Illinois Tool Works Inc (ITW) — Q4 2018 Earnings Call Transcript

Thank you, Sheryl. Good morning, everyone, and welcome to ITW's fourth quarter 2018 conference call. I'm joined by our Chairman and CEO, Scott Santi; along with Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss fourth quarter and full-year 2018 financial results and we will update you on our 2019 outlook. Slide 2 is a reminder that this presentation contains our financial forecast for the first quarter and full-year 2019, as well as other forward-looking statements identified on this slide. We refer you to the Company's 2017 Form 10-K and subsequently filed Form 10-Qs 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. As a reminder, in 2017, we disclosed a $95 million favorable legal settlement and recorded one-time tax charge in the fourth quarter. Therefore, we provided you with two tables on Slides 3 and 4 that summarize key financial measures for fourth quarter and full-year on a GAAP basis, as well as on an adjusted basis excluding the legal settlement and tax charge. For the rest of this conference call, our comments and variances exclude these two one-time charges from 2017. So with that, we can move to Slide 5, and I will now turn the call over to our Chairman and CEO, Scott Santi.

Thanks, Karen, and good morning, everyone. Greetings from the epicenter of the polar vortex. In the fourth quarter, the ITW team delivered solid earnings growth and margin expansion. Fourth quarter EPS was in line with the midpoint of our guidance and increased 8%, 10% excluding currency with operating margin up 70 basis points to 24%, and after-tax return on invested capital up 320 basis points to over 27%. For the full-year, the ITW team delivered high-quality earnings growth of 15%, record operating income, record operating margin, and record return on invested capital. Free cash flow was up 10%, and we invested over $600 million in our businesses for growth and productivity. In addition, we returned more than $3 billion to shareholders in the form of dividends and share repurchases. Throughout 2018, we continue to make significant progress on the execution of our enterprise strategy, as evidenced by 110 basis points of margin improvement from our Enterprise Initiatives over the course of the year. We made really good progress on organic growth acceleration in better than half of our operating divisions. As we discussed in our Investor Day back in December, our focus now is on getting the other 36 of our divisions that are not yet growing to their potential, moving more briskly down that path. And it's a major focus for us in the next couple of years. There's no doubt that 2018 had its challenges, including raw material cost inflation, tariff uncertainties, decelerating auto production, and currency headwinds in the back half of the year. Our ability to power through these challenges and deliver another year of record results is evidence of the performance power of the ITW business model and the resilience of our high-quality diversified business portfolio. As we head into 2019, I'm confident that we are well positioned to deliver another year of meaningful progress toward ITW's full potential and to our 2023 performance goal. Before I turn the call over to Michael, let me conclude by recognizing and thanking my ITW colleagues around the world for the great job that they continue to do in serving our customers and executing our strategy with excellence. Michael, over to you.

