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

Good afternoon, everybody. I'm Karen Fletcher. I run Investor Relations at ITW, and I'm really glad to see such a good turnout for our Investor Day. Admittedly, it has been a while, so we're thrilled that you're here with us in person. And I also want to welcome the folks who are joining us by webcast. And just to let you know, we will post the slides at the end of the program. So with that, I do want to share the perfunctory warnings here. We will be sharing -- making some forward-looking statements today. And we refer you to the company's 2022 Form 10-K and subsequent reports filed with the SEC for important risks and assumptions that could cause actual results to differ materially versus our expectations. So with that out of the way, I would just like to share with you, you're going to hear from our senior leaders, starting with Scott Santi, who's our Chairman and CEO; followed by Chris O'Herlihy, our Vice Chairman; Michael Larsen, Senior Vice President and Chief Financial Officer. We're also joined by 3 of our segment Executive Vice Presidents. We have Axel Beck with Food Equipment; and Chevy Garcia with Automotive and Patty Hartzell, with Test & Measurement and Electronics. So they'll elaborate on their segments as part of our program today. So just a little bit about the agenda before we get started. Scott is going to share his perspectives on the last decade on the power of our business model, coupled with the enterprise strategy that we began 10 years ago and the impact that, that's had on the company, on our performance versus peers, and on the shareholder returns that our owners have enjoyed. He's also going to set the stage for what's to come in the next decade. And Chris is going to share our growth agenda, the priorities and the deliverables for our next phase. And our EVPs are going to support that with some of the work that they've been doing to prepare their segments to grow and then ultimately shift and pivot to growth and deliver on that growth. And they'll give you some examples and insights into how they think about it and what they've been doing. And then Michael is going to share our 2030 performance framework and targets. Then Scott will make some closing remarks. We will take a 15-minute break. And then we'll go to Q&A. So just a little bit about what you're going to hear today just to set the stage for the next couple of hours. Since our enterprise strategy started 10 years ago, we've demonstrated the performance power of our proprietary ITW business model. And the fact that, in our results, you'll see best-in-class performance and best-in-class results. And today, there's a significant opportunity to continue forward with that on our path to our full potential, and that's reflected in the 2030 performance goals that you're going to hear about today. And then last and maybe most important, the real message here is that the ITW business model, coupled with our enterprise strategy framework, will be as formidable of a competitive advantage and a performance differentiator for ITW in the next decade as much as it's been in the last decade and maybe even more so. That's the takeaway. So with that, it's my pleasure to turn the program over to our CEO, Scott.

Thank you, Karen. Good afternoon, everyone. Let me add my welcome, and thank you all for being here today. So as Karen certainly mentioned about a little over a decade ago now, we went all in on a belief that ITW had a very unique and very powerful set of capabilities and operating practices. What we refer to now is the ITW business model, but we were grossly under leveraging those capabilities back in 2012. And we also had a belief that building a strategy around focusing the entire organization on leveraging these unique capabilities to their full potential was our best path forward in terms of delivering differentiated performance and generating shareholder value over the long term. We also believe that a fundamental tenet of this significant pivot in our strategy had to be that having the best-in-class business model meant that we also had to translate it into best-in-class performance and consistently deliver that performance over the long term. Another thing we observed at the time was that companies announcing new strategies with great fanfare was a pretty common practice among public companies, industrial or otherwise. But what was much less common were examples of companies actually following through and delivering on those strategies. And so we saw an additional opportunity to differentiate ITW in term we coined for it internally. This shows you how brilliant our marketing is, is do what we say, execution. And candidly, if we didn't, right out of the box, deliver on what we said we were going to do given the magnitude of the strategic pivot, none of us would have been around long enough to have an opportunity to execute on it. So let's recap the last decade in terms of the deliverables around our enterprise strategy. As you can see on the slide, over the last 10 years, we've increased operating margins by almost 8 percentage points and after-tax returns on invested capital by almost 15 percentage points, and that's an after-tax number. We've tripled our earnings per share and our market cap and increased our dividends per share by almost 3.5x. And as a case study on the power of the insights into. And focus on the profit drivers in a business that we generate through our proprietary 80/20 front-to-back methodology, pay particular attention to the fact that we did all those things on a revenue base that today is still 11% smaller than it was back in 2012. To add another data point, we generated $1 billion more in operating income in 2012 than we did -- in 2022 than we did in 2012 on that 11% less revenue base. That's 80/20 in action. So operating margin and return on invested capital are 2 foundational measures of the relative strength and competitiveness of a business. It's what Warren Buffett likes to refer to as the moat around the business. Operating margin, because it measures both, the level of value add that a company provides to its customers, i.e., the prices it is able to command for its products and services and the efficiency with which it delivers that value add to its customers. The better a company is on both of those dimensions, the wider the spread, the higher the operating margin. In ROIC, because it measures the efficiency of the business's use of shareholder capital and operating the business and the discipline of management and allocating it appropriately. And as you can see from this slide, we built a pretty big moat around ITW over the last decade. Another dimension of our best-in-class business model must translate into best-in-class performance mandate is that every business we own must perform significantly better as part of ITW than it would on the outside. And this slide shows an example of just that and comparing operating margins for each of our 7 segments to the average of their major market peers in their respective industries. And I think it goes without saying that we compete with large, global and very capable companies, and some of our EVPs can talk to you about that when they're up there. So this performance differential is clearly an example of the differential competitive advantage that we derive from the ITW business model. Now relative to the do what we say execution part, I know that a number of you were at that first Investor Day back in December of 2012, and this is what we said at the time. We said we had a lot to do to get the company in a position to fully leverage the performance power of the ITW business model. We had a lot of work to do on our portfolio. And specifically that we will divest commoditized businesses and simplify our product offerings and take all commoditized product lines inside of otherwise differentiated businesses out of the company. And what we did was divested over $5 billion in 2012 revenues and eliminated another $750 million in revenue at the product line level. We said that we needed to simplify and scale up our operating structure to improve our focus and enhance our competitiveness. And what we did was we took 800 distinct P&Ls inside ITW and reorganized ourselves into 84 global divisions. We said we had to leverage the purchasing scale of the company to enhance profitability in our global competitiveness and through our strategic sourcing initiatives have generated over $900 million in aggregate savings over the last decade. And we said we needed to leverage the performance power of the ITW business model to its full potential. At the time, we had a lot of variation inside the company in terms of the level of quality of execution around the core secret sauce of the company. And after a lot of work, I can safely say that we have never been better in terms of our -- the [indiscernible] of our practice all over the company. Peer group #1 in operating margin, consistent 35% to 40% incremental margins and accelerating organic growth. And that we said at the time, we needed to focus our capital allocation on investments that drive organic growth and/or improve margins, while continuing strong return to shareholders via dividends. And today, we are #1 in the peer group, as you saw in return on invested capital. We've increased dividends by almost 3.5x. And that's, by the way, after a 59-year consecutive track record of dividend increases. And we have added high-quality acquisitions in EF&C and MTS. So from the standpoint of shareholder return on this idea of best-in-class business model equals best-in-class performance, you can see that over the past 10 years, we've compounded -- we've delivered a compound TSR of 16.4%, which is well above our proxy peer group and also the S&P 500, and we've delivered a lot of shareholder value. You don't mind if I just hover on this slide for a second, do you? So over the last decade, simply put, we've gone from kind of a middle-of-the-pack industrial company to a leading industrial company. And a fair question to ask is where do we go from here? And as Karen mentioned in her summary messages, 2 key things we're going to focus on today. One is that we have significant room for further improvement on our path to full -- ITW's full potential. And Michael will lay that out for you in more depth during his section of the presentation, including giving you an update on our -- or giving our updated 2030 performance goals. And the second is that we believe that ITW's differentiated business model and enterprise strategy framework will be as powerful and competitively differentiating in the next phase as it was during the last decade. Now our strategy framework is not static. It has evolved every year since we started it 10 years ago, and it will still continue to evolve as we go forward. But the core principles on which it's founded, we feel like are going to be even more robust in the next phase given some of what we'll talk about in a minute. So on the second one, Chris and our team of EVPs are going to dig into the second one of these major focus areas in our next phase as we go forward here in the presentation. But I'm going to spend a few more minutes [ teeing ] up Chris and team, and then we'll turn it over to them. So when we talk about ITW's business model and our core strategy framework being as powerful and differentiating in the next phase, it's really a couple of things that, for us are front and center. The first is that the environment in which we will operate over the next 7 to 10 years, will do nothing but increase in terms of the level of volatility, risk, the pace of change, you name it. And I think the simple answer is, who amongst us saw a pandemic coming 2 or 3 years ago? And the level of the way the environment is changing and the pace of with which it's changing, I think we've come to a view that predicting the future is an absolute impossibility. So companies that have capability, that are nimble, that can use those capabilities to read, react and respond to what's going on around them are going to be in an advantaged position. And we certainly do believe that we have those capabilities in spades. And the second dimension in terms of why our current capabilities and our current strategy framework are going to be even more compelling in the future perhaps than they were in the last decade is that there's a lot of stuff that we've got behind us, and we'll talk about that, right? We're focused on essentially 2 things going forward. One is driving consistent high-quality above-market organic growth, which is our 80; and the second is extending ITW's long-term organic growth potential through selective, high-quality and financially prudent acquisitions. Anybody that remembers that to-do list back in 2012 knows that, that's a very focused agenda relative to where we were back then. So in terms of why we're built for this environment, this global operating environment that I described, high volatility, high risk, high rate of change. The first part of that is that we are defined by in terms of our core competitive advantage, a business model, a set of capabilities. Our core competitive advantage doesn't reside in the legacy industry or a particular technology. And the fact that, that business model is flexible in terms of our ability to deploy it in multiple industries, we've deployed it, and we deploy it very well in 7 industries today, means that from the standpoint of that nimbleness, that ability to read and react to what's going on around us, we have all the capacity in the world in terms of our ability to move in and out of markets as conditions in those markets evolve and change. And the second part of that is we've earned the right through our performance, the equivalency of our performance across 7 different businesses to be a diversified industrial company, and in an overall environment where, as you know, that's not a particularly popular strategy. But that diversity does give us -- in terms of our portfolio, it does give us great advantages in terms of our ability to think and act long term. And again, I'll go back to the pandemic, and I'll talk about it in some -- in terms of an example in more depth. But we don't have a concentration of risk at ITW. We are from a standpoint of market position. So anything bad going on in terms of a particular sector of the economy is going to affect us like it will affect other companies but certainly not to the degree that it might affect other companies who are front and center on oil and gas or aerospace or you pick it. And those -- that gives us, as I said, big advantages in terms of our ability to power through some of those issues to continue investing and executing our strategy. And again, in a world that's very volatile, those issues are going to arise. And anybody that's thinking otherwise is probably not being very realistic. This is one that we don't talk about as much publicly in terms of the competitive advantage that we drive from our operating culture. But ITW has a very unique operating culture built up over years and years. We operate in a very decentralized, what we describe as a flexibility in a framework manner. Chris and team will talk about that more. But in that environment, we have great ability to read, react, respond and evolve. We take great pains and efforts to fight bureaucracy away, to be nimble. Even though we are a large company, we work really hard to make sure that we can operate and execute as a much smaller company would. And that capability allows us to be a fast [ reacter ] rather than, as I alluded to earlier, have to commit to a strategy based on some static prediction of the future that no matter how good our visionary capabilities might be, there's no chance that we're going to -- the level of accuracy in that is it's just impossible. And the third element is really that we are an incredibly efficient cash generator. The operating margins that we generate translate directly into cash that we generate in our business model. Best-in-class margins give us an incredible cushion in terms of withstanding some of those external pressures that will arise from time to time and really enhance our ability to stay invested, to stay focused, to stay on the path towards executing our long-term strategy. We are -- and it gives us an ability to consistently execute through the cycle versus have to take a time out or take a pause. And I'll give you the best example I can give you, which is in the global pandemic. And 2 things I think were on full display in the pandemic. One is the nimbleness of our culture and the second is the strength and resilience of our financial position. So from the cultural standpoint, the pandemic came up. We basically had to issue 3 directives to our team around the world. The first was take care of each other, take care of -- your health is the most important. The second was take care of our customers. And the third was stay invested, get positioned for the recovery. That was it. That was the memo that they got and amazing things happened. Our businesses around the world mobilized. They took those 3 directives and decided what was -- how to implement those in their particular part of the company. We didn't have to have big meetings. We didn't -- that was done in about a week, and off to the races we want and our people did amazing heroic things based on just those 3 elements of guidance, let's call them, that framework. It's a great example when we talk about flexibility and a framework in terms of how we operate. 80/20 is a set of principles, it's not a set of instructions. All the different frameworks we operate are sort of guide thought, but they don't tell people what to do. That's a very powerful way to operate a company because it creates great accountability, great ownership, puts a lot of customized thought in play because it's -- all of it's customized around the particular context of our various divisions around the world. And again, these -- my colleagues will spend some more time talking about that. So on the financial side, revenues dropped, as it says here almost 30% overnight. Margins dropped to 17.5% from low 20s. So the average of our peer group operating margins in 2022 was 14%. So when the worst economic event in over 100 years, our margins were 2.5 points above the average of our peer group at the depths of it. So in terms of ability to stay invested, stay focused, power through these issues, we're not immune, but in terms of that resilience and that ability to, again, think and act long term and not blow the business apart and take a time out when these things happen, that gives us an incredible advantage as we go forward. To give you another example of that, in 2008, in the last big recession, ITW went into that recession, as about a 14% margin business with a lot of cost cutting. At the depths of that recession, we were an 8% business. This -- in this pandemic, went in as a 24% margin business, didn't do any cost cutting and came back and still powered through at 17.5%. That gives us a lot of capability, a lot of room to sustain what really is most important for this company on a long-term basis. And we generated a lot of cash. The big issue at the time was liquidity, right? So my last point, and then I'll turn it over to Chris is really around this idea that all the heavy lifting is behind us. So this on the screen represents our to-do list that we committed to back in 2012, and this is what's left. So as we think about all the time and effort in the last decade that went into implementing all the things on the top end of that list, portfolio was a couple of years' worth of work. This BSS was -- these guys can tell you, it was 2 to 3 years, a really focused effort. We couldn't think -- we can't really do much else. 800 different P&Ls down to 84. This issue of -- or this dimension of getting our quality of business model practice up to lights-out levels all around the company, that was a couple of years of work. So all of those to-dos are now off the plate. We've done all of those things. Those are in place. Now we can't ignore those things. We have to continue to focus on maintaining them, but they are certainly not going to be the multiyear focuses that they were in the past. And so think about all that organizational energy that now is devoted to really driving those last 2 remaining things. We are now all in on growth and the highest quality growth and doing it consistently. So with that, let me turn it over to Chris.

