Illinois Tool Works Inc.

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. For those participating in the Q&A, you'll have an opportunity to ask one question and, if needed, one follow-up question. Thank you. Karen Fletcher, Vice President of Investor Relations. You may begin your conference.

Okay. Thanks, Julianne. Good morning, everyone, and welcome to ITW's first quarter 2020 conference call. I'm joined by our Chairman and CEO, Scott Santee, Vice Chairman Chris Overlehe, and Senior Vice President and CFO Michael Larson. During today's call, we will discuss ITW's first quarter 2020 financial results, as well as the impact of the global pandemic on our business and our strategy for managing through it. Slide two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2019 Form 10-K, the Form 8-K filed today, and the Form 10-Q to be filed on May 7th for more detail about important risks that could cause actual results to differ materially from our expectations. including the potential effects of the COVID-19 pandemic on our business. 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. Please turn to slide three, and it's now my pleasure to turn the call over to our Chairman and CEO, Scott Sancy.

Thank you, Karen, and good morning, everyone. Stating the obvious. a lot has changed relative to the environment we operated in for most of the first quarter. As a result, our focus this morning will be on the company's response to the COVID-19 pandemic and, more specifically, our strategy to leverage ITW's considerable strengths in executing on the challenges and opportunities ahead. I will provide some brief commentary on our Q1 performance, and then we will transition to our pandemic strategy. We have included much of our normal quarterly performance detail in the appendix, and you are, of course, welcome to ask questions regarding our Q1 results during the Q&A session at the conclusion of our presentation. As Karen noted, I have asked our Vice Chairman, Chris O'Herlihy, to join Michael and me on the call this morning, as I thought that it would be helpful for you to hear perspectives from all three of us on how we are managing through the near-term challenges of the containment period we're currently in and on the actions we are taking now and will take over the coming weeks and months to ensure that the company is positioned to participate fully in the recovery. Before we jump in, I want to offer our heartfelt thanks to all of our ITW colleagues around the world. We talk often about the fact that our decentralized entrepreneurial culture is a key element of ITW's secret sauce. It is core to who we are as a company and it is never more valuable than during times of significant, and in this case, rapid change. The proactive teamwork, ingenuity, and selflessness of our people in quickly adapting to rapidly changing conditions and tackling new challenges that seemingly arise daily at the moment is ICW at its finest. We thank all of our colleagues for the incredible level of care and commitment they are bringing to keeping their coworkers safe while continuing to serve our customers with excellence. The fact that the ITW team has responded exactly as we expected they would doesn't make it any less extraordinary. Now on to first quarter results. Total revenue declined 9% year on year, with organic revenue down 6.6%, currency a 1.5% headwind, a negative 1% impact from divestitures, and 40 basis points of PLS. The majority of the organic revenue decline occurred in the last two weeks of March, where we saw organic revenue down more than 20%. By geography, North America was down 5% and Europe was down 7%. China was down 24% for the quarter, but appears to have bottomed in February and was flat year on year in April, an encouraging sign. In the face of a challenging demand environment, we continued to execute well on the elements within our control. Despite a 9% decline in revenues, operating margin was flat at 23.6%. Five of our seven segments expanded margins in the quarter due largely to benefits from enterprise initiatives, which contributed 120 basis points to operating margin at the enterprise level. After-tax return on invested capital was 27% and free cash flow was 554 million with a conversion rate of 98% of net income. Lastly, as noted in our press release this morning, given the uncertainties regarding the impact and duration of the COVID-19 pandemic, we are suspending our previously announced guidance for full year 2020. We will resume guidance once end markets stabilize and the recovery path becomes more clear. Now let's shift gears and talk about how we will manage ITW through the global pandemic. Please turn to slide four. Despite the unusual and in some cases unprecedented challenges of the moment, we continue to execute at a high level and with our usual degree of focus and discipline across the company. As a result of all the work we have done over the last seven years in executing our enterprise strategy and the progress we have made on the path to our full potential performance, ITW is today in a position of significant strength in dealing with the effects of the global pandemic. Today's ITW is centered on our powerful and proprietary business model, and our people are better trained and more skilled at executing it than ever before in the history of our company. ITW's 80-20 front-to-back methodology and the laser-like focus that it drives on the relative handful of critical performance difference-makers and every one of our businesses has served the company extremely well in times of both opportunity and challenge for a long time now. I have no doubt that this unique ITW skill will be a significant asset to us as we work our way through the COVID-19 pandemic and its aftermath. In addition, as I mentioned earlier, we are very fortunate to have a decentralized operating structure and an entrepreneurial culture that has been developed nurtured and protected over many years. Our people think and act like owners. They are accountable, and they deliver. They are deeply trained in our business model, our strategy, and our values, and I assure you that even in unprecedented times such as these, none of them are waiting around to be told what to do. In addition, in today's ITW, we have worked hard in shaping our portfolio and driving consistent high-quality execution across every business in it, both to position the company to deliver consistent upper-tier long-term earnings growth when global conditions are favorable, and to build in a margin cushion and level of diversification that makes us highly resilient during those periods when they are not. And it follows from there that the robust free cash flow we generate through our strong margin profile and the unique attributes of our business model combined with our very disciplined capital allocation strategy, gives us an extremely strong balance sheet and Tier 1 credit ratings. So with these elements as our foundation, our strategy for managing through the pandemic and its aftermath is to focus on the following four priorities. First, to protect the health and support the well-being of our ITW colleagues. Second, to continue to serve our customers with excellence. Third, to maintain financial strength, liquidity, and strategic optionality. And fourth, to leverage ITW's strengths to position the company to fully participate in the recovery. Chris will give you some additional color on priorities one and two. Michael will cover priority three, and I will come back and cover priority four. And then we'll open it up for your questions. Chris, good morning. Over to you.