Illinois Tool Works Inc. (ITW) Earnings Call Transcript & Summary

And, welcome back. We're very excited to have ITW with us. We have Michael Larsen, who is the Senior Vice President and Chief Financial Officer of ITW Michael joined in 2013, having previously served as President and CEO and Director of Gardner Denver, and you've also had a long industrial career.

Very much appreciate you being here, Michael, while I'm walking over, I'll just sort of ask you. Maybe a follow-up to the question I kind of asked you in the earnings call because I think it's sort of an interesting development. You mentioned enterprise initiatives going to be 100 basis points this year. But you answered my question about enterprise strategy kind of suggesting that the savings can be ongoing. And I want to say indefinite because -- but I would say ongoing and that you could sort of achieve 100 basis points pretty much every year. So can you maybe describe how you've honed enterprise strategy over the last 10 years? Because it seems like it's gotten better for you? And why couldn't you -- if it continues to be good or better, why couldn't you deliver more than your usual target of 35% to 40% incremental margin?

Sure. Well, thank you, Andy. And -- thank you for having us back. I think this is our sixth year and every year, I wonder whether I'm going to be invited back next year. And so far, so good

We always love, as you are back.

So, As its ongoing , Sounds great really to be here. And let me just take a step back and answer your question maybe a little differently. I think we're 10 years into our quest here to position the company as a solid organic grower with best-in-class margins and returns. And we've certainly, I think, come a long way in terms of achieving our goal of being one of the most competitive highest quality industrial companies in this space. I'll just point to a couple of proof points around our margin profile for the people that are not aware, our EBIT margins get not adjusted are in the mid-20s return on capital. 30% plus on an after-tax basis. We -- I think over that time frame have kind of uniquely earned the right to be a diversified industrial company, just given the quality of the portfolio and the fact that there really are no weak links across this portfolio. And I think also in the process, we've kind of gone from a kind of a peer average multiple valuation to now solid 20%-plus premium relative to the peer group. So certainly, a lot of progress. I think the really good news from our perspective is that there's still a lot of runway in front of us. I mean based on everything that we're seeing today, including the more recent progress, maybe we'll talk about kind of 2022 and the fourth quarter, all points to the fact that we've got another 5-plus years ahead of us in terms of really continued strong execution on this enterprise strategy. A significant component of that has been the enterprise initiatives that you were talking about. So if you look back over the last 10 years, we've generated 100 basis points of margin improvement every year. It adds up to $1.5 billion of cost out over the last 10 years, really from 2 big initiatives: one being the reimplementation of our 80/20 front-to-back Think of it as our operating system across our 84 divisions only a much more powerful 80/20 today than it was 3, 5, 10 years ago as we continue to learn and further improve kind of the tools and the techniques that are associated with 80/20. I think our people, our teams are much better in terms of being real experts at the implementation of the business model. And then the third piece is we're applying these tools and techniques to businesses that are much more differentiated given all the work we've done around the portfolio, exiting the lower growth, lower margin businesses, most of that early on in the beginning of the enterprise strategy. So that process continues to deliver significant savings for us as does the strategic sourcing efforts that I also have been ongoing inside the company for 10 years. And so think of it as for the first time, we're leveraging the combined spend of the enterprise to generate meaningful savings across the company. And all of that is done by real strategic sourcing experts, which was really a weapon we didn't have in our arsenal when we started this 10 years ago. So those 2 capabilities put together is what we collectively call the enterprise initiatives, and I think we were quite pleased when we rolled out the annual plan numbers late last year and then checked in again in January to see that all the projects and activities that support these 2 initiatives still added up to 100 basis points of margin improvement in 2023. And as we -- I think we talked about in the earnings call, I think we expect that there will continue to be a meaningful contribution from these initiatives on a go-forward basis, just given that we continue to evolve and get better at applying these tools and the tools themselves evolve. And so I think we feel very confident that we'll continue to contribute the enterprise initiatives continue to contribute in a meaningful way to the overall performance of the company, which I might add in a world that's ever more challenging and uncertain is a great thing to have in your back pocket.

