Good morning. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to ITW's First Quarter Earnings Conference Call.

Thank you, Krista. Good morning, and welcome to ITW's First Quarter 2024 Conference Call. Today, I'm joined by our President and CEO, Chris O’Herlihy; Senior Vice President and CFO, Michael Larsen; and Vice President of Investor Relations, Karen Fletcher. During today's call, we will discuss ITW's first quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 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 President and CEO, Chris O’Herlihy.

Thank you, Erin, and good morning everyone. While the near-term demand environment across the majority of our segments was certainly challenging as we anticipated, the ITW team delivered a solid start to the year as our first quarter results came in as expected. And we remain solidly on track to deliver on our 2024 performance targets. Starting with the top line, organic growth was down 0.6% as 5 of 7 segments declined in the face of a tough demand environment and versus some difficult comparisons year-over-year. Those comparisons are more favorable for the balance of the year, and based on current levels of demand, we are confident that we will deliver on our full year performance targets, including organic growth of 1% to 3%. The ITW team continued to execute at a very high level and delivered strong margin and profitability performance in the first quarter. Excluding a one-time inventory accounting item, quarterly operating income grew 4%, as operating margin expanded 120 basis points to 25.4%, with a strong contribution from enterprise initiatives of 140 basis points, as we continue to make solid progress towards our goal of 30% operating margin by 2030. GAAP EPS of $2.73 increased 17%, and excluding the one-time item, we grew EPS 5% to $2.44. The free cash flow conversion rate of 68% was in line with normal Q1 levels. Looking ahead, where we did raise our GAAP EPS and margin guidance for the year to account for the one-time item, our operational guidance remains unchanged. We continue to expect that current levels of demand across the majority of our end markets and favorable year-over-year comparisons will translate to positive organic growth through the balance of the year. Combined with our continued strong margin and profitability performance, we are confident that ITW is firmly on track and well-positioned to deliver on our 2024 guidance. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence, and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our first quarter performance in more detail, as well as our updated full year guidance. Michael?

