Illinois Tool Works Inc.

Good morning. My name is Brent 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, again, press star 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. Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Thank you, Brett. Good morning, and welcome to ITW's fourth quarter 2021 conference call. With me today are Chairman and CEO Scott Santee and Senior Vice President and CFO Michael Larson. During today's call, we will discuss ITW's fourth quarter and full year 2021 financial results and provide guidance for full year 2022. Slide number two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2020 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 Chairman and CEO Scott Santee.

Thanks, Karen, and good morning, everyone. In Q4, the ITW team delivered another quarter of excellent operational execution and strong financial performance. Six of our seven segments combined delivered 12% organic growth while our auto OEM segment continued to be impacted by near-term limitations on auto production due to component supply shortages, and as a result was down 16% in the quarter. At the enterprise level, we delivered organic growth of 5%, GAAP EBS of $1.93, operating margin of 22.7%, and free cash flow of $695 million, or 114% of net income. Throughout the entirety of 2021, our teams around the world did an exceptional job of delivering for our customers, while responding quickly and decisively to rapidly rising input costs and aggressively executing our win-the-recovery strategy to accelerate profitable market penetration and organic growth across our portfolio. As a result, for the full year, we generated organic growth of 12%, with each of our seven segments delivering organic growth ranging from 6% to 18%. And despite a seemingly constant barrage of input cost increases, we expanded operating margin by 120 basis points to 24.1%, with another 100 basis point contribution from enterprise initiatives. GAAP BPS was an all-time record at $8.51, an increase of 28% versus the prior year. And in 2021, we also raised our dividend by 7%. returned $2.5 billion to our shareholders in the form of dividends and share repurchases, and closed on a very high-quality acquisition in the MTS test and simulation business. Most importantly, we delivered these results while continuing to drive meaningful progress on our path to ITW's full potential through the execution of our long-term enterprise strategy. As you may recall, early in the pandemic, we made the decision to remain fully invested in our people and in our long-term strategy. The people that we retained and the marketing, innovation, and capacity investments that we continued to fund as a result of that decision are fueling the results that ITW is delivering today and have the company very well positioned to continue to accelerate organic growth, add high-quality bolt-on acquisitions, and sustain our best-in-class margins and returns in 2022 and beyond. I want to close by thanking all of our ITW colleagues around the world for their exceptional efforts and dedication. Their performance throughout 2021 provides another proof point that ITW is a company that has the enduring competitive advantages, the agility, and the resilience necessary to deliver top-tier performance in any environment. Now I'll turn the call over to Michael, who will provide more detail on our Q4 and full-year 2021 performance, as well as our 2022 guidance. Michael?

