Illinois Tool Works Inc (ITW) — Q1 2023 Earnings Call Transcript

Okay, thank you, Rob. Good morning, and welcome to ITW's first quarter 2023 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 ITW's first quarter financial results and provide an update on our outlook for the full year 2023. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2022 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 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. As you saw from our earnings release this morning, we delivered a solid start to the year, with results coming in largely in line with our expectations heading into the quarter. Starting with the top line, organic growth was 5% with four of seven segments delivering positive organic growth, led by Food Equipment up 16%, Welding up 10%, Automotive OEM up 8%, and Test & Measurement and Electronics up 6%. Polymers & Fluids was flat, Construction was down 1%, and Specialty was down 5%. Operating margin expanded 150 basis points to 24.2% with a 100 basis point contribution from enterprise initiatives. GAAP earnings per share increased 10% to $2.33, which was a new Q1 record for the company. Our free cash flow conversion rate was 86% of net income, which was in line with or modestly above normal Q1 levels. Looking ahead at the balance of the year, while there is of course some uncertainty with regard to the macro environment, I have no doubt that my ITW colleagues around the world will continue to react and execute at a high level to whatever comes our way. I will now turn the call over to Michael to discuss our Q1 performance in more detail and our updated full year guidance. Michael?

Thank you, Scott. And good morning everyone. ITW delivered another solid quarter operationally and financially, starting with organic growth of more than 5%. Foreign currency translation headwind and divestitures reduced revenue by 2% and 1% respectively. On the bottom line, our operating income grew 9% with incremental margins of 98%. Operating margin improved 150 basis points to 24.2% with enterprise initiatives and price costs contributing 100 basis points and 190 basis points respectively. In addition to higher wages and benefit costs year-over-year, we're funding our growth investments, including headcount in the areas that support our organic growth strategies and initiatives. And we still delivered 150 basis points of margin improvement in the quarter. GAAP EPS grew 10% to $2.33, which included foreign currency translation a headwind of $0.06, and our Q1 tax rate was 22.6%. And as Scott said, it was encouraging to see our free cash flow performance return to normal levels. Overall for Q1, excellent operational execution across the board and strong financial performance including record EPS. Please turn to Slide four, starting with positive organic growth in all of our major geographies, including North America, which represents about 55% of total revenues, and grew 5%, and Europe is up 6%. Asia Pacific grew 2%, despite a 6% decline in China due to COVID-related headwinds in Q1. Moving on to segment results, starting with Automotive OEM and solid organic growth of 8%. North America was up 3% and Europe grew 16%. China was down 5% due to COVID-related headwinds in Q1. And we're seeing the expected bounce back here in Q2. In terms of automotive OEM margins, we are beginning to recover the price cost margin impact that has diluted margins in this segment by about 450 basis points over the last two years. As a result, we expect price cost margin impact to turn positive starting in Q2, which, combined with positive volume leverage and contributions from enterprise initiatives, will lead to higher margins sequentially and year-over-year starting in Q2 and for the balance of the year. Turning to Slide 5. Food Equipment delivered another strong quarter with organic growth of 16% as North America led the way with organic growth of 21%. Institutional end markets were up more than 50% with particular strength in education and lodging. In addition, restaurants were up more than 30%. International revenue grew 9%, with Europe up 11% and Asia Pacific was down 6% due to China. Strong progress on margins with Q1 operating margin of 26.7%, an increase of more than 400 basis points year-over-year. Test & Measurement and Electronics delivered organic growth of 6% despite a double-digit slowdown in semiconductor-related revenues, which represent about 20% of segment revenue. On the other hand, demand for our capital equipment remains strong as evidenced by Instron, for example, which was up 22%. Overall, Test & Measurement grew 12% organically and electronics was down 4%. Moving on to Slide 6. Welding delivered double-digit organic growth of 10% in Q1 on top of 13% in Q1 last year, as equipment grew 10% and consumables were up 11%. Industrial sales remained strong with organic growth of 17%, while the commercial side was down 2%. North America grew 10%, and international grew 12%, driven by strength in the oil and gas business, which was up 15%. Operating margin expanded 110 basis points to 31.9%, a new record for the segment and the company. Organic growth in Polymers and Fluids was about flat against a difficult comparison of plus 13% last year. Automotive aftermarket was down 1%, Polymers grew 1%, and Fluids was also up 1%. On a geographic basis, North America grew 1% and international declined 2%. Turn to Slide 7. Organic revenue and construction was down 1% against a tough comparison of plus 21% last year. Residential construction was down 1% and commercial construction, which represents a little less than 20% of the business in North America was up 5%. Europe was down 9%, and Australia, New Zealand was up 3%. Finally, Specialty organic revenue was down 5%, which included 3 percentage points of headwind from product line simplification. On a geographic basis, North America was down 4% and international was down 6%. Okay, let's move to Slide eight, for an update on our full year 2023 guidance. As you saw this morning, we raised GAAP EPS guidance by $0.05 to a new range of $9.45 to $9.85, which considers the lower projected tax rate for the full year in the range of 23.5% to 24%. Given the level of macroeconomic uncertainty going forward, we're essentially holding our operational guidance and adjusting EPS to reflect the lower projected tax rate. Our organic growth projection of 3% to 5% reflects current levels of demand with some risk adjustment for further slowing in certain end markets. Combined, foreign currency translation impact at current rates and divestitures are projected to reduce revenue by 1%. Operating margin is projected to expand by more than 100 basis points at the midpoint of our range, which includes approximately 100 basis points from enterprise initiatives and positive price/cost margin impact. Like I said, we're off to a solid start to the year with some positive momentum heading into Q2, and we remain well positioned to continue to outperform in whatever economic conditions emerge through the balance of 2023. With that, Karen, I'll turn it back to you.