Thanks, Scott, and good morning. Let's stay on Slide 5 and recap a few more highlights for the fourth quarter. GAAP EPS was $1.83, an increase of 8% as we managed through some international end markets softness in two segments: the solid execution and delivered earnings per share at the midpoint of our guidance. Organic revenue was up 1%, with solid 4% growth in North America, offset by a 2% decline in international markets. I'll provide some additional color on what we saw in North America and international markets in a couple of minutes. PLS was 90 basis points this quarter, a little bit above our full-year rate of 70 basis points. Operating margin performance was solid as margins improved 70 basis points, with 110 basis points from Enterprise Initiatives, lowering price/cost margin dilution headwind. Finally, free cash flow increased 18% to $727 million, 120% of net income, and we repurchased $500 million of our shares in the quarter. Moving to Slide 6 for detail on fourth quarter operating margin. We've expanded operating margin every quarter this year, and the fourth quarter was no different. In fact, we did better than last quarter, with 70 basis points of improvement year-over-year versus 30 basis points in Q3. All year, our teams have continued to execute well in Enterprise Initiatives, consistently contributing 100 basis points or more of margin improvement every quarter. And the impact is broad-based. In the fourth quarter, Enterprise Initiative benefits ranged from 80 basis points to 120 basis points across each one of our seven segments. As I mentioned, price/cost margin dilution improved, narrowing from 70 basis points in the second quarter to 60 basis points in the third quarter, and now 40 basis points in the fourth quarter. Throughout the year, we continued to take decisive pricing actions to offset cost inflation and tariff impact. As planned, on a dollar basis, price more than offset raw material costs this quarter and for the full year. All in, operating margin expanded by 70 basis points in the fourth quarter to 24%, the highest Q4 operating margin in ITW's history. Now we'll look at segment performance, starting with Slide 7. The table on the left provides some additional color on our fourth quarter organic growth rates by segment and by region. As I mentioned, North America continued its solid growth pattern with 4% this quarter, similar to Q3 and the first half of the year. North America has really been steady and strong all year, ending the year up 4%. You can see some really good organic growth numbers in North America, with for example, Food Equipment and Welding both up 7%; Polymers & Fluids up 6%. For the full year, every segment delivered positive organic growth in North America, ranging from 2% to 11%. International was more of a challenge, specifically in two segments, with organic growth down 2% in the fourth quarter, compared to up 2% in the first half of the year. The international market challenges that we're experiencing are not broad-based and relate to just two segments, Automotive OEM and Specialty. Excluding those two segments, our international growth rate in Q2 would have been 4 points higher at plus 2%. More on that in the next few slides. I should just point out that China overall was down slightly, at minus 2%, with again lower sales in automotive and specialty only. The other five segments saw positive demand trends as evidenced by, for example, Test & Measurement and Electronics, up 12%; Welding up 22%; and Polymers & Fluids, up 9%. For the full year, China was up 3%. Let's go into the segment details, starting with Automotive OEM. Organic growth was down 4% this quarter. North America being positive 2% was not enough to offset a meaningful reduction in build rates in Europe and China. For the full year, Automotive OEM organic growth was flat, as the auto builds in regions that are relevant to ITW all declined. If you look at 2018's full-year organic growth compared to builds by region, we delivered significant above-market growth in two of our key markets, North America and China. In North America, we grew 3% versus builds down 1%. And in China, organic growth was 3% versus builds down 4%. In Europe, the implementation of mandated new emissions testing procedures in Q3 caused significant auto production disruption in the back half of the year. We're confident that our below build rate revenue declines in the second half are a function of mix, what models passed the new emissions testing procedures and when, and not the result of any material share loss. Our new program wins in Europe in 2018 were very strong as is our new program pipeline there. We remain confident that our European auto businesses are well positioned to deliver consistent above-market growth and that they will get back to doing so over the next several quarters. With respect to the European market production issues I referenced a minute ago, our auto team on the ground expects that they will work themselves through over the next several quarters and that conditions will begin to normalize in the back half of the year. Fourth quarter operating margin declined 150 basis points almost entirely due to price cost headwinds. As you know, pricing actions take longer to implement in the automotive market. It is encouraging though that for the full year, this segment's operating margin of 22.5% was down only 30 basis points with the benefits from Enterprise Initiatives, essentially offsetting price/cost headwinds. Moving on to Slide 8. Food Equipment had a strong quarter and delivered accelerating organic revenue growth of 5%, its highest quarterly growth in four years as overall demand continued to improve across the board. North America grew 7%, with equipment up 9%, and service up 4%. The food service was up 11% and retail, i.e., sales to grocery stores, turned positive as we began to lap difficult comps that we've talked about on prior calls. Growth in institutional end markets continues to be very strong, and was up double digits, with particular strength in the education and lodging categories. International markets were solid too, up 3% with good growth in both equipment and service. As expected, Test & Measurement and Electronics organic revenue was flat against the tough comp of 9% organic growth in the fourth quarter of 2017. Test & Measurement was down 1% due to this difficult year-over-year comparison. Electronics was up 2%. While this quarter had a tough comp, full-year organic growth was solid at plus 4%, and I should point out that fourth quarter operating margin improved by 140 basis points to 24.8%, a record for the segment. Now on to Slide 9. Welding continued its strong run, with 8% organic growth this quarter, which is impressive versus a comp of 6% growth last year. Demand was strong across the board, with global equipment up 7% and consumables up 8%. The industrial business was up 7%, commercial up 8%, and oil and gas, up 9%. By region, North America was up 7%; and international, up 11%. Polymers & Fluids organic growth was 4% with 7% growth in the automotive aftermarket, which benefited from a new product launch. And Polymers was up 4%, with strong product sales at Asia Pacific, offsetting a 4% decline in Fluids, which included a significant amount of PLS and a tough comp at plus 5% last year. Turning to Slide 10. Construction organic sales were down 1%, as our North American commercial sales were down 10%, primarily due to project timing in our warehouse growing business. North America residential was essentially flat, with 5% growth in renovation and remodel, offset by a decline in new construction. Europe was a bright spot with sales up 6%. Australia and New Zealand sales were down 5% due to a slowing residential construction market there. Specialty organic sales were down 2% against the tough comp of plus 5% last year. This segment also had over 100 basis points of PLS in the quarter. International organic sales were down 8% with some of the same soft spots that we saw in the third quarter, including appliance components and graphics. Equipment sales were a bright spot, up 4%, and our Hi-Cone division, which we saw at our Investor Day, was up 13%. Moving on to Slide 11 and full-year 2018 performance. 