Earnings Call Transcript - ITW Q4 2020

Operator, Operator

Good morning, my name is Julian, and I will be your conference operator today. I would like to welcome everyone to the conference call. Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Karen Fletcher, Vice President of Investor Relations

Okay. Thank you, Julian. Good morning and welcome to ITW's Fourth Quarter 2020 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'll discuss ITW's fourth quarter and full-year 2020 financial results and provide guidance for full-year 2021. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the Company's 2019 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, including the ongoing effects of the COVID-19 pandemic on our businesses. 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.

Scott Santi, Chairman and CEO

Thank you, Karen. Good morning, everyone. The ITW team closed out 2020 with another quarter of strong operational execution and financial performance. From my perspective, the highlights are that Q4 revenues returned to year-ago levels despite food equipment being down 17%, and net operating income, operating margin, and after-tax ROIC were all Q4 records for the company. It was a solid finish to the year that, needless to say, provided some unique and unprecedented circumstances and challenges, and indicates good momentum as we head into 2021. While it was the challenges brought about by the pandemic that dominated our attention in 2020, it was the collection of capabilities and competitive advantages that we have built and honed over the past eight years through the execution of our enterprise strategy that provided us with the options to respond to them as we did. Early on as the pandemic unfolded, we refocused the entire company on only two core imperatives: A, to protect the health, safety, and well-being of our people, and B, to continue to serve our customers with excellence. In my view, we executed extremely well on both. Our manufacturing, operations, and customer service teams around the world deserve special recognition for their extraordinary efforts and leadership in support of these two key pandemic priorities. Their dedication and commitment to keeping themselves and their colleagues safe while continuing to deliver excellent service to our customers was truly inspiring, and there’s no question that we differentiate ourselves with many of our key customers as a result of our ability to sustain our normal, rock-solid quality and delivery performance throughout 2020, thanks to their efforts. We also did our best to take full advantage of ITW's position of strength as we've considered how to manage the company through the pandemic. Back in the spring, as we analyzed and stress-tested the Company's performance across a wide range of scenarios, it became clear that the financial and competitive strengths we had built up over the last eight years had resulted in a very strong and resilient company. As a result, we didn't have to just pull out our old recession playbook and hunker down. For ITW, this was a unique opportunity to react smartly and to stay focused on the long term. This led to two key decisions regarding how we would manage ITW through the pandemic crisis. First, we chose to leverage the strong financial foundation that we've built over the last eight years to reinforce our commitment to our people by providing full compensation and benefits support to all ITW colleagues through the entirety of Q2, when the economic effects of the pandemic were at their most widespread and severe. Secondly, we decided that we would not initiate any enterprise-wide employment reduction mandates or programs at any point in 2020. These were not obvious or easy decisions given the unprecedented and uncertain circumstances, but we believe that they were the right decisions for our company, and I know that our people will remember them. These decisions also turned out to be the right ones for us operationally, given the pace of demand recovery we saw beginning in Q3. Second, we chose to leverage our position of strength by implementing our 'Win the Recovery' agenda and mindset across the Company. 'Win the Recovery' was not an opportunistic new strategy but a commitment to stay the course and continue to prioritize the execution of our long-term enterprise strategy despite the unique challenges brought about by the pandemic. For us, 'Win the Recovery' did not mean ignoring the pandemic; rather, we had to read and react to the near-term realities as we always do. But it does mean that we are committed to protecting key investments supporting the execution of our long-term strategy. From very early on, we empowered our divisional leadership teams to continue to think long-term and remain aggressive throughout the pandemic. For 2021, our 'Win the Recovery' posture and mindset remains central to our operating plans for each of our 83 divisions. Before I turn the call over to Michael for more detail on our Q4 performance and 2021 guidance, let me close by thanking all of our ITW colleagues around the world for their exceptional performance and dedication during the challenging circumstances of the past year. The performance that they delivered in 2020 provides another proof point that ITW is a company with enduring competitive advantages, resilience, and agility necessary to deliver consistent top-tier performance in any environment. Like many of you, I am hopeful for a return to a semblance of normalcy at some point in 2021, which would enable us to focus on taking ITW to its full potential. Until then, we will continue to leverage the full breadth of ITW's capabilities and competitive advantages to keep our people safe, serve our customers excellently, and execute our long-term enterprise strategy. Michael, over to you.

