Welcome, and thank you for joining ITW's 2018 Fourth Quarter Earnings Call. My name is Sheryl, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Please note, today's conference is being recorded. I will now turn the call over to Karen Fletcher, Vice President of Investor Relations. You may begin.

Thank you, Sheryl. Good morning, everyone, and welcome to ITW's fourth quarter 2018 conference call. I'm joined by our Chairman and CEO, Scott Santi; along with Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss fourth quarter and full-year 2018 financial results and we will update you on our 2019 outlook. Slide 2 is a reminder that this presentation contains our financial forecast for the first quarter and full-year 2019, as well as other forward-looking statements identified on this slide. We refer you to the Company's 2017 Form 10-K and subsequently filed Form 10-Qs for more detail about important risks that could cause actual results to differ materially from our expectations. Also, this presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release. As a reminder, in 2017, we disclosed $95 million favorable legal settlement and recorded one-time tax charge in the fourth quarter. Therefore, we provided you with two tables on Slides 3 and 4 that summarize key financial measures for fourth quarter and full-year on a GAAP basis, as well as on an adjusted basis excluding the legal settlement and tax charge. For the rest of this conference call, our comments and variances exclude these two one-time times from 2017. So with that, we can move to Slide 5, and I will now turn the call over to our Chairman and CEO, Scott Santi.

Thanks, Karen, and good morning, everyone. Greetings from the epicenter of the polar vortex. In the fourth quarter, the ITW team delivered solid earnings growth and margin expansion. Fourth quarter EPS was in line with the midpoint of our guidance and increased 8%, 10% excluding currency with operating margin up 70 basis points to 24%, and after-tax return on invested capital up 320 basis points to over 27%. For the full-year, the ITW team delivered high-quality earnings growth of 15%, record operating income, record operating margin, and record return on invested capital. Free cash flow was up 10%, and we invested over $600 million in our businesses for growth and productivity. In addition, we returned more than $3 billion to shareholders in the form of dividends and share repurchases. Throughout 2018, we continue to make significant progress on the execution of our enterprise strategy, as evidenced by 110 basis points of margin improvement from our Enterprise Initiatives over the course of the year. We made really good progress on organic growth acceleration in better than half of our operating divisions. As we discussed in our Investor Day back in December, our focus now is on getting the other 36 of our divisions that are not yet growing to their potential, moving more briskly down that path. And it's a major focus for us in the next couple of years. There's no doubt that 2018 had its challenges, raw material cost inflation, tariff uncertainties, decelerating auto production and currency headwinds in the back half of the year. Our ability to power through these challenges and deliver another year of record results, as evidence of the performance power of the ITW business model and the resilience of our high-quality diversified business portfolio. As we head into 2019, I'm confident that we are well positioned to deliver another year of meaningful progress down the path to ITW's full potential and to our 2023 performance goal. Before I turn the call over to Michael, let me conclude by recognizing and thanking my ITW colleagues around the world for the great job that they continue to do in serving our customers and executing our strategy with excellence. Michael, over to you.

Thanks, Scott, and good morning. Let's stay on Slide 5 and recap a few more highlights for the fourth quarter. GAAP EPS was $1.83, an increase of 8% as we managed through some international end markets softness in two segments: the solid execution and delivered earnings per share at the midpoint of our guidance. Organic revenue was up 1%, with solid 4% growth in North America, offset by a 2% decline in international markets. I'll provide some additional color on what we saw in North America and international markets in a couple of minutes. PLS was 90 basis points this quarter, a little bit above our full-year rate of 70 basis points. Operating margin performance was solid as margins improved 70 basis points, with 110 basis points from Enterprise Initiatives, lower price/cost margin dilution headwind. Finally, free cash flow increased 18% to $727 million, 120% of net income and we repurchased $500 million of our shares in the quarter. Moving to Slide 6 for detail on fourth quarter operating margin. We've expanded operating margin every quarter this year and the fourth quarter was no different. In fact, we did better than last quarter, with 70 basis points of improvement year-over-year versus 30 basis points in Q3. All year, our teams have continued to execute well in Enterprise Initiatives, consistently contributing 100 basis points or more of margin improvement every quarter. And the impact is broad-based. In the fourth quarter, Enterprise Initiatives benefits ranged from 80 basis points to 120 basis points across each one of our seven segments. As I mentioned, price/cost margin dilution improved, narrowing from 70 basis points in the second quarter to 60 basis points in the third quarter, and now 40 basis points in the fourth quarter. Throughout the year, we continue to take decisive pricing…

Okay. Thanks, Michael. Sheryl, let's open up the lines for questions.