Thank you, Scott, and good morning, everyone. The strong growth momentum that we experienced in the third quarter continued into the fourth quarter as revenue grew 5.9% year-over-year to $3.7 billion, with organic growth of 5.3%. EMTS acquisition added 1.3%, and foreign currency translation impact reduced revenue by 0.7%. Sequentially, organic revenue accelerated by 6% from Q3 into Q4 on a sales-per-day basis, as compared to our historical sequential of plus 2%. By geography, North America grew 9%, and international was up 1%. Europe declined 2%, while Asia Pacific was up 7%, with China up 2%. Gap EPS of $1.93 included 2 cents of headwind from the MTS acquisition and related transaction costs. Operating margin was 22.7%, 23.1%, excluding MTS. As expected in the fourth quarter, we experienced price-cost margin headwinds of 200 basis points, the same as in the third quarter. Our businesses continued to respond appropriately and decisively to rising raw material costs, and in the fourth quarter and the full year, we were positive on a dollar-for-dollar basis. Overall for Q4, excellent operational execution across the board and strong financial performance in what remains a pretty uncertain and volatile environment. Okay, let's go to slide four for segment results, starting with automotive OEM. As expected, organic revenue was down 16%, with North America down 12%, Europe down 29%, and China down 3%. Despite these near-term pressures on the top line, the operating margin was resilient and remained solidly in the mid-teens. While supply chain challenges continue to persist for the industry in the near term, we are confident that the inevitable recovery of the auto market will be a major contributor to organic growth for ITW over an extended period of time as these issues ultimately get resolved. Food equipment led the way this quarter with the highest organic growth rate inside the company at 21%. North America was up 22% with equipment up 26% and service up 15%. Institutional growth of 28% was particularly strong in education and restaurants were up around 50%. International growth was strong and on par with North America at 20%, mostly driven by Europe up 23% with Asia Pacific up 9%. Both equipment and service grew 20%. Turn to slide five for test and measurement and electronics. Organic growth was 11%, with electronics up 4%, and test and measurement up 17%, driven by continued strong demand for semiconductors and capital equipment, as evidenced by our organic growth rate of 17% in our Instron business. As Scott said, in December, we closed on the MTS acquisition, which we're excited about, as it's a great strategic fit for ITW and highly complementary to our Instron business. We acquired Instron in 2006, and today it is a business growing consistently at 6% to 7% organically with operating margins well above the company average. We're confident that MTS has the potential to reach similar levels of performance over the next five to seven years through the application of the ITW business model. Moving to slide six. Welding delivered broad-based organic revenue growth of 15% with 30% operating margin in Q4. Equipment revenue grew 14%, and consumables were up 16%. Industrial revenue grew 18%, and the commercial business grew 8%. North America was up 15%, and international growth was 14%, driven by 18% growth in oil and gas. Polymers and fluids organic growth was 3%, with 8% growth in polymers, with continued strength in MROs. and heavy industry applications. Fluids was down 5% against the tough comp of plus 16% last year when demand for industrial hygiene products surged. Automotive aftermarket grew 4% with continued strength in retail. Onto slide seven. Construction organic revenue was up 12% as North America grew 22% with residential renovation up 23% driven by continued strength in the home center channel. Commercial construction, which is about 20% of our business, was up 21%. Europe grew 2%, and Australia and New Zealand was up 10%. Specialty organic growth was strong at 7%, with North America up 10% and international up 2%. With that, let's go to slide 8 for a summary of 2021. Operationally, the teams around the world continue to execute with discipline, in a challenging environment as they sustained world-class customer service levels, implemented timely price adjustments in response to rapidly rising raw material costs, and executed on our wind and recovery initiatives to accelerate organic growth across the portfolio. As a result, revenue grew 15% to $14.5 billion, with broad-based organic growth of 12%, 14%, if you exclude auto OEM, where growth was obviously very constrained due to component shortages at our customers. Operating income increased 21%, and operating margin was 24.1%. Incremental margin was 32%, which is below our typical 35% to 40% range due to price cost. Excluding the impact of price cost, incremental margin was 40%. GAAP EPS increased 28% and after-tax RIC improved by more than 300 basis points to 29.5%. Free cash flow was $2.3 billion with a conversion rate of 84% on net income, which is below our 100% plus long-term target for free cash flow due to higher working capital investments to support the company's 15% revenue growth and the strategic decision that we have made to increase inventory levels and select key raw materials, components, and finished goods to help mitigate supply chain risk and sustain service levels to our key customers. Moving to slide nine for our full year 2022 guidance. So we're headed into 2022 with strong momentum, and the company is in a very good position to deliver another year of strong financial performance with organic growth of 6% to 9% and 10% to 15% earnings growth. Per our usual process, our organic growth guidance is established by projecting current levels of demand into the future and adjusting them for typical seasonality. As you can see by segment on the next page, every segment is positioned to deliver solid organic growth in 2022, with organic growth of 6% to 9% at the enterprise level. Our total revenue growth projection of 7.5% to 10.5% includes a 3% contribution from MTS, partially offset by 1.5% of foreign currency headwind at today's exchange rates. Specific to MTS, guidance includes full-year revenue of $4 to $450 million, the expectation that margins are dilutive at the enterprise level by approximately 50 basis points, and finally, consistent with what we've said before, EPS neutral. Operating margin excluding MTS is forecast to expand by about 100 basis points to 24.5% to 25.5% as enterprise initiatives contribute approximately 100 basis points. We expect price-cost headwind of about 50 basis points. Incremental margin is expected to be about 30% including MTS, and our core incremental margin excluding MTS is in our typical 35% to 40% range. We expect gap EPS in the range of $8.90 to $9.30, which is up 10% to 15%, excluding one-time tax items from last year. The tax rate for 2022 is expected to be 23% to 24% as compared to 19% in 2021. We are forecasting solid free cash flow with a conversion rate of 90% to 100% of net income With further working capital investments to support the company's growth, mitigate supply chain risk, and sustain service levels to our key customers as needed. Our capital allocation plans for 2022 are consistent with our longstanding disciplined capital allocation framework. Priority number one remains internal investments to support our organic growth efforts and sustain our highly profitable core businesses. Second, an attractive dividend that grows in line with earnings over time. remains a critical component of ITW's total shareholder return model. Third, selective high-quality acquisitions, such as MTS, that enhance ITW's long-term profitable growth potential have significant margin improvement potential from the application of our proprietary 80-20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' capital. Lastly, we allocate surplus capital to an active share repurchase program, and we expect to buy back $1.5 billion of our own shares in 2022. In addition, we have reactivated our previously announced divestiture plans, and in 2022, we will reinitiate divestiture processes for five businesses with combined annual revenues of approximately $500 million. While these businesses are performing quite well coming out of the pandemic, they operate in markets where growth expectations are not aligned with ITW's long-term organic growth goals. When these divestitures are completed over the next 12 to 18 months, we expect approximately 50 basis points of lift to ITW's organic growth rate and operating margins. Given the timing uncertainties associated with these divestiture transactions, 2022 guidance assumes we own them for the full year. Finally, last slide is slide 10 with the organic growth projections by segment. You can see that based on current run rates, we're expecting some solid organic growth rates in every one of our seven segments with organic growth of 6% to 9% at the enterprise level. For automotive OEM, our guidance of 6% to 10% is based on a risk-adjusted forecast of automotive production in the mid-single digits plus our typical penetration gains of 2% to 3%. With that, Karen, I'll turn it back to you.

