Again, welcome back. We're very excited to have ITW with us. We have Michael Larsen, who is the Senior Vice President and Chief Financial Officer of ITW. Michael joined in 2013, having previously served as President, CEO, and Director of Gardner Denver. You have also had a long industrial career. Very much appreciate you being here, Michael. While I'm walking over, I'll just sort of ask you maybe a follow-up to the question I kind of asked you on the earnings call, because I think it's sort of an interesting development. You mentioned enterprise initiatives, going to be 100 basis points this year. You answered my question about enterprise strategy, kind of suggesting that the savings can be ongoing.
I don't want to say indefinite, but I would say ongoing, and that you could sort of achieve 100 basis points pretty much every year. Can you maybe describe how you've honed enterprise strategy over the last 10 years? Because it seems like it's gotten better for you. And why couldn't you, if it continues to be good or better, why couldn't you deliver more than your usual target of 35%-40% Incremental Margins?
Sure. Thank you, Andy. Thank you for having us back. I think this is our sixth year. Every year, I wonder whether I'm going to get invited back next year. So far.
We always love you back as it's ongoing.
Thrilled to be here. Let me just take a step back and answer your question maybe a little differently. I think we're 10 years into our quest here to position the company as a solid, organic grower with best-in-class margins and returns. We've certainly, I think, come a long way in terms of achieving our goal of being one of the most competitive, highest-quality industrial companies in this space. I'll just point to a couple of proof points around our margin profile. For the people that are not aware, our EBIT margins gap not adjusted are in the mid-20s. Return on capital 30% plus on an after-tax basis. I think over that time frame have kind of uniquely earned the right to be a
diversified industrial company, just given the quality of the portfolio and the fact that there really are no weak links across this portfolio. I think also in the process, we've kind of gone from kind of a peer average multiple valuation to now solid 20% plus premium relative to the peer group. Certainly a lot of progress. I think the really good news from our perspective is that there's still a lot of runway in front of us. I mean, based on everything that we're seeing today, including the more recent progress, maybe we'll talk about kind of 2022 and the fourth quarter, all points to the fact that we've got another five-plus years ahead of us in terms of really continued strong execution on this enterprise strategy.
A significant component of that has been the enterprise initiatives that you were talking about. If you look back over the last 10 years, we've generated 100 basis points of margin improvement every year. It adds up to $1.5 billion of cost out over the last 10 years, really from two big initiatives, one being the reimplementation of our 80/20 front-to-back. I think of it as our operating system across our 84 divisions. Only a much more powerful 80/20 today than it was 3, 5, 10 years ago as we continue to learn and further improve kind of the tools and the techniques that are associated with 80/20. I think our people, our teams are much better in terms of being real experts at the implementation of the business model.
The third piece is we're applying these tools and techniques to businesses that are much more differentiated, given all the work we've done around the portfolio, exiting the lower growth, lower margin businesses, most of that early on in the beginning of the enterprise strategy. That process continues to deliver significant savings for us, as does the strategic sourcing efforts that also have been ongoing inside the company for 10 years. Think of it as for the first time we're leveraging the combined spend of the enterprise to generate meaningful savings across the company. All of that is done by real strategic sourcing experts, which was really a weapon we didn't have in our arsenal when we started this 10 years ago.
Those two capabilities put together is what we collectively call the enterprise initiatives. I think we were quite pleased when we rolled up the annual plan numbers late last year and then checked in again in January to see that all the projects and activities that support these two initiatives still added up to 100 basis points of margin improvement in 2023. As I think we talked about on the earnings call, I think we expect that there will continue to be a meaningful contribution from these initiatives on a go-forward basis, just given that we continue to evolve and get better at applying these tools, and the tools themselves evolve.
I think we feel very confident that we'll continue to contribute. The enterprise initiatives will continue to contribute in a meaningful way to the overall performance of the company, which I might add, in a world that's ever more challenging and uncertain, is a great thing to have in your back pocket.
For sure. Just to ask you one follow-up, you mentioned sort of five more years, you think good runway. Is it across sort of the three different things you do, sourcing or simplification?