Thank you. Our first question comes from Andy Casey from Wells Fargo Securities. Your line is open.

Thanks a lot. Good morning, everybody.

Good morning.

Your guidance is pretty interesting. It looks like topline is more or less consistent with a bear case on the stock, but the bottom line guide is what you said back in December. So a couple of questions on the backend loaded nature of what you just presented. First, why is price/cost negative 50 bps for the year, given pricing momentum is carrying over? And from the outside, it looks like you're looking at apparent decreases in some of your raw material input costs and then within that, do you expect price/cost to improve through the year?

Yes. Andy, price/cost was negative 50 basis points from a margin standpoint in 2018 and we're not providing a number for 2019 primarily because it's still a pretty dynamic environment in terms of raw materials as well as potential tariffs. That said, what you are saying is correct. I mean it is reasonable to assume based on what we know today in terms of the price actions we've taken, the expected raw material costs, the tariffs including the increase in March from 10% to 25% that may or may not happen. It is reasonable to assume that we will continue to make progress on price/cost from a margin standpoint in 2019 and certainly, we will continue to be positive on a dollar-for-dollar basis to a degree that’s significantly higher actually that what we saw in 2018. So I hope that answers your question.

It does. And if I can also follow-up on something else, Michael, thank you for that. In your commentary around the first half versus second half, Q1 midpoint implies about 6% earnings decline year-over-year, but the rest of the year is up around 9%. It sound pretty confident that in assuming the current run rate. Is a majority of that confidence really related to the pull ahead of the seven out of 10 for restructuring in the year into Q2? And basically, is that the big part of your confidence?

Yes. I think what we're pulling forward, the restructuring obviously has a pretty big impact here in Q1 of $0.07. Some of those benefits will start to show up in the back end of the year. Many of these projects have one-year payback or better in many cases. In addition to the higher restructuring, currency is more of a headwind in Q1, the tax rate is a headwind. And then we do have one less shipping day as I mentioned in Q1. And so…

That we get back in Q3.

That we get back in Q3. So that's why the year looks a little different relative to what you're used to from ITW, but there is some really good reasons behind that. And when you pencil it all out, you can get comfortable. We certainly are comfortable and very confident in our ability to deliver on the guidance that we are providing today.

Okay. Sounds good. Thank you very much.

Sure.

Thank you. Our next question comes from Jeffrey Sprague, Vertical Research. Your line is open.

Thank you. Good morning, everyone.

Good morning.

Good morning. I wonder if I can just dig into a couple of segment level detail questions. First on automotive and the whole emissions, WLTC had a logjam in Europe. Your view that it doesn't really sort itself up in the second half, is that kind of a well grounded in what you're hearing from the OEMs? Or is that really kind of just kind of caution on the chaos we've seen up to this point and it's just kind of hard to predict how things play out there?

I think it's a little bit of both, but more of the latter. I want to be careful how I say this, but I think the information has, in terms of direct customer, that's been a little bit up and down just because I think it's a fairly fluid situation. But I think our posture from a planning standpoint, we believe is definitely on the conservative side and just to be clear, we're saying that things start to mitigate in the back half of normalized, but certainly aren't all the way corrected probably and it will begin with some elements of this all the way through the year is our current view.

Okay. And just on the Construction side. I'm sorry, can you elaborate on what drove the commercial weakness in North America and the U.S.? And is there kind of visibility on the recovery plan there?

Yes, there is. So it's a fairly small part of our overall business in North America. Part of what we do is we provide concrete solutions for warehouse flooring. And we had a number of projects that we're scheduled to go in Q4 that pushed out to 2019, so it's just primarily a timing issue more than a commentary on what's going on in the commercial construction space.

And maybe just one other really quick follow-up. Do you have some additional restructuring kind of on-the-shelf, for lack of a better term, if kind of the macro environment does begin to pick it on as soon as 2019 unfolds?