2018 was a record year for EPS, operating income, operating margin of 24.3% and after-tax return on invested capital of 28.2%. Operating margin was up 60 basis points, driven primarily by another year of strong execution on Enterprise Initiatives, contributing 110 basis points. Free cash flow was up 10% to $2.4 billion with free cash flow conversion of 95%, slightly below our target, primarily due to the combination of modestly higher CapEx investments and slightly elevated inventory levels at year-end due to higher material costs. Finally, we executed $2 billion in share repurchases and increased the dividend by 28% this year. Looking back at 2018, we delivered on the full-year EPS guidance that we provided as we entered the year, thus continuing our track record of exceeding our annual guidance for the past six years. The consistency and quality of our financial performance as summarized here for 2018 are a testament to the power of ITW's proprietary business model, our high-quality diversified business portfolio and strong execution by the ITW team. Let's now turn to Slide 12 in 2019 guidance. We are reiterating our full-year EPS guidance from Investor Day in December. EPS of $7.90 to $8.20, with a midpoint of $8.05, which represents 6% growth year-over-year. We now expect organic growth in the range of 1% to 3%, compared to a range of 2% to 4% previously. This reduction is entirely related to taking a more conservative, risk-adjusted view with regards to auto builds and semiconductor-related demand in 2019. This range also includes PLS of about 80 basis points, which is unchanged from December. We continue to firm up the projects and activities related to our Enterprise Initiatives, and are confident that they will deliver 100 basis points of operating margin expansion, independent of volume. Also, included in our plan are higher restructuring expenses versus 2018, and we have a particularly heavy restructuring agenda in Q1. This is driven to a significant degree by actions we are taking to rightsize our automotive OEM and specialty businesses in Europe. The price/cost equation remains pretty dynamic, but margin headwinds should continue to moderate as the majority of raw material costs appear to have stabilized, and we have strong pricing momentum heading into the year, with the vast majority of planned pricing actions already implemented. 2019 tariff expectations remain around $60 million, which is based on current and announced tariffs, including the potential impact of these three growing from 10% to 25% in March. We continue to view the overall tariff impact as manageable, given the fact that we are largely a produce where we sell company, and that we only source approximately 2% of our spend from China. Given the differentiated nature of our product offerings across the company, we expect to be able to offset the impact of any incremental raw material cost inflation and tariff impacts that might arise in 2019, with pricing actions on a dollar-for-dollar basis at a minimum, just as we did in 2018. Finally, we expect free cash flow conversion at or above 100% of net income, share repurchases of $1.5 billion and a tax rate in the range of 24.5% to 25.5%, up slightly from 24.5% in 2018 due to the non-repeat of discrete items. Taking a closer look at the first quarter. We should point out that we expect that the first half of 2019 will be a little more challenging than what is typical for us in terms of year-over-year comparisons due to more difficult comps, more currency headwind in the first half versus the second half of the year and higher Q1 restructuring costs. Specifically, in Q1, we have a $0.07 of currency headwind at current rates. The impact of higher restructuring also $0.07, and $0.05 of tax rate headwind due to a discrete $14 million tax item that we recognized in Q1 of last year. There's also one last shipping day in Q1, which is another approximately $0.02 headwind to EPS and 1.5 percentage points headwind to organic growth. It's important to note that we have an extra shipping day in Q3. As a result, we expect Q1 EPS in the range of $0.73 to $0.83, and essentially flat organic growth. However, coming out of Q1, the headwinds I just described start to moderate. Roughly two-thirds of $0.14 of the expected currency headwind this year is in the first half. Restructuring activities, as we discussed, are front-end loaded this year, and price/cost margin impact should moderate as we go through the year. It’s important to note that our full-year guidance is based entirely on current demand run rates. Existing and announced price/cost impacts, known enterprise initiative benefits, and what we believe is a prudently risk-adjusted posture with regard to 2019 demand expectations in auto and semiconductor end-to-end markets. We do not have any projections of demand improvement versus current levels in our 2019 guidance. However, given what I just described and the fact that revenue comps are much easier in the second half of the year, year-over-year revenue and earnings growth comparisons will get increasingly positive as we move through the year. On Slide 13, we provided an EPS range for 2019 versus 2018. Organic growth of 1% to 3% at our normal incremental margin of 35% contributes to $0.20 to $0.30 to EPS growth. Benefits from Enterprise Initiatives add another $0.25 to $0.35. Lower share count represents the impact on the $2 billion of share repurchases completed in 2018 and the $1.5 billion planned for 2019. Combined, they contribute approximately $0.25 a share. At current exchange rates, we anticipate a $0.20 impact from foreign currency and approximately two-thirds of that impact is expected in the first half of the year as we talked about. And finally, we proved a few things, and others on this bridge. It includes our expectations to higher restructuring this year, approximately $0.10, with $0.07 of that in Q1; a higher tax rate than 2018 due to the non-repeat of discrete items, which is a $0.05 headwind, partially offset by lower interest expense due by savings and the $1.35 billion in bond maturities in March and April. These three items and a few other puts and takes combined to reduce EPS by $0.10 to $0.20. You will note that there's no accommodations of potential M&A activity and specifically the potential divestitures that we talked about at Investor Day. Our guidance is all in, meaning that the baseline presented here assumes our portfolio as it is today. We are making good progress on our potential divestitures, and we'll update you on our progress as we go through the year. Importantly, as we said before, any EPS dilution from divestitures will be completely offset by incremental share repurchases and are therefore EPS-neutral. Finally, we have provided our views on organic growth outlook by segment for the full year 2019 on Slide 14. These are based on current run rates, adjusted for seasonality, and are obviously influenced by year-over-year comparisons as we go through the year. It's important to note that there's no expectation of demand acceleration embedded in our guidance. We see solid growth in Welding of 3% to 6%, down from 2018, but just as a function of the more difficult 10% comparison year-over-year. Food Equipment has good momentum and pretty easy comps in the first half, and are expected to be up 3% to 5% for the full year. Construction of 1% to 4%, which also includes a number of meaningful new product launches. Test & Measurement incorporates a more cautious sales expectation for equipment related to semiconductor manufacturing. Those sales represent approximately $200 million and are expected to be down double-digits in 2019. This creates a drag of 2 percentage points of organic growth to the Test & Measurement and Electronics segment. Polymers & Fluids and Specialty, all with low single-digit growth expectation, and automotive, as we mentioned, we are being pretty cautious with sales expected to be flat to down 4% despite the fact that third parties, such as IHS, are expecting positive growth in auto builds in 2019. Lastly, a comment about quarterly guidance. From day one back in 2013, our strategy has been centered on leveraging ITW's powerful and proprietary business model to its full potential and in doing so, position the company to deliver solid growth with best-in-class margins and returns over the long-term. In the early stages of implementing our strategy, we believe that providing quarterly guidance was constructive given the number and magnitude of the changes and initiatives that we were implementing across the company. We have now progressed far enough in executing our strategy that you believe that providing quarterly guidance is no longer value-added given the long-term performance focus of the company and our core shareholders. As a result, we are discontinuing this practice as of this quarter. We will continue to provide an updated five-year performance goals and EPS and organic growth guidance annually. With that, Karen, back to you.

