Illinois Tool Works Inc (ITW) — Q4 2019 Earnings Call Transcript

Okay. Thank you, Julianne. Good morning, and welcome to ITW's Fourth Quarter 2019 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss fourth quarter and full year 2019 financial results and provide guidance for full year 2020. Slide 2 is a reminder that this presentation contains our financial forecast for 2020, 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. 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. Finally, I would like to remind folks, we have our Investor Day coming up six weeks from today on March 13 in Fort Worth, Texas. We encourage you to join us or listen to the webcast for an update on our strategy and long-range plans. The link to access the webcast is posted on our investor website. Please turn to Slide 3. And it's now my pleasure to turn the call over to our Chairman and CEO, Scott Santi.

Thank you, Karen, and good morning everyone. The ITW team delivered another quarter of solid operational execution and strong financial performance in Q4. Despite some broad based macro challenges, we delivered GAAP EPS growth of 9%, operating margin of 23.7% and after-tax return on invested capital of 28.9% in the quarter. For the full year against the backdrop of an industrial demand environment that went from decelerating in the first half of the year to contracting in the second half of the year, we continued to execute well on the things within our control. As a result, despite revenues that were down $700 million or 4.5% year-on-year, we delivered record GAAP EPS of $7.74, expanded operating margin to 24.4% excluding higher restructuring expenses, and grew free cash flow by 9%. In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases. Equally important, in 2019, we continued to make solid progress on our path to ITW's full potential performance through the execution of our enterprise strategy. Last year, we invested more than $600 million to support the execution of our strategy and further enhanced the growth and profitability performance of our core businesses. In addition, each of our divisions continued to make progress in executing well-defined and focused plans to achieve full potential performance in their respective businesses. We look forward to providing a full progress update on our enterprise strategy and our progress towards ITW's full potential performance at our Investor Day in March. Looking ahead, ITW's powerful and proprietary business model, diversified high-quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver a differentiated performance across a range of economic scenarios in 2020 and beyond. Now, I'll turn the call over to Michael who will provide you with more detail on our Q4 and full year 2019 performance as well as our guidance for 2020. Michael?

