Good morning. My name is David, and I will be your conference operator today. I would like to welcome everyone to the ITW Q1 2022 Earnings Conference Call. This conference is being recorded, and all lines have been muted to avoid background noise. Following the speaker's remarks, we will have a question-and-answer session. Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Thank you, David. Good morning everyone, and welcome to ITW’s first quarter 2022 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 update our guidance for full year 2022. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2021 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 directly comparable GAAP measures is contained in the press release. So please turn to slide 3, and it’s now my pleasure to turn the call over to our Chairman and CEO, Scott Santi.

Thanks, Karen, and good morning, everyone. We have talked often about the fact that the core focus of our enterprise strategy is to leverage the performance power of the ITW business model to consistently deliver top-tier performance in any environment. And our teams around the world continue to do an exceptional job of doing just that as evidenced by the 11% organic growth and 23% operating margins that they delivered in Q1. In the quarter we saw continued strong demand almost across the board while input cost inflation and supply chain issues remain challenging to say the least. Our business has responded effectively. Across the company, we continue to leverage the advantaged supply capabilities inherent in our 80/20 front-to-back operating system to support our customers and execute our Win the Recovery strategy to accelerate profitable market penetration and organic growth across our portfolio. Many of our businesses continue to receive strong feedback from their customers indicating that their current delivery performance is truly differentiated, and they are being awarded additional share as a result. Despite another step-up in input cost inflation in Q1, we effectively offset cost increases on a dollar-for-dollar basis in the quarter. Looking ahead at the remainder of 2022, based on our first quarter results and projecting current demand, supply rates, and all known cost increases through the balance of the year, we are raising our guidance for full year 2022 organic growth to 8.5% at the midpoint and GAAP EPS of $9.20 at the midpoint, which represents 14% earnings growth year-over-year and would be an all-time record for the company. While the near-term environment certainly has its challenges, we remain focused on delivering differentiated service to our customers, differentiated financial performance for our shareholders, and continued progress on our path to ITW's full potential. Now I'll turn the call over to Michael, who will provide more detail on the quarter and our full year outlook. Michael?