Well, I would say, we normally operate with a fair degree of contingency planning around our plans, whether that's within a particular segment or at the overall company level. We certainly have the flexibility to make adjustments as we're talking about here related to auto and specialty in the near term. And that's been sort of normal practice for the company for quite a long time. So should things in terms of sort of external and macro environment play out differently than what we're anticipating now, and again, I think we're taking a pretty conservative posture in terms of our planning approach here. And absolutely, we would expect to be able to adjust to that and do it in a relatively short order. As I said, we have a pretty flexible cost structure given how we operate to maybe 2020. So we could certainly make those adjustments within the quarter or two.

Great. Appreciate the perspective. Thank you.

Thank you. Our next question comes from Jamie Cook, Credit Suisse. Your line is open.

Hi, good morning. First, I just wanted to better understand if we think about what – your preliminary guide at the Analyst Meeting, the EPS is the same as it is today. Basically, reaffirmed it, but your organic growth assumption is 1 point worse. I don't recall of the restructuring number was in there and also FX seems to be more of a headwind. So can you just sort of help me understand what's offsetting those headwinds relative to what you guys said at the Analyst Day? And then my second question is just with regards to the organic growth, the 2% for this year. One would argue in 2018 where the economy was relatively strong. You guys put up the same level of organic growth. So just comfort level on you can put together – or you can put up another 2% organic growth in a tougher macro. Thank you.

Yes. So let me start with the first part, which is a very fair question, in terms of the organic growth guide today being lower than what we guided in December. Really on the back of being more conservative around automotive builds as well as factoring in the latest view on the semiconductor-related end markets. As we've gone through these last few months here, we really firmed up our views in terms of the enterprise savings from – Enterprise Initiatives to specific projects and activities that will deliver 100 basis points of margin improvement as well as other discretionary cost items. And so that's really what's driving the majority of our confidence and ability to maintain the EPS number. In addition to that, I would say, although I'm cautious on this, given what we saw in 2018 as the price/cost headwinds are certainly looking more favorable today than at the end of last year. And then just to be precise, restructuring, I think, that we had in our guidance in December is the same number as today. And so that number has not changed. I think the second part, if I remember correctly, was around our ability – confidence to deliver 1% to 3% organic growth this year similar to last year. And I'll go back to how we modeled this, which is basically based on current run rates, adjusted for seasonality, and if you run that out for the year, with the adjustments we made in auto and specialty, you get to a range of 1% to 3% organic growth. We provided a little more detail on the last slide, Slide 14, in the deck. You can see how it kind of pencils out by segment. And again, these are based on current run rates, risk-adjusted on a couple of areas, and in our view, pretty cautious and conservative view overall.

I guess, so just given the account of the weaker macro, there are certain segments where you are assuming that your market share is above average and that sort of helps the organic growth? I mean, can you talk about Construction little? I'm not sure if market share is contributing more, I mean, relative to just overall whatever macro? Thanks.

Yes. I think Construction, there's significant new product launches on the docket for this year. I'd say in addition to that, I wouldn't underestimate the impact of price this year relative to 2018. And so if you add all that up, these are the numbers that make up the guidance by segment and 1% to 3% in total.

Okay, thank you. I’ll get back in queue.

Sure.

Thank you. Our next question comes from Andrew Kaplowitz, Citibank. Go ahead, your line in open.

Hear me okay?

Yes. We got you.

Yes. So Scott or Mike obviously ITW's is relatively strong in Europe, and you did mention that Europe would be up a couple of percent instead of down if it weren't for your issues in auto. And Specialty Products, so maybe give us a little more color regarding what’s going on in Europe. Construction actually looks like strong for you, guys, given the environment there. And so and what's the outlook here as we go through 2019 in Europe?

Yes, I think the issues on the international side are really isolated to the two segments we talked about. I think the other five segments are doing pretty well across the Board. If you just look at the fourth quarter, certainly, auto, specialty were down, but we put up some really good numbers in Europe. Construction overall was up 6%. Welding, up 7%. Food, up 3%. We've not seen a big impact from Brexit or the U.K. Those markets are pretty stable. So we feel pretty confident going into 2019 in terms of modeling current run rates in that geography.

You just may be – yes, just another data point is, and if you net – if you look at our European sales in Q3 and Q4 net of auto and specialty, it was plus 3 in Q3 and plus 2 in Q4, so we're certainly not – which feels pretty stable to us not – the 3% to 2% I don’t know, we're certainly not calling that a trend. But sort of down single-digit is pretty sold.