Thank you, Scott, and good afternoon, everyone. So I'm going to cover the next phase of our strategy here from '23 to 2030 in terms of where we have 2 key priorities, as Scott outlined, to execute on our growth agenda with our primary focus on organic growth both, in terms of delivering 4%-plus high-quality organic growth at the enterprise level and then extending our long-term organic growth potential through high-quality acquisitions where it makes sense to do so. And while growth is certainly our primary focus, we like to be very intentional about ensuring that we sustain those foundational strengths that we've built up over the last decade, in particular, the high-quality business model practice throughout the company, the quality and depth of our leadership bench and pipeline. And as Michael will highlight later, accomplishing both of these priorities will result in double-digit compound annual TSR. So in this next phase of our strategy, organic growth is the most important priority we have as a company, as Scott mentioned. And this is very much reflected in how we spend our time as a leadership team, but also in terms of how our divisions spend their time. Our target is 4% organic growth through the cycle. And as we've often said, in ITW, it's not just about organic growth, it's about the quality of that organic growth. Historically, we have delivered growth at 35% to 40% incremental margins. And due to the quality of our portfolio and the effectiveness of our business model, we are really well positioned to sustain this quality of growth going forward. And although we've made considerable progress on organic growth already, we're committed to building our capabilities and improving our execution in this next phase of our strategy such that our organic growth capabilities are on par with our financial performance and operating capabilities. This is a journey we're on right now. We are far from done for sure, but with a strong conviction that this is a goal we will achieve by 2030. So getting to segment growth targets. So for reasons that I will describe here on the next slide, our planning assumption is that all 7 segments are capable of averaging 4% to 7% organic growth over the long term, with the base assumption that market growth in the aggregate will be in the 1% to 2% range; net market penetration, so that's penetration net of PLS, in the 1% to 2% range; and customer-back innovation in the 2% to 3% range. Now it stands to reason, but any said with 7 segments at any given time, we'll always have some segments that will have headwinds and some that have tailwinds. But the resilience of this diversified high-quality portfolio does give us a much higher probability of delivering consistent 4% plus organic growth at the enterprise level over the long term. And so as outlined by Scott, the work we've done really in the past 10 years has resulted in a lot of progress in organic growth execution such that we're delivering above-market organic growth for a while now, as evidenced by the fact that we grew 1% above our peers in 2019. Staying invested during the pandemic helped us win the recovery. And over the last 2 years, we have outgrown our peers by 3%. So we're delivering above-market growth now, and certainly well positioned to achieve 4% through the cycle going forward -- 4% plus through the cycle going forward based on the attributes that are listed on this page, starting with portfolio management. As you know, we've always been pretty intentional and disciplined about how we manage our portfolio to ensure we sustain and enhance the levels of sustainable differentiation in that portfolio and ensure that we're utilizing that to drive high-quality growth, targeted at customers who recognize and will pay for the value that we are providing. We have plenty of room to grow in each segment. As you'll hear from the segment presentations that are to follow, our segments are typically in the less than 20% relevant market share range. So lots of runway in markets where we have strong value propositions, of course, and we have great brands. We have best-in-class customer-facing metrics in areas like quality, customer delivery and so on. And we've often said, this is a natural outcome of our business model. It truly is a strength of ITW, a major competitive advantage, and this was never more evident than in the last 2 years here when we saw this pandemic, the supply chain crisis that we've just been through where, as a consequence of our ability to supply, we gained market share in many of our businesses. In addition, we've used our strategic sales excellence initiative to build a sustainable and customized sales capability in every 1 of our divisions, which included, where necessary, increasing our sales and go-to-market investments in a very focused way. Similarly, with customer-back innovation, which I will describe our progress on in the next slide. So finally, as I mentioned earlier, in this phase of our strategy, the growth agenda is the 80 focus of our entire organization. We've made a lot of progress, as reflected in our growth rates in the past 2 years. But just like every other part of our business, we will look to continue to improve on growth execution going forward from here. So moving to customer-back innovation, which, as this slide indicates, is the most impactful driver of our ability to grow at 4%. If you think about it, essentially, the customer-back innovation revenue of today, it fuels the ability and to drive market penetration in the future. So very important and the most critical driver. And we've often described this, but just to refresh, I mean, this is about really our divisions taking the time and effort to establish this trusted problem solver position with our key customers in order to invent solutions for our customers' most critical pain points. It's been a very successful approach for the company for a long, long time. And more recently, as part of our increased focus on organic growth, we have developed a very effective customer-backed innovation framework, which is in use in every one of our divisions. And we've also, where needed again, made appropriate investments in strategic marketing and innovation to drive our progress. And on the back of this, we've improved our contribution level on organic growth from customer-back innovation from what was 1% in 2019 to 2% currently. This is very much, again, something we've talked about before, a very much a serial innovation approach. Every 1 of our 84 divisions is working on a continuous new product pipeline of 10 to 15 differentiated customer solutions. So just think about that. 84 divisions, each has 10 to 15 differentiated projects, accumulates to about 800 to 1,000 projects being worked upon across the company. So we call this more of a kind of a singles and doubles approach, which we find to be higher probability, higher velocity, higher rate of return, and most importantly, extremely prolific in the context of growth creation. And it's this high probability aspect that drives very efficient utilization of our innovation resources in that every 1 of these 800 to 1,000 projects is tied to a known customer pain point or opportunity, so likely to have a higher hit rate in terms of delivery of incremental revenues. We're also working very hard to ensure that we have effective intellectual property oversight on anything that we invent to protect these important customer solutions. And in this regard, we have over 19,000 granted and pending patents, and we filed them at a rate of about 1,700 per annum. And this was the case even during the pandemic. Even during the depths of the pandemic, we were churning out 1,700 patent applications, which really speaks to the innovation rigor, the quality of the process and of course, the whole innovation focus in the company. And given that fact, today, roughly half of our revenues are protected by patent or trade secrets. So moving to acquisitions and importantly, where they fit. So just to reiterate, and we've said a lot today, but we'd say it again, organic growth is our #1 priority. And as Michael will highlight, we don't need acquisitions to deliver differentiated returns to our shareholders over the long term. And so we'll only look to supplement our organic growth focus with high-quality acquisitions that are compelling, meaning they are well aligned strategically and financially and obviously worthy of our time and effort. What this means, as the slide says, is that potential acquisitions need to be able to contribute to our ability to grow 4% plus over the long term and can achieve best-in-class margins over time through application of the ITW business model. If both of these conditions are not met, we're better off not getting distracted given the -- what we believe to be a compelling organic growth opportunity. In terms of size, our sweet spot, we believe, and where we've been more successful in the past is in the $200 million to $500 million acquired revenue size as opposed to larger, say, greater than $1 billion acquisitions. We are, in our view, when we come on to this, we would see more challenges. These $200 million to $500 million sized acquisitions would either be bolt-on to existing segments or would be a suitable entry point stroke building block, if you will, for a new segment. And so with respect to this building block concept, we have 2 compelling examples here of where this has been a very successful strategy in both, Welding and Test & Measurement and Electronics. And so the summary is on the slide here, but if you think Welding. Welding started with the Miller Electric acquisition in 1994, added a quite number of bolt-on acquisitions, revenue today is about $1.9 billion. About 70% of the growth has come from organic growth in that time. And today, organic growth in that segment is above 7% in the 2019 to 2022 timeframe. Now bearing in mind, this also was during the pandemic. So 7% plus over the last 3 years in the middle of a pandemic. And no surprise, but obviously, the margins here in Welding, as we've talked about many occasions, have increased substantially to 31% today. And very analogous situation in Test & Measurement, where we started with the Instron acquisition in '05, added quite a number of bolt-on acquisitions, most recently with of course, with MTS here on the back end of 2021. Today, it's a $2.8 billion segment. Here, we have about 45% of the growth organic. But let's not forget, we owned Welding 10 years longer. So 10 years from now, we expect to see, given the growth in this of the segment, a similar growth profile here in Test & Measurement. And again, today, over the last 3 years, pandemic included, a segment that's growing at 6.5%, but operating margins now heading into the high 20s. So the common theme here is that both of these highly successful segments started with a very high-quality, appropriately sized acquisition, which had the right characteristics in terms of great organic growth potential and great opportunity to leverage the business model. And on the back of that, we get this kind of performance. So both of these characteristics are very clearly demonstrated in the results and in the shareholder value created. And if such an opportunity was to present itself again, then we'd be very happy to look at acquiring businesses like this if these conditions are [indiscernible]. So then the comment here in terms of challenges with larger acquisitions. And so from our standpoint, no surprise, but all acquisitions consume leadership time, energy and effort and larger acquisitions, exponentially more. And of course, for [indiscernible], this is time and energy that could be spent focused on organic growth. Larger acquisitions are likely to require portfolio actions to ultimately get to the pieces we want. And if we look at the example of the Primark acquisition, so Primark was an ITW acquisition, 1999, $2.5 billion acquisition. In acquiring Primark, we acquired 5 business segments. Today, we have one of those segments. So we divested 4 segments, but the one we have is a very valuable one, it's Food Equipment. But the reality is that of time, effort and attention went into divesting those parts of the business. Obviously, that's time that could have been spent growing our business organically. And of course, we're standing here and talking about lessons that we learned from the vantage point of a very high-quality portfolio that delivers best-in-class performance, currently has significant organic and bolt-on capability and can deliver consistent double-digit TSR over the next 10 years here. So we feel we can be pretty selective on which opportunities in this context we ought to pursue. And in an acquisition context, for all the reasons I just outlined, $200 million to $500 million sized acquisitions are generally a better fit for us on this basis. So this wraps up the growth section of the priority and moving now to the second priority, which is the sustaining foundational strengths in the quality of business model practice and in the quality and depth of leadership bench and pipeline. And so you've heard us talk about our business model a lot over the years. Obviously, this is a business model that we've been working on for over 40 years. In that time, we've continuously expanded, continuously improved and refined it to where, as Scott said, it is the core source of differentiating competitive advantage in our company today. And each of the 3 elements that we talk about creates competitive advantage in their own way. So 80/20 creates competitive advantage in terms of how we operate, customer-backed innovation in terms of how we innovate, and our decentralized entrepreneurial culture in terms of how we execute. And today, we are at a point, as Scott referenced, where this business model has never been more powerful nor more consistently applied across the company. So given how hard we've worked on this and the progress that we've made, we are very focused on ensuring that we are sustaining the quality of practice going forward over this next phase with absolutely no regression. So I quickly walk through the elements. Given that I've covered customer-back already, I'll focus my comments in this section on 80/20, front-to-back and on our culture. So 80/20, front-to-back, obviously, creates this enormous competitive advantage in terms of how we operate. It's a unique and proprietary holistic process proprietary to ITW, and it's the core operating system in every 1 of our 84 divisions. It improves -- it's a holistic process, which improves all aspects of the business. One of the great strengths of 80/20 from our standpoint is that it's very data-driven, so data informs the strategy, right? Strategies tend to be routed in reality, much more realistic, much more likely to be achieved. And as Scott referenced, even though we're a better 80/20 front-to-back now than we've ever been in our history, we have a strong commitment to continuous improvement. And, in this regard, every division has a rolling 3- to 5-year implementation schedule. So this is very much the gift that keeps on giving, right? Every year, every one of our businesses is looking to get better and better and better on this. And as Scott referenced, I mean, there's enormous opportunity here for individual experimentation. This is not an instruction menu. This is a framework that's flexible enough for our businesses to deploy relative to their particular context and opportunity. The key outcomes, first one is our own strategic clarity, right? Again, data informs the strategy. Data really helps us understand where we should choose to play based on differentiation, based on our ability to win in various product lines and customer groups where we often have low share -- high differentiation low share. So again, data informs the strategy. As mentioned earlier, this business model creates significant competitive advantage in terms of customer-facing metrics, quality, part availability and so on. So the bottom line is that if you are an ITW customer, you absolutely love 80/20 because it shows how delivers value for you in terms of all these very important metrics like quality and product availability. And we see this in every segment -- every division, every segment. It is not confined to any one part of the company, it's right across the company. And of course, this was really reinforced to us, as I said before, over the last few years here. And so the result of all of that is that we get best-in-class financial performance and high-quality organic growth. And so then moving to culture. Again, creates this enormous competitive advantage in terms of how we execute. Scott used the term, flexibility within the framework, which is how we -- the word -- the phrase we used to describe the culture inside ITW. With the framework being our values, which dictate how we do business and protect our reputation, our enterprise strategy, which ensures that all of our divisions are working towards a common strategy, and of course, our business model, which is the value add from being part of ITW. However, within the confines of that framework, every one of our divisions have the flexibility to make decisions to maximize the impact of the strategy and the business model relative to their particular business context, right? And a way of thinking about this is there's really a dual purpose here. The purpose -- the first purpose being that it keeps everyone moving on the right track. The second one being that it's flexible enough to liberate the considerable capabilities of our people and our businesses to do what's right for their customers and markets. A way of thinking about this, as Scott referenced, we don't tell people what to think, we provide a perspective on some things they should think about as they run their business. That's the whole essence of flexibility within a framework. But the outcome of this is that you get this really strong entrepreneurial mindset, where our leaders run real businesses, and they're empowered to think and act like owners effectively. They have full functional control of all the functions required to run their business and serve their customers, including, of course, full P&L responsibility. So every one of our divisions is a fully functional P&L. There are no metric structures in ITW. The end result of that is that this drives enormous ownership and accountability where decision-making is done close to the customer. From our standpoint, that enables better decision-making, also oftentimes enables better outcomes for our customers. And the business planning process is bottom up, based on market reality, strategies and action plans coming all of our divisions that are much more likely to be achievable and realistic, which ultimately translates to this enormous say-do ratio for the company, right? Scott referenced ITW as do-what-we-say company. We're a do-what-we-say company because our divisions do what they say. And this is based on performance metrics, which are simple, clear and consistent. Our division metrics, our organic growth, operating margin and ROIC, so obviously, very highly correlated to our enterprise performance. And so the end result of all that is that our people really thrive in this environment, this flexibility with the framework culture. They think and act like owners. And they are accountable, and as the results over the last number of years have shown, they deliver. So given the competitive advantage created by all 3 elements of our business model, and how hard we have worked over the last decade to get quality practice to where it is today, you can rest assured that we are very focused on ensuring that we sustain and enhance the quality of practice on our business model with no aggression as we increase our focus on organic growth. And a key way we do this is to build capability in business model excellence through our talent management system. Now the business model is really only words on paper, unless you've got the leadership talent who can execute it at a high level. And so for this reason, business model expertise is our most important leadership attribute in ITW. And it's not something we could hire from the outside. We've got to develop this ourselves, right? And developing business model expertise is not something that can be learned from a book, right? It's learned by doing. It's learned through experiences. There are no shortcuts. And we're okay with that. It takes time, right? We'd rather do it right, than do it fast, right? But it takes time. And a key way we do this is through build these expertise through substantive leadership experiences across our businesses usually 3 years at a time. To accomplish this and to enable it, we have a policy inside that our entire -- our enterprise leadership team owns the placement decisions for our top 200 leaders, right, and manages all moves involving them. And that is the dual purpose of balancing our business needs with individual development needs and making sure we're putting the right people in the right spots to accomplish both. And we've used this approach to build business model capability for quite a few years, which means that we're building this deep into the company, okay? It continues to be a key leadership priority for us, I would say. But as a result of doing this for quite a number of years now, we are really well positioned again to sustain business model practice excellence as we go forward. And this [indiscernible], in turn, ensures that we're really well positioned to handle whatever the next 7 years throws at us, right? Whatever economic conditions or uncertainty, we're positioned to handle on the base of the rigor of business model excellence that we have in this company. In other words, to reinforce the point made in Scott's section, we're built for this. So a way of illustration of everything that you've heard so far, we're not going to move to the segment presentations to illustrate both the progress we've made on enterprise strategy execution in these segments. And our conviction that each of our segments has the characteristics, which make 4% to 7% organic growth over the long term in each segment a high probability. So with that, I'm going to turn it over to Axel Beck, who's going to come up here and tell us about Food Equipment.