Okay, thanks, Michael. Brent, let's open up the line for questions.

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. We'll pause for a moment to compile a Q&A roster. Your first question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.

Good morning, everyone. Good morning, Andy. So, Michael, I know you mentioned that you're predicting to run rate growth as you usually do, but it looks like polymers and fluids is the only segment where you actually forecast the business to re-accelerate in 22 versus Q4 levels. So maybe you could talk about what you're seeing there. And then it seems like your CapEx businesses continue to be quite strong. Are you seeing customers step up CapEx in 22? And, you know, how does that factor into the forecast, if at all?

Yeah, I think... Polymers and fluids, it's really the growth rate for 2022 is established the same way as the other segments, which is based on current levels of demand inside of the segment today projected into 2022 and adjusted for typical seasonality. So that's where you get to that 5% to 9% range for polymers and fluids. On the CapEx question, I'd say we definitely – um continue to see very strong demand in our capital equipment businesses you know we talked about an acceleration from q3 into q4 uh with revenue per day up six percent when normally we're only up you know two percent and we expect really you know uh that strong demand to continue into 2022. um again we're not assuming an acceleration in 2022 it's based on current run rates but based on the trends we're seeing it's it's possible that You know, we fully expect that demand will continue at these levels. We've seen nothing in Q4 to suggest that demand is slowing down in any one of our segments.

Appreciate that. And then you delivered mid-teens margins in autumn Q4, which – I think it was in line with expectations. But as you know, steel prices have begun to come down. So can you give us some more color on how to think about margin in auto in 2022? And could you talk about your ability? I think you talked last quarter about maybe being able to reprice some auto OEM contracts. So have you had any success in doing that?