Okay. Thanks, Michael. Sheryl, let's open up the lines for questions.

Thanks a lot. Good morning, everybody.

Good morning.

Your guidance is pretty interesting. It looks like topline is more or less consistent with a bear case on the stock, but the bottom line guide is what you said back in December. So a couple of questions on the backend loaded nature of what you just presented. First, why is price/cost negative 50 bps for the year, given pricing momentum is carrying over? And from the outside, it looks like you're looking at apparent decreases in some of your raw material input costs and then within that, do you expect price/cost to improve through the year?

Yes. Andy, price/cost was negative 50 basis points from a margin standpoint in 2018 and we're not providing a number for 2019 primarily because it's still a pretty dynamic environment in terms of raw materials as well as potential tariffs. That said, what you're saying is correct. I mean it is reasonable to assume based on what we know today in terms of the price actions we've taken, the expected raw material costs, the tariffs including the increase in March from 10% to 25% that may or may not happen. It is reasonable to assume that we will continue to make progress on price/cost from a margin standpoint in 2019 and certainly, we will continue to be positive on a dollar-for-dollar basis to a degree that’s significantly higher actually what we saw in 2018. So I hope that answers your question.

It does. And if I can also follow-up on something else, Michael, thank you for that. In your commentary around the first half versus second half, Q1 midpoint implies about 6% earnings decline year-over-year, but the rest of the year is up around 9%. It sounds pretty confident that in assuming the current run rate. Is a majority of that confidence really related to the pull ahead of the seven out of 10 for restructuring in the year into Q2? And basically, is that the big part of your confidence?

Yes. I think what we're pulling forward, the restructuring obviously has a pretty big impact here in Q1 of $0.07. Some of those benefits will start to show up in the back end of the year. Many of these projects have one-year payback or better in many cases. In addition to the higher restructuring, currency is more of a headwind in Q1, the tax rate is a headwind. And then we do have one less shipping day, as I mentioned in Q1. And so…

That we get back in Q3.

That we get back in Q3. So that's why the year looks a little different relative to what you're used to from ITW, but there are some really good reasons behind that. And when you pencil it all out, you can get comfortable. We certainly are comfortable and very confident in our ability to deliver on the guidance that we are providing today.

Okay. Sounds good. Thank you very much.

Sure.

Thank you. Good morning, everyone.

Good morning.

Good morning. I wonder if I can just dig into a couple of segment level detail questions. First on automotive and the whole emissions, WLTC had a logjam in Europe. Your view that it doesn't really sort itself up in the second half, is that kind of a well grounded in what you're hearing from the OEMs? Or is that really kind of just kind of caution on the chaos we've seen up to this point and it's just kind of hard to predict how things play out there?

I think it's a little bit of both, but more of the latter. I want to be careful how I say this, but I think the information has, in terms of direct customer, that's been a little bit up and down just because I think it's a fairly fluid situation. But I think our posture from a planning standpoint, we believe is definitely on the conservative side and just to be clear, we're saying that things start to mitigate in the back half of normalized, but certainly aren't all the way corrected probably, and it will begin with some elements of this all the way through the year is our current view.

Okay. And just on the Construction side. I'm sorry, can you elaborate on what drove the commercial weakness in North America and the U.S.? And is there kind of visibility on the recovery plan there?