Michael Larsen, Senior Vice President and CFO

Thank you, Scott, and good morning, everyone. Please turn to Slide 4. In the fourth quarter, we continued to see solid recovery progress in many of the end markets that we serve, evidenced by our revenue being up sequentially 5% versus the third quarter. The increase is 8% when you adjust for an equal number of days, as historically our revenue per day has increased by 1% from Q3 to Q4. Overall, we delivered revenue of $3.5 billion, operating income of $883 million, an increase of 7% year-over-year, operating margin of 24.4%, free cash flow of $705 million, and GAAP EPS of $2.02. After-tax return on invested capital improved to 32%. As Scott mentioned, operating income, operating margin, and after-tax ROIC were fourth quarter records for the company. Revenue in all major geographies improved sequentially. Year-over-year, North America organic revenue declined 3%, International revenue grew 1%, and Europe was down 2%. Similar to Q3, China remained a bright spot with 11% growth. As we've discussed before, the operating flexibility that is central to our 80/20 Front-to-Back operating system also applies to the cost structure, which was on full display through our operating margin performance in Q4. We improved our operating margin by 170 basis points to 25.4%, the second-highest margin rate in a quarter in the company’s history. As I mentioned, we grew operating income 7% to $883 million, the highest fourth quarter ever. The biggest driver of our margin improvement comes from our enterprise initiatives, as the ITW team executed on projects and activities that contributed 130 basis points in Q4. The impact was broad-based, with all segments delivering enterprise initiative benefits in the range of 80 to 170 basis points. GAAP EPS was $2.02, up 2%. However, keep in mind that last year's Q4 included $0.11 of one-time gains from divestitures. If you exclude those gains, EPS was up 7%, consistent with operating income. Working capital performance was excellent, and free cash flow of $705 million was solid, with a conversion rate of 110% of net income. Finally, the effective tax rate was 22.1%, down slightly from last year. In summary, we had a strong finish to a challenging year and good momentum as we head into 2021. Let’s move to Slide 5 to review the fourth quarter recovery and responses by segment. We updated this slide from our last earnings call with Q4 information, and you can see that our segments continue to respond effectively to the increase in demand recovery, improving sequentially in both revenue and operating margin. I would highlight a few things to illustrate the resilience and adaptability of our businesses. You can see the rapid recovery in our end markets, relative to the Q2 bottom, but down 27%. In Q4, three of our segments experienced demand levels that were higher than a year ago. The most pronounced recovery has been in automotive OEM, which more than doubled since Q2 and grew 8% year-over-year in Q4, as did construction products. Polymers and Fluids grew 7%, while demand in three segments—Test & Measurement and Electronics, welding, and specialty products—was only slightly lower year-over-year. As expected, food equipment continues to be impacted by the effects of the pandemic, although we are seeing some sequential improvement. Overall, you can see the benefit of having a high quality diversified portfolio, as we are back to demand levels of a year ago, with total revenue essentially flat year-over-year despite one of our core segments being down organically by 19%. On the right side of the page, you can see the operating flexibility I talked about and how this also applies to our cost structure, ultimately showing up in our operating margin performance. In Q2, we delivered solid operating margins of 17.5%, and only two segments were below 20%. In Q4, we achieved nearly 800 basis points higher at 25.4%, despite no volume growth year-over-year, and every segment is back above 22%, including Food Equipment. Six out of seven segments achieved record fourth quarter operating margins. Let’s move on to Slide 6 for a closer look at individual segment performance, starting with automotive OEM. The team has continued to execute exceptionally well in quality and delivery, responding to customer demand levels that have more than doubled since Q2. In Q4, organic growth of 8% year-over-year marked the highest growth rate since the first quarter of 2017. While North America was flat in Q2, it was more than offset by strong demand in Europe, which grew 10%, and China, which grew 20%. As expected, food equipment end markets remained challenged in Q4, with organic revenue down 19%, somewhat improved from the third quarter, and demand levels in Q4 were similar to those in Q3 when assessed by geography and end markets. North America was down 20%, international down 18%, equipment sales were down 20%, and service down 18%. Institutional demand was down about 30%, with restaurants performing slightly worse than that. Not surprisingly, the consistent bright spot throughout the year was retail, with organic growth of 8%. Moving to Slide 7 for Test & Measurement and Electronics, Q4 organic revenue declined 3%, with Test & Measurement down 8%, against a tough comparison of a plus 6% in Q4 '19. Electronics was up 3%, and while demand for capital equipment remains sluggish, the segment benefited from considerable strength in several end-markets, including semiconductor, healthcare, and clean room. As you may have seen on January 19, we announced that we had entered into an agreement with Amphenol to acquire MTS's Test & Simulation Business. The Test & Simulation Business is very complementary to our Instron business, which we highlighted during our 2018 Investor Day, and some of you may have visited our facility outside of Boston. MTS's Test & Simulation business possesses similar organic growth potential and there is substantial opportunity for margin improvement through the application of the ITW business model. Pre-COVID revenues in fiscal year 2019 were $559 million, with an operating margin of 6%. We expect to get the business to generate ITW caliber operating margins by the end of year five, producing after-tax ROIC in the high teens by the end of year 10. As you saw in the announcement, we expect the acquisition to close in mid-2021 and we look forward to welcoming the MTS Test & Simulation team to the ITW family. Moving on, please turn to Slide 8. In welding, we saw a meaningful pickup in demand as organic revenue improved from being down 10% year-over-year in Q3 to only being down 2% in Q4. Our commercial business, which primarily serves smaller businesses and individual users and accounts for 