Illinois Tool Works Inc (ITW) — Q1 2019 Earnings Call Transcript

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

Thank you, Karen, and good morning, everyone. Overall, we had a solid start to the year, and the first quarter played out about as expected with EPS of $1.81, coming in modestly above the midpoint of our guidance. The ITW team continued to execute well on the things within our control, delivering 100 basis points of benefits from Enterprise Initiatives and an operating margin of 24.3%, excluding 70 basis points of margin impact due to accelerated restructuring investments. We delivered a 27.7% after-tax return on invested capital and a 21% increase in free cash flow. Sales started out a little slow across the board in January before picking up the pace in February and March. Organic revenue was down 1.5% or flat excluding the impact of one less shipping day in the quarter. Our auto OEM sales declined 6% as auto production in North America, Europe and China was down a combined 8%. That being said, we are seeing some signs of stabilization in Europe and China auto markets and expect to see some modest improvement in the back half of the year. The 6% decline in auto OEM revenues reduced our Q1 organic growth rate by 1.5% at the enterprise level. One less shipping day was another 1.5% and PLS was 70 basis points as expected. As we discussed on the last call, we had a pretty heavy restructuring agenda in Q1 as we accelerated our 2019 plans into the first quarter, a significant portion of which was directed at our auto OEM business in Europe in order to adjust our costs to current demand levels. As we also discussed on our January call, we knew that the first quarter and, in fact, the first half had some challenges in terms of year-on-year comparisons: the currency translation, accelerated restructuring, a slightly higher tax rate, one less shipping day, tougher organic growth comps and auto production declines in Europe and China. And that these challenges would dissipate and the operating environment would be much more favorable in the back half of the year. Coming out of Q1, things are playing out largely as we anticipated. We are executing well on our long-term enterprise strategy and on our 2019 operating plan. And as a result, we remain firmly on track to deliver on our full year EPS and margin improvement guidance. I'll now turn the call over to Michael who will provide you with some additional detail on our Q1 performance and our outlook for the balance of the year. Over to you, Michael.

