Joseph O’Dea: Understood. Thank you.
Operator: Your next question comes from the line of Andrew Obin with Bank of America. Your line is open.
Sabrina: Hey, good morning. You have Sabrina Abrams on for Andrew Obin.
Michael Larsen: Hey, Sabrina.
Sabrina: As we think about pricing into 2024, are there any segments or any particular businesses where on the margin you’re seeing more competition and pricing competition as cost moderate?
Michael Larsen: Well, I think, Sabrina, we’ve talked about this before, we want to maintain our price premium based on the quality and the customer service, the lead times that ITW is uniquely positioned to provide, but we also want to compete and we want to gain market share. That’s kind of central to our overall enterprise strategy and the focus I just talked about around organic growth. So that’s said, I think we expect a normal contribution from price here in 2024. These inflation-driven price increases are now behind us. Input cost inflation, that big wave we’ve been dealing with, as we sit here today, we’d say is largely behind us. And so we’re entering into a normal pricing environment across the portfolio. I think that is a fair statement. If you just look at, we’ve now essentially recovered the margin impact from that price costs, the price cost dynamics, and we’re entering into a normal environment in 2024.
Sabrina: Thanks. And then as a follow-up on welding, what is driving the reacceleration in growth there from down 6% in 4Q? And how are you thinking about margins in the segment in 2024 given where you’re exiting the year and the sort of margins you reported in 2023 here?
Christopher O’Herlihy: Well, I think welding, so we’re not counting on a market acceleration, just to be clear. This is if you look at in a normal market environment, just assume for a minute, let’s assume the market is flat. The contribution from new products and normal price very quickly gets you to something in the low-single digits. So I just want to be clear around that. The other thing I’d say, just on the margins. We talked a little about the year-over-year inventory revaluations. That’s what caused the margins to drop in the fourth quarter, below 30%. And we expect that to be back above 30% here in the first quarter as that one-time kind of year-over-year inventory impact is behind us. So we would expect margins to kind of remain in that 30% plus as we go through 2024.
And as I said earlier, that’s not unusual. Every one of our segments told us as part of this bottom up planning process that they are on target to improve their operating margin performance in 2024.
Sabrina: Thanks. I’ll pass it on.
Christopher O’Herlihy: Yes. Thank you.
Operator: Your next question comes from the line of Steven Fisher with UBS. Your line is open.
Steven Fisher: Well, thanks. Good morning.
Christopher O’Herlihy: Good morning.
Steven Fisher: This has been asked in a few ways about the segments, but really just trying to think about the 1% to 3% organic growth in the context of your sort of 4% to 7% CAGR through 2030. I guess what’s the buildup of market growth and price versus market penetration and customer-back innovation? I know again, there’s lots of different segment dynamics here, but when you roll it all up, are you basically assuming that it is kind of like flat markets and a couple of points of penetration and innovation. Is that the way to think about it?
Christopher O’Herlihy: Yes. I think it is. I mean, as we say, in our four to seven calculus that we outlined at our Investor Day, you have a contribution from market – contribution from market penetration, and the largest contribution is actually from customer-back innovation. And that’s what we’re seeing here in 2024 really across most of our businesses. As we used to think about growth, 2% growth last year on top of 2021 – or 12% growth in 2021 and 2022 and targeting 1% to 3% here on the path to four plus, is kind of how are outlining this. And I would say that it’s a target and a goal that we’re very confident on the basis that it’s where the bulk of our divisions are spending their time. We’re making progress, certainly more to do, but given the portfolio, given the fact that we’ve got plenty of room to grow in each segment, given the investments that Michael has been talking about that we’ve been making now for quite a few years in strategic marketing and innovation.
We’re really putting ourselves and building the muscle here to get into a position where we will grow 4% plus over the entirety of this next phase. And I think in terms of just capability build, if you think about this in the way that – the way we leaned into front to back 80/20 in the last phase of our strategy, that’s the way we’re leaning into innovation in the next phase of our strategy. The same level of rigor, scope, and capability building that we applied to front to back 80/20 in the first phase. We are now applying to customer-back innovation here in this next phase. And I would say we’re very encouraged by the progress that we’ve seen on innovation over the last couple of years. It was a 1% contributor five years ago. It’s now a 2% contributor on its way to 3% and beyond.
And again, very encouraged by the progress that we’re seeing across many of our divisions in terms of the qualitative work they’re doing on innovation, but also in terms of the quality of the innovation pipeline across all seven segments.