Okay. Thank you, Michael. Rob, let's open up the line for questions, please.

Hey, good morning, everyone. Michael, can you give us a little more color on how you're thinking about the company's margins for the year? I know you didn't change your forecast, but as you said, it was up 150 basis points in Q1. I think you guided us to 100 basis points, and you said the price versus cost in Q1, I think you said it was 190 points. I know you're thinking about 100 basis points for the year. So are you thinking that should be materially higher now especially given your comps returning in automotive? So what held you back from not increasing your margin forecast for the year?

Q1 aligned with our expectations across the income statement and free cash flow. Margins grew by 150 basis points, which is generally the lowest point for the year. Historically, we anticipate that margins will improve in Q2, Q3, and Q4. Based on our current plans, we expect about 100 basis points of margin improvement year-over-year in each of the remaining quarters, and we are observing similar trends in margin improvements across our segments. We are also starting to benefit from positive operating leverage due to our organic growth this year, with approximately 100 basis points contribution from our enterprise initiatives, which are projects and activities under our control. The price-cost margin trend started to show positive effects in Q4, and we expect this to continue positively for the year. Over the last two years, we have seen diluted margins at the enterprise level of around 250 basis points, and we may recover about half of that this year, possibly a bit more than 100 basis points from price-cost improvements. The remaining difference is related to our investments in organic growth, especially in our workforce, leading to increases in wages and benefits similar to what others are experiencing. That summarizes the margin outlook for the year. I hope this addresses your question.

Yes, Michael, that's helpful. And then last quarter, you said that 25% of your ITW businesses were slowing. Is that still the case? And did those businesses end up slowing at the run rate you projected, or maybe better or worse than you projected? And then Q1 is a bit higher than you predicted in terms of seasonality. Are you still thinking sort of that 49-51 in terms of EPS breakdown for the year?

Yes, I believe we're seeing about 25% of the company's revenues slowing down as discussed last quarter. To recap, this primarily relates to residential construction, commercial welding, and the automotive aftermarket experiencing declines in Q1 in the low single digits. Our appliance components business and Specialty Products have seen decreases in the high single digits, while the semiconductor sector is starting to show a drop in orders that is now affecting revenues, which are down in the 10% to 15% range, mainly in the Test & Measurement segment. Q1 matched our expectations. We anticipate additional slowing, especially in the specific businesses I mentioned.

And that's not new. That's in our plan.

Yes, that was in our plan, and that's included in our guidance and our plan for the rest of the year. I would just say there's a lot of strength in other parts of the company, obviously. The vast majority of our businesses are still seeing solid demand. We're always going to have some headwind and tailwind and it kind of all nets out to some pretty solid performance, as you saw in Q1, and we'd expect the same for the remainder of the year. I'll just say this, I mean, the environment, obviously, this is pretty uncertain at this point, things can change pretty quickly. But based on what we know today, we remain really well positioned to deliver solid performance here in Q2 and for the balance of the year.

Michael, are you still thinking that 49-51 split?