For sure. And just to ask you one follow-up, you mentioned sort of 5 more years, you think, good runway. Is it across sort of the 3 different things you do or sourcing or simplification...

Well, really what I'm talking about is in terms of the total shareholder return model. We've really been laser-focused really since 2016 on organic growth. And as you know, we had some heavy lifting to do early on in the enterprise strategy in terms of simplifying these businesses and getting them ready to grow operationally and getting the margin profile to where we -- to a point where we would tell the businesses, okay, now it's time to really lean in on organic growth, changed the incentives in 2016. And we've made a lot of progress. What we're trying to do is position the company so that we can grow 4% plus organically through the cycle. -- and by 4% because 4% at our historical 35% to 40% incrementals, yields operating income growth of 7%. Given all the surplus cash that we generate, some combination of acquisitions and/or share repurchases contribute another 2 to 3 percentage points of EPS growth. So now you're growing 9% to 10%. And then you add on top of that an attractive dividend that grows in line with earnings over time, It's about 7%. If you look at the last 4 years, 59 years in a row of dividend increases. That dividend gives us another 2% to 3%. And so now you're looking at TSR of 11% to 13% in what I would describe as fairly low risk, high probability. And of the 11% to 13% , the first 7% I talked about is tied to organic growth. The balance is all within our own control. That's capital allocation, right? So that's really what we're trying to do. And we've done better than that over the last 10 years. I think we've averaged somewhere around 18%, 19% TSR. Part of that was the rerating of the multiple, as I talked about earlier, from parity with the peers to 20%-plus now solidly 20% plus. We don't expect that lift again in the multiple, but really solid kind of 4% organic growth, 11% to 13% TSR that's what we're trying to do. We believe that over any 5-year period, that will put us in the top quartile of the industrial companies kind of the peer group. So that's why there's been so much focus on organic growth. and solidifying that as the primary growth engine of the company. And the rallying cries at the company is we want to be as good as organic growth as we are operationally at 80-20. Now that's a high bar if you think about it, right? But that's where the -- That's we're at. We're certainly encouraged by the progress. 2021, we grew 12% organic. In 2022, we grew 12% organic. This year, we're guiding 3% to 5%. So certainly, very comfortable with the progress that we're making. And again, we're only trying to get to 4% in a normal GDP world or maybe the economy through our CBI customer-back innovation efforts and others initiatives inside the company all we're trying to do is get to 4% to 5%.

So related to that, Michael, like you talked in Q4 about hiring. You want to bring higher support organic growth and invest in capacity, but you kind of made it sound like this is just normal for ITW. And you also talked about that you highlight 150 to 200 basis points of inflation-related cost associated with higher labor expense. So my question really is, first of all, is that 150 to 200 basis points sort of the cost of doing business now? And -- or should that go down over time because it's kind of an unusual headwind this year? And then is it sort of normal hiring? Or are you putting it in sort of areas like food equipment or welding where you've had really pretty extraordinary growth over the last couple of years...

Well, I think across the company, we've continued to invest. I think this year, it maybe stands out a little bit more because of the pretty unusual inflationary pressure [ used on ] on material cost side but also on the wages, salaries, growth investments. I mean you're not going to grow -- if you look at the last 2 years, you're not going to grow 25% without investing in growth and investing in capacity and in new products. And so -- but I think you're right. I mean that's essentially part of kind of the ongoing process of doing business. We fund every good project inside the company. We are and have really since 2016 with this big growth focus. We have ramped up significantly on the front end of the business. We've hired some commercial expertise, sales and marketing that we maybe didn't have inside the company -- and I think that's really helped us with the fact that during the pandemic, we made the decision based on our margin profile and based on this fortress balance sheet that we've built up to take the long-term view and stay invested in our growth efforts, stay invested in our people, not lay anybody off and stay invested in our strategies to further accelerate organic growth. And I think the pandemic was just another proof point for what we've built. Another example of what we've built, and this highly resilient, very profitable company that when faced with diversity, we can take the long-term view, and we can stay invested in our strategic priorities, organic growth in particular.

