarter. Yeah, I think that's

a pretty good... I would take, on the corporate side, our corporate costs are pretty much flat year over year on an annual basis. It can move around a little bit on a quarterly basis, but I would probably model last year. For the auto question, yes, there is. For the full year, we're expecting, as we talked about, two to three percentage points of auto outgrowth, maybe at the lower end of that range here for the second half. Just, again, try to be a little more conservative in a pretty dynamic environment.

I understand. Thank you.

Thank you. Our next question comes from Steve Bulkman from Jeffreys. Your line is open.

Good morning, guys. So, Michael, lots of discussion around first half, second half, but I noticed you guys didn't provide the specific guide on the second quarter, and the streets got you flatish, I guess, for the next three quarters. And I guess I just wanted to make sure there wasn't a little more detail you wanted to provide around that.

Yeah, I think Q2 will look, in terms of organic growth, pretty similar to what we just reported for Q1. I think we do have... This shipping day issue goes away in Q2, but the first half is going to be, as we expected, pretty challenging. And so I guess that's the color that I would provide on Q2 in the first half.

Okay, fair enough. Thank you. And then just a quick follow-up on test and measurement. It looks like semiconductor was really sort of what dragged that down. What are you hearing or seeing relative to semiconductor as we go forward?

Yeah, so really no change to our view. We have, just as a reminder, about $200 million of semi-con exposure. The assumption that we built into the plan this year was for that to be down double digits, and we've not changed that view. But like you, we've certainly heard some of the more positive commentary from industry experts and customers as it relates to the back half of the year. We have not adjusted anything in our guidance for semi-con. And so, like I said, hopefully that will turn out, just like order, to be a fairly conservative view.

Great. Thank

you.

Thank you. Our next question comes from Jamie Cook, Credit Suisse. Your line is open.

Hi. Good morning. I guess two questions. The comments that you made about things improving in March, I feel like that's consistent with what we've heard from other industrial companies. Can you just speak to what geographies or segments sort of that was most pronounced in, I guess is what I would say. And then just my second question on the guide. I know you're taking organic growth down a little, and you talked about the shipping days, your EPS, but your margin expansion of 100 bips is still the same. Just on the lower organic growth, how do we still get the same margin improvement on sort of somewhat lower organic growth, what changed quarter to quarter? Thank you.

Jamie, and you can do the math yourself. Half the point of organic growth in terms of EPS impact is in that mid to high single digit EPS impact. And the biggest driver kind of working the other way is the price cost dynamic that we talked about that really offsets that, plus a couple of other puts and takes. It's really improving price cost dynamics is why we're holding EPS guidance for the full year despite the lower organic growth. And then to your first question, this February, March dynamic, that was pretty broad based. All segments, and when we look at the major geographies, we really saw the same dynamics in terms of a slower start to the year and then sequential improvements in February and March above our typical seasonality. So that's certainly encouraging, and that's how it played out in the first quarter.

Okay, thank you.

Thank you. Our next question comes from Jeffrey Sprague from Vertical Research. Your line is open.

Thank you. Just a couple from me. First, just on the trajectory into Q2, given that it sounds like you exited March a bit better, and we're not going to be talking about government shutdowns and weather and everything else that was swirling on, why wouldn't you expect some acceleration in your organic growth rate in the second quarter relative to what you printed here today?

Yeah, I think, Jeff, the comp is a little bit tougher. We were up 4% in Q2 last year, and so certainly your points are valid. It's just the comp that is a little bit more difficult than Q2.

Great, thanks for that. And then just to clarify on the restructuring, Michael, the nine cents in the first half, that's just the gross cost of the restructuring or is there some net benefit from the action showing up in that number?

That's just the gross number, and that is the increase year over year in restructuring costs. So I think year over year, 10 cents is the higher restructuring costs, and that nine cents are really in the first half of the year.

Okay, got it. Thank you. And then just back to price costs, are you able to continue to push price higher now in this environment or this is more about kind of annualizing the steps you've made and trying to kind of hold on to it maybe as costs start to slip the other way?

Yeah, this is, you know, I think the big effort was around offsetting raw material costs, including tariff impact, and we've essentially done that at this point. And we're entering into a more normal pricing environment on a go-forward basis. Certainly we benefit from the fact that Scott said that, you know, there was a lag last year. We've kind of neutralized that and we're trending in a more positive direction. But we also don't expect, to answer your question, that there is going to be price reductions. We will be able to hold on to what we have implemented so far, and we're just benefiting here in the near term from the raw material costs being a little bit better. Great, thank you for that.