Thank you, Scott, and good morning everyone. In the fourth quarter, organic revenue decreased by 1.6% compared to the previous year in a challenging demand environment. The General Motors strike lowered our enterprise organic growth rate by about 50 basis points, and product line simplification accounted for a 60 basis point impact this quarter. By region, North America saw a decline of 2%, while international revenue decreased by 1%. Europe was down by 1%, and Asia Pacific remained flat. In China, we experienced broad-based organic growth across our portfolio, increasing by 7% year-over-year. As expected, our execution on controllable factors remained robust in the fourth quarter. Our operating margin was 23.7%, which reflects a 40 basis point adverse impact from increased restructuring expenses year-over-year. If we exclude these higher expenses, the operating margin improved by 10 basis points to 24.1%. Enterprise initiatives contributed 130 basis points, and price cost was beneficial by 30 basis points. GAAP EPS increased by 9% to $1.99, including a gain of $0.11 from three divestitures and a $0.06 headwind from higher restructuring expenses year-over-year as well as foreign currency translation effects. The effective tax rate for the quarter stood at 22.8%. Our free cash flow was 114% of net income, and we repurchased $375 million of our shares during the quarter as planned. Overall, Q4 was marked by strong operational performance and resilient financial results despite a challenging demand environment. Let's proceed to the details on operating margins. The overall operating margin of 23.7% declined by 30 basis points year-over-year, mainly due to increased restructuring expenses. Excluding those higher expenses, the margin improved by 10 basis points even as revenues dropped by 3%. Enterprise initiatives were a key highlight and main driver of our margin performance, contributing 130 basis points, the highest since Q4 2017. The impact of enterprise initiatives was widespread across all seven segments, ranging from 80 to 200 basis points, with benefits from earlier restructuring activities. Most of these restructuring projects support the implementation of our enterprise initiatives, particularly our 80/20 front-to-back execution. Pricing remained strong, with prices exceeding raw material costs, leading to a positive contribution of 30 basis points this quarter. Volume leverage had a negative impact of 30 basis points. In Q4, as is customary, we adjusted our inventory standards to align with current raw material costs. As raw materials have generally decreased over the year, the annual mark-to-market adjustment on our inventory had an unfavorable effect of 30 basis points compared to the previous year. Additionally, last year, we had a favorable item that did not repeat this year for 40 basis points. Moreover, wage and salary inflation accounted for 50 basis points, resulting in solid margin performance for both the quarter and the year. Now let's review segment performance. In 2019, industrial demand was tough across all our segments, with organic growth rates in each of our seven segments lower than in 2018. At the enterprise level, organic growth shifted from a positive 2% in 2018 to a decline of 2% in 2019, with the most significant swings in our capital equipment and automotive offerings. For automotive, organic revenue dropped by 5% due to the GM strike, which cut revenues by about two percentage points. Examining regional performance, North America aligned with D3 production, decreasing by 13%, Europe remained flat against a 6% decline in builds, and China saw organic growth of 11%, contrasting with a 1% increase in builds. The continued strong output in China indicates growing penetration with local OEMs. In food equipment, we saw a good quarter with organic growth of 2% year-over-year, despite a tough comparison with 5% growth last year. The service business was solid, up by 4%, while equipment growth of 1% included double-digit growth in retail but a modest decline in institutional and restaurants due to strong year-over-year comparisons. Operating margin expanded by 90 basis points to 27.5%, primarily driven by enterprise initiatives. The test and measurement segment had a very strong quarter, with growth in test and measurement at 6% and a notable 13% increase in our Instron business. This segment also observed a significant rise in demand from semiconductor customers, and electronics grew by 2%. The margin was particularly strong, expanding by 330 basis points to a record 28.1%, the highest in the company this quarter, thanks to contributions from enterprise initiatives and volume leverage. Additionally, we divested an electronics business with revenues of about $60 million in 2019. In welding, organic revenue fell by 4% against a challenging comparison of 8% growth last year. Equipment in North America was down by 3% compared to the previous year's 7% increase, with lower demand mainly in the industrial sector. However, the commercial sector, which includes smaller enterprises and personal users, remained stable. Oil and gas revenues dipped by 2%, with an operating margin of 25.4%, down by 150 basis points due to increased restructuring expenses. This quarter, we also divested an installation business that had revenues of around $60 million in 2019, which lowered welding's organic growth rate by 250 basis points. In the Polymers and Fluids segment, organic growth decreased by 2% compared to a tough 4% growth last year. Polymers remained flat, the automotive aftermarket declined by 1%, and fluids dropped by 6%. Nonetheless, operating margin remained strong, increasing by 150 basis points primarily from enterprise initiatives. In construction, organic revenue dropped by 1%, with continued softness in Australia and New Zealand at -4%. Europe saw a 3% decline, with