What I'm talking about is in terms of the total shareholder return model. We've really been laser-focused really since 2016 on Organic Growth. As you know, we had some heavy lifting to do early on in the enterprise strategy in terms of simplifying these businesses and getting them ready to grow operationally and getting the margin profile to where we to a point where we would tell the businesses, "Okay, now it's time to really lean in on Organic Growth." Changed the incentives in 2016. We've made a lot of progress. What we're trying to do is position the company so that we can grow 4% plus organically through the cycle. Why 4%? Because 4% at our historical 35%-40% incrementals yields operating income growth of 7%.
Given all the surplus cash that we generate, some combination of acquisitions and/or share repurchases contribute another 2-3 percentage points of EPS growth. Now you're growing 9-10. You add on top of that an attractive dividend that grows in line with earnings over time, about 7%. If you look at the last four years, 59 years in a row of dividend increases, that dividend gives us another 2-3 years. Now you're looking at TSR of 11-13 in what I would describe as fairly low risk, high probability. Of the 11-13, the first 7% I talked about is tied to Organic Growth. The balance is all within our own control. That's capital allocation, right? That's really what we're trying to do. We've done better than that over the last 10 years.
I think we've averaged somewhere around 18-19% TSR. Part of that was the re-rating of the multiple, as I talked about earlier, from parity with the peers to 20% plus now, solidly 20% plus. We don't expect that lift again in the multiple, but really solid kind of 4% Organic Growth, 11-13% TSR. That's what we're trying to do. We believe that over any five-year period, that will put us in the top quartile of the industrial companies kind of of the peer group. That is why there's been so much focus on Organic Growth and solidifying that as the primary growth engine of the company. The rallying cry inside the company is we want to be as good at Organic Growth as we are operationally at 80/20. Now, that's a high bar if you think about it, right? But that's really that's where we're at.
We're certainly encouraged by the progress. 2021, we grew 12% organic. In 2022, we grew 12% organic. This year, we're guiding 3-5%. Certainly very comfortable with the progress that we're making. Again, we're only trying to get to 4% in a normal GDP world, maybe the macroeconomic through our CBI, Customer-backed innovation efforts, and others' initiatives inside the company. All we're trying to do is get to 4-5%.
Related to that, Michael, you talked in Q4 about hiring. You want to support Organic Growth and invest in capacity. You kind of made it sound like this is just normal for ITW. You also talked about that you highlight 150-200 basis points of inflation-related costs associated with higher labor expense. My question really is, first of all, is that 150-200 basis points sort of the cost of doing business now? Or should that go down over time because it is kind of an unusual headwind this year? Is it sort of normal hiring? Are you putting it in areas like food Equipment or welding where you have had really pretty extraordinary growth over the last couple of years?
I think across the company, we've continued to invest. I think this year it maybe stands out a little bit more because of the pretty unusual inflationary pressure on the material cost side, but also on the wages, salaries, growth investments. I mean, you're not going to grow if you look at the last two years, you're not going to grow 25% without investing in growth and investing in capacity and in new products. I think you're right. I mean, that's essentially part of kind of the ongoing process of doing business. We fund every good project inside the company. We are and have really since 2016 with this big growth focus. We have ramped up significantly on the front end of the business. We've hired some commercial expertise, sales, and marketing that we maybe didn't have inside the company.
I think that's really helped us with the fact that during the pandemic, we made a decision based on our margin profile and based on this fortress balance sheet that we built up to take the long-term view and stay invested in our growth efforts, stay invested in our people, not lay anybody off, and stay invested in our strategies to further accelerate Organic Growth. I think the pandemic was just another proof point for what we've built, another example of what we've built. It is this highly resilient, very profitable company that when faced with adversity, we can take the long-term view and we can stay invested in our strategic priorities, Organic Growth in particular.
Michael, I want to follow up on your comment around win the recovery. That's what you did basically is that you decided to stay fully invested in your people. That partly led to the Organic Growth that you had. As we sort of transition here, macro is slowing a little bit. How do you look at sort of ITW's ability to grow above market? I think when you had your last investor day, you talked about 100 basis points above market. Now you're talking about 4% growth, but obviously the market's not static, right? How do you think about your ability versus that 100 basis points?
I think to your point, it's difficult to put a number around what's your market growing at when you're in 84 global divisions touching pretty much every aspect of the global economy. I think the last time we rolled up the numbers in 2019, we said to your point, we thought we were outgrowing the underlying markets by a percentage point. If we roll those numbers up now, it would probably be more than that. I just don't have the degree of confidence to tell you, "Here's what the market's growing at. Here's what ITW is growing at." All I can do is we can point to some encouraging data points. We talked about this on our earnings call three weeks ago.