So Michael, I want to follow up on your comment around when the recovery, that's what you did basically is that you decided to stay fully invested in your people that led -- part of it led to the organic growth that you had as we sort of transition here, macro slowing a little bit. How do you look at sort of ITW's ability to grow above market? I think when you had your last Investor Day, you talked about 100 basis points above market. Now you're talking about 4% growth. But obviously, the market is not static, right? So how do you think about your ability versus that 100 basis points...

Well, I think it's -- to your point, it's difficult to put a number on what's your market growing at when you are in 84 global divisions touching pretty much every aspect of the global economy. So I think the last time we rolled up the numbers in 2019, we said to your point that we thought we were outgrowing the underlying markets by a percentage point. If we roll those numbers up now, it would probably be more than that, but I just don't have the degree of confidence to tell you, here's what the market's growing at here is what ITW is growing at. All I can do is we can point to some encouraging data points, and we talked about this on our earnings call 3 weeks ago. If you look at our growth rate over the last 2 years, 12% in '21, 12% in '22 organically. Relative to our peers, our proxy peer is growing at 9% and 9%. That is very different from the ITW of just a few years ago, right? I mean I think we've never claimed to be in the top quartile from an organic growth standpoint, but now we are. And so while nobody is in victory, and we know how much work we have left to do inside the company and every one of our divisions will tell you that they're not there in terms of achieving their full potential organic growth rate, I think it's certainly a confirmation that we're headed down the right path here. But to put a specific number around our growth rate relative to the underlying market is at this point, given all the volatility is probably not the best thing to try to do.

So let me follow up in this way, then like if I look at a business like food equipment or welding like the growth has been really, really strong over the last couple of years. And obviously, we know about pandemic reopening, like some of that is helping you. But kind of what's gone into those businesses? Is it share gains? Or is it something you did sort of pre-pandemic or endemic to really energize those businesses growth?

Well, I think Welding and Food Equipment are actually good examples because there are publicly traded competitors and you can certainly compare our growth rates in those segments and our margin profile to theirs, and then you can draw your own conclusions. We would say that we have definitely have gained share as a result of the focus that we've had on organic growth and because of the positioning, the fact that we stayed invested. And then I think more recently, this has been pretty challenging from a supply chain standpoint. And the fact that we were very intentional about mitigating supply chain risk in order to sustain kind of our superior customer service levels, we had to build inventory. And we've probably -- you can look at this yourself. We've probably added about $1 billion of inventory to mitigate supply chain risk and take care of customers and ultimately put ourselves in a position to deliver when our competitors can't, and therefore, gain share. And there's plenty of anecdotal evidence inside the company that, that's exactly what happened. And we know what our lead times are relative to our competitors. And we are -- like I said, there's a lot of evidence that we are gaining share as a result of that. Not opportunistic one-off kind of buys, but really strategic long-term share gains. I think from that perspective, the pandemic was a great opportunity for ITW to demonstrate how differentiated our supply chain capabilities really are. And I think it's -- the results that we're putting up right now would not have happened without those decisions that were made in terms of staying invested and taking care of customers.

And then I wanted to ask you kind of alternatively around specialty products. So it's the only business that -- only a segment where you have revenues for due to be down [ '20 ] versus 2019. Is that because the overall segment tends to have more of a consumer focus? Or is there something else going on there...

Yes. I think the -- if you look at kind of the portfolio, maybe answer it a little more broadly. I think -- overall demand is really strong in 75% of the company. I think the kind of the balance, the 25% tends to be either more consumer-oriented, like specialty, as you point out, more interest rate sensitive that would be residential construction business or there's a little bit of a cycle going on in semi right now. Those things add up to about 25% of the company. And so there's no doubt that we've seen some slowing in those end markets. We have projected in our guidance that, that's -- that will continue to slow in 2023. So we're reasonably confident that we've kind of derisked that I'll just say that one of the big advantages of being as diversified as we are is you're always going to have challenges or headwinds in some parts of the company and tailwinds in other parts of the company. And when you add it all up, I told you about the growth rates over the last 2 years, 12% 2 years in a row and this year, 3% to 5% at a time when certain things are slowing, I think that's another proof point of like the value of this high-quality diversified business portfolio. And the resilience it gives us to continue to stay invested for the long term.