Good afternoon, ladies and gentlemen. It's great to be here. Axel Beck, EVP of the Food Equipment Group. And I'm going to give you some insight about the solid progress that we have made on the Food Equipment side since the start of the enterprise strategy. So the ITW Food Equipment Group is a leading global supplier of food equipment, services and solutions to the commercial food equipment service and to the food retail market. And generally, we are premium manufacturer, so quality and service is an important element and a critical factor for our customers. Our revenue in 2022 was $2.4 million, operating margins, $25.3 million, and our organic growth over the last 3 years has been 6.3%, a significant step-up from previous growth rates. By geography, we do about 61% of our revenue in North America, the biggest market for us, 32% in Europe, the second biggest and about 7% in Asia, predominantly in China. Our 80 product categories warewash with a revenue of approximately 30% of our revenue. That's about $720 million. We are the biggest manufacturer of warewash equipment worldwide with key products like under-counter machines, food and [indiscernible] machines, conveyor machines, washing thousands of dishes every day for our customers. Then our cooking segment, cooking business with a share of 20%, approximately $480 million with a range of horizontal and vertical cooking equipment like ranges, convection ovens and fryers. Refrigeration, 15% with cabinets under-counters and prep tables providing a full range of refrigeration equipment to demanding customers where it really matters how performant our products are when you're opening the doors day in, day out. And the last food machines with mixers and [indiscernible] business predominantly to the retail market. Our full product range is supported globally by our own service division, service organization that around the world with more than 2,000 own technicians. So we are supporting our customers over the lifetime of the product and provide guidance and support as equipment becomes obsolete and needs replacement. This is a great benefit for us and a clear differentiation. A great portfolio of businesses that allows us to stay close to our customers and fully leverage our equipment and service differentiation. All our brands like Hobart, Traulsen and Vulcan, which are really strong brands here in North America, but all the others are known in Europe, all our brands are premium brands and are known in the local market as premium brands. So which markets are we serving? Three key end markets in the Food Equipment space. The total food Equipment Market, addressable market for us is between $17 billion and $23 billion. The first market, the institutional market, which is about 50% of our revenue, which covers education with K-12 universities and higher education. The health care market with hospitals, care homes and then business and industry, typical, these end markets. These end customers are running bigger canteens, bigger facilities and kitchens to serve hundreds and thousands of customers each day. The restaurant market, 35% of our revenue covering Food Service restaurants, QSR, limited service and lodging, which covers the hotel size and the tourism sector. And the third end market is smallest for us, retail, about 15% of the food service revenue covering the big supermarkets, the Krogers of this world, the Walmarts, groceries and convenience stores. So what are the market trends that we are seeing in these markets? And all the market trends are pretty common across all these submarkets that we are seeing. So availability of labor has become a major pain point for all of our customers, and this has become more and more prevalent with a very competitive and tight global labor market being a major obstacle for a lot of our customers, keeping restaurants open because of the lack of labor. Customers are looking for solutions that help them save labor in the kitchen process and being able to operate their kitchen with less staff. Our key innovation to address the need of automation to our customers is to incorporate automation in our products and to allow customers to operate our machines with less labor or with lower cost labor, which relates also to the cleaning, maintenance of the machine, downtime also plays a role. The payback of incremental cost of automation plays a significant role for our customers, which are really reluctant to invest in overly complex equipment. Sustainability, a growing major trend globally, driving lower consumption of resources, energy, gas and water, but also the need for equipment that can better handle wash and dry reusable. So when I talk about reusables, it means generally plasticware. So this is a big trend, coffee cups and plates, that are moving away from disposables to plastic. Globally, all major players in the food service market are working on concepts to eliminate or reduce disposables and use reusables instead. This trend will continue to accelerate. Total cost of ownership remains a trend running cost, gas price, electricity, the cost of equipment over the lifetime remains a key trend and it's something that we have to take care of. Increasing food safety standards remain a key trend, in particular, after the pandemic. I think there has been some heightened intention during the pandemic about food safety. In order to make sure that their equipment is operated safe and that we guarantee a safe working environment for our people as well as for our customers. And finally, the trend to better food quality and new concept, accelerated trend really in the marketplace, which has been fueled by the pandemic with new restaurant concepts, more pickup, drive-through and cloud kitchens, concepts which are driving new equipment concepts, new need for equipment, different equipment, addressing the specific needs and pain points of the consumers that want to pick up food. Food Equipment is well positioned to address the macro trends in the Food Equipment space with our unique differentiation, which is grounded in strong innovation track record across our product portfolio, reaching -- reacting quickly to end customers. Chris said, reading the customer, understanding pain points and reacting to the needs and provide innovative solutions to our customers. A unique high-quality manufacturing service supporting our customers globally. Highly trusted brands built over decades on reliability and durable products. And our leadership position in sustainability with the lowest water energy and water consumption and new technologies to address the needs of the reusable transition. And last, not -- but not least, best-in-class delivery performance, a great foundation for share gain and accelerated growth. So where are we coming from? Our journey, which started 2012, the first part, 2012 to 2017, we were focusing our efforts to prepare the segment to grow and build the operational foundation for quality growth. This is all about focusing on the 80s of the business and mobilizing the organization around the most profitable parts of the business, driving margin improvement. We radically simplified business, simplified our product range, customer base and operations. We have reduced approximately 12% of our total SKUs, simplified customer base, allocating 20 customers to distribution and focus on 80 customers -- profitable 80 customers. Based on our 80/20 findings, we radically simplified our operation in line, introduced Kanban, improved and implemented consistent front to back. As a key result of our 80/20 front-to-back, we gained a deep understanding of our profit levels. Our key 80 products, our key 80 customers generating high-quality margins across our divisions. This provided clarity on where to play, which are the most profitable market segments, valuing the differentiation of our products, and focusing. So focusing our entire organization and our innovation efforts, in particular, on these key strategic end markets was a key lever to improve our return on sales from 17.1% from -- in 2017 to 25.3%. So building a quality margin business and a solid foundation to pivot for growth was a key milestone to continue our journey to get the Food Equipment to full potential. Our next step, with a great operational foundation, which we built and the strategic clarity, we did continue from 2017 to build and enhance the structure and capabilities to drive sustainable above-market growth. What we saw was a fragmented sales and marketing structure across our divisions, lacking sales focused talent and quality execution and inconsistent application of our innovation process and the significant opportunity to accelerate strategic innovation to the market and the lack of leveraging our equipment and service differentiation with our 80 customers and 80 markets. So what did we do? Focused our sales and marketing resources on our 80 markets, improved on our strategic sales excellence by refocusing and consolidating our sales force, enhance the quality of our sales talent and upgraded about 40% of our commercial leaders over the last 5 years. We did significant investment in sales systems and digital marketing. We provide sales process rigor and the high quality of sales execution, and improved our lead-to-order conversion with the implementation of CRM systems and other sales systems. On the CBI side, we reinvigorated the innovation process, ensuring strategic focus, which means innovating on 80 products for key 80 market segments, increased the quality of the new product development process and accelerated the execution. Since 2019, our divisions have continuously filled our new product pipeline with new innovations hitting the market. All divisions have a long-term innovation planning process, reaching 5 years out, making sure we have a continuous flow of new and differentiated products each year. The outcome of what we did was a significant increase of our CBI growth contribution of more than 2%, driving also share gain of 1% to 2% over the last years. Overall, the business of our -- overall the results of our pivot to growth transformation has significantly improved our organic growth rate from 2.7% to 6.3% over the last 3 years. Let me talk a bit about a great example from North America, a great example about the division here, pivoting for [ growth. ] The revenue of the North American warewash division was $202 million in 2017 and increased to $275 million in 2020. On a margin profile that was significantly above the average segment margin. CAGR over this period was 7%, also above the segment average. Key products for this division is as undercounter, [indiscernible], dishwasher and conveyor machines. The revenue by market 60% on the institutional side, 30% on the restaurant side and the remaining on the retail side. The division has a proven track record of being a serial innovator, providing continuous flow of new products every year in different categories. To move to next. So this is just an example of our innovation pipeline that shows our innovation plan, our product launch plan for the different product categories, which illustrates how we are thinking about innovation, and how we are moving it forward. A well-defined field pipeline with new innovation products reaching out more than 5 years is important for us. We are leveraging with our warewash business, also a global platform technology center with structured innovation creation and new product development focused on our key 80 products. A great example of our ability to accelerate innovation to our strategic end markets and provide differentiation and a superior value proposition for our customers with an outcome of 2% to 3%. And the warewash business was clearly at the upper end of CBI contribution. One example on the innovation side is demonstrating also the power of the innovation and also the particular success that we had in the company. A great example again for share gain resulting from CBI and our position to be a leader in sustainability. Target customer in this example was the QSR in the fast casual market. The big players out there, the big Ms, the KFCs of this world, plenty out there that have issues, and they still wash with manual things. A lot of their warewash is still manual washing, a very labor-intensive work that they do. Their pain points, food safety and reliable sanitization of their ware. Sustainability, addressing also the need of plastic where that is being more and more introduced with these customers, which is very difficult to dry with the dishwasher. Total cost of ownership, which relates to energy, water consumption, but also the need for less manual labor in their kitchens. Our innovation and solution to the customer are dishwashers, guaranteeing the lowest energy and water consumption, but also include a unique patented drying technology that is guaranteeing perfect dry plasticware. This is unique to us, and this is not available anywhere else in the marketplace. The outcome, a unique industry solution to wash reusable equipment, reusable plastic equipment, helping the customer to save labor and have a safe and efficient process. The rollout with well-known chain customers in the QSR space has delivered more than $50 million revenue growth with significant further revenue potential as we continue to penetrate the market with these unique solutions. So we come to the last slide that is really demonstrating where we are. So we are moving into the next phase, growth opportunity for ITW. Our addressable market, $17 billion to $23 billion. Our market growth, the traditional market growth in the food service market has been in a range from 1% to 3%. We are expecting and we are targeting 1% to 2% share gain consistently over time. 2% to 3% CBI contribution and are confident and well positioned with the Food Equipment business to drive 4% to 7% organic growth rate sustainably over the future. So a great foundation for our business and a great outlook for the future. Thank you. So I hand over to Chevy, who is the EVP of the Automotive business.