Yes. From a planning standpoint, I think that's still a good assumption and in line with really what we have done historically.

Hi, good morning. Thank you so much for taking my questions. So you mentioned sequentially, you expect Automotive margins to get better from here on. How about sales? Should we also expect the first quarter sales to be the lowest of the year and then build from here? Or is there some seasonality that we should be modeling?

I believe there isn't much improvement expected moving forward. The growth rates year-over-year are primarily influenced by comparisons. For instance, in Q2 of last year, we saw a notable decline in auto builds, but this year, that number is expected to be higher. Thus, we should experience good year-over-year growth in Q2. However, on a sequential basis, significant revenue growth is not anticipated, and we aren't factoring that into our assumptions.

Thank you. Good morning, everyone. Maybe two separate topics for me. If you think about the parts of the portfolio that are still resilient and you have visibility, I think one of the uncharacteristic things maybe you saw in the last year or so is backlog build where you wouldn't typically get backlog build. I just wonder if you could speak to that kind of your forward visibility on some of the things that are a bit later, longer cycle, are the backlogs holding, you're starting to burn into them? Any color on orders there would be interesting?

Yes. I mean, I think as you point out, Jeff, we are not necessarily a backlog-driven company. And while backlogs have come down a little bit, they're still significantly higher today than kind of pre-COVID levels. So maybe not running at 2x, 3x, but at least 50% higher in businesses like Welding and Food Equipment where we're still seeing a fair bit of backlog. The other thing we talked about, Jeff, you know this, as supply chain continues to moderate here in terms of the challenges, we're going to see backlogs come down, and that's exactly what we're seeing across the company.

And I wonder if you could speak longer term to auto margins. I think you said kind of a 450 basis point hit from just the price cost, arithmetic and the game had catch-up there. Margins are down only about 300 basis points right over the last year or so. Are you actually pointing us to kind of higher structural margins in auto on the other side of this? I know we don't get it all in 2023, but are we headed to a higher place than we were a year or two ago in auto margins?

Yes. I'm not sure, Jeff, the exact comp that you're referring to, but I think it's safe to say that auto margins, we see a low to mid-20s business over the next two or three years. And it's a combination of great growth prospects there. The fact that all the new programs that we add are margin positive and in fact, just to put in a plug for our Investor Day in a couple of weeks, we're going to spend some time detailing out sort of the margin path in auto in more substance.

Hey, good morning. Scott, Michael and Karen, I was wondering if you guys could give us a little bit of a window into what's going on in China. I think the April PMI came in a little lighter than what folks were expecting back down to a contraction level, but they should be reopening. And I think January was probably the toughest month you had in the quarter. But you've had a chance, I'm guessing by now to see at least an early look at April. What are you seeing there kind of just from a macro perspective and perhaps into each of the businesses if that makes sense?

Yes, to answer your question, we're seeing a bounce back in April, which supports a double-digit growth rate on a year-over-year basis in China for the second quarter. In the first quarter, particularly in January, several of our customers, including automotive OEMs and restaurant food equipment businesses, were slower to open up. As a result, we were down 5% in automotive OEM and saw a decline of 15% to 20% in Polymers & Fluids. However, those businesses are recovering strongly in the second quarter, with significant growth expected in automotive OEM in China, potentially resulting in a year-over-year increase. The conditions are more favorable now, leading us to anticipate a 40% to 50% growth rate in the automotive sector in China. Food Equipment, Polymers & Fluids, and the Welding business are also bouncing back. Overall, we expect around a 20% year-over-year increase in Q2, fueled by the recovery from the slower first quarter.

All right. That's helpful. And I want to go back to Jeff's question, and I don't want to blow up your Investor Day, but feel free to point. But is the era of price de-escalators or price downs and the auto contracts, is that era over with and we're at least over the next 5 years, you envision more of a flattish price environment? Or has nothing really changed? And at the end of the day, we're going to be back into that kind of usual down 1%, 2% price dynamic?

Yes. I think it's more of the latter, to be honest here. I think the industry has not really changed in terms of how these contracts are structured where you get a lot of price upfront. And so the key there is to continue to innovate and solve problems for customers in ways that nobody else can. And so as you win new programs and get new content on vehicles, that has to come in at a higher price. But in terms of the structure price tons every year that has not changed at this point.

Okay. Thank you for the integrity of your answer.