Well, I think on auto margins, they've been remarkably resilient, considering that we've been down 15% to 20% in Q3 and Q4. And we're still in that mid to high teen level. Obviously, as auto production comes back, we're going to get positive volume leverage in the business. Price-cost remains a significant headwind, and it's not so much steel. It's really more on the resin side in the auto business, and we expect that those headwinds will continue in 2022 in the auto business. As we've talked about before, you know, getting price takes a little bit longer in this space, just given the contractual nature of the industry. And we are continuing to partner with our customers as we, you know, renew contracts and add new content to vehicles. And so I do think that longer term, you know, structurally auto margins will go back to levels they were at historically, which is in the, you know, low to mid-20s. When exactly that happens really depends on, you know, when volume comes back and when we get ahead of these price-cost headwinds that are pretty significant at this point.

Appreciate it, Michael.

Sure. Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open.

Yeah, thanks. Good morning, guys.

Good morning.

Maybe we could just start with thinking about the quarterly cadence of know revenue and margins i totally appreciate that you guys don't historically give you know specific quarterly eps guidance but if you could talk a little bit about maybe the price cost impact how things kind of look versus normal seasonality just because 2022 seems like it could be a bit of a strange year again yes you're right i think um it's likely to be another strange year we um if you look at it historically um our first half versus second half

in terms of the EPS that we generate for the full year. We are typically 49% in the first half and 51% in the second half. It would be good to be 49-59. Yeah, 49% would be good. We've not found a way to do that. So we're 49-51 historically. We think this year, based on current run rates and how we think price-cost might play out, we're more like a 47-53. So it's close. But the plans are a little more back-end loaded than typical. The one thing I'll just call out is if you look at Q1 specifically, in Q1 last year, there were no significant chip shortages in the automotive space. So auto was up 8% last year in Q1. We still expect the auto business to be down here in the first quarter of 2022. Not as much as in Q4, but still a down quarter in automotive. And so that's really what's driving, you know, this more back-end loaded plan that I talked about. I think I'll just add on price-cost. You know, we're continuing to work that. Our teams are doing a good job. It's going to take a little bit of time to catch up here, even though we are, you know, the lag that we historically have seen has become smaller as we've learned some things in the past and are doing a better job responding with timely and appropriate price adjustments as we deal with this really unprecedented raw material cost inflation. I might just add, we've also not really seen anything to suggest that those inflationary pressures are slowing down.

got it that's very clear and just a quick follow-up on the price cost situation is the expectation that we kind of enter 2022 with a similar headwind to what you experienced in the fourth quarter and then you exit with a price cost tailwind so um i think the expectation is that uh price cost will be margin dilutive 50 basis points uh for the year

And consistent with our past practice and all of 2021, the goal was to be EPS neutral or better. And I think slightly positive is where we ended up, as we said, in Q4. But to be honest with you, it's a really uncertain environment here. I mean, if there are further raw material cost increases, we are going to react to those raw material cost increases with further price, and that will put further pressure on the margins. So it's really difficult to, you know, predict where we'll end up for the year. In our guidance here in our model is 50 basis points of headwind.

I was going to say that 50 basis points include all existing and known price increases, but, you know, I think just to put a But if emphasis on your point, subsequent increases that we don't know about today that occur are going to certainly affect that level of margin dilution as we go through the year. Yeah.

There's no assumption here that things are getting better or worse. This is based on what we're seeing in our businesses today, based on incurred, you know, known and future cost and corresponding price increases. And it'll be, I think, again, in 2022, as you said, a strange year, a pretty dynamic year from that perspective, too.

Thank you. I'll pass it on.

Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Your line is open.

Thank you. Good morning, everyone. Morning. I wonder if you could just provide a little bit more color on, you know, what's going on at the customer level on supply chain and the nature of the question, Scott, in particular, going back to Q2, but also in Q3, I think, you know, had some issues of just being able to deliver to customers despite your own ability to, you know, to deliver. Was that an impact in Q4? And do you see that sort of situation continuing into the early part of this year?