Thank you, Axel, and good afternoon, everybody. My name is Chevy Garcia, and I'm responsible for the ITW Automotive OEM business. And I would like to share with you the progress of this business since we started the execution of the enterprise strategy, where we are and what are the opportunities that we see in terms of organic growth and how we are going to deliver that. So let me start spending a little bit of time introducing you the Auto segment. We are a $3 billion segment that is highly focused on its supplier of components and fasteners for [indiscernible]. And we are mainly focused on product lines and opportunities where we can really differentiate by solving customer problems, customer pain points through innovative solutions. As we can see in the slides, our revenues are split in 3 main regions. The first one is North America with 40% of the revenues. Then we have Europe, 31% of the revenues, and China 16% of our revenues. This is 87% of the total revenues in this segment. In 2022, we delivered 16.8% operating margin, and we were able to improve our content per car, or dollars per car from $43 to $47 between 2017 and 2022. And this is considering the car builds in North America, Europe and China; our main 3 regions. If we take a look into our product portfolio, we can split that in 3 main categories. The first one is highly differentiated fasteners that are used in both, in combustion engine vehicles and electrical vehicles. We design and produce plastic, stamped metal and [indiscernible] headed fasteners, and we can find these products mainly in interior and exterior applications to fix panels and trims. Also, they are used to fix wiring harness to the body of the car and also to fix components or subsystems into the frame of the car. The second category is the high-value components, again, for both combustion engines and electrical vehicles. And we can find in this category, door handles for interior and exterior, fuel filler housing, colon regulators and air resistors. And the third category are products that are specifically for electrical vehicles. And this is where we can find the charge sports for batteries, deep drawn battery for the cans and thermal management connectors that are used in battery systems. I would say that in most of these product lines, we are talking about highly engineered products, differentiated solutions, in many cases, with [ patents ] that has been developed over the past years according to the customer pain point that we have found and using our customer-back innovation process. Let's take a look into the market trends in this industry. And as you know, the automotive industry is rapidly changing according to the transition from combustion engines to electrical vehicles. Due to this huge technology transformation in the industry, we see new OEMs that are starting to play in the EV space. There is also more and more use of electronics for better connectivity in the car or to integrate smart components as we will see later on. There is an increasing on regulations on safety. And finally, there are weight reductions trends as in the past in order to improve the efficiency of combustion engines and EV vehicles. This is a massive change, but we at ITW, we see all these macro trends and technology evolution as an opportunity to win. Our business model keep us focused on the best growth opportunities with differentiated solutions. We are very well connected with our customers, with a strong engineering relationships with all our 80 customers, and we are considered a trust adviser partner for them. Customer work innovation framework help us to be more efficient on understanding what are the new customer problems and to solve them by providing differentiated solutions. And the more than 3,000 patents that we have in this segment is a track record of the CBI strength that we have. Another differentiation is the process know-how, the expertise that we have in manufacturing technologies and our ability to serve our global customers locally, thanks to the global manufacturing footprint that we have. And that was especially important in the last years during the pandemic periods. And also our strong experience and manufacturing capabilities in terms of engineering and manufacturing capabilities in China, which is an 80 market for us, a growth market for us. Let's talk about the evolution of this business since 2012 to 2017. And since 2012, when we launched the enterprise strategy, until now, our focus was to prepare this segment for high-quality growth. At the time, we saw in consistency on how we were applying the 80/20 front-to-back process across the segment. We saw that many businesses had too much complexity in our operations. That was mainly due to too much product lines, too much customers in some cases, and therefore, we have no differentiating -- we were not differentiating of our 80 versus our 20s. And we didn't have a differentiated performance with our 80 customers. During this period of time, the business did a radical simplification of our operations. We did PLS, product line simplification, or we were treating differently the 20s versus the 80s. As an example, we could find in facilities injection machines where we had -- where we were producing several parts. We were mixing 80s and 20s that was created -- creating low efficiencies, high manufacturing costs, lack of focus on the 80s and lack of capacity as well. Applying the 80/20 front-to-back process, we created dedicated lines or manufacturing cells for these 80 product lines. We invested in this dedicated manufacturing lines in terms of automation, and we aligned our processes in order to ensure that we have the right quality and the right capacity to grow in the future. These investments on focus on the 80s contributed into the improvement in our customer-facing metrics, which in auto, it's mainly quality and delivery service. As we executed our 80/20 front-to-back, our operating margins improved from 19.4% in 2012 to 22.8% in 2017. That is 340 basis points improvement. And on top, we got more clarity on where we had the high profitable business, where we have sustainable differentiation with the highest margin products, and that provided more clarity on where we wanted to play and how we win -- how to win. Nevertheless, since 2017, despite having all this great 80/20 front-to-back execution, and after all these margin improvements that we have seen in the prior slides, we had 2 external factors that impacted our margins. The first one is the unprecedented inflation periods in an industry that it takes more time than in others to recover price. And the second one is a decline in car builds. Since 2017, car builds has declined by 10 million cars, which is a 12% volume reduction. I would say that 2/3 of the margin impact is coming from the price costs, the other 1/3 is coming from volume decline. Nevertheless, we have a clear path. We have an action plan to recover this margin and to ensure that we will be, again, in this low- to mid-20s in the next 2, 3 years. And the way how we are going to do that is continued recovering on price costs that will contribute into 1 to 2 points margin improvement. We are highly confident that we are going to deliver that. And in fact, we are going to see meaningful progress in the next coming quarters this year. Another 2 points of margin recovery will come from volume increases. Automotive industry is expecting a 7 million vehicles increase, which are projected from now to 2026, and that will contribute into these 2 points margin improvement. Another point will come from CBI. As mentioned in prior slides, CBI is allowing us to sell differentiated solutions. And differentiated solutions means high margins for us. And finally, another 1 to 2 points that will come from the enterprise initiative, which is just as we have done in the past and as we have been able to deliver consistently this enterprise initiatives in the past years. So this is our plan, and we are highly confident that we will come back to this mid-20s percent margins. Let's talk now about how this business pivoted to growth since 2017. As we saw in the prior slides that we got more clarity on where to play and how to win, we identified that our CBI was contributing by less than 1% in growth. The main reason is that this is an industry that as also discussed in prior slides, is changing rapidly. It's transitioning from combustion engines to EVs. And we have a lack of understanding of the industry trends, new customer problems and how we can support our customers to solve these problems. We were lacking some strategic marketing capabilities to support this growth in this new scenario. So we decided to invest in new strategic marketing resources in all divisions where we identified growth opportunities with sustainable differentiation. We build new engineering capabilities, new competencies that we didn't have in the past to support this transition to EVs and that means new technology expertise. We also reinforced the quality of practice of our CBI framework, our CBI process, allowing us to be more efficient on discovering the new problems from our customers, our -- the needs from our customers and to solve them with engineered solutions. The outcome of this is that we already see now a contribution from growth coming from CBI of more than 2%. And also despite the market declines in 2017, our penetration, our dollars per car is increasing from $43 to $47, which means 2% annually. I would like to share how do we see the electrical vehicle opportunity for us ITW. Let me first explain what are the main product lines that we have in this space. And this is mainly fasteners used for EVs, deep drawn can for the cans of the batteries, deep drawn cans for the batteries, flush door handles and smart charge ports. These are the main categories that we sell in this space. Overall, we are selling today $400 million. This $400 million is 13% of our total revenues in the segment. And this $400 million is already growing at more than 40% compound annual growth. If we take a look into the dollars per car that we have in EVS, in the blue column, you will see that we have $39 at this moment, which is still below what we have with combustion engines. But we are highly confident based on the growth rates that we already see in this business, that we will be at $52 per car by 2027. And that means more than $1 billion revenues in EV markets by 2027, so huge growth in this space. If we take a look into the market opportunity that we have, with EVs, we have a potential market growth of $300 per car. If we compare it to the combustion engines, it's $220, so $80 more of opportunity. And that means for us that despite combustion engines volumes will decline progressively, we see more opportunities than risk with this transition. So the conclusion is that we have very profitable $400 million of revenues that is growing fast, that will more than offset the expected decline in combustion engines in the next coming years. And we expect to have more than $1 billion by 2027. I would like to share one of the examples, one of the businesses that we have in this segment. This is the China plastic components business. This is a business that has been growing 24% compound annual growth since 2016 in a market that has been flat. The increased revenues from $76 million to $200 million, with margins that are above the margins of the segment. In this business, we are making fuel filler housing, charge ports for the EVs, flush door handles, [indiscernible], actuators and others. If we take a look into the China markets, today, 21% of the vehicles are EVs. In this business, already 35% of our revenues are with EVs. So in terms of dollars per car, we are more than doubling the dollars per car that we have with combustion engines, 13 versus 6. And I think that this is just showing the opportunities that we have had with EVs. On top, I would say that 50% of the revenues that we are generating in this business is with Chinese OEMs, which are the ones that are growing at a faster rate. In this business, today, we have, at an average, $19 per car, and we're expecting to be at $42 per car by 2026. So more than doubling our revenues, and this is just because we are very well focused on the best growth opportunities, which are EVs and Chinese OEMs because they are growing the fastest. I would also like to share an example and a specific example of CVI in the EBS space. We at ITW, we are market leaders in fuel filler house for combustion engines. We are selling this product line in most of the 80 OEMs, and we have a very strong customer relationship with them. We are a trust adviser for them. As OEMs are transitioning to EVs, we leveraged our strong position, our strong relationships with them to understand what are the new pain points, the new problems that they had with battery charts. And using our CBI process, we have been able to develop a patented innovative solution, which you can see in this picture. And the main innovations is the remote actuation of the flap with improved motion. We are also integrating lighting that is indicating the status of the battery or the logo of the OEM. We have integrated communication with the vehicle, and we have great performance under all weather conditions. This is just an example of innovation from combustion engines to EVs that, for us, is increasing the market opportunity. When we are selling fuel filler housing, the average dollars per car is $6. This is our opportunity. With this new product line for EVs, we are talking about $18 per car opportunity at an average. So again, increasing our opportunity is to grow. We expect to grow more than $100 million in this product line by 2026. And this example shows also the ability that we have to solve real customer problems and how we have established our problem solver position with EVs at the same level as we have with combustion engines, thanks to the new competencies that we added in the business. Finally, as you have seen, we are very well positioned to -- for high-quality growth as the industry is changing. We are very well focused on the right regions, with the right OEMs and with the right product lines with strong CBI capabilities. And we have high confidence level that we can deliver this 4% to 7% revenue growth. And the way how we are going to deliver that is keeping focus on these 3 regions, which is an addressable market for us of 58 million to 70 million builds. Considering North America, Europe and China, we expect to deliver 1% to 2% on growth from market growth and price. Another 2% to 3% will come from market penetration, another 2 points from CBI, and that gives this 4% to 7% projected growth. So high confidence that we will deliver that. That's all from my side. Thanks for your attention. And with that, let me turn it over to Patty.