Thank you, Scott, and good morning everyone. In Q1, demand was strong across the board and supported by our advantaged supply position, ITW grew revenue by 11.2% to more than $3.9 billion. Organic growth was 10.6% and the MTS acquisition contributed about $100 million, or 2.8% to revenue. Foreign currency translation reduced revenue by 2.2%. GAAP EPS of $2.11 tied last year's Q1 record. Foreign currency translation reduced GAAP EPS by $0.05. By geography, North America grew 13%, international grew 7% with organic growth of 7% in Europe, and China grew 1%. Six of seven segments delivered positive combined organic growth of 14%, while Automotive OEM saw a decline of less than 1%. Orders remained strong across the board, and while we're performing significantly better than many of our competitors in terms of lead times and delivery performance, we grew backlogs again in the first quarter. Sequentially from Q4 to Q1, organic revenue grew 6% on a sales per day basis, as opposed to our historical sequential average of minus 1%. Moreover, GAAP EPS of $2.11 grew by 9% compared to Q4 2021. Our operating margin was 22.7%, and 23.4% excluding 70 basis points of margin dilution from the recent MTS acquisition. Enterprise Initiatives contributed 90 basis points. As we always do, our business teams reacted appropriately to higher cost inflation by adjusting selling prices, and as a result, we remain positive on a dollar-for-dollar basis. However, price/cost was still dilutive to our operating margin by 250 basis points. After-tax ROIC stood at 27.6%, and 29.8% when excluding the impact of the MTS acquisition. Free cash flow was $249 million but with a conversion rate of 38%, which is below our typical 80% to 85% range in the first quarter. The lower conversion rate is due to intentional working capital investments that support our strong growth trajectory while mitigating supply chain risk and sustaining service levels to our key customers. Once supply conditions normalize, we expect our working capital needs to align back to our typical strong cash flow performance. As planned, we repurchased $375 million of our shares in the first quarter, while the effective tax rate was 23.1%, which is 70 basis points higher than Q1 last year. Overall, Q1 was an excellent start characterized by strong broad-based demand, supported by our differentiated supply position, yielding organic growth of 11%, an operating margin of 23%, and GAAP EPS of $2.11. Moving to Slide 4, we're including an analysis of our current operating margin performance. Reported Q1 operating margin was 22.7%, but three factors are pressuring our margins in the near term, starting with a 250 basis point margin dilution impact from price/cost adjustments. Eventually, as raw material costs normalize, we expect the margin impact from price/cost to turn positive, allowing us to fully recover the margin differential. The second factor is that Q1 marked the first full quarter of the recent MTS acquisition, which diluted margins by 70 basis points, as we have stated, it will take us a few years to fully implement the ITW business model on MTS and drive organic growth at ITW caliber margins and returns. The final factor is slightly higher restructuring costs associated with 80/20 front-to-back projects, impacting margins by 20 basis points. Importantly, our core operating margins are currently running around 26%-plus, which aligns with what we expect from ITW in a normal environment and remains close to our pre-pandemic target of 28%-plus. This is further evidence of our continued progress in driving structural margin improvement via our enterprise strategy through the pandemic. If you recall, pre-pandemic margins in 2019 were roughly 24% versus the current core run rate here in Q1 of 26%. We have full confidence in our ability to deliver sustained above-market organic growth with 30% to 40% incremental margins, allowing us to expand operating margins as we grow. Moving forward, Automotive OEM was the only segment that didn't show growth this quarter, with organic revenue declining by less than 1%, improved from a greater decline of 16% in Q4 2021. North America grew by 3%, Europe declined 11%, and China grew by 12%. It's important to remember we are comparing against a tough comp of 8% organic growth in Q1 of last year, as the impact on auto production from chip shortages fully materialized in Q2. For guidance purposes, we do not anticipate improvement in the chip shortage situation until 2023, which means our guidance assumes that automotive production and associated revenues remain capped at current Q1 levels through the rest of the year. Regarding Slide 5, Food Equipment led the way with the highest organic growth rate of 28%. North America grew 23%, with equipment up 24% and service up 21%. Restaurants were up over 40%, with strength across the board, and institutional growth was nearly 10%, led by education and lodging. International growth was robust at 36%, with Europe up 45% and Asia Pacific up 4%. Both equipment and service revenues increased around 36%. In Test and Measurement and Electronics, organic growth also stood at 8%, with Test and Measurement up 10% and Electronics up 6%. Strong demand for semiconductor-related equipment consistently drives organic growth in the mid-teens, while demand for capital equipment remains strong, with Instron growing 6%. Finally, we noted that the MTS acquisition diluted operating margin by around 400 basis points. Excluding the MTS impact, margins were recorded at 26% compared to 26.4% in Q4 2021. As for slide 6, Welding reported organic revenue growth of 13%, with Equipment up 10% and Consumables up 17%. The industrial segment grew 14%, and the commercial business nearly hit 10%. North America saw growth of 12%, while international growth reached 17%, including an 18% increase in oil and gas. Europe experienced a 20% increase, and Asia Pacific grew by 15%. Due to strong operational leverage and contributions from enterprise initiatives, Welding's operating margin marked a record 30.8%, the highest quarterly record for any ITW segment, underscoring that as we deliver organic growth with industry-leading margins, there remains substantial potential for further margin expansion across all seven segments. In Polymers and Fluids, organic growth came in at 13%, with automotive aftermarket growth at 17%. Polymers grew by 11% with sustained strength in MRO and heavy industry applications, while Fluids increased by 6%. Geographically, North America grew 15% and international showed a 9% increase. On to Slide 7, Construction exhibited strong organic revenue growth of 21%, with North America showing a remarkable 32% increase driven by a 36% growth in residential and a 15% growth in commercial sectors. Europe grew by 16%, and Australia and New Zealand also saw a 10% uptick. Although construction margins were impacted by rising steel costs, the operating margin remained solid at 24.7%, aided by strong volume leverage and significant contributions from enterprise initiatives. Specialty organic growth was 1%, with North America up 7%, while international figures declined by 9%. Let's move to Slide 8 to review our updated full year 2022 guidance. Based on our Q1 results and current demand projections through the year, we now estimate organic growth at 7% to 10% and total revenue growth between 8.5% to 11.5%. With the increase in revenue growth, we're raising GAAP EPS by $0.10 to a range of $9 to $9.40—a midpoint of $9.20 indicating 14% earnings growth and positioning the company for another record year financially. Operating margin guidance remains unchanged, bolstered by robust volume leverage and a 100 basis point boost from enterprise initiatives. Our teams will continue to effectively cover inflation on a dollar-for-dollar basis. Our guidance also incorporates all known costs and anticipated price increases. Additionally, we expect strong free cash flow growth of 10% to 20% year-over-year, with a conversion rate of 85% to 95% of net income. This is below our 100%-plus target due to our decision to invest in working capital to support robust growth, mitigate supply chain risks, and maintain service levels for our key customers. We remain on track to repurchase $1.5 billion of our shares and foresee an effective tax rate between 23% to 24%. In summary, Q1 was yet another quarter marked by high-quality execution within a challenging environment, positioning us well to raise both our organic growth and EPS guidance for the full year. With that, Karen, I'll turn it back to you.

