Andy Kaplowitz: 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?
Michael Larsen: Yeah. I think the big driver here is really the comparisons year-over-year. From a — 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, where 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.
Andy Kaplowitz: Agreed on the margin performance.
Michael Larsen: You’re welcome.
Operator: Your next question comes from Andrew Obin with Bank of America. Please go ahead, your line is open.
Sabrina Abrams: Hi. You have Sabrina Abrams on for Andrew Obin. Good morning and congratulations Karen.
Karen Fletcher: Thanks, Sabrina.
Sabrina Abrams: 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 like walk through the different buckets and how they relate to the full year guide?
Michael Larsen: 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%.
Sabrina Abrams: Thank you. 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 five or six quarters now, but clearly, the comps are getting easier. Has this started to bottom out yet?
Michael Larsen: Well, so I think it’s a little bit of a mixed picture there. I think last year, we talked a lot about the challenges in the semi-related businesses. Last year, those were down order of magnitude 20% to 25%. Now, we’re talking about just to kind of size things. These businesses represent about 15% of the Test & Measurement and Electronics segment, 3% of total ITW revenues. So, just to kind of put things in context. The positive news is that the semi markets appear to have bottomed out. So, this is no longer a drag on the overall growth rate of the segment. They were actually maybe slightly positive here in Q1, but the inevitable recovery has been deferred. And so when exactly that will come, whether that’s in the second half or next year, is hard to tell.
It’s not factored into our guidance as we told you today. And then we’re seeing a little bit of what I said in the script, a little bit of pressure in the electronic assembly side of things. So this is maybe more tied to consumer electronics, and that’s what drove electronics being down 8% here in the first quarter.
Sabrina Abrams: Thank you.
Operator: Your next question comes from Mig Dobre with Baird. Please go ahead. Your line is open.
Mig Dobre: Thank you. And I’ll join the porous here. Karen, all the best in retirement and really appreciate all the color.
Karen Fletcher: Thanks, Mig.
Mig Dobre: 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?
Michael Larsen: I mean the big driver in Europe here from a dollar standpoint was the Specialty Products, these two equipment businesses here and the timing around some of those orders as those — Specialty was up 20% here in the first quarter. But overall, I’d say pretty stable, Automotive was up 2%; Test & Measurement and Electronics, up 5%; Food Equipment about flat. That’s a little bit of an anominally that will return to more positive growth as we go through the year. And then smaller businesses. Welding down a little bit and Polymers & Fluids down a little bit. But overall — and then Construction obviously, remains the – a drag internationally as it has been for well over a year at this point. So Construction was still down double-digit here in the first quarter. But overall, 1% positive organic growth in the first quarter in Europe.
Mig Dobre: 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 an non-resi side?
Michael Larsen: 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. It’s only to be down 3% in a market that if you look at all the key metrics, it’s certainly down a lot more than that, is pretty impressive. Residential and 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’ve 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 delivering 29% plus margins is pretty remarkable without any volume leverage.
Mig Dobre: All right. Thank you.
Michael Larsen: You’re welcome.
Karen Fletcher: And I think we’ll take one more question, please.
Operator: Your next question comes from Julian Mitchell with Barclays. Please go ahead, your line is open.
Matthew Pan: Hi. Good morning. This is Matthew Pan from Julian Mitchell’s team at Barclays. Just one on — if you could dial in on the TME margins, they were down year-over-year. Can they expand in 2024 overall?
Michael Larsen: 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 a great performance. And — 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 kind of — 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.
Christopher O’Herlihy: 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.
Matthew Pan: 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?
Michael Larsen: 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 looks — 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 in the — 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.
Matthew Pan: Perfect. Thank you, very much.
Michael Larsen: You are welcome.
Operator: 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.