Yes. Okay, that’s helpful guys. And then a couple of businesses that have been somewhat lethargic over the last couple of quarters, they looked like they kicked up a little bit here in this past quarter. If I look at Polymers & Fluids and you mentioned that new product intro and auto aftermarket. And then with include equipment that you mentioned retail reconfiguration turning around. Do these businesses have some sustaining power here going forward? In other words, are you seeing a little bit more CapEx from grocery stores, for instance, in Food Equipment and does this new product rollout in auto aftermarket? Does that give you continuing growth in the segment for the next few quarters?

Yes. I’d say Andy that Food Equipment certainly feels very good. I think the acceleration really started in the second half. The strength is broad-based. On the equipment side, service put up a pretty good number here as well. On the retail side, just to be clear, we're not seeing a pickup in terms of the CapEx spend on the grocery side. Really, what we're seeing is, these are flat to up slightly on a year-over-year basis as we lapped a more difficult comps. But all the benefits that we expected in terms of new product introductions, certainly, we're seeing though in the second half of the year and we expect those to continue into 2019. So Food Equipment, let say, 3% to 5% feels very good for 2019. Polymers & Fluids, we did benefit from a new product launch in automotive aftermarket. I hesitate to say this, but we’re a beneficiary also of some weather-related impact in terms of Rain-X wiper blades. And so that part of the business was up 7% overall. That is not a sustainable rate for the full-year, obviously. But I'd say also in Polymers, you're seeing some good progress there in terms of the overall organic growth rate. And like I mentioned earlier, you are seeing the impact of price. So certainly some good progress in those two segments and we should expect to continue to see that in 2019 as reflected in the segment outlook we gave you on Page 14.

Appreciated guys.

Thank you. Our next question comes from Mig Dobre from Baird. Your line is open.

Yes. Good morning, guys. So I want to stick with Food Equipment here. I mean, 3% to 5% growth this would probably be the best growth since 2014, 2015, that time range. And I wanted to make sure that I understand kind of what the moving pieces are here. Retail, you said, feels a little bit better, but it's mostly a factor of comps. So I'm not sure how much you're really expecting this business to grow. Institutional, you mentioned, was quite good, so maybe you can talk a little bit about the momentum into 2019? I'm also wondering just your restaurant business, so I think that's pretty meaningful as well. How that's doing international as well as North America?

Yes, Mig. So the demand we saw really here in Q3, Q4 was broad-based. So we talked specifically about food service, which is everything excluding the retail side, being up 11%. Retail turned positive in the no single-digits. We're not counting on a big pickup in retail in 2019 and it's not that significant portion of our overall business. We continue to see a lot of strengths on the institutional side, up double-digits. And again, there are a couple of categories here, really, around education, so K12, universities as well as lodging. And on the restaurant side also, double-digit growth, including which for us is a smaller part of the business on the QSR side. International is solid, up 3%. Certainly feel good about the momentum going into 2019. And just Q4 was best growth rate I think in over four years here. So new product introductions are really taking off and we feel we're very pleased with the progress we're making in Food Equivalent.

Got it. That’s helpful. And then sort of going back to the big picture topline guidance, so if you're starting the year flat in Q1 and you're guiding on current levels of TAM, and your comp is getting tougher in Q2 by at least 100 basis points. Should we have expectations for an organic decline in Q2, and then acceleration in the second half on easier comps? Is that how we should be thinking about it?

So Mig, you should definitely think about it as just given the comps higher growth rates in the back half of the year than in the first half. If you just go back and look at 2018, I think in 2018, we were up 3% organic rounding in the first half were up 1% in the second half. That alone is driving some of the higher growth rates, both in terms of organic as well as well as earnings growth. So really the swings you're going to see are really a function of what the comps are on a year-over-year basis. Those are the big drivers. Again, there's no demand acceleration assumed here on the contrary, if anything, we've dialed it back in certainly in auto as well as semi, which we talked about earlier.

But there is not something on the products side or – I don’t know something it based on some of the visibility that you might have that would be able to maybe reassure us that you'd be able to cross the tougher comp in Q2 versus Q1?

There is typical every year, new products contribute…

And we are not managed for the quarter. The quarterly plans, we'll give you a Q2 update when we get there. Our expectation is, again, as Michael said, were recent current demand levels and projecting them through the year. I'm – if you look at Q2 this was a full-year in a Q1 number. I don't recall exactly what the Q2 organic growth rate is embedded in our plan if we had it, and so I think…

No, I appreciate it. I was just trying to make sure that we have already much better line what you guys are thinking. That’s it?