Yes, there is. So it's a fairly small part of our overall business in North America. Part of what we do is we provide concrete solutions for warehouse flooring. And we had a number of projects that we're scheduled to go in Q4 that pushed out to 2019, so it's just primarily a timing issue more than a commentary on what's going on in the commercial construction space.

And maybe just one other really quick follow-up. Do you have some additional restructuring kind of on-the-shelf, for lack of a better term, if kind of the macro environment does begin to pick it on as soon as 2019 unfolds?

Well, I would say, we normally operate with a fair degree of contingency planning around our plans, whether that's within a particular segment or at the overall company level. We certainly have the flexibility to make adjustments as we're talking about here related to auto and specialty in the near term. And that's been sort of normal practice for the company for quite a long time. So should things in terms of sort of external and macro environment play out differently than what we're anticipating now. And again, I think we're taking a pretty conservative posture in terms of our planning approach here. And absolutely, we would expect to be able to adjust to that and do it in a relatively short order. As I said, we have a pretty flexible cost structure given how we operate to maybe 2020. So we could certainly make those adjustments within the quarter or two.

Great. Appreciate the perspective. Thank you.

Hi, good morning. First, I just wanted to better understand if we think about what – your preliminary guide at the Analyst Meeting, the EPS is the same as it is today. Basically, reaffirmed it, but your organic growth assumption is 1 point worse. I don't recall if the restructuring number was in there and also FX seems to be more of a headwind. So can you just sort of help me understand what's offsetting those headwinds relative to what you guys said at the Analyst Day? And then my second question is just with regards to the organic growth, the 2% for this year. One would argue in 2018 where the economy was relatively strong. You guys put up the same level of organic growth. So just comfort level on you can put together – or you can put up another 2% organic growth in a tougher macro. Thank you.

Yes. So let me start with the first part, which is a very fair question, in terms of the organic growth guide today being lower than what we guided in December. Really on the back of being more conservative around automotive builds as well as factoring in the latest view on the semiconductor-related end markets. As we've gone through these last few months here, we really firmed up our views in terms of the enterprise savings from – Enterprise Initiatives to specific projects and activities that will deliver 100 basis points of margin improvement as well as other discretionary cost items. And so that's really what's driving the majority of our confidence and ability to maintain the EPS number. In addition to that, I would say, although I'm cautious on this, given what we saw in 2018 as the price/cost headwinds are certainly looking more favorable today than at the end of last year. And then just to be precise, restructuring, I think that we had in our guidance in December is the same number as today. And so that number has not changed. I think the second part, if I remember correctly, was around our ability – confidence to deliver 1% to 3% organic growth this year similar to last year. And I'll go back to how we modeled this, which is basically based on current run rates, adjusted for seasonality, and if you run that out for the year, with the adjustments we made in auto and specialty, you get to a range of 1% to 3% organic growth. We provided a little more detail on the last slide, Slide 14, in the deck. You can see how it kind of pencils out by segment. And again, these are based on current run rates, risk-adjusted on a couple of areas, and in our view, pretty cautious and conservative view overall.

I guess, so just given the account of the weaker macro, there are certain segments where you are assuming that your market share is above average and that sort of helps the organic growth? I mean, can you talk about Construction a little? I'm not sure if market share is contributing more, I mean, relative to just overall whatever macro? Thanks.

Yes. I think Construction, there's significant new product launches on the docket for this year. I'd say in addition to that, I wouldn't underestimate the impact of price this year relative to 2018. And so if you add all that up, these are the numbers that make up the guidance by segment and 1% to 3% in total.

Okay, thank you. I’ll get back in queue.

Hear me okay?

Yes. We got you.

Yes. So Scott or Mike obviously ITW's is relatively strong in Europe, and you did mention that Europe would be up a couple of percent instead of down if it weren't for your issues in auto. And Specialty Products, so maybe give us a little more color regarding what’s going on in Europe. Construction actually looks like strong for you guys, given the environment there. And so, what's the outlook here as we go through 2019 in Europe?

Yes, I think the issues on the international side are really isolated to the two segments we talked about. I think the other five segments are doing pretty well across the board. If you just look at the fourth quarter, certainly, auto and specialty were down, but we put up some really good numbers in Europe. Construction overall was up 6%. Welding, up 7%. Food, up 3%. We've not seen a big impact from Brexit or the U.K. Those markets are pretty stable. So we feel pretty confident going into 2019 in terms of modeling current run rates in that geography.

You just may be – yes, just another data point is, and if you net – if you look at our European sales in Q3 and Q4 net of auto and specialty, it was plus 3 in Q3 and plus 2 in Q4. So we're certainly not – which feels pretty stable to us not – the 3% to 2% I don’t know; we're certainly not calling that a trend. But sort of down single-digit is pretty solid.

Yes. Okay, that’s helpful guys. And then a couple of businesses that have been somewhat lethargic over the last couple of quarters, they looked like they kicked up a little bit here in this past quarter. If I look at Polymers & Fluids and you mentioned that new product intro and auto aftermarket. And then with include equipment that you mentioned retail reconfiguration turning around. Do these businesses have some sustaining power here going forward? In other words, are you seeing a little bit more CapEx from grocery stores, for instance, in Food Equipment and does this new product rollout in auto aftermarket? Does that give you continuing growth in the segment for the next few quarters?