If you look at our growth rate over the last two years, 12% in 2021, 12% in 2022 organically relative to our peers, our proxy peers growing at 9 and 9, that is very different from the ITW of just a few years ago, right? I mean, I think we've never claimed to be in the top quartile from an Organic Growth standpoint, but now we are. While nobody is declaring victory and we know how much work we have left to do inside the company, and every one of our divisions will tell you that they're not there in terms of achieving their full potential Organic Growth rate, I think it's certainly confirmation that we're headed down the right path here. To put a specific number around our growth rate relative to the underlying market is at this point, given all the volatility, probably not the best thing to try to do.
Let me follow up in this way then. If I look at a business like Food Equipment or Welding, the growth has been really, really strong over the last couple of years. Obviously, we know about pandemic reopening. Some of that is helping you. Kind of what's gone into those businesses? Is it share gains? Is it something you did sort of pre-pandemic or during the pandemic to really energize those businesses' growth?
I think Welding and Food Equipment are actually good examples because there are publicly traded competitors. You can certainly compare our growth rates in those segments and our margin profile to theirs. You can draw your own conclusions. We would say that we definitely have gained share as a result of the focus that we've had on Organic Growth and because of the positioning, the fact that we stayed invested. I think more recently, this has been pretty challenging from a supply chain standpoint. The fact that we were very intentional about mitigating supply chain risk in order to sustain kind of our superior customer service levels, we had to build inventory.
We have probably—you can look at this yourself—we have probably added about $1 billion of inventory to mitigate supply chain risk and take care of customers and ultimately put ourselves in a position to deliver when our competitors cannot and therefore gain share. There is plenty of anecdotal evidence inside the company that that is exactly what happened. We know what our lead times are relative to our competitors. There is, like I said, a lot of evidence that we are gaining share as a result of that. Not opportunistic one-off kind of buys, but really strategic long-term share gains. I think from that perspective, the pandemic was a great opportunity for ITW to demonstrate how differentiated our supply chain capabilities really are.
I think it's the results that we're putting up right now would not have happened without those decisions that were made in terms of staying invested and taking care of customers.
I wanted to ask you kind of alternatively around specialty products. It is the only business, the only segment where you have revenues projected to be down 2023 versus 2019. Is that because the overall segment tends to have more of a consumer focus, or is there something else going on there that meets?
Yeah, I think if you look at kind of the portfolio, maybe to answer a little more broadly, I think overall demand is really strong in 75% of the company. I think kind of the balance, the 25% tends to be either more consumer-oriented, like specialty, as you point out, more interest rate sensitive. That would be a residential construction business. There is a little bit of a cycle going on in semi right now. Those things add up to about 25% of the company. There is no doubt that we've seen some slowing in those end markets. We have projected in our guidance that that will continue to slow in 2023. We are reasonably confident that we've kind of de-risked that.
I'll just say that one of the big advantages of being as diversified as we are is you're always going to have challenges or headwinds in some parts of the company and tailwinds in other parts of the company. When you add it all up, I told you about the growth rates over the last two years, 12% two years in a row, and this year 3-5% at a time when certain things are slowing. I think that's another proof point of the value of this high-quality diversified business portfolio and the resilience it gives us to continue to stay invested for the long term.
We already talked about this a little bit. I'm going to rephrase the question I have here in the sense that you never spent that much on R&D as a percent of sales versus a lot of the industrial competitors, but you've gotten obviously very high return for what you spent on. Have you done anything different in terms of innovation? I know you're focused on customer-backed R&D that's also helped you to improve your growth. Was it all the other things we talked about with enterprise strategy?
I think we're not really doing anything differently. I mean, to take a step back, we are not trying to invent a new molecule or kind of a new-to-the-world application. We are much more comfortable with customer-backed innovation, singles and doubles supported by a patent portfolio of over 19,000 patents, really things that are unique to ITW that only we can provide. It just happens that this customer-backed innovation process has a much higher—the velocity is greater. The outcomes are typically better because we don't start working on something if we don't have a purchase order. We're confident that when we develop this product, we don't have to find a way to commercialize it.