Thank you, Scott, and good morning. GAAP EPS of $1.81 came in above our guidance midpoint of $1.78. As expected, year-over-year EPS headwinds included $0.07 of foreign currency impact, $0.06 of higher restructuring costs and $0.03 of higher tax rate, which combined for a $0.16 unfavorable EPS impact in the quarter. Excluding these headwinds, Q1 EPS would have been $1.97, an increase of 4% over last year. It is important to note that we expect these specific headwinds to significantly moderate as the year progresses. More on that later in my remarks. In addition, as we mentioned on the last call, Q1 also had 1 less shipping day, which was approximately $0.03 to $0.04 unfavorable impact to EPS and a 1.5 percentage point reduction to organic growth. As a reminder, we get that shipping day back in Q3. Organic revenue for the quarter was down 1.5%, below our guidance due to the slower start in January and flat on an equal day basis. Sales trends improved in February and March as March organic revenue was up 2% year-over-year on an equal day basis. In line with our expectations, PLS impact related to 80/20 activities was 70 basis points this quarter. Operating margin of 23.6% improved 20 basis points, excluding 70 basis points of accelerated restructuring impact. Once again, strong execution on Enterprise Initiatives contributed 100 basis points. Another bright spot was stronger pricing and moderating raw material inflation, which resulted in better-than-expected price/cost margin impact in Q1. Cash flow performance was also a highlight as free cash flow increased 21% with a conversion rate of 90%, which is seasonally strong for the first quarter. Return on invested capital was 27.7% and finally, we repurchased $375 million of our shares as planned. As Scott said, the ITW team executed really well on the things within our control and other than the slow start in January, this was a pretty solid quarter for ITW. Moving to Slide 4 for some detail on operating margin. Overall, 23.6% operating margin in Q1 as I mentioned. And on the bottom left of the slide, we laid out the positive price/cost trends that I just referenced. Strong pricing across all segments more than offset moderating raw material costs on a dollar basis, resulting in improving price/cost dynamics in Q1 and going forward. On the right side, Enterprise Initiatives continue to be our most significant and consistent contributor to margin performance. Our 80/20 initiatives and Strategic Sourcing efforts combined for 100 basis points of margin improvement. And that impact is broad-based. In the quarter, Enterprise Initiatives benefits ranged from 70 to 130 basis points across each of our seven segments. This quarter, revenues were down, resulting in 30 basis points of negative volume leverage, only 10 basis points of margin dilution from price/cost, which was our best performance since the fourth quarter 2016, and 40 basis points of other, which is primarily related to employee costs, specifically our typical annual salary and wage increases. Going forward, we expect to return to our normal run rate of 10 to 30 basis points for this line item in the remaining quarters of 2019. This brings us to net 20 basis points of margin expansion before adding the impact of 70 basis points from restructuring, which considering the negative volume impact this quarter, is pretty solid performance. Even with the higher restructuring, operating margin was strong at 23.6% and the good news is that we have significantly more runway for improvement as the year progresses and over the next few years as we shared at our Investor Day in December. Please turn to Slide 5 for details on segment performance. The table on the left summarizes organic growth both as reported and normalized on an equal days basis. As you can see, six segments had flat to positive organic revenue growth on a worldwide basis despite the slower start to the year, with automotive OEM the only segment that declined due to the decline in automotive production this quarter. On a geographic basis, North America organic revenue was up 1% while international was down 1%. For the year, we're expecting low single-digit growth in all major regions based on current run rates and our risk-adjusted view of auto build forecasts. On that point, IHS forecasts combined auto build growth for North America, Europe and China to be plus 4% in the second half. Our risk-adjusted view puts those combined builds flat for the second half, 4 points lower, which is the scenario embedded in our annual guidance. This brings us to the right side of the slide on Automotive OEM segment results. Overall, organic revenue was down 6%. IHS data for Q1 build rates in North America, Europe and China combined saw a decline of 8% in the quarter in what remains a pretty dynamic industry environment. That said, there's some optimism in the industry and amongst our teams on the ground that builds would bottom out in the first half. Again, looking at North America, Europe and China combined, IHS projects auto production to be down 6% in the first half, followed by 4% growth in the second half. And as I just mentioned, our current guidance reflects an assumption of only flat growth in auto production, no growth in auto production in the back half of the year. Our North American business was down 6% with Detroit 3 production down significantly. As expected, in the quarter, builds were also down in Europe and China. In Europe, the implementation of the WLTP emissions testing procedures from last year continues to cause some auto production disruption although this situation seems to be normalizing. And in China, auto retail sales were down double digits in the quarter. Automotive operating margin declined 350 basis points this quarter. As planned, restructuring related to our adjusting cost structure in Europe and EF&C acquisition integration reduced margins by 190 basis points. Despite the fact that we're beginning to trend positive on price in this segment and actually getting positive price in the first quarter, price/cost reduced margins by 110 basis points.

Just stepping back for a minute from some of these near-term challenges in the auto market. Our new program wins remain strong as does our new product pipeline. Our annual new program win targets equate to 2% to 3% of above-market organic growth, and we have met or exceeded those targets for each of the last three years and expect to do so again in 2019. Overall, we have a strong and focused business operating in a well-defined, highly value-added niche in the auto market. And we deliver a ton of value to our customers in serving that niche as reflected in both our level of profitability and in our organic growth rate over the last five years. As you all know, this is an industry that's going through significant change, and in our view, the trends and changes that will play out in the auto industry over the next decade or so only add to the significant future profitable growth potential that ITW has in this space. There's no question that we're in a challenging point in time with regard to the auto market, and we are taking the appropriate steps to adjust our cost structure accordingly. In fact, we're performing quite well in the current auto downcycle as reflected in our ability to maintain auto OEM segment operating margins well above 28% despite a meaningful year-over-year revenue decline over the past two quarters. We will continue to manage our way through these near-term demand challenges, but our primary focus remains on acting and investing to position ITW to take full advantage of the significant long-term profitable growth potential that we have ahead of us in our niche of the auto market.