the U.K. down by 14%, while North America improved by 2%, with residential remodels increasing by 2% and commercial by 5%. Operating margin was at 22.2%, affected by inventory adjustments and restructuring expenses. Specialty organic revenue fell by 3%, though this was an improvement from recent quarters. The main factors behind the decline were significant PLS and the relative performance of businesses earmarked for potential divestiture. Excluding these potential divestitures, core organic growth was down by 1.7%. Regionally, North America was down by 4%, and international was down by 3%. A business in this segment with revenues of approximately $15 million in 2019 was divested, which impacted specialties growth rate by nearly 8 percentage points. Looking at the entire year of 2019, organic revenue was down by 1.9% in a challenging industrial demand climate, with total revenue decreased by 4.5% as foreign currency impacts reduced revenues by 2.3% and divestitures by 30 basis points. GAAP EPS was $7.74, including a $0.09 gain from divestitures and a $0.32 reduction from foreign currency and higher restructuring expenses year-over-year. Operating margin stood at 24.1%, or 24.4% after excluding increased restructuring expenses, with enterprise initiatives contributing 120 basis points and after-tax return on invested capital improving by 50 basis points to 28.7%. We demonstrated strong cash performance, with free cash flow increasing by 9% and a conversion rate of 106% of net income. We have made substantial internal investments to grow and support our highly profitable businesses, increased our annual dividend by 7%, and utilized our share repurchase program to return capital to our shareholders. We are on track with various divestiture processes and are looking to potentially divest certain businesses with revenues totaling up to $1 billion, targeting completion by the end of 2020. The strategic goal of this phase in our portfolio management is to improve our overall organic growth rate by 50 basis points and enhance margins by around 100 basis points. Without accounting for potential gains from sales, we plan to offset any EPS dilution through additional share repurchases. In Q4, we completed the sale of three businesses with combined 2019 revenues of around $135 million, realizing a pre-tax gain of $50 million or $0.11 a share. In 2019, these businesses had a 20 basis point negative impact on our organic growth rate and contributed 10 basis points to our margin rate. In summary, amidst a challenging demand environment, the ITW team performed well, delivering solid financial results and making progress on our enterprise strategy, including organic growth initiatives, positioning the company for distinctive performance in 2020 and beyond. We will provide an update on our organic growth initiatives, where we analyzed the market growth or decline for each segment and compared it with their actual organic performance in 2019, alongside product line simplification data. We noted that the full potential steady state for PLS is projected at about 30 basis points. Overall, we have made good progress as all segments are outpacing their underlying markets except for specialty products. At the enterprise level, we estimate that we surpassed our blended market growth rates by about 1 percentage point. We anticipate that by fully executing our Finish the Job agenda in the coming years, we can achieve one to two percentage points of additional improvement in ITW's organic growth rate. We look forward to a comprehensive progress update at our Investor Day in March. Now, let's discuss 2020. We expect GAAP EPS to be in the range of $7.65 to $8.05 for 2020, taking current demand levels into account and adjusting for seasonality. The forecast for organic growth at the enterprise level is estimated between 0% to 2% for the year. At current exchange rates, foreign currency translation and revenue from our 2019 divestitures are each expected to pose a one percentage point headwind. The impact from PLS is anticipated to be approximately 50 basis points. We expect our operating margin to increase from 24.1% in 2019 to between 24.5% and 25% in 2020, with enterprise initiatives contributing approximately 100 basis points. After-tax return on invested capital should improve to between 29% and 30%. As usual, we anticipate strong free cash flow with conversion exceeding net income. We have allocated $2 billion for share repurchases, with core repurchases of $1.5 billion and an additional $500 million to cover EPS dilution from the completed divestitures. Other considerations include an expected tax rate between 23.5% and 24.5%, which translates to a $0.10 headwind on EPS, and unfavorable foreign currency effects at today's rates amounting to $0.10 EPS. Regarding the Coronavirus situation in China, we are in the same position as others and have incorporated a week of production loss into our guidance, assuming operations resume in China on February 10th. However, it remains uncertain, and we will continue to monitor the situation closely. Overall, ITW is well positioned for differentiated financial performance across various scenarios as we execute on controllable factors and make significant strides towards full potential performance through the implementation of our Finish the Job enterprise strategy. Lastly, we will outline the organic growth outlook by segment for the full year of 2020, acknowledging that these forecasts are based on current run rates, adjusted for seasonality, and influenced by year-over-year comparisons throughout the year. It’s important to note that we do not expect any demand acceleration within our guidance. Each segment is expected to show an improvement in organic growth rates in 2020 compared to 2019, and every segment is anticipated to enhance their margin performance this year.