Yes. I’d say, Andy, that Food Equipment certainly feels very good. I think the acceleration really started in the second half. The strength is broad-based. On the equipment side, service put up a pretty good number here as well. On the retail side, just to be clear, we're not seeing a pickup in terms of the CapEx spend on the grocery side. Really, what we're seeing is these are flat to up slightly on a year-over-year basis as we lapped a more difficult comps. But all the benefits that we expected in terms of new product introductions, certainly, we're seeing though in the second half of the year, and we expect those to continue into 2019. So Food Equipment, let's say, 3% to 5% feels very good for 2019. Polymers & Fluids, we did benefit from a new product launch in automotive aftermarket. I hesitate to say this, but we’re a beneficiary also of some weather-related impact in terms of Rain-X wiper blades. And so that part of the business was up 7% overall. That is not a sustainable rate for the full year, obviously. But I'd say also in Polymers, you're seeing some good progress there in terms of the overall organic growth rate. And like I mentioned earlier, you are seeing the impact of price. So certainly some good progress in those two segments, and we should expect to continue to see that in 2019 as reflected in the segment outlook we gave you on Page 14.

Appreciated guys.

Yes. Good morning, guys. So I want to stick with Food Equipment here. I mean, 3% to 5% growth this would probably be the best growth since 2014, 2015, that time range. And I wanted to make sure that I understand kind of what the moving pieces are here. Retail, you said, feels a little bit better, but it's mostly a factor of comps. So I'm not sure how much you're really expecting this business to grow. Institutional, you mentioned, was quite good, so maybe you can talk a little bit about the momentum into 2019? I'm also wondering just your restaurant business, so I think that's pretty meaningful as well. How that's doing international as well as North America?

Yes, Mig. So the demand we saw really here in Q3, Q4 was broad-based. So we talked specifically about food service, which is everything excluding the retail side, being up 11%. Retail turned positive in the single digits. We're not counting on a big pickup in retail in 2019 and it's not that significant portion of our overall business. We continue to see a lot of strengths on the institutional side, up double-digits. And again, there are a couple of categories here, really, around education, so K12, universities as well as lodging. And on the restaurant side also, double-digit growth, including which for us is a smaller part of the business on the QSR side. International is solid, up 3%. Certainly feel good about the momentum going into 2019. And just Q4 was best growth rate I think in over four years here. So new product introductions are really taking off, and we feel we're very pleased with the progress we're making in Food Equipment.

Got it. That’s helpful. And then sort of going back to the big picture topline guidance, so if you're starting the year flat in Q1 and you're guiding on current levels of TAM, and your comp is getting tougher in Q2 by at least 100 basis points. Should we have expectations for an organic decline in Q2, and then acceleration in the second half on easier comps? Is that how we should be thinking about it?

So Mig, you should definitely think about it as just given the comps higher growth rates in the back half of the year than in the first half. If you just go back and look at 2018, I think in 2018, we were up 3% organic rounding in the first half were up 1% in the second half. That alone is driving some of the higher growth rates, both in terms of organic as well as earnings growth. So really the swings you're going to see are really a function of what the comps are on a year-over-year basis. Those are the big drivers. Again, there's no demand acceleration assumed here on the contrary, if anything, we've dialed it back in certainly in auto as well as semi, which we talked about earlier.

But there is not something on the product side or, I don’t know something it based on some of the visibility that you might have that would be able to maybe reassure us that you'd be able to cross the tougher comp in Q2 versus Q1?

There is typically every year, new products contribute…

And we are not managed for the quarter. The quarterly plans, we'll give you a Q2 update when we get there. Our expectation is, again, as Michael said, we’re recent current demand levels and projecting them through the year. I'm – if you look at Q2 this was a full-year in a Q1 number. I don't recall exactly what the Q2 organic growth rate is embedded in our plan if we had it, and so I think…

No, I appreciate it. I was just trying to make sure that we have already much better line what you guys are thinking. That’s it?

I think the math is – there's nothing funny in the math here. This is really straightforward, as Michael said, if anything have to dialed back relative to current demand rates in a couple of areas where we think there's some potential risks. We're not seeing that it's going to play out that way. I think overall, that's a smart and prudent approach in terms of our planning. And it also highlights the fact that we've got a lot of earnings growth power from the same point of Enterprise Initiatives and other things going on underneath that's not vulnerable to some further erosion in auto, if things play out. And ultimately, we've got to plan where we believe there's more upside potential than downside. That's why we always plan and that's really what were, I think, embedded in the approach we've taken in terms of taken the organic growth rate down a percent relative to where we were in December.

Got it. Thank you, guys. Appreciate it.

Thanks. Good morning, everybody.

Good morning.