35% of revenue in this segment, remained strong and grew 12% year-over-year. Our Industrial business showed signs of strong recovery, from being down 23% in Q3 to down only 5% in Q4, as customer activity and equipment orders gained strength. Overall, organic revenue for food equipment was flat versus the prior year, and improved significantly from a 10% decline in the third quarter. Polymers & Fluids delivered strong organic growth of 7%, with fluids up 16%, driven by continued strong demand in healthcare and hygiene related end-markets. The automotive aftermarket business benefited from strong retail sales with organic growth of 5%, while polymers grew 4% with solid demand for MRO and automotive applications. Moving to Slide 9, construction continues to benefit from strong demand in the home center channel, delivering organic growth of 8% in Q4. Growth was strong across all geographies, with North America up 10%. Double-digit growth in the residential renovation market was somewhat offset by commercial construction, which represents only about 15% of North America revenue, down 11%. Europe grew 9%, and Australia/New Zealand grew 5% due to strong retail sales. Specialty organic revenue was down 3% this quarter, with North America down 2% and international revenue down 4%. Demand for consumer packaging remains solid, but it has been offset by lower demand in the capital equipment businesses. So that concludes the segment commentary. Let’s move on to Slide 10 for a discussion of our full year 2020 summary results. In the face of unprecedented challenges, including temporary customer shutdowns across vast swaths of our end markets during the year, organic revenue was down 10%. Still, we delivered operating income of $2.9 billion and highly resilient operating margin of 22.9%, only down 120 basis points year-over-year despite no major cost takeout initiatives or mandates, and with a strong contribution of 120 basis points from our Enterprise Initiatives. After-tax ROIC was 26.2%, and free cash flow was $2.6 billion. Throughout the pandemic, one of our priorities has been to maintain our financial strength, liquidity, and strategic optionality, and as you can see, we did just that in 2020. ITW's balance sheet remains strong, with ample liquidity. We did not have any need to issue debt or commercial paper in 2020, ending the year with total debt to EBITDA leverage of 2.5 times, which is only slightly above our 2.25 times target. At year-end, we had approximately $2.6 billion in cash and cash equivalents on hand. With 2020 behind us, let’s move to Slide 11 for a discussion of our 2021 guidance. Starting with the caveat that we continue to operate in a fairly uncertain economic environment, we have based our guidance, as we always do, on the current levels of demand in our businesses. Following our usual process, we are projecting these levels into the future and adjusting them for typical seasonality. The outcome of that exercise is a forecast of solid broad-based organic growth of 7% to 10% at the enterprise level. Foreign currency at today’s exchange rates is favorable, contributing 2 percentage points to the total revenue growth forecast of 9% to 12%. Using our typical incremental margins of 35% to 40%, we expect GAAP EPS to be in the range of $7.60 to $8 a share, up 18% at the midpoint. We are forecasting an operating margin range of 24% to 25%, which is an improvement of more than 150 basis points year-over-year at the midpoint. Enterprise Initiatives are a key driver of operating margin expansion in 2021, with expected contributions of approximately 100 basis points. Restructuring and pricing costs are expected to be approximately margin neutral year-over-year. We are closely monitoring the raw material cost environment, and our 2021 guidance accounts for known raw material increases in commodities such as steel, resins, and chemicals. Given the differentiated nature of our product offerings across the company, we expect to offset the impact of any incremental raw material cost increases in 2021 with pricing actions on a dollar-for-dollar basis. We expect strong free cash flow in 2021, with a conversion rate greater than 100% of net income. I wanted to provide a brief update on our capital allocation plans for 2021. Our top priority remains internal investments to support our organic growth efforts and sustain our core businesses. Our second priority is the importance of an attractive dividend to our long-term shareholders; we view it as a critical component of ITW's total shareholder return model. Third, we remain focused on selective high-quality acquisitions to supplement our portfolio and further enhance ITW's long-term organic growth potential. I should point out that the guidance we are providing today pertains to the core business only. Following the MTS Test & Simulation acquisition closure, we will provide you with an update, but we do not expect a material impact in 2021. In line with our capital allocation, we are returning surplus capital to shareholders and reinstating share repurchases, with a plan to invest approximately $1 billion in 2021. We expect our tax rate for the year to be in the range of 23% to 24%. Finally, in terms of portfolio management, we have decided to defer any divestiture activity until next year and focus our time and efforts on recovery in 2021. While our view regarding the long-term strategic fit of the remaining divestitures hasn’t changed, we believe that, given their expected performance this year, they will be more valuable in 2022. Let’s turn to Slide 12 and the forecast for organic growth by segment. Again, with the caveat that the environment remains fairly uncertain, we are providing an organic growth outlook for each segment and based on current levels of demand. We are forecasting solid broad-based growth; every segment is expected to improve their organic growth rate in 2021. At the enterprise level, this all adds up to solid organic growth of 7% to 10%. To wrap it up, ITW finished a challenging year strong, as we continue to fully leverage the capabilities and competitive advantages built over the past eight years through the execution of our enterprise strategy. Our strong operational and financial performance in 2020 strongly supports that ITW is a company that possesses both enduring competitive advantages and resilience necessary to deliver consistent top-tier performance in any environment. Looking ahead to 2021, we have good momentum from Q4 heading into the year, and our solid guidance reflects our commitment to delivering strong results while continuing to execute our long-term strategy to achieve and sustain ITW's full potential performance. With that, Karen, I'll turn it back to you.