So we already talked about this a little bit, so I'm going to rephrase the question I have here in the sense that like you never spent that much on R&D as a percent of sales versus a lot of the industrial competitors, but you've gone, obviously very high return for what you spent on. So I mean not anything different in terms of innovation. I know you're focused on customer-backed R&D that's also helped you to improve your growth was in all the other things we talked about with enterprise strategy?

Well, I think we're not really doing anything differently. I mean to take a step back. So we are not trying to invent a new molecule or kind of a new to the world application, we are much more comfortable with customer-back innovation singles. And doubles supported by a pet portfolio of over 19,000 patents of really things that are unique to ITW that only we can provide. And it just happens that this customer-backed innovation process is -- has a much higher the velocity is greater. The outcomes are typically better because we don't start working on something if we don't have a purchase order, and we are confident that when we develop this product, we don't have to find a way to commercialize it. We know who's going to buy it and what they're going to pay for it. So I would say it's much more efficient way of doing of innovating, it is a little bit difficult for looking in from the outside to get excited about because we don't have these $100 million innovations, but we have 100 of $1 million or $2 million here and there in every division, 4 or 5 really meaningful projects for their division that contributes to the overall growth rate of the company. And I might just add -- well, we're not doing anything different, we're being much better in terms of how we are innovating for our customers. So what historically has been a contribution to organic growth of maybe 1 percentage point, maybe a little bit less to be very honest with you, is now a 2% overall contribution to the organic growth rate of the company. And it's not that we have to spend more. And we'll spend whatever we need to, but it just happens that our R&D efforts, the way we capture those costs and disclose them it's about 2% of sales. And so as sales grow, those R&D efforts will certainly -- the cost will grow, but it's not a matter of cost. It's much more a matter of being focused and being really efficient and smart in terms of how you innovate for your customers. That's how we would describe it.

Got it. So you know I was going to focus on the near term just for a few minutes. So you talked about the 25% of the business, up from 20% that's slowing. Have you seen any broader slowing albeit to that 25%, is it decelerating more anything, the 75% that's still slowing. And I thought part of the reason why you guided 3% to 5% organic growth was to account for incremental slowing. How are these markets trending for your expectations because have to slow for you to make your guidance come down? If that makes sense.

Yes. Well, so you may be a little disappointed in how I answer this, but I think we just our earnings call was 3 weeks ago and if I ....

Long time, Michael.

And if I was sitting things can change quickly. I'll get to that, but if i was.

No, to cycle business.

If I was sitting here and giving you different update. I probably -- we probably didn't do a good job 3 weeks ago. So what I will tell you broadly is that everything is on track and play out largely as expected. In our guidance of 3% to 5%, is totally a weak guide to what we describe as a -- so we look at demand rates exiting Q4. We extrapolate into the year. We adjust for seasonality, and that becomes our guidance around. We saw just giving everything we talked about. We wanted to be a little bit more cautious. And so we've risk-adjusted those run rates down and our guidance is 3% to 5% organic. And we expect that the 25% that slowed in the back half of the year is probably going to continue to slow in '23. That is the 75% of the company demand is still really strong. And the other tailwinds we have is supply chain conditions are starting to normalize. And input cost, material cost inflation, those -- the pace of those increases has definitely moderated. And while costs are not coming down. They're certainly not going up any longer either. So I think there's puts and takes as there always is I will just say like in terms of how we are, the momentum we have going into '23 and how we're positioned to perform in just about any environment. And to outperform, I think, just about anybody in whatever environment we end up in for '23 and '24, I feel really good about our positioning at this point.