You know, it's, you know, the way I would respond to that is I think those issues in terms of customer impacted demand, customer supply chain impacted demand are better known today. So in Q2, it was a sort of emerging situation. It was volatile. You know, I would say that the sort of order to shipment, the timing of all that has been adjusted around, you know, a more known set of issues at our customer. So it's less of a surprise. It's hard to say, you know, it had any incremental impact in Q4 because it was just basically embedded in our plan by that point, you know, in our run rates and in our plan. So I think it's I think the overall thing that I would say is we're not seeing any evidence that things are improving in any dramatic fashion from the standpoint of all the supply chain constraints. It's still, you know, there are issues all over the place. We are reacting to those internally very well. Our customers are still challenged. You know, automotive is just the most visible sort of representation of that. But these sorts of issues are applying to all customers of ours across all seven of our segments. But, you know, it's still, you know, given the growth rates, you know, the net of all of it is still, you know, very positive in terms of underlying demand. And, you know, if everybody had everything that, you know, access to every component and every bit of raw material that they might want right now, I couldn't even guess, you know, sort of the incremental delta on that, but it would be meaningful.

Could you provide us, you know, some context on what you're – you know, aggregate realized price was in 2021 and what's embedded in your guidance for 2022?

So, we provided kind of an estimate, and that's really what this is at best, is an estimate of the breakdown between price and volume for full year 2021. I think we said Price of 3% to 4% roughly for the full year on organic growth in that 8% range. That's what we talked about on the last call. That's where we ended up. You know, and while I fully appreciate the question, I'm not sure it can be really helpful in terms of the guidance here for 2022 because, as I said, you know, price versus volume, you know, these are estimates at best. And so, in our opinion, the performance metric that really matters most is organic growth, which, of course, includes both. price and volume. And, you know, we try to be very transparent in terms of providing fully organic growth guidance at the enterprise level for the segments. And we report actuals as we go through the year, both for the enterprise and for the segments. But that's really as much granularity as we can give you with a high degree of confidence.

Great. And maybe just one last one from me. I mean, the auto guide you gave is pretty clear, builds plus your normal content. So there's no kind of bullwhip effect in the channel. Like we heard at 3M, you know, there was a lot of disconnect between build rates and what was in the channel and, you know, some real disconnects between the two. But it sounds like from your vantage point and relative to your supply chain, everything is sort of evened out. Is that correct? Or there's maybe some noise first half versus second half?

I think that's a fair way to characterize it. And maybe just to be clear, if you look at kind of third-party leading industry, I hesitate to call them experts, but forecasts at least are suggesting, you know, builds for the year 2022 somewhere in that 9% to 10% range. What we have embedded in our guidance here is basically half of that. So we are somewhere in the mid-single digits is our base assumption for automotive bills. They are plus two to three percentage points of penetration gains, which are essentially locked in at this point. And so hopefully that's a fairly conservative assumption. It is also a little back-end loaded. So I think, like I said, we expect auto to be down. you know, at least in Q1 and then with gradual improvement from there as we go through the year. And hopefully these supply chain issues, you know, get resolved and automotive, like we said, will become a really meaningful contributor to the overall organic growth rate of the company once those bottlenecks get resolved. Thank you. Appreciate the call. Sure.

Sure.

Your next question comes from the line of Scott Davis with Mellius Research. Your line is open.

Good morning, Scott, Michael, and Karen.

Good morning.

Hey, Scott. I think a lot of the good questions have been asked. But can you tell us again, when you were talking about divestitures in your commentary, I kind of zoned out for a second.

We have that effect on people.

Yeah, I don't know what was going on, but can you remind us kind of the reality, kind of the size and timing of that? And then I'm just kind of curious, are there MTS-type acquisitions out there that you have in your sites that could offset some of that?

So just to kind of summarize on the divestitures real quick, so we've begun the previously announced divestiture plans. We've kind of reinitiated the process for five business units here. with combined annual revenues of about $500 million. And we expect the process could take anywhere between 12 to 18 months to get these completed. And of course, as you know, there's a fair bit of uncertainty around the timing of these. And so in our guidance today is embedded that we're, you know, that we own these businesses for all of 2022. And we've also not included any kind of one-time gains on sale that might flow through the the uh the the positive impact to the company obviously you know the one-time gains on sale is one thing but really the kind of the structural benefit is a approximately 50 basis points improvement in the overall organic growth rate of the company and 50 basis points of improvement in the overall operating margin of the company so that's kind of the addition by subtraction effect with the divestitures. And essentially, if you wanted to, you could say that we've added a really high-quality asset with MTS, and we're replacing, you know, these divestitures with a business that we know can deliver the type of performance that we've seen in our Instron business through the application of the business model. In terms of the pipeline of deals, I mean, I think we remain, you know, disciplined but also opportunistic and to the extent that other opportunities come along that have the same characteristics that we've talked about many times and we're going to certainly be leaning in on those. And, you know, when these things might come to fruition, that's always a little bit of there's some uncertainty around that, just like there's some uncertainty around the timing of these divestitures. Okay.