Karen Fletcher, Vice President of Investor Relations

Okay. Thank you, Michael. And Julianne, let's open up the lines for questions, please.

Operator, Operator

Your first question comes from Andrew Kaplowitz from Citi. Please go ahead, your line is open.

Andrew Kaplowitz, Analyst

Good execution as usual. So it's been a couple of years now since your last Analyst Day. Maybe you could update us on the goal of finishing the job related to the enterprise strategy. It seems like your performance in the second half of '20 and the 7% to 10% growth guidance you've got for '21 reflects full organic growth potential versus your end markets. But maybe give us some color around that and how you're thinking about enterprise strategy coming out of the pandemic? Do you still see 100 basis points of margin improvement per year through at least 2023?

Scott Santi, Chairman and CEO

I'd say a couple of things, Andy. First of all, this has been a process throughout the journey where the further we go, the more opportunity we find to continue improving. One of the remarkable things from our perspective is, eight years into this, I don't see that slowing down. We are focused on moving forward to get better every year, a little bit better this year than we were last year. Within this framework, the strategy that we've laid out, there still remains ample room to continue that path for several years. We have performance goals in place; you're right, it's been a couple of years since we updated those goals, but we remain absolutely on track and committed to delivering on them. As we get closer to completion, we'll figure out what the next steps are.

Andrew Kaplowitz, Analyst

Thanks for that, Scott. And then is it right to think that generally, you should see more margin improvement from the segment with the largest growth projections for '21? Could you give us, we know you talked about price versus cost; there are sometimes lags in some segments like auto OEM. Should we be concerned about that at all? Any other color on price versus cost you could provide?