Sure.

Thank you. Our next question comes from Joel Tiss from BMO. Your line is open.

Hey guys, how's it going?

Morning.

I wonder if, can you just, I don't know if you mentioned this or not, but the PLS for the year, I know you're jamming a lot into the first half. Is it going to be pretty much done, or are there more things that you can pull out in the second half if you need to?

Yeah, I mean that's, it's really not a number that we manage, you know, at the, you know, Sort of not in terms of time. It's more an outcome of the, you know, hundreds of, you know, activities and projects going on across the company. And so it was 70 basis points in the first quarter and our view for the year has not changed at 80 basis points.

Okay. And is it too early to frame for us the kind of earnings dilution you might get from divesting those seven underperforming businesses?

Well, we're not going to get, I mean we are going to get some, these businesses are profitable businesses. And so there are some earnings going away, but we'll more than, the plan is to make that neutral by offsetting any earnings dilution by incremental share repurchases above the 1.5 million that is in the plan. 1.5 billion. 1.5 billion, did I say 1.5 million? 1.5 billion that's in the plan.

Okay. All right. Thank you very much.

Thank you. Our next question comes from Andy Casey from Wells Fargo. Your line is open.

Thanks. Good morning. Just wanted to go, good morning. The cadence that you talked about, the slow January getting better through March. And you mentioned it was pretty broad-based geographically. Could you, and Jeff kind of touched on some of this in his question. Could you kind of talk about what you were hearing for the reasons behind that in the US and then also for international markets?

Yeah, I mean I think Jeff mentioned a few of them. I mean I think it's difficult to quantify things like weather, for example. But we do know that our operations in Wisconsin, in our welding business, were closed down for two days and you can, that certainly had an impact. But beyond that, it's really difficult to...

Yeah, I would say the sort of obvious premise would have been if this would have been isolated to North America or US, it was weather and the government shut down. The fact that it was pretty consistent in our international business was certainly surprising. And to be honest with you, I don't think we've heard any great answers or theories necessarily other than it was certainly there. As a factor, it seems to have moderated as we move through the quarter. But it was a really, let's call it an interesting early part of the quarter for sure.

Sure, thank you. And then for auto, the EF&C acquisition integration, it seemed to accelerate a little bit from what you can see in the fourth quarter. Is that a correct read and how long do you expect that to persist as it had went to margins?

These were planned activities just as we put together the acquisition integration plans. I think if anything, they were planned for this year and we moved them forward by a couple of quarters. But those were activities that were planned all along.

And pretty focused in Europe. So some of the acceleration as, although as Michael said, they were planned, some of the acceleration was really around in response to the dip in production rates in Europe. And in addition to that, some other restructuring in our core auto businesses in Europe. But the normal integration process, Andy, is typically three to five years. So these are, as Michael said, normal things that were in year four with EF&C. And so I certainly would expect that to slow down in another year or so in terms of specific restructuring around EF&C.

Okay, thanks, Scott. Just a follow up on that. Should we pretty much expect the sort of headwind through this year or should it dissipate as the year goes along?

The bulk of the restructuring, 75% of our restructuring this year will be done in the first half of the year. So there's going to be a benefit when you look at the second half relative to the first half when we get to

the back end of the year. In terms of less your headwind and also in terms of benefits from the investments. Right, yeah. There's

two dynamics here. That's a good point. I mean, there's lower restructuring costs in the second half of the year and you're starting to see the benefits of the projects that we are executing right now and that we've approved for the first half of the year. We quantified that at 25 to 30 million. So, you know, five to six cents share of benefit here in the second half relative to the first half.

Okay, thank you very much.

Sure. Thank you. Our next question comes from Migg Do'Ray from Baird. Your line is open.

Yes, good morning, guys. My question is on food equipment starting there. So, frankly, this was a little bit slower than what I anticipated in terms of your organic growth in a quarter. I'm wondering if you can provide a little more color here. I understand you mentioned a tough confidence, but at least looking back through the data that I've got, it looks to me like from an overall segment perspective, Q1 was really your tedious comp and food equipment. And I guess what I'm wondering here as the comparisons get tougher as the year progresses, how do you think about growth here and what happening?