So let me ask you about that 75% that's not slowing. In fact, in 4Q you mentioned that you actually saw a larger than usual seasonal uptick. So to the extent you can talk about that acceleration. And I do often ask you about or CapEx businesses, they were strong in Q4. Like what does that tell you about the global economy?

Well, so let me preface this was -- I'm not an economist, okay.

Neither am I.

But I think we were certainly really encouraged by the sequential increase in demand that we saw from Q3 to Q4. And so, I think what you're referring to is, typically, we see kind of revenue per day go up 2% from Q3 to Q4. We actually saw it go up 4% from Q3 to Q4. And like I said, really strong demand across the vast majority of our portfolio. And so including automotive, which granted had an easy comp year-over-year but up 20%. I think Food Equipment was up 17%, somebody correct me if I am wrong, but double-digit growth in Test and Measurement even with some slowing. So I think all the demand for capital equipment welding equipment going into the industrial side to our big customers there, demand there remains really so I think we were very optimistic on this year for those businesses. And at the same time, we know that things can change quickly. And so I think that we're, again, a point the resilience of the company. I'll point your ability to of our teams in the divisions to kind of read and react to whatever the conditions on the ground may be. And I think you look at our kind of our track record of execution and our say-do ratio it's hard enough to really good about where we're at.

So maybe I can ask you a similar question sort of by region, right? You're hanging in there. U.S. doing reasonably well. China, like you're doing -- seems like very well on China auto, in particular, even with the noise, Chinese New Year, COVID, all that kind of stuff. So any updates on as we come out of Chinese New Year, you still feel good about China actually being above your 3% to 5% growth for the year?

Yes. So when we look at this by geography, and I should say we don't run the company by geography. I mean, I think one of the things that's really unique about ITW is that our margin profile is very similar in all 3 major geographies, right? So we are as profitable in China as we are in North America and Europe, which is a little unusual, I think. In our guidance of 3% to 5% maybe that has North America maybe towards 5%, Europe towards 3% and China kind of in the mid-single digits. For the first time last year, we surpassed $1 billion in China. We grew 6% organically in China last year. And I would say this, our Chinese colleagues have done an incredible job over the last 2 years under very difficult circumstances, frankly, much more difficult than anything that we had to prove in the U.S., and they have passed whatever obstacle was thrown at with the results speak for themselves. And so I think a big thank you to our Chinese colleagues. About half of our business in China is, I think, as you pointed out, the automotive business and we are seeing really significant growth on the EV side of things in China. We're very optimistic. We are investing in capacity to meet the demand that we're seeing right now as well as projected for the next few years. So we feel very good about China. Of course, there's going to be bumps in the road, just like they were last year. And so -- but kind of long term, we feel really good about how we're positioned not just in automotive, but also in test and measurement, Food Equipment and Polymers & Fluids our other businesses in China.

Great. I want to open up to the audience in a few minutes, but first, let me ask you about price costs. You kind of mentioned a little bit, was the 70 basis points tailwind in Q4, which was nice to see. I think you've known as an expectation tailwind of about 100 basis for '23. So can you clarify whether that's based on that already done? Is this going to be a normal year for pricing? We've seen commodities bounce off a lot, does that actually help with the price versus cost equation because it allows you to kind of glance customers? You got it? Raising price? Like how do you think about that?