Good afternoon, everyone. My name is Patty Hartzell, and I came to ITW through the Instron acquisition. As Chris shared, Instron was the first company acquired as part of the Test & Measurement segment. So through my tenure, I've watched this segment transform from a single company making 9% operating income to a segment that's generating $2.8 billion with many divisions making 26% operating income. Needless to say, the impact of the ITW business model on this segment has been profound. I've participated in this journey at various levels within the organization and consider it an honor to lead this talented team as the Executive Vice President. The Test Measurement and Electronics segment, which I'll refer to today as TME is a global innovative supplier of equipment, services and consumables. Our differentiated products are used in demanding R&D and quality control applications and support the world's manufacturers as they improve their products and processes. As I mentioned, the segment generated $2.8 billion in revenues in 2022 and is a very global segment, with 39% of our revenues going into the Americas, 36% into the Asian region and the balance into Europe. The segment exceeded 26% operating income last year and finished with a 3-year average organic growth of 6.5%. About 30% of the segment's revenues come from Testing equipment. This includes well-known brands, like Instron, Buehler and MTS. These instruments range from laboratory equipment, which can characterize materials and products like the Instron Electropulse machine that you see on the left side of the slide, to more complex equipment designed to characterize ground vehicle performance and durability. About 20% of our revenues come from products sold into the semiconductor industry. This category includes well-known brands like Brooks Instrument, SimCoTec, TechSwipe and [indiscernible]. Here, we make a wide range of products, including the mass flow controllers and clean room equipment that you see on the slide. About 20% of the segment's revenues come from electronics equipment. This includes a range of products like the Camalot dispensers produced by EAE, which dispense liquid [indiscernible] for use on printed circuit boards. About 15% of TME portfolio is from weighing and inspection equipment. This includes brands like LOMA, MagniFlex and Avery. Here's a picture of Avery's forklift scales, which allow operators to weigh goods in motion. Finally, 15% of TME's revenues come from services. In fact, 70% of our divisions include a service group that provides services like installation, calibration and training. TME serves a wide range of end markets with very challenging problems. I will highlight just a few of our 80 end markets here this afternoon. First, if we look at semiconductor and electronics manufacturers, they are in a race for processing power and miniaturization. The size of nodes on chips is getting smaller, board sizes are shrinking and the density of electronics on PCBs is increasing. As everything gets smaller, it's becoming easier to damage expensive components. Dirt and static electricity that we can't see with the human eye, or even feel can lead to low chip yields and worse yet, latent warranty issues for device manufacturers. Many of the products we offer in the TME segment are designed to address these very challenges. In the second category, biomedical companies, they're making products with a high cost of failure. Imagine the expense of issues associated with faulty stents, orthopedics that fail prematurely or pharmacy errors. This drives extensive reviews, testing and characterization across the health care industry. Pictured here is just one example, a test characterizing the performance of an auto-injector device like the EpiPen I carry from my daughter's allergies. Finally, the automotive industry is experiencing many changes as you heard from [indiscernible]. All of these changes are demanding more testing and more products, lightweighting of vehicles, battery development, the introduction of new EV models and increasing safety standards. Pictured here is one of our crash sleds testing passenger safety systems like seatbelts and airbags. These are just 3 of our major markets. We serve many other industrial markets as well. The 3 industries that I highlighted are good examples of the positive macro trends we are seeing in TME and why we have good opportunities for organic growth. Expectations of quality are advancing. The good enough quality from years ago is no longer acceptable. We are seeing companies place increased focus on product safety and brand reputation. No one wants to see their company name in the headlines or nowadays going viral because of a product recall or someone getting injured. Regulations and standards are increasing which simply put, drives increased testing and process control. Companies are continuing to evaluate novel materials and new applications for materials, which again drives characterization in R&D labs and testing and quality control. Next, the use of electronics is growing rapidly. From the use of electronics in the cars we drive to everyday devices, like our coffee makers and even the phones we carry which incidentally now have more processing power than the supercomputers of years ago. This trend is only accelerating. The speed of innovation is increasing and product life cycles are shortening. Again, more change means more testing and more products from TME. Finally, things are getting harder to make. As you heard, manufacturers face labor and throughput challenges and are demanding more automation, another space where we play. While we are not the only company in the market, ITW is differentiated. As Chris shared, we work closely with customers to focus innovation on their biggest issues. In short, we designed from the customer back, not from the company out. This results in market-leading innovations and differentiated products protected by patents. We have 3,500 and TME alone. The TME segment was built by acquiring great brands. You may not have heard of the names I mentioned previously, but I assure you they are #1 or #2 players in the markets that they serve. And unlike many of our competitors, our divisions are very global in scale and most include local aftermarket service capability. And most importantly, all of our divisions leverage the ITW business model, which not only drives shareholder value, but also customer-facing benefits with best-in-class quality and delivery performance. We're now going to take a look back to review the power of the business model over the last decade on TME. As a reminder, TME is a segment that was formed through a series of acquisitions, most of which occurred from 2005 through 2012. So as a younger segment back in 2012, we really lacked deep knowledge of the 80/20 front-to-back process. Our operating income was in the mid-teens, and I would say that only a few of our divisions had operating margins worthy of a growth focus, most were still riddled with complexity. Over the first 5 years of the enterprise strategy, we worked to prepare this segment for growth. We appointed a talented 80/20 front-to-back coach who worked across divisions. We applied the 80/20 front-to-back process to each and every division and inspected progress multiple times each year. Many of our VPGMs through extensive training, and we continue to share learnings across divisions. In fact, I would say some of the richest learning for me at ITW was visiting VPGM colleagues and exchanging ideas. In short, we built 80/20 front-to-back capability within this segment. By the end of those first 5 years, our divisions had radically simplified their products, their customers and operations. For instance, Instron eliminated 50% of its frame models. And Brooks Instrument eliminated 90% of the discrete parts that they needed to make their 80 models. Perhaps more importantly, this intense focus on the 80, without the distraction of the 20, allowed us to make needle-moving changes for our customers. Businesses offering consumables like MagniFlex and Buehler were soon offering products to customers same day or next day. And businesses making capital equipment, like the one where I came from, went from taking weeks or months to build machines to having machines ready in a couple of days and sometimes same day. From division to division, availability improved, warranty costs dropped and customer satisfaction levels grew. In these first 5 years, TME margins expanded 700 bps, and over the full decade, TME improved margins more than 11 percentage points, and that includes the recent acquisition of MTS. This wasn't a story of one or two divisions driving the average. I can honestly say that nearly every TME division improved operating income dramatically over this period. I'm very proud of the work achieved by my colleagues and can clearly say, we exited 2017 with much of the heavy lifting behind us. Although our divisions dramatically improved operating income during those first 5 years, we had low contribution from CBI initiatives. We lacked focus on our sales channel and our market penetration yield was low. In short, we had low organic growth. In fact, the average organic growth from '12 to '17 was slightly negative, and we contracted 0.6%. In 2017, we committed to focus on organic growth, and that's exactly what we did. We appointed a segment-level CBI coach, who does an exceptional job of working with each division to ensure our CBI framework is consistently applied, and ensures that our CBI pipelines support our 80/20 front-to-back strategy, the where-to-play part. At the enterprise level, we introduced growth frameworks such as strategic sales excellence. And in typical ITW fashion that Scott talked about, VPGMs applied these frameworks with the flexibility they need to make them suitable for their customers, their products and their markets. As with front-to-back, we shared learnings across divisions and overall, continue to focus on improving our organic growth capability. Finally, we changed comp plans. As organic growth grew in importance, we needed to change our compensation plans to add a growth component. We first rolled this out at the VPGM level and have now cascaded it more deeply within our divisions. After 5 years of focus, I'm proud to say that our say-do commitment, as Scott said, inorganic growth is shining through. Our 3-year organic growth average is 6.5%, which includes the pandemic challenges of 2020. Our CBI yield has doubled, and we are getting better performance in market penetration. In summary, we are working to build our organic growth competence to be just as good as our competence in 80/20 front to back. When I look at the talent and the TME team, along those 2 axes, I can truly say TME has never been stronger and has never been better positioned for the future. I will now share an example of the enterprise impact on Brooks Instrument, one of the businesses within our segment. Brooks manufacturers measurement and control devices in 4 locations with products, including mass flow controllers, vacuum and pressure products. 75% of their sales go into the semiconductor industry, with the remaining 25% going into vacuum and pressure products. As the headline here demonstrates, this is an excellent example of the power of our business model. When we acquired Brooks, it was only a $160 million company. And as you can see, over the last 5 years, Brooks grew on average 10% per annum. And over -- since acquisition, Brooks has improved operating margin more than 20 percentage points. I will share just one story on CBI from the Brooks growth journey. As I said, Brooks sells into the semiconductor market into OEMs who make equipment for deposition and edge processes on wafers. Through CBI, the team identified clear pain points with wafer yield production, scaling limitation for smaller nodes and flexibility to change the gas recipes. As a result, they developed market-leading pressure-based mass flow controllers that offer the industry's best flow accuracy with a differentiated sensor, the most responsive control through a very novel valve architecture and a wider flow range versus our competition, which enables this recipe flexibility. The outcome, a new differentiated product or actually 2 lines that are designed in or now specified by all of our 80 customers. We have 2 patents granted so far, 4 more are pending, and we can see our way to $100 million more in growth potential. This is a great example of CBI unlocking share gain potential. Today, Brooks is the clear market leader for its thermal-based mass flow controllers. This innovation opens significant runway in the pressure-based mass flow controller market. In summary, we've done the heavy lifting of simplification and have significantly improved our strength in organic growth. TME has never been stronger and has never been better positioned for the future. We play in very attractive markets. These are global markets with very challenging problems where our differentiation is rewarded. We expect these $15 billion to $20 billion markets to grow between 1% to 3% in the future. And consistent with the other segments that you heard from today, we have low share. In total, our divisions estimate that we have only 15% of the market share. So we have room to run and expect to grow another 1% from gained shares. Finally, as we continue to improve our capability in CBI, we expect another 2% to 3% of growth from innovation. And in total, we are positioned for high-quality organic growth in the 4% to 7% range in the years ahead. With that, I'll now turn it over to Michael Larsen, who will talk about our 2023 through 2030 performance framework and our 2030 performance goals.