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

We'll take our first question from Scott Davis with Melius Research. Your line is open.

Good morning, guys.

Good morning.

Thanks for making an uneventful quarter versus what we've seen in some other places.

You're welcome.

A couple of little things here. I mean first your guidance implies kind of or perhaps doesn't imply, but you're not forecasting additional inflation. Does that mean that you've seen kind of some plateauing in the supply chain price increases and materials, etc.?

Well, so let me just explain kind of how we are modeling price/cost because I think there's an opportunity to maybe clarify a few things. What we are doing, consistent with our past approach around price/cost, is we're including in our guidance today all known cost increases and all of the associated price increases. Those are the two things that we know today. Based on that you saw the actuals of 250 basis points of margin headwind in the first quarter, but actually positive on a dollar-for-dollar basis. As we project into the future based on what we know today, that 250 basis points is going to become less of a drag on a go-forward basis and maybe even turn slightly positive in the back half of the year, okay? So that's what's embedded here. Everything we know as we sit here today is included in our guidance. Additional inflation will be offset on a dollar-for-dollar basis, and to the extent that happens, that will apply further pressure on margins.

That's totally fair. Is there any way to disaggregate the content growth in auto versus kind of potential inventory builds versus sell-through, etc.? Just any color there will be helpful...

I'd say at this point, that would be really tough, just given all that's going on.

Yes, I agree with that. I would just add, I mean, I think it's a tough number and it doesn't make a lot of sense on a quarterly basis. I think in terms of the long term, we're highly confident that we're outgrowing the underlying market by two to three percentage points. What exactly that was in one quarter versus the other is a little more difficult to ascertain, especially in the current environment. But on a full year basis, certainly, the way these plans are set up is for two to three percentage points of outgrowth on an annual basis.

Okay. Sounds good. Thank you, guys. Appreciate the color.

Sure. Thank you.

Next, we'll go to Tami Zakaria with JPMorgan. Your line is open.

Hi. Good morning. Thanks for taking my questions. So I wanted to get some clarity on the improved organic growth guidance you're raising it by one point. Is that a reflection of better-than-expected first quarter performance versus your internal expectations or does it embed improved organic growth you're seeing quarter-to-date? And if the latter, which segments are driving that? And is it solely coming from incremental pricing or are you expecting volume improvement as well?

Yes. Our growth projection is based on the actual results from Q1 that we are reporting today. We are projecting based on historical run rates for the rest of the year. There are no assumptions involved, nor are we making economic forecasts about whether things will improve or decline in the latter half of the year. It's based solely on revenue per day in Q1 projected into the remainder of the year.

Got it. And so, you're not embedding any pricing benefit into the updated guidance?

No. I think the only pricing that is included in our guidance is what we know as of today. So we know what price increases we have actioned and announced, and that is known. But any further increases beyond that would not be included in our guidance as we sit here today.

Got it. Super helpful. If I can ask one more follow-up?

Sure.

Have you seen any slowdown or impact in your business in the European markets since the war in Ukraine broke? Ask another way; do you feel the demand environment has changed since then?

Well, so I think in Q1, Europe was up 7%. We did see some pressure in the automotive numbers, while we noted a lot of strength in the food equipment segment to offset that. Looking ahead, if you look at the projection for the balance of the year, it appears to add up to a low single-digit growth rate in Europe. So far through April, everything appears to be on track, including in Europe.

Great. Thank you so much.

Sure.

Next, we'll go to Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning everybody.

Good morning, Joe.

I guess my first question I want to just touch on China. I know it's a relatively small part of your business. I saw that it grew double-digits in the auto business. But maybe just provide some color on what you're seeing on the ground there with the COVID shutdowns and how that's impacting your business if at all?