Well, let me just go back a couple of years here. So I think when we started to see really significant ramp-up in inflation in early 2021, a kind of the overall guidance was we want to offset those raw material cost inflation with price on a dollar-for-dollar basis. The objective was not to recover the full margin impact. And you can make those decisions when your EBIT margins are 25% , right. And our teams did an amazing job. I think, again, really respond -- reacting to digital cost increases, the barrage of cost increases appropriately and decisively. And I think we actually learn a lot of things about how to do this back in the '18 like time frame, if you remember, the tariffs. So I think that really -- we learned some lessons and apply those. And did a good job keeping price cost EPS-neutral. But it certainly had a cost from a margin standpoint. So if you go back and look, overall margins were diluted by about 240 basis points from Q1 '21 to Q3 '22. And Q4 was the first quarter where we saw a positive price cost margin impact of 70 basis points, which obviously contributed to the incremental marketing 52% in Q4, right? 12% organic growth, 52% incrementals, 18% income growth and certainly the new news, I think, enterprise initiatives again of 100 basis points, but I think the news about the positive contribution from price cost. I think what you're referring to as -- I don't know how you said in my guidance or whatever, I think I said ballpark, we've got some good momentum on price cost, if that carries into 2023, based on everything we know today about price and cost, I think we're going to start to recover some of that margin impact. Included for '23 is there's certainly some carryover from a price standpoint and also an assumption that there's going to be normal price increases like there always are. I think like I said, costs are not going down. Labor costs actually are going up, right? But I think -- if we were to find ourselves in a deflationary environment, I think there's certainly going to be some pressure on price, and we're going to have to -- we want to maintain our price premium. We are typically deep the command a premium on price based on the performance of our products and our customer metrics. We want to maintain that premium. But we also want to compete, and we want to gain share, right? so we end up from a pricing standpoint. I think even if we have to give up a little bit of price, it's not the world.

Let me ask you a related question on auto OEM. Obviously, it's a little harder there on the price confront but is there anything you can do in terms of whether it's restructuring, contract renegotiations to get margins back up there?

Well, I think if I said at the enterprise level price cost of 240 basis points of margin dilution, it's probably been 2x than in automotive, right? And so I think it's going to take some time to recover that. You know there's the contractual nature of that industry is such that thing it just takes longer to get, right? And that's -- if you want to participate in the industry, that's the way it works right? So we have to win new content per vehicle, we have to provide solutions that our customers are willing to pay for. And it's probably going to take us 2 to 3 years to recover the margin impact in automotive, if things broadly stay the way they are. And again, if your margin is at 25% EBIT, that's okay. Okay. We understand why that is. Automotive right now, EBIT margins are 18%. I think broadly, if you're a supplier to the automotive industry, the average EBIT margin in normal times is 6%, right? And we're reasonably confident that we're going to regain the price/cost margin impact, not because we're better at pricing but because we're better at taking care of our customers and our competitors are.

Questions from the audience? Any questions?

Just a quick one on the EV opportunity. Can you just give us a sense of what the content per vehicle that you're seeing today versus Iced vehicles, like whether it's a number of parts, kind of parts and what the ASP mix looks like and margin impact?

Yes. So I think we actually believe that the total opportunity in terms of content per vehicle is greater on EV than it is on ICE. The current content per vehicle on an EV is about $32 versus $37 on an internal combustion engine. That $32 is growing faster than the $37. There are a lot of differences by geography. But we're really excited about the opportunity in EV. A lot of the products that we sell are directly transferable to a lot of the plastic fasteners for example, are equivalent on an EV versus an internal combustion engine. And then there are some additional opportunities around thermal management around the battery, the heating, the cooling of the battery, the fastening of the battery, whether it's with fasteners or with blue developed by performance polymers as well as we do the air registers, these new very slick air registers that you see on EVs. Typically, there is a lot of focus on how do you reduce the overall levels of noise in the cabin. So because EVs tend to be quieter, you don't want to have a lot of you don't want to hear your AC running. And so those are the types of opportunities that we're working on with our customers, the charge port mechanism. So we think there's really a lot of opportunity on the EV side. And particularly if you look at the growth in China, that's been the big driver for that facility to be able to last few years. So when you look across the company, that's an area where you can't help but be really excited about the organic growth opportunity.

Any other questions?

So Michael, let me just ask you about -- you actually said for your guidance for this year that you expect all your segments to grow margin, but you have a couple of segments like construction, for instance, which are projecting to be down decently. We already talked about specialty products a little bit. Is it price cost that's really helping, like you're doing product line simplification, something like construction? What's getting you to improve margins in a business?