Thank you for that. I'll pass it on.

Sure. Your next question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Hi, this is Chigusa Kotoko on for Jamie. We were wondering if there's any way you could quantify the market share gains that you've been talking about and how sustainable they are. And then in terms of price cost, if you could give us any color on exception for 1H versus 2H and if you're hedged at all. Thank you.

Okay. So let me take a shot at this. I mean, I think on the market share gains, I mean, I think we've At the core of these win-the-recovery initiatives that we've talked a lot about was really the goal of accelerating our organic growth efforts and gaining significant market shares at a time when competitors, in many cases, were not able to stay invested in their people, in their new products, in their capacity to expansion plans, not able to maintain service levels at the same level as ITW. And so, we are hearing across the company from the, you know, many, many of our divisions, lots of anecdotal evidence that we are gaining market share. It is very, it's difficult to quantify. You know, it's an estimate at best, and it's not one that we're confident reporting on externally, but I think there's a lot of evidence inside the company that we are gaining share. I'll just point to our 12% organic revenue growth last year with the challenges in auto, and then 6% to 9% organic this year. And maybe when we get to a point where the market growth rates stabilize. Maybe we'll be able to talk a little bit more about what our above-market organic growth rates are, but we are highly confident that we're making good progress on our organic growth efforts. On your first half versus second half on price-cost, you know, I think we just talked about this. I mean, it remains a pretty uncertain environment. If things stay the way they are, price-cost will be a headwind in the first half, and it'll be maybe neutral in the second half. And for the full year, we end up somewhere around 50 basis points of margin dilution impact. And then to answer your other question, we do not hedge. So the costs that are flowing through our P&L today are essentially today's costs. And there's a whole host of reasons why we think that's a much better way of dealing with these costs real time. may be a little bit different than what you're seeing at other companies. But that's the quick answer on your hedging question.

Your next question comes from the line of Tammy Zakaria with J.P. Morgan. Your line is open.

Hello, everyone. Good morning. Thank you for taking my questions. So, my first question is, your inventory saw a notable increase in the fourth quarter. How much of that is related to the MTS acquisition? And how should we think about its impact on margin and cost absorption as we look into the first quarter and the rest of the year?

So I think of the inventory increase this year, which, like I said, that was a strategic decision to really secure supply for our customers and mitigate any risk around supply chain. A little over $100 million came from MTS here in the month of December as we closed on the transaction. The specific impact to MTS from MTS on margins this year's 50 basis points. And I don't know if that was exactly your question or you had something else in mind.

I think that that's helpful. I do have another follow-up question on MTS actually. Sure. So when do you expect MTS to be margin accretive?

Well, I'd say we're not in a rush. You know, we're going to be very deliberate and thoughtful in terms of how we implement the business model like we always do. I might just add we're really excited about MTS because the business model has never been more powerful than it is today, and so we're excited about what it can do. I think what we said was it'll take about five to seven years to get to ITW caliber margins and organic growth rates that are in line with what we're seeing in the Instron business.

Got it. Understood. Thank you so much.

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

Hey, good morning. This is Trish Gorman on for Julian. So just first question around, it seems like the 22 guide kind of implies around 30% incrementals. You guys have talked a lot to kind of the MTS impact in test and measurement and some price cost impact in the first half in auto. Is there anything else to call out in the other segments regarding margin expansion kind of throughout 22 that you could help us with?