Moving on to Slide 6. Food Equipment organic growth was up 3% on an equal days basis, which follows the best quarter in four years. You will recall that Q4 organic growth was up 5%. In North America, organic growth was 2% with equipment flat and service up a strong 4%. Growth in independent restaurants and quick service restaurants (QSR) was solid, partially offset by a decline in institutional, where we had a tough comp of 10% growth in the prior year quarter. Food retail was a bright spot, up double digits, and we're encouraged to see a sequential recovery taking shape there. Overall, current run rates, coupled with new product introductions, support our view that sales trends will improve from here as the year progresses. With respect to international markets, Europe grew mid-single digits, primarily on strong performance in our ware wash division. Operating margin was almost 25% with Enterprise Initiatives and volume leverage offsetting the impact from restructuring activity in this segment. Test & Measurement and Electronics had a solid quarter with organic revenue up 1% on an equal days basis against a tough comp of 8% organic growth in the prior year. As expected, Test & Measurement was down 2% on lower sales to semiconductor equipment manufacturers. Excluding semiconductor, Test & Measurement was up 5%. Electronics was up 1% with strong sales in equipment assembly and contamination control, partially offset by a decline in electronic components where we had a 9% growth comp last year. Operating margin expanded 70 basis points to 24.1% with Enterprise Initiative benefits, the main driver. On to Slide 7. Welding had a solid quarter despite the fact that organic growth was off to a slow start in January, in part because our main operations in Wisconsin were shut down for two days due to weather. Welding ended up 5% on an equal day basis against a tough comp of 8% last year. As you can see on this slide, organic growth was fairly consistent across the board with equipment and consumables both up in the 3% to 4% range. North America industrial was up 3% against a comp last year of 15% and Commercial was up 5%. International growth was particularly strong in China, up more than 20% while Oil & Gas was essentially flat. Based on current run rates, we continue to expect organic growth of 3% to 6% this year against a tough 2018 comp of 10%. Operating margin was 28.1%, up 40 basis points in the quarter. Polymers & Fluids organic growth was up 1% on an equal days basis. As we talked about on the last call, we expected auto aftermarket to be down following strong 7% growth in the fourth quarter driven by a new product launch. Polymers was up 2% while Fluids was up 1% and operating margin expanded 40 basis points in this segment as well. Turning to Slide 8. Construction organic revenue was flat on an equal days basis. North America was down 3% due primarily to a tough comp with Q1 last year, up 7%. Residential remodel sales were essentially flat while new construction was impacted by softness in U.S. housing starts. Commercial construction was down 4%. Recent sales trends support our view here that we expect sales to improve going forward as comparisons ease and new products are introduced. Europe grew a strong 5% with robust demand across the board. Australia and New Zealand sales were down 6%, similar to the fourth quarter with some continued softness in the economy. Specialty organic growth was flat on an equal days basis with solid organic growth of 6% in the equipment businesses offset by softness in consumables, specifically, a few divisions internationally including graphics and appliances. Overall, international is down 6% and North America grew 2%. Operating margin was essentially flat at 26.5%. Moving on to Slide 9 and an update on 2019 guidance. As you saw this morning, we are reiterating our full year EPS guidance range of $7.90 to $8.20, which represents 4% to 8% growth year-over-year. We now expect organic growth in the range of 0.5% to 2.5%, given the slow start in January. Our guidance is based on current demand run rates and a risk-adjusted second half forecast for auto builds as we talked about. This compares to prior guidance for organic growth of 1% to 3%. And other than the slow start to the year, our outlook for organic growth through the rest of the year is essentially unchanged. As we talked about on the last call, we fully expected going into 2019 that the first half of the year was going to be more challenging for a number of specific reasons as many of these challenges would dissipate such as the operating environment will be more favorable in the back half of the year. As Scott mentioned, this dynamic is pretty much as expected, and our current view of the year is pretty much in line with the organic revenue guidance ranges by segment and the EPS bridge that we provided on our last call. Because the first half of 2019 will be a little more challenging than what is typical for us in terms of year-over-year comparisons, I'll spend a minute describing how we expect some of these challenges to play out as the year progresses. On Slide 3, we sized the EPS impact in Q1 from foreign currency translation impact, restructuring costs, and tax rate for a total of $0.16 year-over-year. For Q2, we expect currency impact at current rates of about $0.06 and higher restructuring activity of about $0.03 for a total of $0.09 in Q2, which adds up to about $0.25 per share for the first half of 2019. These three items are still headwinds year-over-year in the second half, but only to the tune of $0.05 to $0.10. In other words, we expect to see an improvement to second half EPS of $0.15 to $0.20 versus the first half on currency, restructuring, and tax. Now let's talk about organic growth. First, in terms of sales comparisons year-over-year, we have one more challenging organic growth comparison ahead of us in Q2, and then comps get significantly easier in the second half. Second, there's one extra shipping day in the third quarter, which as I mentioned, adds 1.5 percentage points to our Q3 organic growth rate. Third, auto builds for the combined regions, North America, Europe and China, are expected to improve significantly in the second half. As I mentioned earlier, IHS forecasts builds in these combined regions will be up 4%, and our guidance has risk-adjusted this down to builds being flat. Therefore, based on current run rates, easier comps, the extra shipping day, and our risk-adjusted view of auto builds, we expect organic growth in the second half will be in the range of 3% to 4%. Finally, on the margin side, we talked about much improved price/cost dynamics with stronger pricing and more favorable raw material costs. At this point, price/cost margin impact is essentially neutral, and on a dollar basis, price remains significantly higher than the raw material costs. In addition, we expect that restructuring benefits related to the projects that we accelerated into the first half will start to give benefits in the second half of the year. The average payback on the projects that we approved in the first half are less than a year, and the savings projected for the second half on these projects are expected to be in the $25 million to $30 million range. The most significant and consistent driver of margin improvement remains the Enterprise Initiatives, where we have clear line of sights to projects and activities that support at least 100 basis points of improvement every quarter going forward and for the full year. And as I said earlier, we're off to a strong start in free cash flow and expect conversion above 100% of net income for the year. And as you know, we've allocated $1.5 billion to share repurchases in 2019. Before I wrap up my prepared comments, just a few words on our portfolio management activities. Overall, we're on track to complete some of our planned divestitures in 2019, pending Board approval. Given the quality of these ITW businesses, we're seeing solid interest and attractive valuations. As we complete the project schedule for 2019, they will trigger some pretty significant gains on sale and cash proceeds, all of which are excluded from our current guidance. As we have stated before, the divestiture of these long-term growth-challenged divisions, when completed by the end of 2020, are expected to be accretive, favorable to our overall organic growth rate and margins in the tune of 0.5 point of organic growth and 100 basis points of margin expansion. And as a reminder, we're committing to making sure that these divestitures are EPS-neutral, and we plan to offset any EPS dilution with incremental share repurchases above the $1.5 billion in our plan today. In summary, as we have for the past 6-plus years, we delivered on our quality commitments despite some near-term challenges that we continue to expect will dissipate in the back half of the year. Overall, we're set up for a stronger second half in terms of delivering solid organic growth with best-in-class margins and returns, accelerating earnings growth, and strong free cash flows. With that, Karen, back to you.