Hi, Michael. So wondering if there's kind of an update on the divestitures that you plan for this year? And just as kind of to that, Michael, if we were actually to have taken the 2019 divestitures that you've got out and best of them at the beginning of the year, kind of pro forma, would that have any material impact on the 1% to 3% core growth that you're just betting for 2019?

Yes. So as that's a very good question. So the impact is these potential divestitures all happen is an improvement in our organic growth rate of about 50 basis points and improvement in our operating margins by 100 basis points. So that would – assuming that all of those take place this year, that's what we would expect to see in 2020. I think that's a fairly optimistic assumption. I think we're certainly making good progress, and I think a more reasonable planning assumption would be maybe half of them get done this year. But none of that is included in the numbers today. So certainly you see some slightly lower revenues to the effect that if EPS dilution, you'll see higher share repurchases to offset that, so that they are EPS-neutral. There are going to be some gains on some of these potential divestitures. Those are also not included, but on pro forma basis, it's a meaningful impact. And we are making good progress.

If there's some reason you couldn't – I know you said half, but it's not a bad point, right? But to some reason, if you start to get a cadence going because I'm assuming you're not doing them sequentially one after another, you got to have booked out more than one. I mean, why couldn’t these things hit sooner? Is it just – I guess I don't really understand why it – there's not a lot of companies like why couldn't we get most of this done in 2019?

I will pass that on to the steering committee in charge of the divestiture activities, John. We prioritized in terms of the biggest impact on the company. We’re going to try to get those done first. We’re not in a rush here. We’re going to be very deliberate and thoughtful in terms of how we execute of this and maximizing the value for the company and so…

I'll just quibble a little bit with your perspective in terms of there – there is a decent amount of work involved in each one in terms of preparing to separate from ITW and all the things we need to do to…

Yes, I look in the ivory tower, so I guess.

I don't want to go to that part, John, but I was just – I think we've got a good cadence, we've got good plans that we are finalizing now in terms of being very deliberate and intentional how bad – how we go bad if, as Michael said, I think the reality of it is probably a two-year process to move all the way through maybe. And of course, everything that we can do to make it happen faster, we will certainly do that. But at this point, we also are not – that's not the number one priority right now. So would everything else that we are trying to work on and make progress there.

And just sort on the polymers business, I know Michael, you called out the auto aftermarket likely not to see that cadence, that makes sense. Was there any kind of a pre-buy in that business maybe associated with getting ahead of some cost increases or price increases? That’s also potentially contributing to the 1% to 3% kind of slight acceleration?

John, we did not see that in Polymers & Fluids. And actually, in any of our other segments as we went through the fourth quarter here. The quarter played out as it usually does on a monthly basis. There's really nothing unusual, as we went through the quarter, including in Polymers & Fluids.

The other question I had is oil and gas prices have come down obviously, since the December meeting. I know we're talking about raw increases, but I was wondering about the indirect impact or even direct impact of those hydrocarbon pricings coming down? I realize you buy a lot of metals, like, in metals derivatives. But is there possibly some sort of once we get the impact of this, is there some sort of potential net tailwind that kind of begins to accrue to you later this year or something?

Eventually, the answer is yes. I don’t know whether that will be end of this year or not. I mean there is certainly a tailwind today on a dollar-for-dollar basis, as I said earlier, while raw material cost increases – just carryover from last year is still pretty significant number in 2019. Its leg than 2018 and we are certainly significantly ahead on a dollar-for-dollar basis. So with the standard, it is providing some tailwind here.

Got it, talk it. All right, thanks guys. Appreciated.

Hey good morning. Thanks guys. Just on auto, I think you said that you're assuming flat to negative 4% for 2019. Can you give us any type of breakdown by region particular since you were saying that you’re not assuming any acceleration in the second half? I would just think given like what's going on in China right now to get the flat to negative 4% and just the pressures in that end market globally that you would have assume some re-acceleration for now to be down more than that.

Yes. So there is a lot of uncertainty around the numbers that third parties are providing on a geographic basis. I think the best I can tell you is, when we were together in December, the view was is that our auto business will be flat on markets that globally would be down 2% to 3%. We gave that a further risk adjustment here relative to what we said in December. I can't really give you a view by quarter here as the year plays out. I'll give you the actuals, when we get through Q2, Q3, and Q4, but I can't really give you guidance around that.

We got people studied this, like IHS out with a projection of plus 2% on builds on China for the year, plus 1% in North America, and I think down a couple – I think certainly, globally they're plus 1%, we’re at 0% to minus 4%. It’s just one data point, but there are people that study this that have – I’ll call it an optimistic view, but I think we're back to them. The comment we are making earlier about making sure that we're appropriately conservative there where there's still some uncertainty, but we're not, I don't think we're on the high side of optimism relative to what most of this, at least third parties that we look at to study this market feel like it's going to go on in 2019. We're on the conservative side of them.

Just on the restructuring, the $0.07 and I think the $0.10 for the year, what is it actually for? I mean, is it headcount related or is it five-year enterprise initiatives? And I think you mentioned before, but where is it again?