Thank you, Chris, and good morning, everyone. In Q1, we delivered a solid start to the year with some high-quality execution in a pretty challenging demand environment as expected. Despite an organic revenue decline of 0.6%, operating income grew 4% and operating margin improved 120 basis points to 25.4% as enterprise initiatives contributed 140 basis points. EPS increased 5% to $2.44, excluding a one-time item. Our free cash flow was $494 million, and we repurchased $375 million of our own shares during the quarter as planned. EPS increased 17% to $2.73, and operating margin expanded 420 basis points to 28.4%. As you saw this morning, our GAAP results include a one-time LIFO inventory accounting change that resulted in a favorable pretax impact of $117 million to cost of revenue equal to $0.29 a share. In Q1, we made the decision to transition from the LIFO to FIFO inventory accounting method for all of our U.S. businesses because it is a more consistent and simpler method for valuing inventory across our operations. In summary, Q1 results were as expected in the current environment, and growth rates are projected to improve as we go through the balance of the year. Our margin and profitability performance continues to be strong, and we're solidly on track to deliver on our guidance, which I will discuss in a few slides. Please turn to Slide 4 for a look at organic growth by geography. As you can see, the 4% decline in North America was partially offset by positive growth internationally, as Europe grew 1% and Asia Pacific grew 6%, led by China up 15%. Excluding the 23% growth rate in our Chinese automotive OEM business, organic growth in China was still up 7%. For the full year and for our usual process, which is based on current levels of demand, we expect organic growth of 1% to 3% in both North America and Europe, with Asia Pacific up in the mid-single digits, led by China. Moving on to segment results and starting with the Automotive OEM segment, which delivered solid organic growth of 3% despite North America being down 6% as Europe grew 2% and China grew 23%, driven by continued strong penetration and market share gains. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China. Margin and profitability performance was strong as margins improved by 370 basis points to 19.8%, and enterprise initiatives contributed more than 200 basis points. We continue to make solid progress on the margin enhancement plan in this segment, and we are firmly on track to deliver margins in the low to mid-20s by 2026, which you will recall is what we said we would do at our Investor Day last year. Turning to Slide 5. Food Equipment organic revenue declined 1% as expected against a tough comparison of plus 16% in the first quarter last year. Equipment was down 4%, and service grew 3%. And by region, North America declined 2% due to a particularly difficult comparison of plus 21%. On a positive note, the retail business was up 10%, fueled by new product launches and overall North America order activity in Q1 was pretty encouraging across the board. International revenue was flat with Europe down 1% and Asia Pacific up 6%. While 5 of our 7 segments improved their margins in Q1, Food Equipment margins declined modestly to 26% as a result of focused capacity investments to support and accelerate continued above-market organic growth in our very attractive service business. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to Test & Measurement and Electronics. Organic revenue was down modestly as Test & Measurement grew 2% despite a tough comparison of plus 12%. Electronics was down 8% due to challenging near-term demand trends in electronic assembly. The recent MTS acquisition continues to perform well and grew more than 20%. With margins that are improving but still in the mid-teens, this created a mix headwind for this segment and diluted segment margins by about 250 basis points. Looking ahead, we expect Test & Measurement and Electronics margins to improve from here as we go through the balance of the year. Moving on to Slide 6. And as expected, Welding faced a tough demand environment and year-over-year comparison of plus 10%, which resulted in a decline of 3% in Q1. Equipment declined 2%, and consumables were down 6%. Industrial sales declined 1% versus an 18% comparison, and the commercial side was down 6%. By region, North America declined 3% against the comparison of plus 10% and international declined 8%. On a positive note, operating margin improved 80 basis points to 32.7% with a solid contribution from enterprise initiatives. Organic revenue in Polymers & Fluids declined modestly as Automotive Aftermarket was down 2%, and both Fluids and Polymers were essentially flat in the quarter. On a geographic basis, North America declined 5% and international grew 5%, led by China. Operating margins improved 104 basis points to 25.8%. Turning to Slide 7. Near-term demand trends in Construction Products continued to be challenging on a global basis as organic revenue declined 7% in Q1. North America was down 3% as the residential and renovation business was down 1%. And international markets remained soft as Europe was down 11% and Australia and New Zealand was down 12%. On a positive note, operating margin improved 190 basis points to 29.4%, driven primarily by another solid contribution from enterprise initiatives. Finally, Specialty Products. Organic revenue growth was up 6%, due primarily to the timing of large equipment orders in 2 European businesses. As a result, international was up 19% and North America was down 1%. As we have talked about before, we're working to reposition the Specialty segment for consistent above-market organic growth, which involves some strategic portfolio work and more significant product line simplification as we go forward. Operating margin improved 410 basis points to 29.7%, driven by operating leverage and a solid contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2024 guidance. With Q1 results that were right in line with our expectations, we're solidly on track to deliver on our 2024 performance targets and guidance. Looking ahead and starting with the top line, we do see some positives in terms of stable demand, more favorable comparisons year-over-year as we move forward, a normalized pricing and inflationary environment, new product launches, and no meaningful headwind from inventory destocking. Per our usual process, our organic growth guidance of 1% to 3% is based on current run rates adjusted for typical seasonality. Operating margin is expected to improve by 140 basis points at the midpoint to a range of 26% to 27%, which includes more than 100 basis points contribution from enterprise initiatives and 50 basis points from the one-time item in Q1. As I mentioned on our last call, every segment is projecting to improve their operating margin performance, again, in 2024, with another solid contribution from enterprise initiatives across the board. After-tax return on capital is expected to remain firmly above 30%, and we expect strong free cash flows, again, with conversion greater than net income. As you saw this morning, we raised our full year GAAP EPS guidance to a new range of $10.30 to $10.70, which now includes $0.30 of EPS from the Q1 inventory accounting change. Setting that item aside, our operational guidance remains essentially unchanged as we expect a combined headwind of about $0.30 from higher interest expense, currency and income taxes, with an expected tax rate in the range of 24% to 24.5%. In terms of cadence for the year, we expect our first half, second half EPS split to be about 50-50 this year, as we factor in the one-time item in the first quarter, which compares to our typical split of 49-51, so slightly less back-end loaded than usual. To wrap things up, as expected, the ITW team continues to execute at a very high level in a challenging near-term demand environment, which we anticipate will improve as we go through the balance of the year based on current levels of demand and more favorable comparison. In addition, our first quarter results came in as expected, and we are solidly on track to deliver on our 2024 guidance. On a separate note, today is Karen Fletcher's last ITW earnings call. Over the last 6 years, Karen has been instrumental in articulating ITW's unique and differentiated competitive advantages and our plan to leverage them to their full potential to you, the investment community, in a clear and compelling manner. In doing so, she has helped us position ITW as one of the world's highest quality, best performing, and most respected industrial companies. Please join Chris and me in thanking Karen for her many contributions to ITW and wishing her all the best in retirement.