I think the math is – there's nothing funny in the math here. This is really straightforward, as Michael said, if anything have to dialed back relative to current demand rates in a couple of areas where we think there's some potential risks. We're not seeing that it's going to play out that way. I think overall, that's a smart and prudent approach in terms of our planning. And it also highlights the fact that we've got a lot of earnings growth power from the same point of Enterprise Initiatives and other things going on underneath that's not vulnerable to some further erosion in auto, if things play out. And ultimately, we've got to plan where we believe there's more upside potential than downside. That's why we always plan and that's really what were, I think, embedded in the approach we've taken in terms of taken the organic growth rate down a percent relative to where we were in December.

Got it. Thank you, guys. Appreciate it.

Thank you. Our next question comes from John Inch, Gordon Haskett. Your line is open.

Thanks. Good morning, everybody.

Good morning.

Hi, Michael. So wondering if there's kind of an update on the divestitures that you plan for this year? And just as kind of to that, Michael, if we were actually to have taken the 2019 divestitures that you've got out and best of them at the beginning of the year, kind of pro forma, would that have any material impact on the 1% to 3% core growth that you're just betting for 2019?

Yes. So as that's a very good question. So the impact is these potential divestitures all happen is an improvement in our organic growth rate of about 50 basis points and improvement in our operating margins by 100 basis points. So that would – assuming that all of those take place this year, that's what we would expect to see in 2020. I think that's a fairly optimistic assumption. I think we're certainly making good progress, and I think a more reasonable planning assumption would be maybe half of them get done this year. But none of that is included in the numbers today. So certainly you see some slightly lower revenues to the effect that if EPS dilution, you'll see higher share repurchases to offset that, so that they are EPS-neutral. There are going to be some gains on some of these potential divestitures. Those are also not included, but on pro forma basis, it's a meaningful impact. And we are making good progress.

If there's some reason you couldn't – I know you said half, but it's not a bad point, right? But to some reason, if you start to get a cadence going because I'm assuming you're not doing them sequentially one after another, you got kind have booked out more than one. I mean, why couldn’t these things hit sooner? Is it just – I guess I don't really understand why it – there's not a lot of companies like why couldn't we get most of this done in 2019?

I will pass that on to the steering committee in charge of the divestiture activities, John. We prioritized in terms of the biggest impact of the company. We’re going to try to get those done first. We’re not in a rush here. We’re going to be very liberate and thoughtful in terms of how we execute of this and maximizing the value for the company and so…

I'll just quibble a little bit with your perspective in terms of there – there is a decent amount of work involved in each one in terms of preparing to separate from ITW and all the things we need to do to…

Yes, I look in the ivory tower, so I guess.

I don't want to go to that part, John, but I was just – I think we've got a good cadence, we've got good plans that we are finalizing now in terms of being very deliberate and intentional how bad – how we go bad if as Michael said, I think the reality of it is probably a two-year process to move all the way through maybe. And of course, everything that we can do to make it happen faster, we will certainly do that. But at this point, we also are not – that's not the number one priority right now. So would everything else that we are trying to work on and make progress there.

And just sort on the polymers business, I know Michael, you called out the auto aftermarket likely not to see that cadence, that make sense. Was there any kind of a pre-buy in that business maybe associated with getting ahead of some cost increases or price increases? That’s also potentially contributing to the 1% to 3% kind of slight acceleration?

John, we did not see that in Polymers & Fluids. And actually, in any of our other segments as we went through the fourth quarter here. The quarter played out as it usually does on a monthly basis. There's really nothing unusual, as we went through the quarter, including in Polymers & Fluids.

The other question I had is oil and gas prices have come down obviously, since the December meeting. I know we're talking about raw increases, but I was wondering about the indirect impact or even direct impact of those hydrocarbon pricings coming down? I realize you buy a lot of metals, like, in metals derivatives. But is there possibly some sort of once we get the impact of this, is there some sort of potential net tailwind that kind of begins to accrue to you later this year or something?

Eventually, the answer is yes. I don’t know whether that will be end of this year or not. I mean there is certainly a tailwind today on a dollar-for-dollar basis, as I said earlier, while raw material costs increases – just carryover from last year is still pretty significant number in 2019. Its leg than 2018 and we are certainly significantly ahead on a dollar-for-dollar basis. So with the standard, it is providing some tailwind here.

