Michael M. Larsen
Senior Vice President & Chief Financial Officer at Illinois Tool Works
Thank you Chris and good morning everyone. In Q4, the ITW team delivered a solid finish operationally and financially to a record year. Starting with the top line, organic growth was down 0.5% which included a 0.9% revenue reduction from strategic product line simplification. Foreign currency translation reduced revenue by 1% and two acquisitions earlier in the year added 0.2%. Total revenues was down 1.3%. Sequentially, revenue growth of plus 3.7% from Q3 to Q4 compared favorably to our historical sequential growth of plus 1.5% on a geographic basis. Organic revenue declined about 1.5% in North America, Europe was down 3% and Asia Pacific was up 5% with China up 9%. On the bottom line, the ITW team continued to focus and execute well on the things within our control as evidenced by operating margin of 26.2%, an increase of 140 basis points year over year driven by enterprise initiatives which contributed to 120 basis points. Six of our seven segments expanded operating margin driven primarily by strong execution on enterprise initiatives that contributed between 70 and 190 basis points to each segment. In summary for Q4 we outperformed our underlying end markets with positive organic growth. XPLs achieved record margin performance with a strong contribution from enterprise initiatives and generated record free cash flow and record GAAP EPS of $2.54. Please turn to slide 4. Operating cash flow was $1.1 billion and free cash flow increased 10% to a quarterly record of $1 billion with a conversion to net income of 133%. Strong working capital management including inventory was a meaningful driver of the strong cash performance in Q4. We with further targeted inventory reductions this year as we project free cash flow conversion of greater than 100% for 2025. Now let's move to the segment results starting with automotive OEM where organic revenue declined 2% in the fourth quarter against a tough comparison of plus 8% in Q4.23. On a regional basis, North America was down 5% while Europe was down 10% against a tough comparison of plus 11%. China grew 8% despite a comparison of plus 31% as our China team continues to drive customer back innovation and gain market share, including in the rapidly growing EV market for the full year. Compared to industry build data, the segment outperformed relevant builds by our typical 2 to 300 basis points and we expect similar outperformance in 2025 as we project that automotive OEM will grow 0 to 2% 1 to 3% excluding PLS with auto bills in relevant markets that are projected to be down in the low single digits. On the bottom line for the full year, Automotive OEM improved margins by 230 basis points to 19.6% and the segment remains firmly on track to achieve its goal of low to mid 20s operating margin over the next couple years. Turn to Slide 5 Food equipment delivered organic growth of almost 3.5% as equipment grew 3% and service grew 5% as the growth investments made in the first half of 2024 to expand capacity and support large. Long term above market growth in this very attractive service business are paying off by region. North America grew 2% with institutional end markets up in the high single digits and restaurants essentially flat. Our international business was strong with growth of 5% with Europe up 4% and Asia Pacific was up 11% due to strong equipment sales, test and measurement and electronics Organic revenue turned positive for the first time in five quarters up 2% with test and measurement essentially flat as electronics grew 6%, the highest growth rate since the fourth quarter of 2022 as semiconductor and electronics activity started to pick up. As we have talked about before, because of our focused growth investments including customer backed innovation through the cycle, we remain very well positioned to capitalize on a long list of attractive growth opportunities as the semi electronics recovery begins to take shape. Operating margins expanded by 170 basis points in the quarter to 27%. Moving on to slide 6. Organic growth in welding improved as organic revenue was essentially flat after five subsequent quarters of year over year declines. Equipment was flat and consumables were down 1% while North America was down 2%. International grew 9% with strong growth in China as a result of some very targeted customer backed innovation efforts. Throughout 2024, the welding team continued to benefit from a strong pipeline of new products which contributed more than 3% to growth in our view. This is a great example of how our strategic CBI efforts and the adoption of our next phase CBI framework gives our divisions the ability to gain share and outgrow end markets on a consistent basis. Operating margin of 31.2% was 160 basis point improvement over the prior year. Polymers and fluids organic revenue grew 1% with Palmers up 5% and fluids up 1%. Automotive aftermarket, which tends to be more correlated to consumer discretionary spending was down 1% which is about 2 points ahead of end market growth with relevant point of sale data indicating a market that was down 3% on a geographic basis. North America declined 4% and international grew 8% with Europe again showing solid demand. Turning to slide 7 in our most interest rate sensitive segment, Construction products organic growth was down 4% in a tough market as new housing starts were down about 7% globally in Q4. In North America, construction products was down 4%, approximately 3 points ahead of a market that was down about 7% with residential renovation down 3%. And commercial construction down 9%. Europe was down 3% and Australia and New Zealand was down 8%. The 2025 outlook for the construction market globally remains uncertain, with new housing starts in the US expected to be down in the low to mid single digits. With that as backdrop, we expect construction products to be about