Thanks. Good morning, guys. Can we talk about your position in the Chinese auto OEM market? There seems to be a real change that's happening there. And I'm just curious, how do you think your position is today? Do you need to do anything to kind of help scale the business? Just any thoughts around that would be helpful.

I believe you will see a significant change at Investor Day regarding our very successful automotive business in China. The local Chinese OEMs, especially in the EV sector, are the fastest-growing. We will also discuss the investments we are making to support this growth and ensure we have the necessary capacity and resources for our innovation efforts to succeed in the Chinese automotive market. This business is very different compared to 5 or 10 years ago, but it remains highly successful. The potential for above-market organic growth is among the best within our company. We will elaborate more on this at Investor Day, and we are very optimistic about this business.

That's great to hear. I'm looking forward to learning more about it. I guess the follow-on question, and I know we've talked a little bit about the margin recovery in autos and we'll get more at Investor Day. I'm just curious, though, can you help maybe quantify how much of an impact price/cost was to the margins this quarter on a year-over-year basis? And I know that you're now forecasting for sequential improvement and year-over-year improvement as the year progresses. But how much of a benefit is it expected to be as we progress through the quarters?

Yes. So I think it was a slightly negative price cost margin automotive in Q1, and like I said, we’re expecting this to begin to turn positive here in the second quarter. We are seeing overall deflation on more of the commodities, including resins, nylon and acetyl those more basic commodities, those prices are coming down. And so that's part of what's helping us along with, like we said, new content coming in at higher margins. And so those combined will lead to the beginning of cost recovery, price cost margin recovery this year. But as Scott said, this could take two to three years. This takes a little bit longer in automotive OEM than in other parts of the company.

And I'd just point out, following up on Michael's comments that our auto business still outperforms the peer benchmarks by a margin factor of 2.5 times. The returns on capital we generate are absolutely terrific and right in line with what we do also in the company. So from a long-term standpoint, these are short-term issues that we'll deal with, but it's not terrible by any stretch. The business still performs really well.

That's true.

Great. Thanks, guys.

Good morning, everybody. Michael, you sort of answered a small part of my question, but I'll ask the broader one. I'm curious what you're seeing across the company in terms of the cost side specifically? I think you mentioned a few of these commodities down maybe for automotive. Are there any other areas where you're seeing deflation on the cost side? And then the follow-on is any risk? Or how do you plan that going forward relative to your price? Is there any risk that kind of price follows that back down as that goes down? Thanks.

I wouldn’t say we are experiencing significant deflation at this time; rather, costs are stabilizing. There may be slight deflation in some basic commodities, but for components, such as assembled and machine parts that involve labor, costs will likely remain sticky due to the labor aspect. Our planning, as always, is based on known cost changes and the prices we have implemented or announced. We are seeing a return to normal price increases after lapping previous inflation-driven hikes. Regarding whether these price increases will hold as material costs potentially decrease, approximately 5% of our revenues are tied to an index. Therefore, we expect to maintain our historical price premium while also focusing on competing effectively and gaining market share, which is a primary objective of our strategy to achieve organic growth that outpaces the market. That’s how I would frame the situation.

Great. Okay. Thank you. And then just a quick follow-up on the construction products. Market were quite a bit higher than I think some of us were looking for. Anything to call out there that was kind of margin goodness and how that sort of goes going forward?

Yes. When something unusual occurs, it often relates to price cost. The construction segment has faced more significant challenges than the automotive segment in terms of margins over the past two years. Currently, we are starting to recover from the margin impact, similar to what we anticipate will happen in the automotive sector. This, along with favorable price cost and strong contributions from enterprise initiatives, has significantly influenced the construction business, where the contributions from these initiatives were notably high at around 170 basis points. Looking ahead, we believe this is not just a one-off impact from the first quarter. Based on our team's assessments, we expect to maintain margins in the high 20s, which is impressive considering we began with margins around 12% before implementing our enterprise strategy. We are confident in sustaining these high-20 margins in both the near and medium term.

I appreciate it. Thanks.

This is Chigusa Katoku on for Jamie. Thanks for taking my question. So on organic growth, you maintain the 3% to 5% guide. But I was just wondering if the outlook by segment just at around at all?

We have examined this, and I believe we are very close to the guidance we provided in our last call for the full year. We are experiencing strong performance in automotive, food equipment, test and measurement, welding, and construction, possibly exceeding our expectations. Overall, when considering everything, we are aligned with the assumptions communicated at the enterprise level three months ago, during the last quarter.

