Andy Kaplowitz : Good morning, everyone. Michael, when we think about margin expectations for ’23 across your segments, does the lag in price versus cost flipped the most in Auto OEMs, so you could see a nice jump in margin in that segment? Or should we generally think that your segment margin will trend with who has the highest growth forecast versus the weakest growth forecast in ’23?
Michael Larsen : I think, Andy, we expect — all of our planning here at ITW has done bottoms up, as I think you know. And every one of our segments, including the higher-margin ones, such as Welding as well as Automotive, which is really dealing with some near-term pressures primarily related to price cost as well as just volume leverage. Every one of our 7 segments told us that they expect to improve margins year-over-year in 2023. But obviously, the ones that have the higher growth rates are going to have more volume leverage and therefore, probably a more significant improvement in operating margin. But everybody will get better. I would just say on Automotive, it’s going to take some time to recover the price/cost margin impact, which has been significantly higher in Automotive than in other segments for all the reasons we’ve talked about in the past.
It takes a little bit longer to recover price. So I think our current view is it will take us maybe two to three years to get back to automotive margins in the low to mid-20s. And so that’s maybe how I would — we would characterize it.
Andy Kaplowitz : Very helpful, Michael. And then can you give us an update on the longevity of enterprise initiatives? ITW continues to I think we might begin to get a little spoiled here that it could last indefinitely. So how are you thinking about enterprise strategy? Do you still see a long runway of initiatives across your segments? And where will the focus of enterprise strategy be across your segments in ’23?
Michael Larsen : Well…
Scott Santi : Yes, go ahead, you start.
Michael Larsen : Okay. Well, I think we’re in the tenth year now. I think if you add up the combined savings, it’s approaching $1.5 billion of structural cost out from 80/20 and from strategic sourcing. And when we rolled up the plans here in November and check back in, in January and had a chance to review all the projects and activities that go into delivering these 100 basis points, we were really encouraged by what we saw. And so I know that for a couple of years, we’ve been saying — I’ve been saying this is not going to go on forever, and I…
Scott Santi : We were wrong.
Michael Larsen : And I was wrong, which happens a lot. But I think, ultimately, look, I think if you model ITW long term, I’d go back to the TSR model we’ve given you, which is 4% plus organic growth, incremental margins in that 35% to 40% range. Then operating income grew $7 million. You add acquisitions and buybacks on top of that. And so EPS grows 9% to 10%, and you add an attractive dividend in that 2% to 3% range. 2% to 3% range on top of it, you get 11% to 13% over the long term, that’s what you should expect us to deliver. And so I think I have to say, to give you a definite and on enterprise initiatives because, as Scott reminded me, I’ve been wrong for many years. But that’s probably how I would think about it, Andy.
Scott Santi : I would just add in terms of perspective that I think one of the real strengths of our operating methodology and our business model is it’s there’s no one definition of perfection. There is always room to get better. We use the business model as the core tool that our 84 divisions used to identify and prioritize opportunities to get better. And I don’t see that stopping for quite a while.
Michael Larsen : Right. I think we’ve said this before. I mean, this proprietary ITW business model is more powerful than it’s ever been as we sit here today. It’s much different from 10 years ago, 3 years ago. And we are applying it. Our people, we’ve all gotten better at applying these methodologies, and we’re applying it to a much more differentiated portfolio. And so as long as we continue down that path, I think it is — I agree with Scott. I don’t think it’s going to end any time soon. So that’s probably how we’ve set it up.
Andy Kaplowitz: Appreciate all the color, guys.
Operator: The next question comes from the line of Andrew Obin of Bank of America. Your line is open.
Unidentified Analyst : You have Sabrina Abrams on for Andrew Obin. So first on the margin guide, the 70 bps to 170 bps of year-over-year expansion includes the 100 bps of enterprise initiatives. And then, I guess, the remainder is 20 bps of price/cost at the midpoint. I’m just trying to think, is this a conservative approach? Should you had 70 bps of benefit in 4Q? Is there potential upside here?