All right. Thanks Michael. Julianne, we are ready to open up the line for Q&A.

Hey, good morning guys. Scott and Mike, you had a big pickup at Instron in the quarter and in Food Equipment, which are CapEx businesses that you've tended to watch over the year. So while recognizing all the uncertainty that's out there now because of the virus, maybe still some trade uncertainty, did you actually see some movement in CapEx decisions from your customers and what does it tell you about 2020?

Well, I think Q4 certainly the growth rates in those businesses were better than what we saw in Q3. Part of that was a number of orders in Q3 that were deferred into Q4. And so I think, it’s in our view, it's a little too early to talk about a pickup in demand here in those businesses. Certainly encouraging, but a little too early to tell Andy.

Okay. That's helpful. And then, if I look at your enterprise strategy program, your margin benefit seems to be accelerating here. As these programs get mature, you would think that maybe they'd level off or decelerate. So I know you have your Analyst Day coming up, you'll talk about this, maybe just continuing to get better on 80/20 as you evolve in enterprise strategy, is that really what this is, and do you expect your enterprise strategy to be at least 100 basis points through that target date of 2023?

Well, I mean, let's take one year at a time here. I think the fact that we are eight years into this current enterprise strategy and still generating 100 basis points of margin expansion in 2020 is certainly encouraging. We've talked about before why that is, 80/20 today is significantly more powerful than when we began this journey. We've continued to learn and gotten better from an execution standpoint. The raw materials that we're working with in terms of the quality of the businesses are significantly higher after all the work we've done in the portfolio. And so I think we're really encouraged by the continued progress. We're highly confident that we will reach our 2023 performance goals. 80/20 will continue to be a big part of that, but it's a little too early to tell what those contributions might be in 2021 and 2022, but you can rest assured that we are highly confident in achieving those margin objectives we've put out there.

Thanks Mike. Appreciate it guys.

Thank you. Good morning everyone. Good to see that the divestiture activity is picking up. Is it just that some things kind of fell in place or do you expect actually the pace to be accelerated here? And can you remind us how many individual businesses are left, so these are all kind of one-at-a-time transactions, I would take it.

Yes. I believe that the timing here aligns with the process we've established. We've completed three divestitures and, when we file the 10-K, you'll notice that there are three additional businesses currently categorized as held-for-sale. There are also several more businesses beyond that. We're making good progress despite a slightly more challenging macro environment than we anticipated, but the most important...

Which has slowed the process down a bit.

Yes. I think, I was going to say, it’s probably slowed things down maybe a little bit. I think the really important thing is we are still on track to achieve the 50 basis points of structural improvement in our organic growth rate and a 100 basis points of margin improvement. Current expectations, we're targeting to get those done by the end of 2020, and we certainly have a shot at that, but as Scott said, I mean, just given the macro backdrop that might get pushed out a little bit. But overall these processes are on track.

Well, on the flip side of that, obviously you've been hunting for deals given that you're kind of a cash-rich strategic buyer, do you see things kind of getting easier? Is the pipeline filling up? Like what would you really expect to happen here in 2020 on the acquisition side?

I believe we have been quite active in considering the right assets to add to our portfolio. Last year, we were very engaged in this area, but we haven't completed any acquisitions yet. This is always a matter of strategic fit and valuation, and in 2019, while we looked at some opportunities that aligned strategically, they did not meet our valuation criteria. We will continue to evaluate opportunities for portfolio expansion, but we will maintain a disciplined approach. I am confident that we will successfully add to our portfolio in the future.

Great. Thanks for the color.

Good morning everyone. Just a quick question on the margin guidance. Have you factored in any restructuring at this point?

Yes. At this point, we are guiding to margins for 2020 in the range of 24.5% to 25%, which includes restructuring. We are assuming that restructuring will be flat on a year-over-year basis, and we will see how the year plays out and adjust accordingly.

Flat in dollar terms or in terms of margin drag?

Flat in dollar terms and margin drag and therefore EPS neutral.

Okay. Then my follow up, I'm just trying to kind of wrap my mind on the buckets here. So, if I'm looking at the low end of your guidance the 24.5, I'm presuming that that's consistent with the low end of the revenue guidance or the volume that you're providing. And I'm comparing it to sort of what you’ve done in the prior year. Can you maybe help me with a bit of a bridge here? Obviously you've got the enterprise initiatives were a 100 basis points that helped, but there's some other items to price cost, maybe some other things that you are doing. How do we get to the high-end and the low-end here?