Thank you, Patty. Good afternoon, everybody. So my job today is to walk you through the additional foundational elements of the ITW enterprise strategy, including capital allocation, how we think about the portfolio, our thinking around acquisitions and the discipline with which we approach those. Very important element, ESG. I'll give you an update on that. And then, finally, we'll get to the 2030 performance framework and give you a sense for what the company might look like in just 7 years from now. So we'll start with highly focused capital allocation. I used to say that one of my favorite things of ITW is how much free cash flow the company generates. And then the HR people got to hold on me and said you can't really say that you have to say how much you like the people that you work with, and then you can talk about cash flow. So I will acknowledge that. But nevertheless, this is an unbelievable business model in terms of the significant free cash flow that we generate consistently. And as you know, we have a really strong balance sheet. So when we talk about these best-in-class cash flow is what we talk about is, obviously, the profitability, the fact that our margins are now in the mid-20s and headed higher from there. And that we're an asset-light business model. So what does that mean? It means that we are perfectly comfortable outsourcing some of the more capital-intensive steps that go with manufacturing our products and instead focusing on the areas where we can add value from a customer perspective. So a lot of the metal bending and more capital-intensive steps, like I said, are outsourced to our suppliers. Incremental margins consistently, 35% to 40%, a little bit higher right now. We can talk about that later. We described this as a fortress balance sheet. We have appropriate levels of debt. We have top-tier credit ratings. You may have seen we were upgraded by Moody's, I think, 2 weeks ago. We now have the highest credit rating of any industrial company in the U.S. We generate strong free cash flow in any environment. Scott talked about the pandemic. This gives us incredible resilience in the face of a recession or even an economic shock. As you recall, in the pandemic, this company generated $2.6 billion of free cash flow in 2020. Consistently, we've averaged, over the last 10 years, conversion rate of about 103% consistent with the target we laid out of 100% plus. So the principles of our capital allocation strategy are pretty straightforward. There's really nothing mysterious about this. We deploy capital only where we can leverage this business model into meaningful and sustainable competitive advantage. That also means that surplus capital is returned to shareholders rather than investing outside of our core competitive advantages, distracting us and generating lower rates of return than we would otherwise if we invest in the ITW business model. The outcome of how we run the company and how we think about capital allocation is that approximately 20% to 25% of our operating cash flow is in -- goes to internal investments. That is our #1 priority investing in our very profitable core businesses to support their organic growth efforts and sustain their productivity is the best thing that we can do. It generates the highest rate of return of every -- any investment dollar on this page here. The dividend, we'll talk a little bit about, certainly very important to our long-term shareholders an attractive dividend that grows in line with earnings over time. And then the third piece, acquisitions. Certainly, the priority over an active share repurchase program that we then utilize to return surplus capital to shareholders. But again, these are not targets, these are outcomes of how we run the company. Internal investments, like I said, these are all about investing in our very profitable businesses. CapEx consumes 2% to 2.5% of revenues, customer-back innovation, about 2%. To be honest, we probably don't capture every single dollar that goes into CPI, especially with the increased focus from the leadership team in every one of our divisions at this point. Front-to-back, these are what's feeding our enterprise initiative savings, typically, projects with a payback from a cost standpoint of less than a year, but also that point us in the right direction in terms of the largest organic growth opportunities. Everything we do, our capital allocation strategy is completely aligned with our enterprise strategy. Like I said, these are outcomes. We don't assign or allocate capital to the business units through some artificial annual planning process where everybody gets a set amount of money and then goes to go figure out what to do with it. Here, every single project gets reviewed and gets funded based on its individual merits. If it meets the strategic and financial objectives, if it leverages the business model to generate competitive advantage, it's a go. So it's a pretty binary decision process for us. Dividend, like I said, hugely important to our long-term shareholders. I know many of you are here today or listening in on the webcast. Scott said, we have 59 years of track record here of not just paying a dividend, but increasing a dividend every year and returning cash to our shareholders. It's a really important component of our overall total shareholder return model that I'll show you in a minute. And it has contributed about 15% of the TSR, the 16.4% that Scott was referring to in the opening comments. So going forward, we anticipate that the dividend will continue to grow in line with our long-term earnings growth rate, 7% plus. We are continuing to target a payout ratio of about 50% of free cash flow. I'll also tell you that we can't really imagine a scenario where we would not be increasing the dividend. And I'll tell you why that is in just a moment. So if you look at this slide here, you can see our track record, and I'll just point you to 2020, the pandemic year and the fact that we decided to increase our dividend in that year. Obviously, earnings were down that year, but we decided to raise the dividend by 7%, again, consistent with our long-term earnings growth rate at a time where maybe others were going up $0.01 or $0.02. Acquisitions, I'll spend a little more time on that. We're certainly -- acquisitions play a very important part in terms of our long-term enterprise strategy and our growth strategy, specifically high quality, very selective, financially prudent, as you would expect from us. And then we use the active share repurchase program to return surplus capital to shareholders. That amount at this point is somewhere around $1.5 billion, that will grow to $2 billion over time here as we get to 2030. We could certainly, if there was a large acquisition on the horizon, dial that back. We could also decide not to and basically fund an acquisition with cash on hand and through the debt markets. The point we're trying to make here is that you can count on us to continue to have an active share repurchase program. And that $1.5 billion to $2 billion basically means that 2% to 3% earnings growth -- earning per share growth is locked in on an annual basis. So the portfolio, Chris talked about this strategically, why it is so important and why we're aggressively managing our portfolio to make sure that every -- in every single one of our businesses, the key criteria is that these are businesses with a high level of sustainable differentiation, which means there are enough customers in these markets that are willing to pay for the additional value that we can provide through the business model. It also means that anything commoditized inside these businesses, product lines must go typically through the product line simplification process. Maybe the best way to think about this is, we can either be a 12% operating margin business in a 2% industry, or we can be a 25% operating margin business in a 15% industry with the same amount of energy effort, resources and investments. So for us, that is an obvious choice in terms of where we want to spend our time and where we want to spend our shareholders' capital from an investment standpoint. Acquisitions, like I said, and a very important part of our enterprise strategy. Criteria #1 is if the goal of the company is to grow at 4% plus, we shouldn't acquire anything that can't grow at 4% plus. We need to see this as an extension of our long-term organic growth potential. The second one is maybe a little more nuanced, but the lens that we apply when we look at acquisitions is always what is it worth to us, to ITW, not what made other people be willing to pay? Or what are the bankers telling you, you have to pay? It always has to be about what is it worth to us? What does it give us strategically and financially? Obviously, the margin improvement potential, I think that one -- we really -- to be candid with you, we haven't seen a business where we can't improve the margins. And that gives us a huge competitive advantage in terms of derisking the acquisitions, paying market multiples, and still generating ITW caliber margins and also return on capital by the end of year 10, we're targeting mid- to high teens on margins and mid- to high teens also on the return on capital or on an after-tax basis. So if you think about MTS, which we acquired a little over a year ago, this is one that checks all the boxes. Organic growth. You heard Patty talk about Instron, I'll get to that in a minute, growing in the high single digits. Ability to improve -- margin improvement potential through the implementation of the ITW business model. That was a no-brainer. And then third, evaluation that to us made it worth our time and effort. To be candid with you, writing the check was the easy part, taking leaders from ITW and sending them up to -- Patty's laughing -- to Minnesota to deliver on this and start integrating this business, that was, frankly, the opportunity cost was probably greater than what it took to write the check. And the reason is -- and Chris talked about this, a point of organic growth at our incremental margins is worth significantly more even than what a great acquisition like this can bring to ITW. So this was kind of what made this a no-brainer for us. We had a lot of experience with the Instron business coming in at 9%, a business that Instron competes in similar markets. Through the implementation of the business, it took us a little bit longer back then than it will this time around, but we're now operating as -- I don't know if Patty said this, but we are operating at 30% plus operating margins in our Instron business and growing in the high single digits. And the beauty of this is Patty came with the Instron business, and now she is responsible for integrating MTS. Here's just a status update. We're a year into this, maybe a little bit more standard product. You can see kind of the operational efficiencies, the customer-facing metrics are starting to creep up. It takes us for -- used to take 4 months upon acquisition to enter the order and schedule production. We're down to less than a week for our 80 products. Lead times, you can see the progress there. And then operating margin coming in at 8%, we're operating in the low teens, 13% is the outlook for the year. So really good progress by the team and certainly a lot more to come. Very important element of our overall enterprise strategy on a go-forward basis and, frankly, has been for a long time is our sustainability strategy. This is nothing new to ITW in terms of our commitment. It's deeply rooted in our core values. Four key elements to think about governance and ethics, the environment, our people, our communities. Important to note that everything that we do, not just here, but across the company, everything is data-driven and it's fully aligned with our commitment to being a do-what-we-say company. We're not going to sign up for something that we don't see a path. Like I said, we've been doing this for a long time in terms of being really committed to operating on a sustainable basis. Continuous improvement. I'll show you some examples in terms of how we think about the goals in just a minute. We've been focused on Scope 1 and 2. We are spending quite a bit of time on Scope 3 really with a view to understanding it a little bit better and evaluating what we can do in this area over time. And as we always do, this strategy is operationalized in our 84 divisions. That's really where the rubber meets the road. Certainly, with some help, I'm not sure they would describe it as helped, but certainly with some guidance from the corporate team and some oversight as you would expect from our Board of Directors. So this is a good example of this continuous improvement in this journey that we're on. So in 2022, as you may have seen in our sustainability report, we delivered on our goal that we set forth in 2017 of a 40% reduction in Scope 1 and 2. We've now established a new goal, 50% absolute reduction by 2030. Our divisions, like I said, are really busy trying to figure out how to operationalize that through a combination of operational improvements, energy audits and improvements to reduce their footprint as well as purchasing green or renewable electricity. I'll mention clean tech products but now we're getting into Scope 3 a little bit, but -- and you heard some great examples today about warewash, for example, that Axel talked about. This represent about 30% of our revenues now. So we have a strong pipeline here of customer-backed innovation projects that are squarely focused on reducing the impact of our customers' products on the environment. Our people and communities. I think we have 5 nationalities represented today. We've always been committed to a very diverse pipeline of leaders, about a little more than half of our leadership team is diverse. Board of Directors 40%. Lot of progress in terms of diversity, both female and ethnic diversity. In terms of the communities, this has been primarily through the ITW Foundation. We've invested about $250 million to improve access to high-quality education and workforce development in underserved communities. So very targeted areas where we decide here is an area where we think we can make some real progress and, frankly, also help ourselves by doing so. And like most companies, we've got some great employee resource groups that -- there were 5,000-plus members that provide a great opportunity for inclusion, networking and also, frankly, are a lot of fun. So it's great to see all of this progress we're making and, frankly, our better communication around what we've been doing for a long time resulting in recognition from third parties, and you can see some examples on the slide here. So let's get to the financial update here. So I'm just going to start with the total shareholder return model. So 4% average annual organic growth at our 35% to 40% incrementals. Now operating income grows 7% to 8%. You add on top of that the a combination of share repurchases and/or high-quality acquisitions. Like I said earlier, the share repurchase part is pretty much you can count on that part for sure. Average annual -- now EPS grows 9% to 10% and you had a dividend yield on top of that, that grows 7% plus per year, and you get to 11% to 13% kind of through the cycle over the next 7 years, not every year, but on average, that's what you, as an investor, should expect to deliver. And we believe, not only is this a pretty compelling value proposition, certainly for long-term-oriented investors and shareholders, but makes us a reliable TSR compounder relative lower risk, high probability in what's only becoming an increasingly volatile and uncertain world. Our new performance goals, you can see we're raising the ceiling now on the operating margins. Based on everything we've learned, we are targeting operating margin of 30% by 2030. After-tax return on capital, we're already at right around 30%. That will continue to go up. We've actually created some room in this metric here for acquisitions. So if you just look at the core business, return on capital is headed towards 40% plus. We believe that we will find great acquisitions just like we have done with MTS and EF&C and that will put a little bit of pressure on return on capital, not a target, but really an outcome of how we run the business. Talked a lot about the organic growth, incremental margins, EPS. 100% plus free cash flow has been our metric historically. For those of you that track free cash flow margin, this is 20% plus consistently through the cycle. Dividend 7% to 8% increase on an annual basis. And then we added our sustainability target to kind of our performance goals this year, 50% reduction in Scope 1 and 2, which is our current focus. And all of this, really, we believe we can deliver across any environment, whatever the next 7 years look like, this is what you should expect from us. So with that, I'll turn it back over to Scott.