We know who's going to buy it and what they're going to pay for it. I would say it's a much more efficient way of innovating. It is a little bit difficult for looking in from the outside to get excited about because we don't have these $100 million innovations, but we have a hundred of a million or two here and there in every division, four or five really meaningful projects for their division that contributes to the overall growth rate of the company. I might just add, while we're not doing anything different, we're being much better in terms of how we are innovating for our customers. What historically has been a contribution to Organic Growth of maybe a percentage point, maybe a little bit less,
To be very honest with you, is now a 2% overall contribution to the Organic Growth of the company. It's not that we have to spend more. I mean, we'll spend whatever we need to, but it just happens that our R&D efforts, the way we capture those costs and disclose them, it's about 2% of sales. As sales grow, those R&D efforts will certainly—the cost will grow, but it's not a matter of cost. It's much more a matter of being focused and being really efficient and smart in terms of how you innovate for your customers. That's how we would describe it.
Got it. I know I was going to focus on the near term just for a few minutes. You talked about the 25% of the business, up from 20%, that's slowing. Have you seen any broader slowing? Either that 25% is not decelerating more or anything in the 75% that's still slowing. I thought part of the reason why you guided 3%-5% Organic Growth was to account for incremental slowing. How are these markets trending versus your expectations? They kind of have to slow for you to make your guidance come down, if that makes sense.
Yeah. You may be a little disappointed in how I answer this, but I think we just—our earnings call was three weeks ago, and if I was.
Long time, Michael.
If I was sitting—things can change quickly. I'll get to that. If I was.
It's a cycle of business.
If I was sitting here and giving you a different update, we probably did not do a good job three weeks ago. What I will tell you broadly is that everything is on track and playing out largely as expected. In our guidance of 3-5%, historically, we guide to what we describe as rates. We look at demand rates, exiting Q4. We extrapolate into the year. We adjust for seasonality, and that becomes our guidance. Around, we thought just given everything we talked about, we wanted to be a little bit more cautious. We risk-adjusted those run rates down. Our guidance is 3-5% organic. We expect that the 25% that slowed in the back half of the year is probably going to continue to slow in 2023. The flip side is 75% of the company demand is still really strong.
The other tailwinds we have is supply chain conditions are starting to normalize. Input costs, material cost inflation, the pace of those increases has definitely moderated. While costs are not coming down, they are certainly not going up any longer either. I think there are puts and takes, as there always is. I will just say in terms of how we are—the momentum we have going into 2023 and how we are positioned to perform in just about any environment and to outperform, I think, just about anybody in whatever environment we end up in for 2023 and 2024, I feel really good about our positioning at this point.
Let me ask you about that 75% that's not slowing. In fact, in Q4, you mentioned that you actually saw a larger than usual seasonal uptake. To the extent you can, can you talk about that acceleration? I do often ask you about your CapEx businesses. They were strong in Q4. What does that tell you about the global economy?
Let me preface this with I'm not an economist, okay?
Neither am I.
I think we were certainly really encouraged by the sequential increase in demand that we saw from Q3 to Q4. I think what you're referring to is typically we see kind of revenue per day go up 2% from Q3 to Q4. We actually saw it go up 4% from Q3 to Q4. Like I said, really strong demand across the vast majority of our portfolio, including automotive, which granted had an easy comp year over year, but up 20%. I think Food Equipment was up 17%. Somebody correct me if I'm wrong. Double-digit growth in Test and measurement, even with some slowing. I think all the demand for capital Equipment, Welding Equipment going into the industrial side to our customers there, demand there remains really strong.
I think we were very optimistic going into this year for those businesses. At the same time, we know that things can change quickly. I think that's where, again, I'll point to resilience of the company. I'll point to our ability—of our teams and the divisions to kind of read and react to whatever the conditions on the ground may be. I think you look at kind of our track record of execution and our say-do ratio, it's hard enough. to feel really good about where we're at.
Maybe I can ask you a similar question sort of by region, right? Europe hanging in there, U.S. doing reasonably well, and China, you're doing seems like very well on China auto in particular, even with the noise, Chinese New Year, COVID, all that kind of stuff. Any updates on as we come out of Chinese New Year, you still feel good about China actually being above your 3-5% growth for the year?