Thank you, Michael. That means a lot, and it's been a privilege to do that.

Thank you, Karen. And with that, Erin, I'll turn it back to you.

Thank you, Michael. Krista, will you please open the line for questions?

Your first question comes from Jamie Cook from Truist Securities.

Congrats Karen, and thanks for all your help over the past 6 years.

Thank you, Jamie.

My first question on the Food Equipment side, I think, Michael, you noted some positive order activity in North America. If you could just speak to what you're seeing there? And then how much of a margin headwind was the capacity investments that you spoke about? And then my follow-up question, just on Specialty. I know you spoke to taking portfolio actions in PLS. If you could just give a little more color there, where are you taking actions? And how much is PLS, I guess, a headwind to organic growth within Specialty for the year?

I think that was 4 questions in one, Jamie. Well, I'm going to try... I know, but that's every quarter, so I get... I'm going to try my best here. So the comment on Food Equipment. I think for many of our segments, if you take a step back, these growth rates are a little unusual for us, which is really driven, as we said, by these really significant challenging comparisons that we're dealing with, including in Food Equipment. So the additional color, even though we're not necessarily a backlog-driven company, was directed around the order activity in North America, which grew double digit in the first quarter here, and which I think gives some additional credibility. What we're saying is that we are expecting a return to more typical growth rates here, including in Food Equipment as we go forward. The margin pressure, the margin impact is about 100 basis points in Food Equipment here in Q1 and Q2. And it's really as a result of taking advantage of a huge growth opportunity that's sitting right in front of us in our service business. So what we're talking about is adding a significant number of service technicians to help us meet the demand in one of the most attractive parts of our Food Equipment business. And as you know, we're the only captive OEM with the service business, which is a huge competitive advantage for us in this segment. So I think those were the 2 questions around food equipment. I don't know if you want to add anything to that, Chris?

No. I would just, I guess, accentuate the point of differentiation aspect of the service business within food with unique captive manufacturer. And this is a necessary investment at this point to capitalize on what is an undoubtedly stellar growth opportunity on the service side for us.

The organic growth rate in our Specialty segment was largely fueled by significant equipment orders and their timing in two of our European businesses. Moving forward, we anticipate a notable impact from product line simplification as we strategically reposition this business for consistent growth above 4%. However, we advise against expecting 6% organic growth going forward, as we previously guided this segment to decline by 1% to 3%. It's also important to note the same applies to margins. The current margins reflect how growth in these businesses combined with operating leverage leads to 29.7% operating margins in the Specialty segment. Looking ahead, we consider the growth rate and margins from Q1 to be somewhat atypical, and we expect to revert to still very profitable margins in the high 20s, but likely not starting with a 29.

Congrats again, Karen.

Thanks, Jamie.

First off to Karen, I'll definitely miss you, but I wish you all the best of luck. And welcome aboard, Erin. Looking forward to working with you.

Thanks, Tami.

Of course. So my first question is, just wanted to get a little color here. I think you expect organic growth to be positive throughout the balance of the year. Does that mean you expect 2Q organic growth to be within that full year range of 1% to 3% growth?

So Tami, as you know, we don't give quarterly guidance. What I will tell you to try and help you out here a little bit is that if you model kind of current levels of demand or run rate, as we call them, into Q2, what we're typically seeing is a step-up in revenues in the low single digits from Q1 to Q2. And in Automotive OEM, actually a meaningful improvement in the builds from Q1 to Q2, an increase in the low to mid-single digits there as well. So you will see slightly higher revenues in Q2. And given that the comparison gets easier on a year-over-year basis, we were up 5% in Q1 last year, up 3% in Q2, it is certainly possible that we'll see slightly positive organic growth here in Q2. But the more meaningful step-up really starts in the second half of the year, which is kind of what's implied in our guidance here. So think about it maybe as kind of flattish in the first half, maybe slightly positive in Q2, and then an improvement in the second half of the year, as the comparisons year-over-year improve by 4 points relative to the first half of the year. So in the second half last year, revenues were essentially flat, and at current run rates, you'd expect to see positive organic growth rates in the low single digits in the second half. And I might just add for those keeping track that there are 2 extra shipping days in the second half this year compared to the second half last year, which at least mathematically should provide some additional revenue growth for us.