Got it. One last one, I mean company is used to talk about – I think they still do selectively kind of these cost pressures that are embodied by wages. If you just focus on the U.S., what's actually happening to your U.S. wage costs given – what appeared to be tight employment markets? I mean, our wages going up materially in 2019 I don’t remember if you call back out, materially 2019 versus 2018. Is that any kind of the factor here?

We have not – I think there would be – from the standpoint of aggregate, North American wages. I am summarizing a lot of individual data points, but things are up tens of thousands of points maybe relative to sort of plan increases in prior year, but nothing that I would considered to be material in terms of the impact of the overall company at this point.

Got it, talk it. All right, thanks guys. Appreciated.

Thank you. And our next question comes from Ross Gilardi. You’re line is open.

Hey good morning. Thanks guys. Just on auto, I think you said that you're assuming flat to negative 4% for 2019. Can you give us any type of breakdown by region particular since you were saying that you’re not assuming any acceleration in the second half? I would just think given like what's going on in China right now to get the flat to negative 4% and just the pressures in that end market globally that you would have assume some re-acceleration for now to be down more than that.

Yes. So there is a lot of uncertainty around the numbers that third parties are providing on a geographic basis. I think the best I can tell you is, when we were together in December, the view was is that our auto business will be flat on markets that globally would be down 2% to 3%. We gave that a further risk adjustment here relative to what we said in December. I can't really give you a view by quarter here as the year plays out. I'll give you the actuals, when we get through Q2, Q3 and Q4, but I can't really give you guidance around that.

We got people studied this, like IHS out with a projection of plus 2% on builds on China for the year, plus 1% in North America and I think down a couple – I think certainly, globally they're plus 1%, we’re at 0% to minus 4%. It’s just one data point, but there are people that study this that have – I’ll call it an optimistic view, but I think we're back to them. The comment we are making earlier about making sure that we're appropriately conservative there where there's still some uncertainty, but we're not, I don't think we're on the high side of optimism relative to what most of this, at least third parties that we look at to study this market feel like it's going to go on in 2019. We're on the conservative side of them.

Just on the restructuring, the $0.07 and I think the $0.10 for the year, what is it actually for? I mean, is it headcount related or is it five-year enterprise initiatives? And I think you mentioned before, but where is it again?

So this is primarily focused on rightsizing our footprint in Europe in two businesses, the automotive business as well as the specialty business. And beyond that we typically don't comment on specific restructuring projects.

Okay. But on that, Michael, I mean, you said that, I mean, clearly there's some pressures tied to what you were describing earlier, but it sounded like you thought things were normalizing that you're not losing share and it's kind of a timing issue of when the market actually improves. So why restructure the European auto business if that's the case?

Well, we're just moving faster on some things. We still got an acquisition that we did two years ago that is through the restructuring I would say, is normally – normal part of the integration of that business. It’s a fairly good piece of that. We are accelerating some of that given the environment in this pause and demand, it's a good time to get after some of that. Well there's some things that would have been – we would have gotten to anyway. It’s the easiest way to describe it that I would say we have accelerated into the front-end of the year given the pause and the demand admit. These things are in some ways is better timing if we can get them done when we're not also dealing with some increases in demand. That's probably a better characterization of it.

Okay. Got you.

That's what we're doing.

And just the last one on the Test & Measurement. I mean you guys leaked out 140 basis points of margin expansion with real organic growth in the business in the fourth quarter, which is pretty impressive. But is that type of margin expansion sustainable in the 2019 in a flattish environment for that segment?

I think we still have ways to go in terms of further margin expansion in Test & Measurement and that's based on what the bottoms up, what the team is telling us. What you're really seeing is the impact of the enterprise initiatives in Test & Measurement. And I think it's another data point that supports the view that we have and the confidence that we have in the ability to continue to expand margins in 2019 and beyond as we talked about in December. We believe we have at least another 3 to 4 percentage points of margin expansion ahead of us and Test & Measurement has at least that level of improvement ahead of it in that over the next three to four years.

Okay. Thank you very much.

Thank you. Our next question comes from Joe Ritchie, Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Good morning.

So just on your WLTP comments from earlier, I just wanted to make sure that I understand it. If your platforms are being disproportionately impacted, do you have a sense or line of sight on the approval for those platforms getting through the testing requirements? And shouldn't that just reversed itself at some point in 2019?