Yeah. When we look at this by geography, and I should say we do not run the company by geography. I mean, I think one thing that is really unique about ITW is that our margin profile is very similar in all three major geographies, right? We are as profitable in China as we are in North America and Europe, which is a little unusual, I think. In our guidance of 3-5%, maybe that has North America maybe towards 5%, Europe towards 3%, and China kind of in the mid-single digits. For the first time last year, we surpassed $1 billion in China. We grew 6% organically in China last year.
I would say this, our Chinese colleagues have done an incredible job over the last two years under very difficult circumstances, frankly, much more difficult than anything that we had to go through here in the U.S. They have passed whatever obstacle was thrown at them, and the results speak for themselves. I think a big thank you to our Chinese colleagues. About half of our business in China is, I think, as you pointed out, the automotive business. We are seeing really significant growth on the EV side of things in China. We are very optimistic. We are investing in capacity to meet the demand that we are seeing right now, as well as projected for the next few years.
We feel good about China. Of course, there are going to be bumps in the road, just like there were last year. Long term, we feel really good about how we're positioned, not just in automotive, but also in Test and measurement, Food Equipment, and Polymers and Fluids, and our other businesses in China.
Great. I want to open up to the audience in a few minutes. First, let me ask you about price versus cost. You kind of mentioned a little bit it was a 70 basis points tailwind in Q4, which was nice to see. I think you have noted an expectation tailwind of about 100 basis points for 2023. Can you clarify whether that is based on pricing you have already done? Is this going to be a normal year for pricing? We have seen commodities bounce a lot of years. Does that actually help with the price versus cost equation? Because it allows you to kind of convince customers you have to keep raising price. How do you think about it?
Let me just go back a couple of years here. I think when we started to see really significant ramp-up in inflation in early 2021, kind of the overall guidance was we want to offset those raw material cost inflation with price on a dollar-for-dollar basis. The objective was not to recover the full margin impact. You can make those decisions when your EBIT margins are 25%, right? Our teams did an amazing job, I think, again, really responding, reacting to digital cost increases, this barrage of cost increases appropriately and decisively. I think we actually learned a lot of things about how to do this back in the 2018-2019 timeframe, if you remember the steel tariffs. I think that really we learned some lessons and applied those and did a good job keeping price-cost EPS neutral.
It certainly had a cost from a margin standpoint. If you go back and look, overall margins were diluted by about 240 basis points from Q1 2021 to Q3 2022. Q4 was the first quarter where we saw a positive price-cost margin impact of 70 basis points, which obviously contributed to the Incremental Margin of 52% in Q4, right? 12% Organic Growth, 52% incrementals, 18% income growth. Certainly, the new news, I think, enterprise initiatives, again, of 100 basis points, but I think the new news was the positive contribution from price-cost. I think what you're referring to as, I don't know how you said in my guidance or whatever, I think I said ballpark, we've got some good momentum on price-cost.
If that carries into 2023, based on everything we know today about price and cost, I think we're going to start to recover some of that margin impact. Included for 2023 is there's certainly some carryover from a price standpoint and also an assumption that there's going to be normal price increases like there always are. I think, like I said, costs are not going down. Labor costs actually are going up, right? I think if we were to find ourselves in a deflationary environment, I think there's certainly going to be some pressure on price. We are going to have to, we want to maintain our price premium.
We are typically the command of premium on price based on the performance of our products and our customer metrics. We want to maintain that premium. We also want to compete, and we want to gain share, right? Where do we end up from a pricing standpoint? I think even if we have to give up a little bit of price, it's not the world.
Let me ask you a related question on auto OEM. Obviously, it's a little harder there on the price versus cost. Is there anything you can do in terms of whether it's restructuring, contract renegotiations to get margins back up there?
I think if I said at the enterprise level, price-cost of 240 basis points of margin dilution, it's probably been 2x that in automotive, right? I think it's going to take some time to recover that. You know this, the contractual nature of that industry is such that it just takes longer to get, right? If you want to participate in the industry, that's the way it works, right? We have to win new content per vehicle. We have to provide solutions that our customers are willing to pay for. It's probably going to take us two to three years to recover the margin impact in automotive if things broadly stay the way they are. Again, if your margins are 25% EBIT, that's okay. Okay? We understand why that is. Automotive right now, EBIT margins are 18%.
I think broadly, if you're a supplier to the automotive industry, the average EBIT margin in normal times is 6%, right? We're reasonably confident that we're going to regain the price-cost margin impact, not because we're better at pricing, but because we're better at taking care of our customers than our competitors are.