Okay. Thanks, Michael. We're going to open up the lines for questions. Cheryl, back to you.

Scott or Mike, I think you mentioned international being down 1%. What was Europe specifically? In the last quarter, you mentioned basically you're just seeing some isolated weakness in Europe mostly in auto. Is that still what you're seeing in Europe and what do you expect for the year there?

Yes, in Europe, overall there was a decline of 2%. The most significant drop was in the automotive OEM business. Excluding that, we are actually reporting positive performance in Europe. We are witnessing strong results, with Construction Products up by 5% and Food Equipment up by 4%. The automotive business was the primary factor affecting our results.

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

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

I would like to mention that in response to your visibility question, these are book-and-ship businesses, meaning they do not have long lead times. We are observing consistent performance at the moment, but these businesses do not involve lengthy lead times. Therefore, the current conditions appear to be stable.

First half versus second half? I know that in the Q, we'll get more information around price and cost. But...

Joe, we were cut off, I think, from the starting part of your question. Can you back up from the beginning, please?

Sure, I'll start by saying good morning. Michael provided some good insights on the first and second halves. My question relates to price and cost, and I know we'll get more details in the Q. However, could you offer additional information about trends in price and cost, what you've observed in the segments this quarter, and how you expect that to evolve? Are there specific segments that might perform better as we move through 2019?