Thank you, Michael. So let's close and pick up on the last positioning theme that Michael shared with you that ITW is now positioned as a reliable TSR compounder in a highly volatile and increasingly uncertain world. High single-digit average annual earnings per share growth, increasing annual cash returns to shareholders and the most resilient and reliable business model in the industrial arena. In terms of the high single-digit earnings per share growth, the key elements are 4% plus high-quality organic growth with best-in-class margins and returns, 30% to 40% incremental margins and continued contribution from enterprise initiatives through 2030. Margins moved from 25% to 30%. Adding to that high-quality, financially prudent acquisitions and our strong free cash flow supports meaningful annual capital allocation to share repurchases as Michael showed you. Increasing annual cash returns to shareholders. Our strong free cash flow also supports high single-digit annual dividend increases. 59-year track record. The company has never generated stronger free cash flow. As Michael said, it's hard for us to envision a scenario where we wouldn't increase our dividend by a meaningful amount on an annual basis. And in terms of the most resilient and reliable dynamic, proven business model delivers best-in-class performance in any environment. We have a diversified high-quality business portfolio that buffers macro risk and volatility as we talked about. We've got mid-20s going to 30% margin cushion and a fortress balance sheet that allows us the ability to consistently execute and invest through the ups and downs of the business cycle, which we think is a tremendous competitive advantage as we go forward. And at the core of it all, we've got our track record of do-what-we-say execution. Now as we have proven over the last decade, I think ITW is an industrial company unlike any other. We have a unique set of powerful differentiating competitive advantages. This is now a company built to deliver consistent high-quality performance in any environment. And that generates the compounding value in terms of ITW's ability to deliver consistent, high-quality performance year in and year out in whatever environment comes our way. Now let's be clear, this is a quality of growth strategy, not a quantity of growth strategy. ITW, over the next 7 years, will not be the fastest-growing company in the industrial segment, we don't have to be, as Michael showed you in our TSR model. Our focus is on generating consistent high-quality growth, not maximizing the quantity of growth that we generate. And it's probably true that ITW will never be at the top of the TSR curve in the industrial space in any 1- to 3-year performance cycle. Those performance dimensions in terms of shorter-term TSR are much more dominated by sort of where a particular company is in the macro cycle and who's got tailwind and who's got headwind in certain -- in the end markets they cover. And look, we're in 7 businesses. So we're always going to have some ups and some downs. And the other driver of shorter-term TSR is, frankly, you got companies that tend to underperform for a while that get their act together. But from a long-term 7- to 10-year performance basis, there's not an industrial company on the planet, we believe, that is better positioned to deliver consistent year in and year out performance in whatever environment comes our way in over a 7- to 10-year period that's going to generate top-tier TSR. And so that's where we're going. That's where we're focused on delivering in the future. Thank you for your attention. I thank my colleagues for the excellent job in their presentations. Let's take a 15-minute break. Come back at about quarter 2 -- quarter after, sorry, and we will be happy to take your Q&A, talk about whatever you want to talk about. Thank you. [break]

Hi, we're going to get started with the Q&A session. So I would just -- we're going to have a couple of people with microphones. I would just ask that you wait for the microphone to show up so our webcast people can follow along. And we appreciate if you just introduce yourself and your firm, okay? So...

This is Tami Zakaria from JPMorgan. So 2 quick questions. The bridge from 2023 operating margin of 25% to about 30% by 2030. So the 5% increase over 7 years, should we think about that as sort of a steady 70 bps growth per year? Or is it more back-end loaded, front-end loaded? I guess, what would be the cadence of that?

I'd say it's maybe because of the price/cost margin recovery that we've talked about before, it's maybe a little more front-end loaded. But the primary driver here is the 4% plus organic growth at our 35% to 40% incremental margins, which includes a healthy dose of enterprise initiatives still continuing to contribute as we go forward.

Got it. And the other question is, do you -- I saw in the Food Equipment segment presentation was very impressive. Do you currently service the food processing industry? If not, is that an opportunity going forward?

We don't currently service the food processing industry. It's something that we did look at. And it's not an industry we play because it's generally more project oriented. And what we found is that it's not an area where we're able to get best use of our business model, so we specifically stayed away from it as a result.

Julian Mitchell at Barclays. Maybe just a first question around the margin goal again. You had that target for this year in sort of 28-ish range. It looks like you're doing about 25%. So maybe just help us understand kind of the learnings of -- what were the drivers of that? What it shortfall or delta, let's say? And then what are the sort of the catch-up factors from here that get you sort of easy run towards that 30%?

Well, that's a very easy answer. The delta is 250 basis points of price/cost margin impact that we are just starting to recover now. So that's the delta. So if you -- midpoint of our guidance this year is 25%. If you -- if we had not had price/cost margin impact, we'd be at 27.5%, 28%. So that's the...

And I'm a little hurt by calling it a shortfall. What we don't know...

it's the delta -- the delta given it's the best-in-class margins by anyway.

Okay. And then just a quick follow-up on the sort of around, I guess, the M&A element. I suppose you signaled a greater M&A appetite a few years ago. It's been hard to find acquisitions that are attractive, most industrial companies have been punished for M&A of any scale in recent years. So how do you see that environment right now? And when you're thinking about your M&A, what gives you that confidence around the ability to integrate, say, several deals in the space of 2 or 3 years, given there hasn't been that much activity since 2012?