Well, I'll just say, you know, 30% incrementals, that is including the impact from MTS. Actually, if you adjust for that, for 2022 are in line with our historical kind of 35% to 40% range. And I think as you look across the segments, there's really nothing unusual going on in terms of margins. I think consistent with kind of the bottoms-up planning process that we do at ITW, the segments have all told us that they expect to do a little bit better in 2022 than they did in 2021. despite the fact that they are all operating at best-in-class levels relative to, you know, the markets and the competitors in those markets. So nothing unusual. We expect, like I said, overall 100 basis points of margin improvement, which is what we typically do. The enterprise initiatives are great to see. You know, I think in year 10, another strong contribution from 8020 and strategic sourcing, that's pretty broad-based across all. seven segments, so nothing unusual. We really expect, based on what they've told us, continued progress, certainly on organic growth, as you can see on page 10 in the slide deck, and also on operating margins.

Great. Thank you. That's really helpful. And then just maybe one more follow-up on capital deployment and the portfolio, definitely more active kind of this year and guiding for next year. Should we assume, though, in terms of when we think about priorities, just given the buyback guide for $1.5 billion, Can you just talk about how you prioritize M&A versus share repurchases kind of over the next 12 months, probably two months?

Well, I think we're really fortunate that we are in a position to do both. And so, you know, these are not mutually exclusive. You know, I walked through the four priorities. You know, the $1.5 billion, I mean, something really unusual would have to happen for us to not complete that program. It's really the allocation of our surplus capital. and there's plenty of room for more MTS-type acquisitions to the extent that they become available.

Great. Thanks so much.

Great. You're welcome.

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

Hi. Good morning, everyone. Good morning. I wanted to start just on supply chain. I think it's been clear that it's not getting better, but I'm curious about not getting worse. And so the degree to which over the past three or four months, your confidence level and some stabilization and how that allows you to operate a little bit better. And then just in general, if you do have any better visibility into when things start to improve a little bit. I think, you know, some of the semiconductor comments and improved timing of shipments may be, but anything you can touch on on visibility to improvement.

You know, I think from the standpoint of the tactical issues now, you know, I would certainly say that the environment is pretty stable, but that just means that we've gotten used to this environment, you know, that there is – There are new issues popping up everywhere. I think from the standpoint of the tactics that our business has employed to continue to serve our customers at a high level in this environment, we have certainly learned some things. Michael talked about our willingness to use our balance sheet to support inventory investments. We have talked about the fact that our localized supply chains have really come up big for us here. our long-term relationships with our key suppliers, all of those things have certainly helped us operate in this environment. We've gotten, I'm not going to say comfortable, but we've gotten used to operating in this environment. But I don't think there's any sort of the set of issues that we're confronting on a daily and weekly basis are shrinking dramatically at this point. In terms of forward visibility, I think our mode is not to guess and not to look ahead. I think we are a read and react company. We are well positioned to do that. You can read the same sort of industry-level stuff that we read, and it's interesting. But until it actually shows up, we're not counting on it, and we'll continue to do that. to um you know read and react to the conditions on the ground as we always do um that being said it obviously at some point is going to start to improve in a material way and at that point things certainly get easier we get to turn even more of our attention to leveraging these strong market positions into consistent above market growth that that's helpful uh and then just a second one when you talk about kind of the focus on on when the recovery

I imagine that none of those folks who have lost share are all that happy about it, and at some point your focus becomes kind of sustain the victory. But what are the tools that you have in place? What's your confidence level that the share gains through these disruptions are sticky gains?

Well, our focus in these gains is really with our biggest and best customers that were our biggest and best customers before COVID. I think, you know, in all of these cases, what this pandemic provides us, and this is true across the portfolio, is an opportunity to demonstrate how ITW is different. You know, that we were there for our key customers in a time of significant stress and challenge. And I think there's, you know, we are not looking for opportunistic sort of transient opportunities in this. We are looking for opportunities where we can truly leverage the what is an advantage position and an advantage operating model in ways that ultimately prove to our biggest and best customers, as I said, what the ITW difference is. And I expect that, you know, our ability to perform the way that we have, and there's, you know, as Michael said, there's plenty of sort of anecdotal evidence of this. You know, we are winning business today because of our ability to supply and not just supply, but supply the usual ITW high quality products. So, You know, I think, as we said at the outset, this is a real opportunity for ITW to demonstrate, you know, some pretty fundamental core differences in our capabilities in the markets that we serve and our people and our business model, in my view, have absolutely stepped up to the challenge.