Yes. So Mig, are you talking EPS or margins. What would you like to do?

Just margin, not EPS, just margin.

Yes. So I think for 2020, we provided quite a bit of information already. And maybe one way to think about it is, the initiatives contribute a 100 basis points. We have positive volume leverage baked into our guidance. You can look at historical based on Europe organic growth rate, what the impact might be there. Price cost, we're assuming neutral at this point, maybe slightly positive and we'll see how that plays out. The divestitures that we completed in '19, that is a little bit of a favorability to margins. And then, I'd say the remainder here is going to continue to invest to support our organic growth initiatives. We're going to invest in our people and we're going to invest to sustain our core businesses as we always have. And so if you kind of look at the remaining buckets, 2020, maybe expect it to be similar to what we had in 2019.

Got it. That's helpful. And lastly, if I may, as you look at your segments into 2020, are there one or two that stand out to you as having more margin potential than margin expansion potential than average? Thanks.

Yes. I think, Mig, this is really across the board as I think I said in my comments, we expect every one of our segments based on our bottoms up planning process, based on what they have told us really at the divisional level on up, we expect every segment to continue to make progress in 2020 over 2019.

And I’d say that the other delta is what you talked about before, which is the volume leverage component, right? The more growth we get, the more increase in the margin we're going to get.

Yes. And I think you saw a good example of that. This quarter if you look at just the performance in test and measurement margins up, 330 basis points, two-thirds of that was the volume leverage and the enterprise initiatives. So, you can see what happens in these businesses when we get a little bit of volume, a little bit of organic growth coming through. So…

All right. Fair enough. Thank you.

Hi. Good morning. Just looking at your segment organic growth forecast, could you just walk us through the various segments and where you see the upside versus the downside risks?

I would say that these projections are primarily based on current run rates. There are a few segments, such as automotive OEM and welding, that show a slightly wider range due to market uncertainty. Food Equipment looks solid, falling within a two to four range, while Test and Measurement ranges from one to three. The other segments, including Polymers and Fluids, Construction, and Specialty, are generally in the low-single-digit range at the midpoint. That's how we view the situation. As you know, this is a rather uncertain environment. 2019 was challenging, and we're still assessing the developments with China that we just discussed. Currently, this is our forecast based on the demand levels we are observing in these sectors.

Yes. And in that context, I mean, you're much closer to these businesses than we are obviously, but then Polymers and Fluids, I think of that business as being more consumer driven. And so, can you just talk about all of the guidance for on the downside, the negative one?

Well, I think Polymers and Fluids is about half of the business, and when you mention being consumer-driven, I believe you're referring to the automotive aftermarket business. If you look at the retail numbers in that area, they seem to be down slightly. We've encountered some challenges this year on the MRO side.

Which is more B2B.

More B2B, the fluids business on the MRO side, particularly in Europe. And then, you also have a couple of other end markets that are not exactly very favorable at this point, including some petrochemical exposure. There is some marine exposure and so overall, we'd say Polymers and Fluids flat in 2019 and slightly positive here in 2020.

Okay. I appreciate the color and then I'll get back in the queue. Thank you.

All right. Thank you.

Thanks. Good morning. A little bit of a clarification on the margin walk, you called out several things, inventory restructuring, non-repeat of an item. Would those in the past typically be included in other?

Yes, that is correct. Okay. So the inventory adjustment, sorry, I need to interrupt you, but the inventory adjustment, it's one that we make every year. And it's just that this year, because raw material costs have come down throughout the year that adjustment is a little bit larger than prior years as we mark-to-market the inventory. And so we decided to call it out as a separate item and kind of give you the transparency, the detail around that.

Okay. Thank you. And then a few questions on the divestitures, on your earlier comment about the slower pace than expected due to the macro. Is that purely timing or are you encountering hesitancy from potential buyers of the assets because of the overall uncertainty? And then, for the three and the four sale category, you mentioned in the K, are they excluded from 2020 top-line guidance and what was their impact on 2019 margin performance?