flat 25 as we're well positioned to outperform end markets with the launch of new products and market share gains. Operating margin of 28% improved 110 basis points with another significant contribution from strong execution on enterprise initiatives. As expected, specialty products organic revenue was down 4% with a planned 5% reduction in revenue from strategic PLS as the team continued to take the necessary actions to strategically reposition the segment for consistent above market growth. While the work is not complete, the progress so far has been encouraging with 2024 organic growth of more than 3% and margin improvement of 380 basis points, which gives you a sense of the strategic and financial value we derive from PLS. Operating margin was a record 28.4% for the quarter. Moving to Slide 8 and full year 2024 results as you've seen from ITW all year, our colleagues around the world continue to execute at a high level for our customers and for the enterprise. As a result of their efforts, ITW consistently outperformed end markets and delivered record results on key performance metrics such as earnings, operating margin and after tax return on Capital. Throughout 2024, we remain focused on maximizing our growth and performance over the long term as we invested in projects that accelerate above market organic growth and sustain productivity in our highly profitable core businesses. We raised our dividend for the 61st consecutive year by 7% as we returned more than 3.2 billion to shareholders in the form of dividends and share repurchases. Moving to Slide 9 for an update on one of our key strategic prior priorities. As we've talked about before, customer backed innovation is the most impactful driver of our ability to consistently grow revenue above market. The CBI revenue of today fuels our ability to drive market penetration and share gains in the future, and over the past few years we've expanded our CBI revenue yield from less than a percent pre Covid to 2% in 2024. We're well positioned for further improvement in 2025 based on the recent launch of our next phase CBI framework. We can feel the energy and excitement from our divisional teams as they implement the framework in their divisions and as Chris said, we're particularly pleased with the 18% increase in patent filings in2024 because every one of those patents is tied to a known customer. A pain point and represents a high quality growth opportunity for ITW in 2025. We will continue to work on fully adopting our new CBI framework in each one of our divisions consistent with the pace required to deliver CBI yield of 3% plus by 2030. Let's move to slide 10 and our guidance for full year 2025. As you can see, ITW is once again well positioned to execute at a high level and outperform our end markets in any scenario as we aim to improve margins by approximately 100 basis points with another strong contribution from enterprise initiatives per our usual process. Our organic growth projection of 0 to 2% or 1 to 3% excluding strategic PLs of a percentage point is based on current levels of demand adjusted for typical seasonality. Foreign currency translation at current rates represents a 3% top line headwind. In terms of profitability. Operating margin is expected to improve by about 100 basis points to a range of 26.5 to 27.5% which includes approximately 100 basis points contribution from projects related to enterprise initiatives that are independent of volume and range from 60 to 170 basis points in each segment. We are projecting GAAP EPS in the range of 1015-1055 which includes a longer list than usual of non operational headwinds including $0.30 of unfavorable foreign currency translation impact and 15 to $0.20 from increased restructuring expenses tied to ongoing 8020 front to back projects and higher income tax expense. With an expected tax rate in the range of 24 to 24.5% excluding the 30 cents of non operational headwind from foreign currency eps would be 1065 at the midpoint, an increase of 5% versus last year. In terms of cadence for the year we expect a first half second half EPS split of about 47 and 53% as compared to our usual 4951 which is due to increased restructuring expenses in the first half of the year combined with the typical sequential step down in revenues from Q4 to Q1. We therefore expect Q1 EPS to contribute about 22% of the year's EPS, slightly below our typical 23 to 24%. As I mentioned, we expect strong free cash flows with conversion greater than net income and for our disciplined capital allocation framework, surplus capital is allocated to an active share repurchase program as we plan to buy back 1.5 billion of our own shares in 2025. Our guidance does not account for any pricing adjustments made in response to the implementation of tariffs. ITWs produce. Where we sell strategy largely mitigates potential tariff impact, and we're comfortable that once again, we're in a position to read and react as necessary by adjusting price in response to higher cost as a result of tariffs. Based on our past experience, most recently in 2017, 2018, and our strong operational capabilities, we believe that the price cost equation is manageable for ITW across a wide range of scenarios. Turning to our last slide, Slide 11 for our 2025 organic growth projections by segment. As you can see, six of our seven segments are projecting positive organic growth based on current run rates adjusted for typical seasonality. Every segment is well positioned to outperform their end markets again in 2025. And consistent with our continuous improvement, never satisfied mindset, every segment is also projecting margin improvement with another solid contribution from Enterprise initiatives. In summary, our segments are heading into 2025 well positioned to execute again as they continue to outperform the underlying end markets and improve margins and profitability. With that, Erin, I'll turn it back to you.