Well, it should reverse itself at some point. The answer to your question is we don't have great line of sight because it's a new test and I don't want to speak for the auto OEMs in Europe, but what we're hearing is that there's some uncertainty and some challenges. It's not that it can't be done, it is a new testing procedure and that the backlog involved in getting all of their models through it has been much more of a challenge than perhaps what’s expected. I don't know. I'm not, again, this is where we’ll draw some conclusions over around based on a number of different data points. So my answer to your question is absolutely, it should sort itself out. I think there's still a question of how long it takes to do so. And that's an element of our, let's call it conservatism in terms of our posture around that. There is people are still buying cars in Europe. There's nothing in terms of their consumption data and auto that gives you a whole lot of reason for pause at least to us at this point. It's much more a bad for disruption and the production part relative to the emissions testing regime. And I don't think it's – smooth sailing from here, let's say in terms of how all that plays out. Based on what we hear.

That's fair, Scott. And I guess just a good quick pop follow-up that I had. You guys gave us guidance on the whole growth outlook for Test & Measurement and Electronics. Just wondering, and I know you've got the run rates, but the Electronics business I guess we've been seeing, yes, some softness channel and any color on that business specifically and what do you you're seeing in kind of perspective will be helpful.

Yes, most of our position in the electronic space is really more, I would say, MRO-related. So we're not – with a couple of exceptions, just one in set by we're not sort of upstream in terms of production equipment. So that from our standpoint the electronics has been pretty stable. But it's – but we're able to describe is pretty downstream from the standpoint of where we participate there.

Yes. Clean room.

MRO.

MRO activities.

Not production items. Right.

Thank you. And our next question comes from Ann Duignan. Your line is open.

Hi, good morning.

Good morning.

Most of my questions have been asked. So I just philosophically, I just wanted to ask about the pulling that quarterly guidance. I'm just curious about timing and whether you talked to the fact that, without quarterly guidance probability is that the sale side estimates will be more variable and then you're more likely to miss somebody's expectations and therefore have greater earnings volatility, which actually meant covering multiple on a stopped. So I'm just curious why you chose to stop giving quarterly guidance.

Well, since we haven't missed one in six years, we thought we would try something different. I'm just kidding. I think ultimately we talked a lot of our shareholders, and there's a fair amount of effort and it goes into providing it. There is some philosophical differences around again, what we think the core investor value proposition for ITW which is really around, strength of competitive advantage in the business model, resilience in terms of high quality, diversified portfolio. All of those things are really oriented towards longer time periods of performance. And given all that, I think this is, we felt like we had, I think Michael said in his remarks, it was valuable early in the process given and talk about the enterprise strategy now. And then at this point we progressed far enough words, it's not value added anymore. And the last thing I would say and this will be a little smart key and I don't intend to be, but we listened to your boss. Jamie diamond has told us that. And a lot of companies we should be doing this. I'm just kidding.

Thank you. Our next question comes from Steve Fisher, UBS. Please go ahead. Your line is open.

Thanks. Good morning.

Good morning.

Good morning. Just wanted to follow-up on the oil and gas question more from the revenue side of things? Just wondering to what extent you're seeing any change in momentum in the oil and gas business in the last two or three months or so. And then how that's filtering into your, primarily I guess the 3% to 6% growth in your Welding business.

Yes, our exposure is pretty limited overall to oil and gas. It's primarily on the international side in the Welding business. And we've just started to see a pickup in oil and gas here in Q3 and Q4. We gave you the number here. And we haven't seen any changes over the last couple of months, if that's what you're asking.

Thank you. And our next question comes from Nicole DeBlase, Deutsche Bank. Your line is open.

Yes, thanks. Good morning.

Good morning.

Given that some of the – I guess some of the commentary around why organic growth is a little bit lower for the full-year? Is semiconductor is electronic. I guess I’m curious I don’t think that came up in your commentary within T&M. Are you guys actually starting to see a slowdown in semiconductor spend? Or is it just anticipated to occur throughout 2019?

So we did see a slowdown here in Q4, not entirely on expected. And again it’s in the portion of Test & Measurement that sells equipment for the upfront manufacturing of - in the semiconductor space. And we did see a slowdown here in Q4. In the past, there have been talks about pause, and then a pick up again in the back end of 2019. And we’ve taken all that out and basically assumed current run rate based on what we saw in Q4 and, therefore in our view, appropriately, risk-adjusted for any exposure in semiconductor.