Yes, I mean I think just to kind of dimensionalize it. China accounts for about 8% of our revenues. At this point, we've not seen a significant impact from what's going on in China. However, through April, everything appears to be on track including business activities in China.

Okay. Good to know. And then I guess just a follow-on question. You guys mentioned price/cost negative 250, but only down 100 basis points for the year. It's fair to say, I think we're seeing the most acute pressure in the auto OEM segment. So, I guess, just maybe confirm that that's correct or if you're seeing other pressure across other parts of your business as well. And then within that improvement that you're seeing, how much of it is already baked into the pricing of those automotive contracts that come through as the year progresses?

Everything that we know is baked in, Joe. The inflationary pressures are indeed real across all seven segments, though a bit more pronounced in Automotive OEM and potentially Construction this quarter, alongside Polymers & Fluids. We are still playing catch-up, so the 250 basis points of headwind is expected to improve starting in Q2. Based on our current knowledge, the number might slide closer to 200, and as we proceed through the second half, we anticipate starting to turn positive. Our essential point is that we are beginning to recover the margin impact that we have experienced over the last few quarters.

That's helpful. Thank you.

Next, we'll go to Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good day, everyone. Just first on auto, Scott or Michael. Is the idea that you're capped here what you're hearing directly from your customers, what you can see on kind of forward build schedules, or is this just for lack of a better term a dose of caution given the uncertainty?

It's a combination of factors, Jeff. If you recall from our last call, the guidance contained half of the IHS growth build forecast of 9%, which equals around 4% to 5% builds. IHS remains at that level today. Therefore, we consider it prudent not to adjust the forecasted automotive business revenues, estimating them to stay around $760 million in Q1—which we will maintain for Q2, Q3, and Q4. We also expect that once these supply chain issues are resolved and automotive production recovers, the segment will be an exceptional contributor to our overall organic growth rate.

Understood. And then just back on price. Understanding that what you know is embedded in the guide, if we consider the incremental organic growth guidance, I suspect all of that is price-driven, perhaps even more than 100% of it. Could you provide some color on that?

There is volume leverage associated with the 1% revenue growth increase, which is tied to the additional 10 cents per share added to our guidance. So you could conclude that not all of it is strictly price-driven; instead, it's a blend of factors.

Great. Understood. Thank you for the color.

Sure.

Thank you. Next, we'll go to Andy Kaplowitz with Citigroup. Your line is open.

Good morning, everyone.

Andy.

Scott or Michael, I know you probably don't want to update us on your segment revenue growth expectations, but outside of auto—where you've already given a specific guide—it looks like Food Equipment & Construction accelerated versus your run rate, while specialty products may have weakened a bit. Is that a fair characterization of where revenue growth is moving versus your original forecast? Could you provide some more insights regarding what’s happening in specialty products that may be holding that business down?

Yes, I heard your first part. What was the second part?

Specialty.

Specialty. I believe it’s largely a timing concern associated with specific equipment projects in Europe and a handful of projects in China. It appears more to be a timing issue than anything else. To step back, you pointed out accurately the significant strength in Food Equipment, as well as Welding. There are also hurdles in the Test & Measurement sector due to tough comparables. Construction, however, is enjoying a great deal of positive momentum across the board. Notably, despite our operational metrics, we are establishing substantial backlogs in segments more aligned with capital equipment, such as Test & Measurement, Welding, and Food Equipment, though the impact isn't yet reflected in our revenues.

And Michael, you touched on—regarding your large number in construction, especially, you mentioned North American renovation is up in the low 30% range. Given that this has been ongoing for a while, are we gaining market share here, or is this just indicative of activity levels? What’s the visibility moving forward for 2022?

As you know, there's still significant vigor in the US housing market, evident in the 36% growth for residential remodeling. Our strength in that space is bolstered by meaningful share gains. In commercial, we also saw an increase of 15%, which is a smaller sector of the business. Geographically, the momentum extends beyond North America; for instance, Europe grew by 16%, and the UK achieved a 20% increase, with Australia and New Zealand reflecting solid gains at 10%. It is broad-based, and we have not observed any signs of a market slowdown at this point.

I appreciate the insights.

Sure.

Next, we'll go to Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning.

Good morning.