Michael Larsen, Senior Vice President and CFO

Based on our bottoms-up planning process, we expect every segment to improve on their margin performance in 2021. As Scott said, we expect a little bit better every year as we work towards our full potential. One remarkable thing to note is how the margin performance range by segment has narrowed. Today, the low-end is food equipment at 22%, and the high-end is welding at 29%, very different from the ranges when we began this strategy eight years ago. The primary driver in 2021 remains Enterprise Initiatives. These are broad-based improvements in every segment, and we anticipate meaningful contributions from volume leverage as we go through the year. However, I wouldn't single out any segment for more margin improvement potential than others; we expect all segments to continue making progress towards their full potential.

Andrew Kaplowitz, Analyst

Appreciate it, guys.

Michael Larsen, Senior Vice President and CFO

Certainly, we are closely monitoring the raw material cost environment. We are seeing inflationary pressures in commodities such as steel, resins, and certain chemicals, particularly in segments like automotive, construction, and polymers and fluids. We plan to offset those cost increases we know about and any that arise this year with pricing on a dollar-for-dollar basis. In automotive, given the nature of the industry, the process takes a little longer, but we're confident that we can offset any raw material cost increases with pricing due to the differentiated nature of our product offerings in these segments.

Operator, Operator

Your next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead, your line is open.

Nicole DeBlase, Analyst

Can we start with the outlook for auto OEM? When you think about the 14% to 18% that you forecasted for 2021, how does that look against some of the semiconductor supply chain issues we're seeing? Are those hiccups embedded in your outlook? If you could also discuss the potential quarterly cadence for the auto business, noting that you don’t provide quarterly guidance, it would be helpful.

Michael Larsen, Senior Vice President and CFO

Thank you, Nicole. So regarding the semiconductor shortage in the automotive OEM space, we've not seen a slowdown in demand thus far, and we have strong momentum going into the year that has continued through January. There could be some production slowdowns in Q1 for some of our customers; whether this impacts their demand for our products remains to be seen. It's more of a timing issue. That said, we expect to catch up in Q2 or the second half of the year. In terms of quarterly cadence, Q4 had strong performance, up 8%. We've not seen anything to suggest that demand is slowing down. Given our planning, we expect to see positive organic growth and margin improvement in the first quarter, and typically, that builds as we move through the year. Q2 should be the biggest quarter, while the second half presents some more challenging comparisons.

Scott Santi, Chairman and CEO

I can assure you that Q2 will be a lot better this year than last year. That’s the one certainty we have.

Nicole DeBlase, Analyst

Thanks for that. As a quick follow-up, considering the full company organic growth guidance provided for 2021, have you factored in any margin improvement related to market and market share over peers into that guidance?

Scott Santi, Chairman and CEO

The only way those efforts are factored into our planning is that they're embedded in our current run rates. We haven't baked in any other acceleration into the guidance; our organic growth forecast includes our daily run rates projected through 2021 alongside normal seasonality. Thus, we are not currently projecting an increase in market growth. However, we are determined to remain aggressive as the recovery accelerates.

Operator, Operator

Your next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open.

Jeff Sprague, Analyst

Following up on your previous insights, are there one or two segments that you believe could outpace or lag based on your business sense and experience, given your historical understanding of these businesses?

Michael Larsen, Senior Vice President and CFO

The obvious segment to point to is food equipment, which could be influenced largely by the pace of vaccine penetration and recovery. Despite the 8% to 12% growth rate projected for the year, we are still well below 2019 levels of demand, indicating significant incremental growth opportunities. I wouldn't point to another clear laggard, but maybe capital equipment sectors such as welding and test and measurement could see more investment as businesses become more comfortable with the recovery trajectory, which would stimulate demand in those areas.

Scott Santi, Chairman and CEO

When it comes to growth, I believe our ability to stay focused on aggressive growth agendas through this volatility will pay off. While not every division is fully there, I can confidently state 90% of them are in a good position and doing all the right things.

Operator, Operator

Your next question comes from Ann Duignan from JPMorgan. Please go ahead, your line is open.

Ann Duignan, Analyst

Could you talk about your outlook for construction products? It seemed like organic growth would have been higher in 2021 given strong renovations in 2020.

Scott Santi, Chairman and CEO

We had a strong year for the construction business, finishing Q4 with an 8% year-over-year growth rate, benefiting significantly from home centers amid the pandemic. However, given easier comp scenarios for growth and the current housing starts' encouraging signs, we are expecting mid to high single-digit growth for 2021.

Michael Larsen, Senior Vice President and CFO

Regionally, the comps might be slightly easier in Europe compared to North America. But overall, globally, we have maintained a good performance.