It's tough to hear what you were saying, Migg, but I'll do my...the volume was a little low, but, you know, I think food equipment, similar to the other segments we talked about, a little bit of a slower start, but then picked up good momentum in February and March, you know, up 3% equal days after, you know, up 5% in Q4. You know, I think in North America, what's encouraging is, you know, the restaurant side, QSR was growing in the mid to high single digits. You know, food retail was up significantly year over year, which is the grocery stores. And then the challenge was really some comps on the institutional side. And so those are...those can be bigger projects that move around. You know, we were up 10% on the institutional side last year. And so, like we said, with current run rates, we've got some new products coming in, you know, anecdotally, you know, quoting activity, backlog, order activity, all points to a pretty solid year here with, you know, 3% to 5% growth. Like I said, new products, you know, retail is improving. Europe's pretty strong and looking good for the rest of the year. So we're pretty confident with our...

And the service business growing at probably the best clip, it's just grown in four or five... Yeah, I mean,

service up four was certainly encouraging. So we're on track here, Mig, with the current view.

Okay, okay. I appreciate that. Then switching to welding. So you mentioned a couple of misshipping days in Q1. I'm presuming this is, I don't know, as much as 300 basis points worth of growth to that segment. When do you expect to make those up? Is that lost business

or do

you just make it up into the sequent quarters? And of course, comps are getting tougher here as well, especially on a two-year stack basis. You know, do you think there's enough momentum in this market to allow you to really hit kind of this 3% to 6% guidance? Thank

you. Yeah, I mean, the short answer is yes, we do. You know, we are on track for 3% to 6% organic. You know, it's really hard to quantify, you know, of the two days the operation went closed down, you know, how much did we get back in Q1? How much are we going to get back in Q2? You know, I think when we look at, you know, broad-based, this is still pretty solid. You know, you know, if you look at equipment up three, consumables up four, industrial business was up three against the tough comp, commercial was up five, you know, national was really good, China up 20%. We don't talk much about that. And then oil and gas slowed a little bit, but, you know, I think some of that you could maybe point to the rental business specifically and whether, if you want to, but we feel good about the outlook also in welding for the year.

Thank you. Our next question comes from Anne Dignan from JP Morgan. Your line is open.

Hi, good morning. Sorry. Most of my questions have been answered, but maybe a little bit more of a deep dive into construction products, both US and international, just some commentary on what you're seeing in those markets.

Yeah, I think, you know, I sound like a broken record here, but, you know, this was a little bit of a slower start. You know, North America was down, which that's not typical. You know, we did have a tough comp last year. The residential remodel side is still pretty solid, I think, into the big box kind of retail channel. Very good. Your commercial was down four. That can move around a little bit, you know, and has kind of been flattish over the years. I'd say we certainly saw a pickup here in February, March, which is encouraging. We got some new products coming in cordless technology that's going to get rolled out this year across all geographies. Europe really good, up 5%, and then Australia and New Zealand, as expected, down six, just like we did last year in the fourth quarter. And I think there that's really more of a macro, you know, macro economy than anything else.

Okay, and maybe some commentary on North America, Rezzy, you know, we're seeing a slowdown in housing. Are you seeing any re-acceleration, any color there on the housing side?

There was a little bit of that in Q1. It's, you know, residential remodeled overall was flat. You know, I think the remodel side, you know, is positive. You know, new housing, new residential is a little slower. But I don't think there's a big macro commentary here from us. You know, I think we feel pretty good looking into Q2 and the balance of the year.

Okay, I'll leave it there. Thank you. Appreciate the time. Thank you.

Thank you. Our next question comes from Josh Pokowinski from Morgan Stanley. Your line is open.

Hi, good morning.

Josh?

So I know a lot of the questions have already been asked here, but and apologize if I missed this one around inventory de-stocking. We heard from 3M last hour that they saw a pretty good amount of de-stocking in auto, which I would imagine most of your exposure is more just in time, but just trying to get a sense for across the portfolio, you know, anything you saw on a 4Q pre-buy or a 1Q de-stock that, you know, might not make 1Q look, you know, quite as slow as what it appears on the page.

You know, I would say in the auto space, certainly as production drops, there is, you know, a bit of a compounding effect in terms of inventory at the tiers and even at the OEMs. So, I, you know, I don't know that I would call it sort of intentional de-stocking other than, you know, what I would describe it as from our perspective would be just normalizing inventory levels based on lower production rates, but certainly it's got some compounding effect beyond just the drop in actual end product production. So, certainly at auto, when you talk about, you know, declines in the high single digits, some of that was a factor, there's no doubt, in our organic sales in Q1 as well. Beyond that, I'm not aware of any pre-buy or any significant other actions in any of our other segments related to that.