Michael Larsen : Well, I think maybe what would be helpful, Sabrina, is just — let me just give you some of the elements here that go into the margin improvement on a year-over-year basis. And I’m going to use round numbers here, okay? So if we just ended 2022 at operating margins of about 24%, you should expect volume leverage somewhere in the 50 to 100 basis points of positive contribution to margins year-over-year, the enterprise initiatives, which is sized at about 100. We’re certainly going to make some good progress on price/cost as 70 basis points was encouraging in Q4. I think the — if that’s the run rate going into 2023, maybe a little bit better than that. Let’s just say price/cost adds approximately 100 basis points based on what we know today.
And then the offset to some of this is our typical kind of — we talked about this a little bit, wages and inflation on wages. We are bringing in some new hires to support our organic growth efforts. We are investing in driving organic growth, including capacity. And so that’s typically a headwind of less than 100 basis points. That’s running a little bit higher, just given the underlying inflation that’s in the system that’s probably running at 150 to 200. And so you add all that up, you get 100 basis points plus of margin improvement on a year-over-year basis. And I think that’s a pretty good number, Sabrina.
Unidentified Company Speaker : Got it. That’s helpful. And so China, I guess, was strong in Auto OEM in 4Q. Just trying to think what’s incorporated in your guide for China reopening next year?
Michael Larsen : Well, I think, as we look at kind of on a geographic basis, including China, most of our regions are kind of in that mid-single digits for the year. And China is maybe a little bit higher than that. A big driver, as you pointed out, in China is really the Automotive business, where we continue to make a lot of progress in terms of market share and penetration gains. So that’s certainly our largest business and also the biggest driver of our growth in China next year. And so if the total company is 3% to 5% organic, China is certainly a little bit higher than that in our current projections as we sit here today. So…
Unidentified Company Speaker: Great. Thank you so much. I’ll pass it on.
Operator: Your next question comes from the line of Jeff Sprague of Vertical Research. Please go ahead, your line is open.
Jeff Sprague: Thank you. Good morning, everyone. Solid results. Just back to enterprise, I’ve often kind of thought of it maybe incorrectly as reflecting a little bit of a trade-off between margin and growth. And maybe originally, it was more cost oriented, but the organic growth here recently would suggest you’re not trading growth for margin. And I wonder if you could just kind of comment on that. Obviously, the growth has enjoyed a cyclical lift the last couple of years. So I don’t want to overstate the point, but it does seem that the system has thrown up at organic growth than it had historically? And just any context on that, I think, would be interesting.
Scott Santi : Yes. First of all, Jeff, thank you for noticing. The — what I would say in terms of just the arc of the last decade, we’ve been on this is that clearly, for the first five to seven years, we had a lot more work to do inside the businesses to get ourselves in position to grow. And what we’re delivering now is much more about businesses that are from an operational standpoint, a lot closer to 80% or 90% of their potential. And so a lot of — which allows a lot of our effort and attention and just to be reallocated to commercial opportunities to grow. And that’s ultimately what is showing up now. We have a lot more sort of energy collectively being devoted to growth opportunities because we’ve gotten the internal — the operational position of these businesses firing in sort of in a really strong position.
And so it’s — you can’t be great at everything all at once. It’s part of, I think, what we would reflect that over the last decade and one of the real secrets to the outcomes we’ve delivered in my view is that we’ve been focused on the right things at the right time and have not tried to do too much at any stage. But we’re clearly now at a stage where organic growth is the 80 of what we’ve got opportunities to do and what we’ve got to deliver on going forward. And I think that’s reflected in the numbers that we’re currently throwing off.
Jeff Sprague : And would — Michael gave that piece of the bridge, wage and growth investment. Is that number other than kind of the inflationary pressures that you mentioned? Is that structurally moving higher? Or can that sort of be funded within the normal incremental margin construct and other levers that you’re attempted for?