Well, let me just say this. I mean, I think when I say something like that, it's not because that's the way I'd like it to be. It's based on what our divisions told us in their bottoms-up planning process, which is how we do it at ITW. It's not a top style process. And as we rolled up the numbers from 84 divisions, every one of our segments was showing margin improvement than a year over year basis which is really what we are looking for. It's just a little bit of progress every year, a little bit better this year than last year as we continue to progress towards our full potential because we're not done at 25% EBIT margins, right? I mean, we we've committed to 28%. I think I may have said 28% plus at 1 point and that's...

When it was 31% kind of before...

I don't think so. I think I would remember that -- but I think 31% is the Welding margin, right? And even the Welding business, making 31% with their largest competitor making half that. I think we -- they tell us that they can continue to improve margins. And the big driver is growth. You deliver organic growth at 35% to 40% incrementals, you can't help but continue to improve your margins. I think construction is a little bit of a different story. I think you're expecting due to the softness potential construction that business will be down 3% to 5% organically. Obviously, there might be some carry over from my standpoint that kind of helps buffer kind of the full margin impact. And so we expect some slight -- I think it's not a lot, but we do expect some margin improvement also in the construction business.

And then cash flow, obviously, has been, as we talked about, a little pressured by higher inventory in supply chain, you feel good about 100% this year. Is that the aim in your control to sort of get there?

I feel really good. I think our free cash flow conversion rate has been a little uncharacteristic for the last 2 years because of this intentional decision to add working capital. I mean the business is growing double-digit, but so you're going to have to add some working capital. And then on top of that, we decided to derisk some of the supply chain issues and add about $1 billion worth of inventory. We're running at 3.5 months on hand, but normally running at 2. And there's no doubt in my mind that as supply chain conditions begin to normalize, those levels of working capital will come down. And at the same time, I will tell you this that the priority is to take care of customers. And so if we have to keep inventory levels where they are for another year, that's fine. Given this balance sheet, given our margin profile, that's not a problem. I think we said 100% plus this year that assumes basically no improvement in working capital this year. That's probably a pretty conservative assumption. So if things normalize. And if we can take care of customers, I would expect that number to probably be a little bit better than that.

So I have 30 seconds, and I still have 2 questions for you. So I'm going to ask them very concisely. So one is, are there any MTS type acquisitions out there for you? Like how do you feel about that?

Yes, there are. I think there are -- it's not a matter of demand we'd love to do another couple of MTS acquisitions. We're really excited about that one. It's really more a supply issue. You got to find them and you got to find a willing seller. And we are only going to buy businesses where -- that can grow at 4% plus. We can improve margins from mid-teens to mid-20s, and we can earn a reasonable rate of return that makes sense to the company and for our shareholders. And so MTS, we're going to end up in the high teens by year 7s on an after-tax basis, maybe even a little bit better based on the progress the team is making. But to the extent that those acquisitions become available, you should expect us to definitely lean in and be aggressively opportunistic when it comes to opportunities like that.

And then the last question is, been asking all the companies. What are the top 2 or 3 innovations, megatrends or structural changes that have affected or could affect your company over the next 5 years? Are there any emerging industry trends that are perhaps being over launch in current discrete?

Again, I think you're going to be very disappointed in my...

I'm going to talk about something megatrends.

Maybe I don't get invited back next year, but I will tell you this.

Not turn about megatrends.

My crystal ball is not better than yours or anybody else's. So I think what I will tell you, and maybe we'll end on this, I think I do know for sure that this will continue to be a very challenging and a very uncertain and dynamic environment. And in times like this, I think you want to be positioned with companies that have advantaged business models that have highly resilient, high-quality business portfolios that have margin profiles in the mid-20s return on capital 30% plus that have the resilience and the ability to take the long-term view and really position the company for long-term performance versus having to react aggressively to a recession or whatever else might come at us. So I guess what I'm saying is for what it's worth. In times like this, I think ITW is not a bad place to hang out.

I think it's a good way to end, appreciate the time, Michael. Thank you very much.

Thank you.