Yes, let me start with that. We are assuming in our guidance that we will own those assets in 2020. The 2020 numbers do not include any further divestitures or acquisitions. This is really about the businesses that we currently own. In response to your first question, it's a combination of factors. I believe some of this is related to timing.

The process is taking longer.

Yes. I think, I was going to say, it’s probably slowed things down maybe a little bit. I think the really important thing is, we're still on track to achieve the 50 basis points of structural improvement in our organic growth rate and a 100 basis points of margin improvement, current expectations, we're targeting to get those done by the end of 2020, and we certainly have a shot at that, but as Scott said, I mean, just given the macro backdrop that might get pushed out a little bit. But overall, these processes are on track.

Okay. Thanks. Just as a follow-up on that, the three that are mentioned in the K. Should we expect those to have a similar type margin performance to the three that you have already been able to sell?

Yes. I think they're all pretty similar. I mean, there's a range. The average maybe it's the way to think about it is in that high-single digits EBIT percentage. So that's one way to think about it.

Okay. Thank you very much.

Good morning, everyone. Thank you. I'm curious about the current challenging demand environment. Despite this, you are still expanding margins. How is the company approaching the 3% to 5% organic growth objectives? At what point might it be counterproductive to pursue those goals in this kind of environment? Also, could you share your long-term margin expectations in a flat environment compared to the projected 3% to 5% growth?

From our core growth rate objectives, we essentially want to convey that our business should grow faster than the underlying growth rates of our markets by about 2% to 4% on average over time. Currently, the blended market rate estimates suggest a decline of 2.5% from last year. In a typical GDP scenario, whether it’s 2% or 3% in the long term, this is where our expectation of 3% to 5% growth for the company originates. The current industrial recessionary conditions do not alter our outlook on the long-term potential of the company. We have a highly differentiated portfolio that we believe can generate at least one point of growth from innovation and another point from market penetration. This is the standard we aim to meet consistently. Many of our businesses are already performing at that level and beyond. We do not want to let short-term market conditions disturb our long-term vision for the company's potential. Regarding margins, I'll let Michael add more, but we have performance objectives set for the future that we plan to continue progressing towards.

Yes. I think nothing has changed in terms of our view on the margin target as I said earlier. I mean, Ross, it might be helpful, the three to five, we know that we're not going to grow three to five every year. This is over a five-year period, we'd expect kind of in a normal macro that's the performance that we should be able to deliver. And with that comes to margins in that 28% range and EPS growth in the low double-digit, everything that we've laid out for 2023. So our views on those haven't changed just given the macro that we're in today.

No, thank you. I understand that you're still outpacing your end markets. My intention was not to criticize you for that. I was simply trying to clarify how much your long-term margin target relies on achieving the three to five growth compared to the possibility of remaining in a flat environment for the next few years.

Yes. I mean, again, I think the biggest driver here remains the continued strong execution on the enterprise initiatives. And then, there's a reasonable assumption of some volume leverage that comes with that. And you saw that, like I said earlier, if you look at Test and Measurement is a great example this quarter, you got a little bit of volume leverage. We get a normal macro environment. We're going to get there very quickly. I think that's what we're trying to say here. And over any five-year period, we expect that we'll average in that three to five range, but if we get a couple of really good years and we'll get there faster than that.

Okay. Since you mentioned, you reminded us of the semiconductors and I realize you weren't factoring any pickup into your guide but just ITW is obviously a great barometer for capital spending in general in the global economy. Are you seeing any signs of CapEx picking up anywhere or percolating or, it feels like discussions are getting a little bit more optimistic in any of your businesses?

No. Not at this point. I think Q4 was really more of the same. This remains a pretty challenging environment, so.

Okay, I understand. The last thing I want to ask about is the return of growth in your European and China auto businesses. With China reflecting growth for a couple of quarters now, do you believe that this trend is likely to continue, or does it still feel uncertain from quarter to quarter due to the weakness in the end market?

China is very solid. I mean, I think we have a long track record. The team has a long track record of outgrowing the underlying market there by a wide margin. And as I think we said in the prepared remarks, big drivers are continued penetration with local OEMs and there is a lot of runway still. And if you just look at the projects that have been locked in for the next two to three years, we're confident that that outperformance will continue.