Got it. That's very helpful. My second question is similar to the first one, but on the margin side. I think that in the first quarter, you had $117 million tailwind. That's about 70 basis points tailwind for the full year, but you raised the full year guide by about only $50 million. And the first quarter margin also came in a little better than what most people on the Street were modeling. Just trying to understand, as we think about the next 3 quarters, is there any incremental cost pressures or maybe price cost headwind than originally thought? Or is it just your conservatism that you raised the full year guide by only 50 basis points?

Well, what I would say, Tami, is that we're really pleased with our first quarter operational performance here, as you saw in the margin rates. And if you exclude the one-time item, 140 basis points from initiatives, 120 basis points of overall margin expansion, and margins at 25.4% is a pretty significant accomplishment here for the first quarter. And we do expect, as we typically do going through the year, that margins improve sequentially from here on out. So you should see a modest improvement sequentially from Q1 to Q2, and then again into Q3 and Q4. The only thing I would highlight as you think about the second quarter is, similar to last year, we do expect some higher restructuring expense in the second quarter, and these are all projects that are tied to a typical 80/20 front-to-back projects. These are not tied to any concerns around volume growth whatsoever. I don't want you to think that this is pure planned restructuring for the second quarter. And as I said, just real quick on Q1, again, 5 of 7 segments improved margins in the current environment, including with revenues down in 5 of 7 segments. And we expect, consistent with our bottom-up planning process here for the full year, that every segment will improve margins as we go through the year and on a year-over-year basis.

Great. Karen, I can add my congratulations, and we will miss you. And Erin, welcome. And I'm impressed that you already have Karen's cadence down so well. So...

Thank you.

Can I ask a little bit about China? That seemed to be a bit of an outlier there. I guess, quite a bit of that automotive, but even without that, things seem to be relatively good. Any color you can give us on that?

Yes. I think as you pointed out, Steve, the big driver is obviously our Automotive OEM business, up 23%. And the team there is doing a great job growing content on new vehicles, including on the EV side, and gaining market share. Even excluding those, as I said, China was still up 7% year-over-year. Strong contribution from Polymers & Fluids. Some of that is tied also to market share gains on the EV side of things and the bonding of some of these batteries in the assembly process, where we have a really unique and differentiated product. Specialty products also contributed. Test & Measurement grew and Food Equipment. So across the board, really solid performance in China. And moving forward, we'd say that looks pretty sustainable as we go into Q2, and then the second half, the comps get a little bit more difficult. But as I said, for the full year, China should be up in the mid- to high-single digits here, which is certainly encouraging. And again, I think it speaks to kind of the benefit of being as diversified from a geography standpoint as we are. And so certainly, some challenges in the first quarter in North America, but offset in Europe and in China, which is really a big benefit for us.

Super. And then a follow-up is on Automotive margins. Obviously, going well there, and I think you said 200 basis points or better than 200 basis points of enterprise there. And I'm just trying to get a sense of how we should think of the cadence in auto margins as the year progresses. And I don't know, maybe the exit rate or the total year enterprise something?

Yes. I mean, I think, I wouldn't expect a lot of regression from where we are. These are absolutely sustainable here in the 19%-plus range. And I think that's probably where we'll end up for the year, maybe a little bit better in the back half. Some of that depends on the build assumptions. There might be a little bit of restructuring here in the second quarter. But big picture, I'd say, Automotive, really solid progress here on a year-over-year basis. We expect full year margins in the 19%, almost 20% range, an improvement of 240 basis points on a year-over-year basis, and lots of room to go as we work through our margin enhancement plan.

Yes. And Steve, I suppose just to support that, I mean, this is very much an improvement plan that's on track to get back to the low to mid-20s margins by 2026, as we outlined at our Investor Day, largely through a combination of, over that time, volume recovery, enterprise initiatives, and higher-margin innovation. So both in '23 and again in '24, we're very much tracking on that cadence with respect to what we outlined at our Investor Day last year.

Yes. So nothing unusual in terms of the margins in Q1, and sustainable, but lots of room for improvement from here.

Karen, congratulations. We'll miss you.

Thanks, Andy.

So Michael, probably, I'm guessing you don't want to reset your organic growth guides for your segments every quarter, but just higher level, you had Construction, Specialty forecast to be down, I think 1 of 3, while the other segments were projected to be up between 2 and 4 and 3 and 5. Specialty was actually much better. Has that changed the segment's outlook at all? I know you talked about a little bit of a pull forward in some equipment orders. And were any of the other segments like weaker than you thought, to start?