I would say overall, we observed positive pricing in all segments, including, for the first time in a while, in the automotive sector. Pricing was slightly better than our expectations for the first quarter. Similarly, on the cost side, we discussed last year’s decreasing raw material costs, which certainly manifested in the first quarter. Last year, total price/cost had a 50 basis point margin impact, even though we were positive in dollar terms. This time, we experienced a 10 basis point negative margin impact in the first quarter. These price/cost dynamics are trending positively for the rest of the year. Regarding segments, I want to highlight that while the automotive sector showed positive pricing, it can be somewhat challenging and tends to take longer to reflect pricing changes. However, all the other segments demonstrated really strong pricing performance.

The environment we are observing is that raw material cost inflation is moderating and the impact of previous price adjustments is continuing to affect year-over-year comparisons. There is always a delay between cost increases and pricing adjustments. If input costs remain stable, we are benefiting more from pricing, which we experienced in Q1 and anticipate will continue for the rest of the year.

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

Can you just repeat the second part, Joe?

Yes, the second one was around the corporate number was lower than we expected this quarter.

I believe that's a reasonable perspective. On the corporate side, our corporate costs are largely stable year-over-year. While they might fluctuate a bit quarterly, I would suggest using last year's figures for modeling. Regarding the auto question, yes, for the entire year, we expect an auto outgrowth of 2 to 3 percentage points, possibly leaning towards the lower end of that range in the second half, as we're aiming to be more conservative in this dynamic environment.

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

Yes. I believe Q2 will show organic growth similar to what we reported for Q1. The shipping day issue will be resolved in Q2, but the first half is expected to be quite challenging. That's the insight I can offer regarding Q2 and the first half.

Okay, fair enough. And then just a quick follow-up on Test & Measurement. Looks like semiconductor was really sort of what dragged that down. What are you hearing or seeing relative to semiconductor as we go forward?

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

I have two questions. First, regarding your comments about improvements in March, do you believe that aligns with what we’ve heard from other industrial companies? Could you elaborate on which geographies or segments it was most noticeable? Secondly, concerning your guidance, I see you’ve slightly reduced your organic growth forecast, and you mentioned the impact on shipping days and EPS, but the margin expansion of 100 basis points remains unchanged. With the lower organic growth, how do we still achieve the same margin improvement despite the variability quarter-to-quarter?

Yes, you can calculate that yourself; a 0.5 point of organic growth translates to a mid- to high single-digit impact on EPS. The main factor counteracting this is the price/cost dynamic we've discussed, which offsets it along with a few other variables. However, the improvement in the price/cost dynamics is the reason we are maintaining our EPS guidance for the year, even with lower organic growth. Regarding your first question about the dynamics from February and March, it was observed across all segments. Looking at the major geographies, we experienced similar trends with a slower start to the year, followed by sequential improvements in February and March that exceeded our usual seasonality. This is definitely positive and reflects what happened in the first quarter.

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

Yes, I think the comparison is a bit tougher. We were up 4% in Q2 last year, so your points are valid. The comparison is just more difficult in Q2.

And then just to clarify on the restructuring, Michael. The $0.09 in the first half, that's just the gross cost of the restructuring or is there some net benefit from the actions already kind of showing up in that number?

That's just the gross number. It reflects the year-over-year increase in restructuring costs. Specifically, year-over-year, the restructuring cost is $0.10 higher, and of that amount, $0.09 is attributed to the first half of the year.

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

Yes, the main effort was focused on mitigating raw material costs, including the impact of tariffs, and we have effectively achieved that. We are moving into a more stable pricing environment moving forward. As Scott mentioned, we experienced some lag last year, but we have addressed that and are seeing a more favorable trend. However, to answer your question, we do not anticipate any price reductions. We plan to maintain our current pricing and are currently benefiting from improved raw material costs.

I wonder if you could clarify the PLS for the year. I know you're fitting a lot into the first half. Will it be mostly completed, or are there more items that you can adjust in the second half if necessary?

Yes, it's not really a number that we manage at the moment.

Certainly, manage over the time.

It's more an outcome of the hundreds of activities and projects going on across the company. And so it was 70 basis points in the first quarter and our view for the year has not changed at 80 basis points.