I appreciate you allocating ample time for Q&A. It's much appreciated. While I understand you shy away from discussing pricing, regarding the margin dilution from price/cost, if it seems as neutral, I estimate about a 9% or 10% price impact. Is this an accurate reflection of the scale of pricing that we're experiencing? Is the message simply that pricing is expected to improve throughout the rest of the year?

Well, it's quite accurate that if everything remains consistent, we will move from a substantial margin dilution of 250 basis points in Q1 to potentially slightly positive impacts in the second half of the year, as previously discussed. Historically, we have not specified an exact pricing figure, especially not in such a dynamic environment, so this remains an estimate.

That’s perfectly clear. Thank you.

Sure.

Thank you. Next, we'll go to Mig Dobre with Baird. Your line is open.

Good morning, everyone. So, Michael, I believe you mentioned in the second quarter that the price/cost headwind moderates to the tune of about 50 basis points. So when considering year-over-year margins, is it reasonable to assume roughly 200 basis points of year-over-year compression in Q2, followed by improvement in the latter half?

Yes, I would say that matches what I've indicated. However, I must stress that we operate in a very dynamic and uncertain environment. Given that, where we stand today, your estimate is quite accurate.

Understood. Apologies for reiterating this topic, but I find the current pricing environment unprecedented. Analyzing PPI data, we observe significant increases in Food Equipment and Welding. Do you think your business is effectively matching this industry data, or could there be divergences that we should be aware of? It suggests that growth might be primarily driven by pricing rather than volume in 2022?

I don't share that view. I'm uncertain about the specific data you are analyzing, so giving you an informed perspective is challenging. Our reporting of actual results for the Food Equipment business is available for review, including details by end market. Beyond that, it becomes challenging for us to provide more specifics.

Got it. One last follow-up. I am curious about your long-term perspective on pricing dynamics. When costs normalize, do you expect to retain the pricing gains achieved during this period or will there be pressure to concede those by 2023 and beyond?

We have robust, strategic long-term relationships with our customers. Our objective is not to maximize pricing but to serve our customers while ensuring we're compensated for delivering differentiated products, services, or solutions. Historically, we've maintained pricing power in these sectors, which suggests that when costs normalize, we will generally retain these price increases to recover margins as we detailed earlier.

Okay. Thank you.

Sure.

Next, we'll go to Julian Mitchell with Barclays. Your line is now open.

Hi. Good morning. I wanted to understand the earnings framework for the year better. It seems operating margins are set to increase by about 300 basis points from Q1 to Q4, with relatively flat dollar revenue. Is that solely a reflection of the diminishing price/cost headwind, or are there other significant factors at play? Furthermore, are you maintaining the 47-53 first half to second half EPS split?

Yes. We're sticking to a 46% to 47% share for the first half, with the remainder in the second half. The primary factor is indeed the turning point for price/cost—the move from significant margin dilution in Q1 to a positive shift during the second half. Historically, our performance was typically at 49%-51% split, so we do anticipate a bit more weight in the second half. Additionally, we foresee improvements in Q2, Q3, and Q4 in terms of revenue and margins, although precise figures remain subject to change depending on future developments.

Thanks, Michael. Also, I wanted to address the balance sheet, which hasn’t been touched upon yet. Your inventories have risen significantly, nearly 50% year-on-year, and increased over 10% sequentially in Q1. When do you expect that situation to stabilize? Given your major inventory build, how can you assure us that your customers and channel partners are not experiencing similar phenomena, which could risk an eventual downturn should final demand decrease?

Our inventory levels are around three months on hand, which is above our historical norm of two months. This increase has primarily been driven by our intent to mitigate supply chain uncertainty and maintain high service levels for our customers while seeking share gain opportunities when competitors may struggle. As such, it’s a well-considered use of our balance sheet. For context, you can note the gap between our conversion rates; the difference between the typical 80% to 85% levels and our current 38%, a shortfall of about $300 million attributed directly to planned working capital investments. This proactive strategy was crucial for generating the 11% organic growth you observed this quarter. Therefore, we anticipate the return to the historical two-month inventory levels. However, this timeline hinges on demand trends and supply factors, permitting more steady cash flow performance. Regarding inventory in the channel, we generally lack visibility, but most channel partners do not maintain high inventories as they trust us to provide necessary products. This is about as clear as I can present it, Julian.

That was perfect. Thank you.

That concludes today's question-and-answer session. Thank you for your participation in today's conference call. All lines may now disconnect.