So this is primarily focused on rightsizing our footprint in Europe in two businesses, the automotive business as well as the specialty business. And beyond that, we typically don't comment on specific restructuring projects.

Okay. But on that, Michael, I mean, you said that, I mean, clearly there's some pressures tied to what you were describing earlier, but it sounded like you thought things were normalizing and you're not losing share, and it's kind of a timing issue of when the market actually improves. So why restructure the European auto business if that's the case?

Well, we're just moving faster on some things. We still got an acquisition that we did two years ago that is through the restructuring, I would say, is normally – a normal part of the integration of that business. It’s a fairly good piece of that. We are accelerating some of that given the environment in this pause and demand. It's a good time to get after some of that. Well, there's some things that would have been – we would have gotten to anyway. It’s the easiest way to describe it that I would say we have accelerated into the front-end of the year given the pause and the demand admit. These things are in some ways is better timing if we can get them done when we're not also dealing with some increases in demand. That's probably a better characterization of it.

Okay. Got you.

That's what we're doing.

And just the last one on the Test & Measurement. I mean you guys leaked out 140 basis points of margin expansion with real organic growth in the business in the fourth quarter, which is pretty impressive. But is that type of margin expansion sustainable in the 2019 in a flattish environment for that segment?

I think we still have ways to go in terms of further margin expansion in Test & Measurement and that's based on what the bottoms up, what the team is telling us. What you're really seeing is the impact of the enterprise initiatives in Test & Measurement. And I think it's another data point that supports the view that we have and the confidence that we have in the ability to continue to expand margins in 2019 and beyond as we talked about in December. We believe we have at least another 3 to 4 percentage points of margin expansion ahead of us and Test & Measurement has at least that level of improvement ahead of it in that over the next three to four years.

Okay. Thank you very much.

Thank you. Good morning, everyone.

Good morning.

So just on your WLTP comments from earlier, I just wanted to make sure that I understand it. If your platforms are being disproportionately impacted, do you have a sense or line of sight on the approval for those platforms getting through the testing requirements? And shouldn't that just reversed itself at some point in 2019?

Well, it should reverse itself at some point. The answer to your question is we don't have great line of sight because it's a new test and I don't want to speak for the auto OEMs in Europe, but what we're hearing is that there's some uncertainty and some challenges. It's not that it can't be done, it is a new testing procedure and that the backlog involved in getting all of their models through it has been much more of a challenge than perhaps what's expected. I don't know. I'm not, again, this is where we’ll draw some conclusions over around based on a number of different data points. So my answer to your question is absolutely, it should sort itself out. I think there's still a question of how long it takes to do so. And that's an element of our, let's call it conservatism in terms of our posture around that. There is people are still buying cars in Europe. There's nothing in terms of their consumption data and auto that gives you a whole lot of reason for pause at least to us at this point. It's much more a bad for disruption and the production part relative to the emissions testing regime. And I don't think it's – smooth sailing from here, let's say in terms of how all that plays out. Based on what we hear.

That's fair, Scott. And I guess just a good quick pop follow-up that I had. You guys gave us guidance on the whole growth outlook for Test & Measurement and Electronics. Just wondering, and I know you've got the run rates, but the Electronics business I guess we've been seeing some softness channel and any color on that business specifically and what do you're seeing in kind of perspective will be helpful.

Yes, most of our position in the electronic space is really more, I would say, MRO-related. So we're not – with a couple of exceptions, just one in set by we're not sort of upstream in terms of production equipment. So that from our standpoint, the electronics has been pretty stable. But it's – but we're able to describe is pretty downstream from the standpoint of where we participate there.

Yes. Clean room.

MRO.

Hi, good morning.

Good morning.

Most of my questions have been asked. So I just philosophically, I just wanted to ask about the pulling that quarterly guidance. I'm just curious about timing and whether you talked to the fact that, without quarterly guidance probability is that the sale side estimates will be more variable and then you're more likely to miss somebody's expectations and therefore have greater earnings volatility, which actually meant covering multiple on a stop. So I'm just curious why you chose to stop giving quarterly guidance.

Well, since we haven't missed one in six years, we thought we would try something different. I'm just kidding. I think ultimately we talked a lot with our shareholders, and there's a fair amount of effort and it goes into providing it. There is some philosophical differences around again, what we think the core investor value proposition for ITW which is really around the strength of competitive advantage in the business model, resilience in terms of high quality, diversified portfolio. All of those things are really oriented towards longer time periods of performance. And given all that, I think this is, we felt like we had, I think Michael said in his remarks, it was valuable early in the process given and talk about the enterprise strategy now. And then at this point, we progressed far enough that you believe that providing quarterly guidance is no longer value-added given the long-term performance focus of the company and our core shareholders. As a result, we are discontinuing this practice as of this quarter. We will continue to provide updated five-year performance goals and EPS and organic growth guidance annually. With that, Karen, back to you.

Okay. Thanks, Michael. Sheryl, let's open up the lines for questions.