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

Well, we are going to experience some impact from these businesses, as they are profitable. Some earnings will decrease, but the plan is to offset any earnings dilution with additional share repurchases beyond the $1.5 billion already outlined in the plan.

$1.5 billion.

$1.5 billion. Did I say $1.5 million? $1.5 billion that's in the plan.

I wanted to discuss the trend you mentioned, starting with a slow January that improved through March, and you noted it was fairly widespread geographically. Could you elaborate on what insights you have regarding the factors contributing to this in the U.S. and also in international markets?

Yes, Jeff mentioned a few of them. I think it's difficult to quantify factors like weather. However, we know that our operations in Wisconsin in the Welding business were shut down for two days, which certainly had an impact. Beyond that, it's quite challenging to assess.

I would say there was a clear potential if the issues had been limited to North America or the U.S., which were related to weather and the government shutdown. The consistency of these issues in our international business was unexpected. Frankly, we don’t have many solid answers or explanations, other than acknowledging that it was a factor that seemed to have lessened as we progressed through the quarter. Overall, it was quite an intriguing beginning to this quarter.

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

I would say these were planned activities just as we put together the acquisition integration plans. If anything, they were originally scheduled for this year but we moved them forward by a couple of quarters. However, those activities were part of our plans all along.

We're quite focused in Europe, so while some of the acceleration was planned, it is largely a response to the decrease in production rates there. Additionally, there are other restructuring efforts in our core auto businesses in Europe. The typical integration process is usually 3 to 5 years, so these developments are essentially part of the normal progression with EF&C. Therefore, we do anticipate a slowdown in about a year regarding specific restructuring related to EF&C.

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

The majority of the restructuring, specifically 75%, will be completed in the first half of this year. As a result, we should see a benefit in the second half compared to the first half when we advance to the latter part of the year.

In terms of less year-to-year headwind and also in terms of benefits from the investment...

Right, there's two dynamics here. That's a good point. I mean, there's lower restructuring costs in the second half of the year and you're starting to see the benefits from the projects that we are executing right now and that we've approved for the first half of the year and quantified that at $25 million to $30 million. So $0.05 to $0.06 a share of benefit here in the second half relative to the first half.

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

It's difficult to hear you, Mig. The volume was a bit low. However, I believe Food Equipment, like the other segments we discussed, had a slower start but gained good momentum in February and March, increasing by 3% on an equal days basis after a 5% rise in Q4. In North America, the positive news is that the restaurant sector, particularly quick service restaurants, grew in the mid- to high single digits. Food retail, which includes grocery stores, showed significant year-over-year growth. The challenge came from comparisons in the institutional sector, where there were larger projects that fluctuate; last year we saw a 10% increase in that area. As we mentioned, with the current run rates, we have new products coming in, and anecdotal evidence from quoting activity, backlog, and order activity all suggest a solid year ahead with 3% to 5% growth. Additionally, new products are improving, retail conditions are getting better, and Europe is performing strongly, giving us confidence for the rest of the year.

And the service business growing by the best quote, that is growing 4% to 5%.

Yes, service up 4%, it was certainly encouraging. So we're on track here, Mig. It would be our current view. Okay. Okay. I appreciate that. Then switching to Welding. So you mentioned a couple of missed shipping days in Q1. I'm presuming this is, I don't know, as much as 300 basis points worth of growth to that segment. When do you expect to make those up? Is that lost business? Or do you just make it up in subsequent quarters? And of course, comps are getting tougher here as well, especially on a two-year stacked basis. Do you think there's enough momentum in this market to allow you to really hit kind of this 3% to 6% guidance? Yes, we are on track for 3% to 6% organic growth. It's difficult to assess how much we recovered from the two days the operations were halted in Q1 and how much we will regain in Q2. Overall, the situation remains solid. Equipment sales are up 3%, consumables increased by 4%, and the industrial business also rose by 3% despite tough comparisons. The commercial segment saw a 5% increase, and national performance was strong. China grew by 20%, which we haven't emphasized much, and there was a slight slowdown in Oil & Gas. Some of that slowdown could be attributed to the rental business and weather conditions. However, we are optimistic about the outlook for Welding this year.