Okay. Great. And then on price/cost. So you mentioned that it was 190 basis points positive this quarter. And you remember, you expect it to be positive for the remainder of the year. But I was wondering how we should think about cadence just because I thought there would probably be some puts and takes with auto just beginning to recover onward?

Yes. I think that a 90 basis points contribution from price cost is not typical. Based on what we know today, I expect a similar contribution in the second quarter, but it will decrease in the second half of the year as we face some comparisons regarding price. Overall, you can anticipate around 100 to 150 basis points for the entire year in terms of price-cost margin, given the current information. However, it is important to note that there is still considerable uncertainty in the environment.

You have Sabrina Abrams on for Andrew Obin. Thanks for taking my questions. I think you guys were talking about seeing further slowing through the rest of the year is embedded in the guidance, particularly in the 25% of businesses that you've already pointed to slowing. Are there other areas of the business that you would flag as maybe the next year to drop maybe based on current order activity?

I'm not sure I understood your first point about California slowing.

Just like the 25% of the businesses that you've pointed to slowing, I think those are where you anticipate a further slowdown for the rest of the year. I'm curious if you're noticing any additional signs of softness in other parts of the portfolio.

I think that's a simple answer. The other 75% demand rates continue to be very strong.

Yes. I think and Sabrina, the way maybe to think about it is there's a lot of strength in the more capital equipment businesses, food equipment, test and measurement, welding, there's a lot of strength in the automotive business on the top line, which is kind of on its own cycle. And then the more consumer-oriented, more interest rate sensitive and then semi is where there is some softness. And we've been calling out that softness really if you go back and look. I mean, since last summer, we started to see a slowdown in construction, and it's played out in Q1, at least exactly like we thought it would. And so far, Q2 is off to a pretty good start.

Got you. And then you talked about reinvesting in the business. Can you talk about where adding headcount has been more of a focus?

I believe this is happening across all areas of the company. We are not prioritizing one segment over another. Each business and operating unit has notable organic growth opportunities ahead of them, making their own decisions on where to allocate or increase headcount to support their growth strategies. There aren't just one or two segments that are being favored; all 84 divisions have considerable organic growth prospects, and they are pursuing these by investing in innovation, commercial resources, and capacity to meet customer demands.

And I'll just add that I can reiterate something you said before, which is in all cases, those investments are self-funded, i.e., margins in every segment will continue to go up.

Yes. This is all part of our long-term incremental margins, which are in the 35% to 40% range, after making all the necessary investments to fully leverage the organic growth opportunities ahead of us.

Hi, good morning. Thanks for taking my questions. I wanted to start just on consumables trends and what you're seeing. I think if we look at sort of polymers and specialty products and construction products, those tend to have some of the relatively higher consumables exposure across the businesses. Those are where we've seen some of the softer year-over-year organic trends. And so is that really just a function of consumer exposure? Or also, any signs of seeing some destocking maybe tied to some of these consumables? And if that is the case, any visibility on what inning we might be in terms of sort of inventory correction?

Yes. There is definitely some inventory correction happening this quarter and last quarter. We're not selling directly to the consumer; our businesses are B2B. However, the end market does include consumers, and we are noticing a bit more softness in that area, as you mentioned. I don’t have much more to add on that.

Okay. I just wanted to revisit the earnings distribution for the year, specifically the 49-51 split. It seems to suggest a slightly lower than usual performance in the second quarter. Perhaps you're referring to a minor adjustment, but I want to ensure that it doesn't indicate a slowdown compared to your earlier expectations for the year and that we can still anticipate a relatively typical second quarter.

No, I think last quarter, we discussed the 49-51 split. I believe it's still part of our planning assumption, 49% and 51%. I want to emphasize that this is based on our current observations. There is quite a bit of uncertainty that everyone is facing right now. However, that is our main planning assumption. As I mentioned, so far, the second quarter is off to a good start.

Thanks, good morning. Couple of ground, but I just want to dig into food equipment because that continues to suggest to really outperform quite nicely. So just curious where we are on the post reopening refresh cycle upgrade cycle? Any thoughts there on sort of the in-store base and share gains, etc.?