Yes, regarding Europe and North America, the current situation involves using a broad figure for production, but the real issues vary significantly from one OEM to another in those builds and in each quarter. This creates a somewhat inconsistent comparison. Looking at the full year gives us a clearer picture of our performance in these regions. We plan to provide an update on our performance for 2019 at the Investor Day. I want to emphasize that we have a substantial pipeline of penetration projects in Europe and North America, and we expect to outgrow these markets by at least two to four points in the medium term. However, recent developments over the past six quarters, including how different OEMs are responding to the current environment and how supply chains are adapting, have introduced significant volatility that complicates our ability to recognize underlying progress. We monitor our penetration on a per vehicle basis with each OEM and feel optimistic about our potential to continue growing at a rate much higher than the market across the globe.

Got it. Thanks guys.

Good morning everybody. Hi guys, Michael, just a quick clarification, the repo is going from 1.5 to 2, is that delta of 500 to offset the 1.35 of the divestitures you announced or…

Yes, that's correct. Let me take a moment to clarify. Our estimate for surplus capital for the year is 1.5 billion, which is currently designated for share repurchases. I consider these to be core share repurchases. Additionally, there’s an extra 500 million allocated to compensate for the earnings lost due to the three divestitures. If any further divestitures occur this year, we will adjust the share repurchase figure accordingly, which means we could end up with a total that's greater than what is currently stated.

Got it. Michael, overall demand growth is likely to improve once we address some of the issues in China this year, and your spending is probably increasing in line with what other companies are doing. How confident are you in maintaining or thinking about a 100 basis points of enterprise initiatives that were successful in the past when growth was stronger? Is it possible that you could see better improvements from enterprise initiative benefits due to spending as growth increases, or how would you assess the balance of that? I suppose as conditions improve…

Yes. I would like to follow up on what Michael mentioned earlier. The visibility we have regarding the enterprise initiatives is primarily based on a one-year outlook, comprising specific projects that align with a broader strategy focused on two main areas: strategic sourcing and enhancing the quality of our 80/20 practices throughout the company. As we look ahead to 2020, I am confident that this is not the final chapter. This will continue to provide additional momentum for our profitability for some time. Additionally, regarding the incremental contribution from organic growth as it picks up, I believe we will generate an incremental contribution of around 30% to 35% from each dollar of organic growth, beyond what we achieve through enterprise initiatives.

That's helpful. Yes, it definitely helps. Lastly, Scott and Michael, what are your top personal priorities for ITW to accomplish? Perhaps we can frame that as we look back on 2020 in a year.

You asked to address this individually. Michael will mention improvements in CEO quality, but I believe we are already on that path. Our primary focus for the past couple of years has been to enhance our execution on organic growth. In this environment, it can be tough to notice our underlying progress. However, each day, our Vice Chair, Chris O'Herlihy, Michael, and all of our AVPs are focused on what we can do to advance the company toward our full potential in terms of organic growth rates. The enterprise initiatives also hold a lot of promise and require attention to keep that momentum going. Overall, I am optimistic about both the structural and strategic measures we are implementing to accelerate organic growth. I don't believe that will change in 2020, regardless of the current macroeconomic conditions. Now, I'll turn it over to Michael for his thoughts.

Mine is exactly the same. I would just add, John, that at Investor Day, we will spend a lot of time discussing the topic of organic growth, including a progress update on the number of divisions that are ready to grow and growing, defined as consistently growing above market. We will share those numbers with you, and you will see that we made steady progress in 2019. We expect to continue making progress in 2020 as we execute some focused plans. We will share those metrics and provide real divisional examples, as that is where the work is taking place. This will give you insights into what Scott is talking about. The entire company is focused on improving the organic growth rate, and we will give you much more detail when we meet in March.

I mean, the way you talked about Instron last time was very helpful. So yes, very much looking forward to it. Thank you very much. Bye. Bye.