And just to confirm, I understand it correctly, the bigger portion of kind of the share wins would be

better penetration at existing key customers not so much about new customers yeah that's that's the first priority in this environment absolutely taking care of our existing key customers got it thank you your next question comes from the line of mig dobre with baird your line is open all right thank you um thank you for taking the question good morning everyone um

wanted to go back to the discussion on pricing um and and i certainly appreciate that there's been quite a bit of pricing that he has to put through in 21 and it looks like 22 is not going to be much different um i'm curious your view as to what happens when raw material uh inflationary pressures abate uh how how are your contracts structured or your conversations with your customers Do you think these pricing increases actually stick? And are there any differences, various segments, one versus the other?

Well, I think, you know, given the differentiated nature of our products and service offerings across the company, I think, first of all, we're very pleased that we've been able to make the appropriate price adjustments to offset these really unprecedented raw material cost increases. And I think if and when those costs start to, you know, stabilize or come back down, I mean, there's certainly going to be individual discussions with customers, but, you know, we don't expect that we'll have to adjust pricing in a meaningful way, certainly not in a way that you'll see in the financials that we report.

Okay. Understood. And then my follow up is more of an operating question. You haven't really talked much about the Omicron spike and what that might have done to your own internal operations. I'm presuming there was some absenteeism, various manufacturing sites related to this. And I guess my question is this, now that we're maybe two years into this pandemic, How have you changed the way you do business internally and the way you operate from a just pure output and resilience standpoint, with the question really being if we are seeing yet another wave, say, for instance, in three, four months, how are you prepared to handle that relative to, frankly, what you've had to go through over the past couple of years? Thank you.

Well, all I can do is point to the way we've executed through the various waves to this point. I think there is – have we had to adjust to the challenges of the pandemic from a safety standpoint, let alone a production standpoint? Absolutely. That's been going on now for – we're coming up on two years. So I don't – I think the way the company has responded – We talk a lot about resilience, and that's certainly part of it, but we are a manufacturer. We've got to have in our people our key to our ability to execute, and so we have done everything within our power to keep our people safe, to keep our production lines running, to be able to serve our customers. Have we learned things in the process? Of course, like a lot of companies have. This is not a normal environment, as you all know, but ultimately, you know, I'm very comfortable that we are negotiating our way through these challenges in, you know, a really strong manner, and we'll continue to do so. We'll deal with whatever comes our way.

Great.

Thank you. Your final question comes from the line of Nigel Cole with Wolf Research. Your line is open.

Thank you. Good morning. I was on the first of the call. I apologize if I'm going over, you know, stuff that you've already covered. But just curious, really, you know, in terms of the – this is a very little of a question, but the corporate expense number came in. a little bit heavier than what we had modeled. And I know that you've been pushing more centralized costs over the last couple of years. Just wondering what drove that and what we should be assuming for 2022.

So I'm assuming you're talking about the unallocated number that's a little bit higher in Q4. That's right. Yeah, at 56 million. I think Q3 was 43 million. And the difference is the MTS transaction costs. So kind of a one-time difference. And I think for modeling purposes for next year, I would assume somewhere in that $30 million to $40 million range.

Okay, so the one-time transaction cost is coming through there. Okay, that's very clear. And then, again, sorry if you've covered this, but the free cash conversion, 1,900%. I'm assuming that's working capital investments, as you would cover, but anything else that would be helpful?

No, it's just the investment in inventory. I mean, I think it's like you said. Higher receivables. Well, obviously higher receivables with higher 15% revenue growth and then the inventory to support our customers in a challenging supply chain environment. So we think that's a pretty smart use of our balance sheet. So that's why. Got it. Thanks for the help. Sure.

There are no further questions. Thank you for participating in today's conference call.