I think, Andy, you're right. We don't want to update our guidance for the segments every quarter. And what I will tell you is, given our portfolio, there's always going to be some puts and takes. And I think that's, again, I just talked about the competitive advantage with being as diversified as we are geographically. And the same is true when you look at this portfolio of businesses. You're always going to have some things that maybe are a little more pressured from a market standpoint in the short term. And those are typically offset by segments that are performing a little bit better. And it all kind of evens out to that 1% to 3% organic growth guidance. So I'm not really going to go through segment by segment here, but I'd say there's definitely some puts and takes, but overall, not too far off from what we talked about on the last call. And certainly, our full year guidance, we're firmly on track to deliver on that.

Michael, that's helpful. And then just in Welding, maybe give us a little more color to what you see going on there. There was some destocking end of last year, maybe a little bit still early this year. Are you getting past that, and differences between industrial and commercial markets, sort of what do you see going forward there?

Yes. I think the big driver here is really the comparisons year-over-year. That's driving the growth rates as we go forward. And so just like I said, for the total company, for Welding, it's also true that as we go through the year, these comparisons get easier. 10% growth in Welding in the first quarter last year is obviously not a sustainable growth rate. And so it wasn't really a big surprise that organic revenue was down 3%. I'd say on a positive note, and this is true not just in Welding, but across the board, last year, we dealt with some meaningful headwind from excess inventory at our customers and in the channel. And to the point of magnitude, a percentage point of drag on the organic growth rate last year, that is essentially behind us at this point. So that's kind of the positive news across the board, including in Welding. And then we're back to a normal pricing environment. We've got an exciting lineup in terms of new products that are being launched here in the near term. And so you put all of that together, and we feel really good about the outlook here in Welding. Top line, obviously, but maybe I will just highlight the margin performance again. The fact that with revenues down, margins at 32% plus, operating margins is really strong and speaks to the focus that we have on really quality of growth over quantity of growth. And the team is executing well on that plan.

Agreed on the margin performance.

Your next question comes from Andrew Obin with Bank of America.

You have Sabrina Abrams on for Andrew Obin. Congratulations, Karen.

Thanks, Sabrina.

On the margin side, are there any changes to how you're thinking about volume leverage, price cost, maybe like the reinvestment in enterprise initiatives, as we move through the year? Maybe we could walk through the different buckets and how they relate to the full year guide?

Yes. I think there's not a lot of change from what we talked about on the last call. We are maintaining our operational guidance here kind of big picture at 1% to 3% organic growth. There is some positive operating leverage. We expect slightly more than 100 basis points of enterprise initiatives, which is based on the strong performance here in Q1 at 140 basis points. Price/cost has essentially normalized at this point. So there is some modest favorability from price/cost as we go through the year. Maybe a little bit more in Q1 versus the back end of the year. And then we have done a good job, as we talked about on the last call, managing some of the cost pressures from an inflationary standpoint around employee-related cost benefits. That used to be a headwind. Order of magnitude, we used to talk about 150, 200 basis points, and that's right around 100 basis points of margin headwind now. And then the last thing that I would add is just the accounting change. So factoring in the LIFO accounting change in Q1, that's how you get to that 140 basis points of margin improvement for the full year and the new range of 26% to 27%.

And then what are you guys seeing in terms of electronics demand? And what are you hearing from your customers? Because this market has been pressured for 5 or 6 quarters now, but clearly, the comps are getting easier. Has this started to bottom out yet?

It's a somewhat mixed situation. Last year, we discussed the difficulties in the semiconductor-related businesses, which were down by about 20% to 25%. These businesses account for roughly 15% of the Test & Measurement and Electronics segment and 3% of total ITW revenues, providing some context. The good news is that the semiconductor markets seem to have reached their lowest point, meaning they are no longer hindering the overall growth rate of the segment. In fact, they may have even been slightly positive in the first quarter, but the anticipated recovery has been postponed. It's difficult to predict when that recovery will happen, whether in the second half of this year or next year, and we have not included it in our guidance as mentioned earlier. Additionally, we are experiencing some pressure in the electronic assembly area, which is primarily linked to consumer electronics, leading to an 8% decline in electronics for the first quarter.

Your next question comes from Mig Dobre with Baird.

And I'll join the chorus here. Karen, all the best in retirement and really appreciate all the help over these years.

Thanks, Mig.

One question I had was about EMEA, which frankly came in a little bit better than I would have guessed. I guess one of the themes during this earnings season has been that Europe, frankly, has not been that great. So I'm kind of curious what you're seeing there? Is it just a function of the Specialty kind of one-time items that might have helped Europe in the quarter? Or is there kind of more green shoots to talk about in Europe?