Our next question comes from Nathan Jones from Stifel. Your line is open.

Good morning, everyone.

Good morning.

Couple of follow-ups on the Welding business there, obviously, some good organic growth, but I know that business does sell a lot of steel. So maybe if you could give us some color on what the input is from volumes versus price, in the fourth quarter? And what the pricing tailwind to revenue, at least, is in 2019?

Yes. So Nathan, we do not break out price versus volume at the enterprise level or by segment, including for Welding. So I'm afraid I can’t give you that.

Okay, no worries. Just one on the Construction business that you talked about new product releases on slide for this year. Can you talk about when you expect those to start hitting the market? And any color you could give on the anticipated contribution?

Yes, it’s a pretty long list of new product centered around our cordless technology where ITW is the market leader. They come in throughout the year the various geographies. Typically, the contribution from new products is somewhere in the 1% range in terms of overall revenue growth and we it just based on what’s in the pipeline to be a little bit higher than that in Construction this year.

Thank you. Our next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Hi, good morning guys.

Good morning.

Just a follow-up on, Michael I guess the – part of the answer to your last question that you don't really want to break out price with the enterprise level. But it seems like some of the confidence in the year comes from maybe a bit more price yield and perhaps some commercial initiatives that offsets some of that auto commentary. Is that a fair assessment relative to prior years that you guys just feel like outside of, perhaps, auto that you're carrying a bit more price than usual and able to kind of a hold up, at least any downside scenario?

I don’t know if we really thought about it that the way you’re articulating it. I mean but certainly, like I said earlier, in six out of seven segments, so excluding auto, there's – we've taken pricing actions to offset raw material cost inflation and tariff impact. So to the extent that we'll probably have a little bit more price coming through in 2019 than in 2018 and that certainly helps the overall organic growth rate.

But we offset price every year.

Yes, we get price every year. Maybe a little bit more 2019 and 2018, but it’s not the big driver here.

Thank you. And our next question comes from David Raso, Evercore ISI.

Hi, good morning. I had another question, but just wanted to circle back first on the organic sales guide. I mean just want to make sure that the takeaway is correct. The idea of the first quarter being flat, the second quarter you do expect it to improve. I'm just making sure we are all level set just giving the idea if it's flat in the first quarter, if the second quarter is not at least one or two, it makes the second half obviously a little more of a struggle. So I just want to make sure we level set on that. So if you can give us some perspective. But my real question, food and welding, the food and welding are going to be over 55% in dollar terms of your EBIT growth. I mean, sorry, the organic sales growth. In those businesses, good to see food pickup at least on a year-over-year basis in the fourth quarter. Can you give us any help with a backlog number, an order number, just something kind of looking into 2019 that gives us some perspective of the starting point of growth sort of already booked relative just given their significance to the overall growth for 2019?

I'll answer the second and throw it back to Michael for the first. These are all short cycled businesses from the standpoint of – if we get an order today, we ship it tomorrow. What I can tell you is book-to-bill and both businesses in Q4 was positive. So order rates are at or above shipman rates in Q4. We don't build – these aren't big backlog businesses is my point. These are given the way we deliver. If we get an order today, we ship it tomorrow, we don't build backlog. But it's from the standpoint of just order rates relative to shipment rates in Q4 on both businesses were pretty solid.

Yes. That's where I was going to go with this, welding just grew organically 8%. On a tough comp, there were up 6% in Q4 last year. Food Equipment up 5%, organics have good momentum in those two businesses. In terms of the Q1, Q2 question, without telling you anything new really, I mean we did say that we have one that's shipping day in the first quarter, which lowers our overall organic growth rate by mathematically 1.5%. We do not have that headwind in Q2, so I don't know if that helps you in terms of what Q2 might look like. That’s probably the best I can give you.

Okay. I appreciate it. Just if you do 0%, 2% then it's 3.5%, 2.5%, it feels a little bit better than 0%...

Yes. David, keep in mind that 1.5% in Q1 that mathematically we lose from one less day. We get that back in Q3.

Exactly. I just want to make sure we weren't starting second quarter at one or less, so it just gets more challenging. But I appreciate it. Thank you so much.

Sure.

Thank you.

Okay. Yes, thank you, Sheryl. We've run a bit over. If you have any other questions or follow-up, please reach out to me today and thank you for your time this morning.

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