Got it. And did you have, you know, any kind of above normal price increase on Jan 1 that, you know, might have supported that even if it wasn't obvious to see that people would have looked at or is the pricing counter look a little different?

You know, from a pricing standpoint, we certainly had price increases across our 87 divisions. There are certainly pricing actions that took place in Q4 and in early Q1. I can't say that any of it was so concentrated on January 1 that it would have had a big impact or caused a, let's call it a material pre-buy at the enterprise level anywhere. But, you know, at the division level, I'm sure there was some puts and takes related to that.

Yeah, I would just add to that. I mean, the pricing activities, you know, have been going on across the company for the last, you know, six to nine months since we've worked off-set the raw material cost inflation. And so I would agree with Skye. We don't think anything unusual here on January 1.

Sure. And our next question comes from Walt Liptock from Seaport. Your line is open.

Hi, thanks. Good morning, guys. Good morning. Just a couple of follow-ups I can go through real quick. One, just to clarify, which segments are getting the restructuring?

So if you look at the first half spend here, you know, close to half of it is directed at the automotive segment that we talked about. And the balance is really our typical kind of 80-20 front to back activities. And it's pretty well distributed across the segments. I think if you do the math, you know, construction, specialty products, food equipment, kind of in that order would be, but it's pretty broad-based.

Okay, great. And then the divestiture, I may have missed this, but the timing of it is in the second quarter that we should expect those?

Guys, so I think more second half would be a realistic view. I think, you know, there's quite a bit of work that goes into getting these divestitures done. And so I think we expect second half of the year, we would expect the first ones to come through.

Thank you. Our next question comes from Steve Fisher from UBS. Your line is open.

Thanks. Good morning. You guys have done a very good job of being able to maintain your EPS, despite the organic challenges in recent quarters or years. So I'm just curious if you've stress tested that ability. I mean, we can do our own math on buybacks, but it seems like you may have called out some pricing strategies here. Just curious how much organic growth reduction you could face and still maintain your EPS guidance. So for example, if, you know, you were to have to take another point out for the year, if the second half didn't really come through, kind of, is that level at which you could still hold your guidance?

Yeah, I think, I guess I'll just point to our track record over the last six years. We've done, I think, a pretty good job giving a realistic view of what the year might look like. And then we've executed really well to do better than that. And I think, you know, we expect to be able to continue to do that.

Okay. And then maybe just a follow up to Mig's question on welding. Are you anticipating that the organic growth would hit at or near the top end of the three to six percent range in the second half? And if so, you know, is that China continuing at that strong double digit pace? Is it oil improving? How are you thinking about that?

Yeah, so, you know, so I think for welding specifically, you know, we're, like we said, we're comfortable with the three to six percent for the year. We have a challenging comp here again in Q2. It gets a little easier in Q4. But beyond that, I can't really give you quarterly numbers for the welding business in the second half.

Cheryl, I see we're near the end of the hour. How about we take one more question and then the call?

Thank you very much. Our final question will be from Nicole de Blayce from Deutsche Bank. Your line is open.

Yeah, thanks. I appreciate you guys squeezing me in here. Just one question on March. Is there any possibility that March is benefiting from the shift of Easter from March to April this year? And I guess maybe a way to talk about that is has the strength you've seen in March continued into the early weeks of April?

Yeah, I mean, I don't have a really good answer to your question other than, you know, we saw sequentially better sales trends in February and in March than what we see historically. And April, everything appears to be on track as we sit here today.

Okay, got it. Thanks. And then on the price cost impact, if we kind of think about how costs are expected to wash through the year, if we assume that there's no major change in input costs from this point, kind of like flatline them at spot rates, is it possible that price cost turns into a tailwind for you guys by the back half?

Yes, that is a possibility. I had to say a little bit, Nicole, because things are pretty dynamic, right, still. And so, you know, on the cost side, there's still the tariff dynamic, who knows? But if you lock the cost,

it might be where they are now. But to

answer your question, you know, based on cost, where they are today and what prices mathematically, it should turn positive in the back half of the year from a margin standpoint.

Okay, so with that, we'll end the call on the hour. I know you guys have a busy day today, and I'm happy to take any follow-up questions afterwards. Thanks for joining us.

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