Well, I'd say a couple of things, and then I'll also let these gentlemen weigh in. But I think from the standpoint of where they fit, I think we have -- and several of our presenters mentioned that there is a big opportunity cost. So we have to really love something. So our aperture is wide open in terms of our appetite for wanting to do them, but the qualifiers are, it's a pretty narrow band. And I think that ultimately serves us well. The opportunity cost is everything we invest in integrating, and I'm talking about not necessarily the capital, but all the management time, effort and energy that we invest in an acquisition is, by definition, almost a take away from our focus on organic growth. It's a fixed pie. So this idea of we're only going to sort of do M&A where it really is contributory to our long-term strategy, our ability to support -- I think I lost the mic here. And I think without -- and we've done 2 really nice ones in the last probably 10, right, in terms of the EF&C in automotive and then MTS. And that was with all this other stuff going on. So I would say that the incremental delta is we do have a little bit more time given that we're focused just on the growth agenda going forward, but it doesn't lower the bar in terms of the qualifiers, right? So we've got more ability to focus on evaluating them, certainly integrating them than maybe we did when we were heavy BSS and working on the business model. The other thing I'd say is the integration formula, what's really compelling now from my standpoint is what we do when we integrate is exactly what we do in all 84 divisions every day. We're applying the business model. And so it's not -- it used to be its own kind of rigor now. It's embedded in really how we operate the company. It's a different set of issues we're dealing with, starting at 8% than our businesses are today, but the basic frameworks and methodologies apply.

It's Jeff Sprague at Vertical Research. Just coming back to the growth. First, just wondering on the end market growth. You kind of put all your businesses at 1% to 2%. And I just kind of wonder if that's what you really think is there an effort to maybe blend that higher maybe a low-growth market is interesting because you think you can gain share there and the competition is not as good. But that's kind of question on really that end market growth.

Yes. And I would say it's a blended number across a segment of divisions. So within that segment, you're going to see more opportunities depending on the division. But we're also being a bit conservative in terms of that's the long-term kind of market growth for our businesses that we've seen, and we wouldn't expect -- if it's better than that, that's great. it it's worse than that, we'll react accordingly.

And maybe if I could add to that. We don't manage the company's portfolio from an outside in perspective in that we're not chasing sort of megatrend or large growth. All we want to -- all we need is GDP plus growth in an industry, and it's more important from our standpoint that you can see that growth out 5, 10, 15 years, then we're looking to juice the growth rate because we're into growthier segments because those segments tend to move -- first of all, some of those growth year assumptions don't play out. Second of all, those only last for a while. And our business model takes us 5 years to get this stuff in, in any substantive way. So things like Welding, Test & Measurement, nobody thinks those are mega trend businesses, but those are phenomenal businesses for us because what they do is hard to do. And so I think part of the 1% to 2% for every segment is just a conservative assumption that says, we're not really managing for relative growth rate across these segments.

May be higher not the main driver of our growth.

So maybe the second part goes to what you are managing then. Can you maybe just draw a little bit more distinction for us on how you would kind of distinguish between penetration and share in the CVI growth? And how do you even know there are different things? How do you measure it?

Yes, it's more of a question of timing, I would say, Jeff. So we in terms of how we book at our growth, so we typically think of CBI as revenues kind of recognized in the first 3 years following the development of a product. That then those revenues get bucketed basically in market penetration, i.e., share gain. So it's more of a timing issue than anything else.

They're not new forever.

It's Joe Dea at Wells Fargo. I wanted to ask on price/cost and recovery of that. So you talked about the 250 bps. I think maybe half of that you get back this year. I think auto is the biggest concentration of it. I saw it right, I think the auto bridge maybe had 100 to 200 bps of recovery in sort of the medium term. So you wouldn't be getting all of that back in the framework. And can you sort of talk about kind of your approach to doing that, maybe why you wouldn't get all that back?

Yes. In Auto, we choose to get it back as is evidenced in the bridge. Some of it certainly is price cost recovery. But in auto, a way that we've always managed to get price innovation, So Innovation is always going to be a natural component of being able to recover margins there. Obviously, we've got the operating leverage on the basis that for all particular geographies, we are going to see a $7 million or $8 million increase in car builds between now and 2020.

Unit volume.

Unit volume. Sorry, between now and 2027. So right there, we got the leverage as well. So yes. So in auto, it's going to be a combination, some price cost recovery from pricing. CBI, which has always been a contributor to margin, enterprise initiatives, of course, and then operating leverage on the basis of an expected recover about 3% CAGR in our car builds over the next 4 or 5 years.

I would just add, embedded in that assumption that you saw on the slide is that raw materials stay where they are, right? So to the extent that we're starting to see deflation in some of these commodities that the price/cost margin gap is going to be more favorable to us. But the assumption in this margin improvement is the costs kind of stay where they are.

And then I wanted to circle back on the megatrends comment because you don't really talk about them as a driver, but when you think about something like welding measurement, what are you seeing out there? And is there evidence of these trends that you're seeing sort of growth tailwinds. If you could describe maybe what inning we're in, I mean.

In terms of what?

Sounds like the biggest one.

Say that again.

Near shoring, I would think as maybe one of the biggest ones. But just any evidence to you that there's some distinction between that and normal market growth.

Well, I guess I have a bit of a hard time answering that is I think there's always puts and takes in these industries. So offshoring is certainly helping domestically, but it's not helping us internationally or global. And there are -- I think the way I would describe the critical characteristics for us, again, is these are industries that are embedded in the fabric of large global economies. They are doing value-added. What they're able to do is hard to do. I think it's more in this 3-year period, something like that might affect welding more than it won't, but there'll be something else that will either be pro or cons. There's a lot of puts and takes given the diversity of the portfolio. So I think for us -- I think we have a there doesn't add a lot of value in terms of trying to outguess where these markets are going when you're a read-and-react company. I want -- we want scale, $20 billion global markets. We're a small piece. We're not depending on megatrend. That's part of that conservative 1% to 2% market assumption. We're going to generate our own growth through innovation, through penetration to really outdeliver our quality, and that stuff will help or hurt as it goes. That maybe sounds a little -- I don't know what sort of unvisionary, but it really is the reality of what works with our business model. right? We study and follow and get really close to our customers. And wherever they need to go next, we help them get there, and that's the formula.

Jamie Cook, Credit Suisse. Back to the M&A again, when you're thinking about M&A, it's still just about sort of the organic growth and where the margins and returns of the business can go over time. Or is there an opportunity to rebalance the portfolio, whether it be consumer versus industrial short cycle versus long cycle? That's my first question. And then my second question, back to Julian on M&A, again, acquisitions, you've done some good ones, but they've been less than people elected. Are we casting a wider net in terms of the type of businesses that we're looking at, whether it be a certain end market or the opportunity to add another leg?

Well, I'll take a stab and then you guys can jump in. But from the standpoint of sort of managing the shape of the portfolio, we don't believe that that's a critical factor. We generate enough margin and cash flow that the consumable versus capital good, the -- none of that really is a factor. We want to set up in great businesses and grow in those businesses and whether in all these -- as long as all 7 of our segments have this basic raw material, there's no advantage to us to try to balance cyclicality out. We already get that from the portfolio. There's no advantage in terms of do we make more in consumables than we do in capital goods. The answer is we make a lot of money in both. So it's really -- it's not really productive time for us in terms of trying to sort of again think our end markets are trying to get too cute because what looks good today in terms of portfolio structure look so good in 4 or 5 years. And it's -- you see it happen before. People go all in on these certain expectations of the future and they never work out the same. So I think the methodology we have which is setting ourselves up in the most profitable evaluated components of industries that are going to be around for a long time, it seems to be the right path for us. On the M&A side, what was the second one, I'm sorry?

Just one to check [indiscernible], whether it's end market.

Yes. So that one -- my answer to this may scare you and I don't want to do that. But our approach to M&A has always been opportunistic, which basically means we're going to look at businesses that are for sale, and we'll evaluate them. We didn't decide we wanted to be in the welding business. We got into the welding business because we got to look at a great business similar to electric. Same is true of test and measurement. We've tried some of that stuff before it's just not productive. We're never going to find something before somebody else does. So trying to find water filtration or whatever the hot thing is, and it's -- and we're not making a big bet in terms of the way that Chris described, we do it, right, a $300 million entry acquisition, Look, we get in there, we decide we like it. We want to scale it. That's great like we did with welding or T&M. But the worst case is we drive the margins up, and then we get back out of it if we don't like it. So we're much more, I would say, strategically opportunistic in the M&A space than sort of out there with our feelers trying to look for things because it just works with us.

My name is Scott. I'm the less successful, but better looking Guys, you went from 800 divisions to 84. 84 still sounds like a lot, but I don't do what you do. Does that 84 go to something simpler? Or is there a further opportunity for simplification?

If it does, Scott, it's because it happens by nature. It's not being mandated by us. I mean, 84% is not a number that we picked basically right there on the basis of what's the right level of scale. We acknowledge that we need to scale up the company, right? We were always going to be a decentralized company, but we need to scale up the company because to implement the enterprise strategy, we implemented with 800 businesses would have been absolutely impossible. So it's the right number that basically acknowledges we'll always be a decentralized company, and the advantages that, that brings us balance with a level of scale that we can implement a strategy like this. So 8 is an outcome. It shouldn't change very much from there, but if it does, it will be for a good reason, I would say.

Okay. And then on M&A, and it's a little theoretical, but have you found at least in your 10 years, Scott, in particular, that 80/20 works particularly well with certain types of assets where you would have a competitive advantage in when everybody's deal models tend to kind of look the same at the end of the day, is what I'm told by most bankers. But is there a certain type of asset that seems to fit particularly well with what you guys do?

I mean outside of the criteria that Michael and Chris, probably not. We've got to have -- in the end, we've got -- it's got to be in a market where we can differentiate, where customers want will pay for product performance over what's the cheapest, there enough is good enough and how cheap can I buy it? I think that's back to that 12% versus 2% argument versus 2% industry, 12% return or 25% return on a 15% industry. So differentiated industries tend to be higher return over. We can get the same incremental performance and either using 80/20, the issue is the bang for the buck. It takes the same effort, the same amount of capital, all that stuff. So why -- it's obvious to say we'd rather be the 25, work on the 25% potential business than the 12. We used to think we had -- there were differences between capital goods sort of versus our consumable businesses. I think we've dispelled all of those differences in terms of our experiences Geographically, we're agnostic. We used to think you can't make as much money in Europe or China. We make the same money all over the world. And so I think it comes down to the -- nothing different than the fundamental characteristics that Michael and Chris laid out.

Cliff Ransom. You guys have helped me over the last 25 years. I understand culture and process. So if I ask a couple of numbers-related questions, please don't get nervous. Michael, I may have heard you wrong, but on all your slides, you talked about 35% plus ROIC. At one point you said 40% plus. Was that a slip of the tongue? Or is that a number that we should take on?

That was not as slip of the tongue. That was very deliberate. So what I was trying to say, Cliff, is the core business, ex acquisitions is headed to 40%-plus return on capital by 2030. If you layer in acquisitions, that's the 35 number. And I would just reiterate, those are not targets. They are pure mathematical outcomes of how we allocate capital and how we run this business.

Okay. And then given your business models, I don't know how to ask this question politely, why should we believe that you have 35% to 40% incremental margins? I would have thought it'd be much higher.

Because of the reinvestment rate.

Well, not a lot of that goes to buyback and dividend.

No, no, reinvestment rate in the business in terms of overhead growth.

I'm sorry. Would you say that again?

Reinvestment in our business overhead to support growth.