My questions have been answered, but maybe a little bit more of a deep dive into Construction Products, both U.S. and international, just some commentary on what you're seeing in those markets.

Yes. I think I sound like a broken record here, but this was a little bit of a slower start. North America was down, which is not typical. We did have a tough comp last year. The residential remodel side is still pretty solid, I think into the big box, kind of retail channel very good. Commercial was down 4%. That can move around a little bit and has kind of been flattish over the years. I'd say we certainly saw a pickup here in February and March, which is encouraging. We got some new products coming in our cordless technology that's going to get rolled out this year across all geographies. Europe really good, up 5%. And then Australia and New Zealand, as expected, down 6%, just like we did last year in the fourth quarter. And I think there, that's really more of a macro economy than anything else. So...

Okay. And maybe some commentary on North America resi, we're seeing a slowdown in housing. Are you seeing any reacceleration and any color there on the housing side?

There was a bit of activity in the first quarter. Overall, the residential remodel sector remained stable. The remodel segment is doing well, while new residential construction is somewhat slower. However, we don't believe this reflects any significant macroeconomic trends. We remain optimistic as we look ahead to the second quarter and the rest of the year.

I understand many questions have already been addressed, but I apologize if I overlooked this one regarding inventory destocking. We heard from 3M recently that they experienced significant destocking in the automotive sector, which I assume aligns with your just-in-time strategy. I'm trying to gain insight into whether you observed anything in the fourth quarter pre-buy or first quarter destock that could indicate that the first quarter may not be as slow as it initially seems.

In the auto sector, as production decreases, there is a cumulative effect on inventory at different levels, including OEMs. I would characterize this as intentional destocking, but from our viewpoint, it's simply a normalization of inventory levels due to lower production rates. However, this does create some additional effects beyond the decrease in actual final product output. In the automotive sector, when discussing declines in the high single digits, some of this certainly influenced our organic sales in Q1. Beyond that, I am not aware of any pre-buy or significant actions in our other segments related to this situation.

Got it. And do you have any kind of above-normal price increase on Jan 1 that might have supported that even if it wasn't obvious to see that people would've looked at? Or is the pricing calendar was a little different?

From a pricing perspective, we implemented price increases across all of our divisions. There were indeed pricing actions that occurred in Q4 and early Q1. However, I cannot confirm that these were predominantly concentrated on January 1, such that they would have significantly influenced any substantial pre-buy at the enterprise level. Nonetheless, at the division level, there were likely some fluctuations related to this.

Yes, I would just add to that, I mean, the pricing activities have really been going on across the company for the last 6 to 9 months as we've worked to offset the raw material cost inflation. And so I would agree with Scott, we don't think anything unusual here, January 1.

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

In the first half of our spending, nearly half is allocated to the automotive segment we discussed, while the remainder follows our usual distribution of activities across various segments. If you analyze the numbers, Construction, Specialty Products, and Food Equipment, in that order, would be included, but overall it's quite diversified.

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

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

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

Yes, I believe I can point to our track record over the last six years, where we've done a commendable job of providing a realistic outlook for the year. We have executed effectively, often exceeding those expectations, and we anticipate being able to maintain this performance moving forward.

Okay. And then maybe just a follow-up to Mig's question on Welding. Are you anticipating that the organic growth would hit at or near the top end of the 3% to 6% range in the second half? And if so, is that China continuing that strong double-digit pace? Is it oil improving? How are you thinking about that?

Yes. For Welding specifically, we are comfortable with the growth range of 3% to 6% for the year. We face a tough comparison in Q2, but it will become somewhat easier in Q4. However, I cannot provide specific quarterly estimates for the Welding business in the second half.

We're near the end of the hour. How about we take one more question and end the call.

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

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

And then on the price/cost impacts, if we kind of think about how costs are expected to wash through the year, if we assume that there's no major change in input costs from this point, kind of like flat and then the spot rate, is it possible that price/cost turns into a tailwind for you guys by the back half?

Yes, that is a possibility. I mean, things are pretty dynamic right now. On the cost side, there's still the tariff situation, and who knows how that will play out.

And if you lock the cost right now.

To answer your question, no, it's based on cost where they are today and where price is. Mathematically, it should turn positive in the back half of the year from a margin standpoint.

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