The main contributor to our growth in Europe was the Specialty Products segment, particularly two of our equipment businesses and the timing of some orders, with Specialty seeing a 20% increase in the first quarter. Overall, the market remains stable. Automotive grew by 2%, Test & Measurement and Electronics were up 5%, while Food Equipment remained about flat. I expect Food Equipment to show more positive growth as we progress through the year. Smaller businesses saw a slight decline, with Welding and Polymers & Fluids both down a bit. Additionally, Construction continues to be a challenge internationally, having been in a decline for over a year, with double-digit decreases in the first quarter. Nevertheless, Europe experienced 1% positive organic growth in the first quarter.

Understood. And since you mentioned Construction, that was going to be my follow-up there. How do you sort of think about the way this segment can progress through the year here? Is there some sort of a stocking effect that we need to be aware of? And can you also clarify a little bit what you're seeing in North America? You talked about resi. I'm curious what you're seeing on the non-resi side of things?

Yes. I think overall, actually, if you think about Construction, the performance in North America I think is a good example of illustration of how the business is outperforming in a very challenging down market. Only to be down 3% in a market that, if you look at all the key metrics, is certainly down a lot more than that is pretty impressive. Residential/remodel, we said down 1%. I mean the home centers are actually down a little bit more than that. And on the commercial side, to your question, that continues to be soft. The commercial side is down. I mean, it's a fairly small part of the overall business, about 20% of the global business, maybe even a little bit less than that. That business was down in the low teens here in the first quarter. But overall, pretty resilient performance in a challenging market, and we expect that frankly to remain that way as we go through the balance of the year. If you look at our guidance last time we were together, we said we expected Construction to be down 1% to 3% and I'd certainly put them in that category. And then what's really helping drive some of the performance here is the margin performance. Again, for our Construction business to be delivering 29% plus margins is pretty remarkable without any volume leverage.

And I think we'll take one more question, please.

Your next question comes from Julian Mitchell with Barclays.

This is Matthew Pan from Julian Mitchell's team at Barclays. Just one, if you could dial in on the TME margins, they were down year-over-year. Can they expand in 2024 overall?

The short answer is yes. And I think one of the reasons, as I said in the prepared remarks that Test & Measurement margins were down in the first quarter is really the strong performance of the MTS business, which grew at 20% plus organic, which is certainly great performance. But due to the fact that we're only 2 years in, in terms of implementing the ITW business model, margins are in the mid-teens in that business. And so there's a negative mix effect that diluted the margins in Test & Measurement by about 250 basis points. Now as we go forward, starting Q2 and then through the balance of the year, we do expect that margins will improve from here in the Test & Measurement and Electronics segment. If you just look at kind of where we were historically, we're going to be back to kind of the mid-20s here for the full year is the current expectation. So like in every segment, including in Test & Measurement and Electronics, we expect to improve margins on a year-over-year basis.

Yes. In Test & Measurement and Electronics, I would just add that there's an extremely fertile environment for innovation, which will underpin margin progression going forward in that segment.

Yes.

Got it. And just a quick follow-up. The free cash flow was down year-over-year in Q1. Is that just a working capital build? And then what are your thoughts on Q2? Is that up year-over-year?

Yes. I think if you look at the free cash flow conversion, it's actually pretty close to kind of normal seasonality. Working capital, if you look at the inventory, it's certainly a decline on a year-over-year basis. It looks like an increase from year-end in Q1. You have to factor out this LIFO inventory accounting change, which added $117 million of inventory in the first quarter. If you do that, you'll see that inventory was actually flat in the quarter relative to year-end, when typically we see a 5% increase or about $85 million of inventory increase in the first quarter, which the team was able to offset. Now that said, our months on hand are still elevated relative to pre-COVID levels. And so pre-COVID, we were in the low 2s months on hand. We're right around 3. Certainly, some improvement, but we believe that there is a lot more opportunity here to drive those inventory levels back to kind of pre-COVID levels given that supply chain has normalized. And so as a result of that, you should expect continued strong free cash flow performance as we go through the year. And that's consistent with the guidance we gave today, which is a conversion of 100% plus for the full year. So I think overall kind of typical performance in Q1, and more to come as we go through the balance of the year in terms of reducing our inventory levels, which will result in strong free cash flow, as you've come to expect from ITW.

That concludes our question-and-answer session. And with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.