Well, I think we've gained a lot of share in this business based on our ability to service and supply our customers with lead times when others maybe struggled. I think there's really nothing unusual going on in terms of the recovery, the equipment side, we'd say we have largely recovered at this point. And then on the service side, we're still picking up momentum, maybe an area where we're a little constrained in terms of our ability to take care of everybody on the service side. But overall, we are continuing to see some really strong demand trends in this business. This is an area we're talking about backlog earlier where the backlog is 2x normal levels, which gives us a little bit more visibility than what we're normally used to. In terms of the end markets, as you know, our business is more focused on the institutional side, and we're seeing a lot of strength there, whether it's health care or education or lodging but also restaurants up 30% plus. I think we said this in the prepared remarks. So overall, really a lot of solid momentum here. China was a little softer in Q1 as we talked about, I think that business was down about 20%, and so that's going to come back here in Q2 and for the remainder of the year. But certainly a business that's performing at a very high level, including on the margin side, it's really encouraging to see the margins back in the high 20s again. So overall, I think a solid quarter and really well positioned for the remainder of the year.

Just to mention it again, sorry, Nigel. I was just going to.

Go ahead.

That we will be featuring food equipment as one of the segments at our Investor Day in a couple of weeks, just to make another plug for that event.

That would be great. And then just my follow-up is just going back to order margins. You've talked about price cost, I understand that. North America was 3% growth, Europe is 17%. Just wondering if there's a mix issue as well that maybe just essentially to that margin to the downside. And when you talk about sequential improvement in order margins in Q2, do you think that continues into the back half of the year, so we have a nice cadence Q-over-Q from here?

The answer is yes, that is the current planning assumption that margins will continue to improve in the automotive sector. In North America, you shouldn't read too much into the quarterly build numbers. Overall builds were up approximately 10% in North America in Q1. However, we are more focused on the D3 auto OEMs, which experienced an increase of around 2% in the quarter. I don't believe this has a significant impact on margins. As we've mentioned previously, our margins are relatively consistent across customers and regions, so there isn't a substantial mix issue to consider.

Good morning. And thanks for squeezing me in. I just wanted to circle back to the organic sales guide for the year. Because in Q1, I think you did 5% the year sort of guided at 4 at the midpoint, the price/cost tailwind shrinks through the year, and I'm assuming therefore that the price revenue tailwind does as well. So you're essentially assuming sort of flat volume growth or sort of steady volume growth Q2 to Q4 with Q1 or even an acceleration perhaps. But you've talked about 1/4 of the business seeing a slowdown. So maybe help us understand what's the sort of the quarter of the business that's accelerating volume-wise from Q1 to offset the 25% that's slowing more.

Yes. During our last call, we talked about expecting organic growth of 3% to 5%. We anticipate that organic growth in the first half of the year will be closer to 5%, while the second half will be nearer to 3%. This mainly reflects year-over-year comparisons rather than any projections of acceleration in the latter half. Typically, Q1 is the low point for revenue, followed by an increase in Q2 and again in Q3, with Q4 being similar to Q3. These are our planning assumptions based on current insights. I would like to note that these assumptions have not changed. Q1 results aligned with our expectations, and we remain on track with our full year plan.

And is it fair to assume sort of firm why that price tailwind does taper through the year just as the sort of the price cost margin tailwind tapers?

Yes. Maybe with the exception of the one business we talked a lot about today, which is the automotive OEM business, that's just beginning to recover we do expect that one to pick up here starting in the second quarter and then again in the second half of the year.

That's helpful. And then just my follow-up would be on the Test & Measurement business, where I don't think there's been many questions, but some of the peers like say, Tektronix, Fortive or something. They were growing 20% plus in Q1. They're guiding to exit the year at flat. Just wondered on the sort of the core test and measurement piece aside from electronics, how you're thinking about the balance of the year in terms of that rate of slowdown?

Well, general and industrial demand for Test & Measurement equipment remains really strong. I think I mentioned Instron up 22%, another plug for our Investor Day, MTS, which will give you kind of a progress report was up 14% year-over-year in Q1. So those businesses are even more in line with some of the numbers that you were quoting. And really, the only challenges here are on the semi side, which is only about 20% of the segment. And like we said, those semi revenues are now down in that 10% to 15% range in Q1. We expect some further softness here in Q2 in that part of the business. But overall, I mean, I think organic growth of 6% and our margins kind of in the mid-20s after digesting a lower-margin acquisition and some really good progress in this segment.

That’s great. Thank you.

So that wraps things up. I want to thank everybody for joining us this morning. And just a reminder, we look forward to seeing you at our Investor Day in Boston on May 18.