Operator, Operator

Your next question comes from John Inch from Gordon Haskett. Please go ahead, your line is open.

John Inch, Analyst

Are there any specific businesses that have made internal changes in 2020 that you believe position them favorably for growth going into 2021, such as enterprise initiatives or new offerings?

Scott Santi, Chairman and CEO

Reflecting on what we accomplished in 2020, we managed to stay focused on our core strategies and keep advancing our initiatives throughout a tumultuous year. While I can't point to any significant shifts, we remained ready, prepared, and engaged, moving forward amidst unusual circumstances, which I believe will yield substantial benefits going forward.

John Inch, Analyst

How significant will new product introductions play in driving faster growth in the next few years?

Scott Santi, Chairman and CEO

New products are a core component of our strategy; customer-back innovation remains central to our model. We've consistently generated a couple of thousand patents every year. While I can't point to any inflection in our strategy, it's crucial to outgrow our markets in the long haul with continued innovation.

Michael Larsen, Senior Vice President and CFO

Financially speaking, our investments in new product development are our top priorities regarding capital allocation. For 2020, our spending matched what we spent in 2019 as we maintained our focus on projects and strategies designed to drive organic growth.

Operator, Operator

Your next question comes from Jamie Cook from Credit Suisse. Please go ahead, your line is open.

Jamie Cook, Analyst

Do you have anything in your guidance built in for potentially higher supply chain costs, such as freight, as you navigate 2021?

Michael Larsen, Senior Vice President and CFO

Yes, we are seeing increased freight costs, which, while not the largest cost factor, are certainly accounted for in our current guidance. As for market share growth, we now have numerous examples across all segments where our ability to maintain quality and delivery has led to share gains, justifying our long-term focus on sustainable improvements.

Operator, Operator

You next question comes from Julian Mitchell from Barclays. Please go ahead, your line is open.

Julian Mitchell, Analyst

What are your expectations regarding CapEx recovery in relation to working capital, specifically in light of the strong free cash flow delivered last year?

Michael Larsen, Senior Vice President and CFO

You're correct; some capacity expansions were postponed last year due to the pandemic, but as recovery progresses, we expect CapEx to return to normal levels. We also incorporate the notion of building up some working capital to support nearly double-digit growth across the enterprise. Therefore, we believe 2021 will yield another strong cash flow year with a conversion rate exceeding 100% of net income.

Operator, Operator

Your next question comes from David Raso from Evercore. Please go ahead, your line is open.

David Raso, Analyst

Considering the normalized costs, you mentioned it would match the higher costs dollar for dollar. When analyzing your guidance in context of organic growth, how much of the EPS growth should be determined by cost versus pricing?

Scott Santi, Chairman and CEO

We don’t assess it that way directly. Essentially, we will cover any material cost increases with price on a dollar-for-dollar basis. Our planning presently aims for positive pricing ahead of costs—any increases from here will be offset steadily.

Michael Larsen, Senior Vice President and CFO

That indeed indicates that while any cost increase can slightly dilute margins through timing delays, we still plan to maintain our margins. Our current outlook reflects a solid yet realistic pricing environment.

Operator, Operator

Your next question comes from Joe Ritchie from Goldman Sachs. Please go ahead, your line is open.

Joe Ritchie, Analyst

Do you anticipate any PLS impact from the MTS acquisition? Will there be a revenue trajectory associated with it?

Michael Larsen, Senior Vice President and CFO

You should anticipate PLS will be a significant component of the overall ITW business model post-acquisition. However, the first couple of years are anticipated to experience some downturn. But you'll see accelerated growth thereafter.

Joe Ritchie, Analyst

Lastly, can you reflect on the polymers and fluids segment's recent growth trend and whether new product initiatives will sustain that pace?

Michael Larsen, Senior Vice President and CFO

Indeed, there has been strong growth in the polymers and fluids segment. Our ongoing focus on new products has paid off, with our average annual organic growth rate predominantly coming from innovative developments in this area. The outlook for 2021 appears promising, particularly for health and hygiene related markets as well as in MRO applications.

Karen Fletcher, Vice President of Investor Relations

Okay. I think we are out of time. So I’ll just say to everybody, thanks for joining us this morning. If you have any follow-up questions, please give me a call. Thank you.

Operator, Operator

Thank you for participating in today's conference call. All lines may disconnect at this time.