Questions from the audience? Any questions?
Thanks. Just a quick one on the EV opportunity. Can you just give us a sense of what the content per vehicle that you're seeing today versus ICE vehicles, whether it's number of parts, kind of parts, and what the ASP mix looks like in margin impact?
Yeah. I think we actually believe that the total opportunity in terms of content per vehicle is greater on EV than it is on ICE. The current content per vehicle on an EV is about $32 vs $37 on an internal combustion engine. That $32 is growing faster than the $37. There are a lot of differences by geography. We are really excited about the opportunity in EV. A lot of the products that we sell are directly transferable. A lot of the plastic fasteners, for example, are equivalent on an EV versus an internal combustion engine.
There are some additional opportunities around thermal management around the battery, the heating, the cooling of the battery, the fastening of the battery, whether it's with fasteners or with glue developed by Performance polymers, as well as we do the Air registers, these new very slick Air registers that you see on EVs. Typically, there is a lot of focus on how do you reduce the overall levels of noise in the cabin. Because EVs tend to be quieter, you don't want to have a lot of, you don't want to hear your AC running. Those are the types of opportunities that we're working on with our customers, the charge port mechanism. We think there's really a lot of opportunity on the EV side.
Particularly if you look at the growth in China, that's been the big driver for that business over the last few years. When you look across the company, that's an area where you can't help but be really excited about the Organic Growth.
Any other questions? Michael, let me just ask you about, you actually said for your guidance for this year that you expect all your segments to grow margin. You have a couple of segments like construction, for instance, which you are projecting to be down decently. We already discussed products a little bit. Is it price-cost that's really helping? Are you doing product line simplification, something like construction? What's getting you to improve margins in a business?
Let me just say this. I mean, I think when I say something like that, it's not because that's the way I'd like it to be. It's based on what our divisions told us in their bottoms-up planning process, which is how we do it at ITW. It's not a top-down process. As we rolled up the numbers from 84 divisions, every one of our segments was showing margin improvement in a year-over-year. What we're looking for is just a little bit of progress every year, a little bit better this year than last year as we continue to progress towards our full potential because we're not done at 25% EBIT margins, right? I mean, we've committed to 28%. I think I may have said 28% plus at one point.
You might have whispered 31 times before.
I don't think so. I don't think I would remember that. I think 31% is the Welding margin, right? Even the Welding business making 31% with their largest competitor making half that, I think they tell us that they can continue to improve margins. The big driver is growth. If you deliver Organic Growth at 35-40% incrementals, you can't help but continue to improve your margins. I think construction is a little bit of a different story. I think we're expecting due to the softness of potential construction that that business will be down 3-5% organically. Obviously, there might be some carryover from an ICE standpoint that kind of helps buffer the full margin impact. We expect some slight, I think it's not a lot, but we do expect some margin improvement also in the construction business.
Cash flow, obviously, has been, as we talked about, a little pressured by higher inventory and supply chain. You feel good about 100% this year. Factors in your control to sort of get there?
I feel really good. I think our free cash flow conversion rate has been a little uncharacteristic for the last two years because of this intentional decision to add working capital. I mean, the business is growing double digit, right? You are going to have to add some working capital. On top of that, we decided to de-risk some of the supply chain issues and add about $1 billion worth of inventory. We are running at three and a half months on hand when normally we are running at two. There is no doubt in my mind that as supply chain conditions begin to normalize, those levels of working capital will come down. At the same time, I will tell you this, the priority is to take care of customers.
If we have to keep inventory levels where they are for another year, that's fine. Given this balance sheet, given our margin profile, that's not a problem. I think we said 100% plus this year. That assumes basically no improvement in working capital this year. That's probably a pretty conservative assumption. If things normalize and if we can take care of customers, I would expect that number to probably be a little bit better than that.
I only have 30 seconds, and I still have two questions for you. I'm going to ask them very concisely. One is, are there any MTS-type acquisitions out there for you? How do you feel about that?
Yes, there are. I think it's not a matter of demand. We'd love to do another couple of MTS acquisitions. We're really excited about that one. It's really more a supply issue. You got to find them, and you got to find a willing seller. We are only going to buy businesses that can grow at 4% plus. We can improve margins from mid-teens to mid-20s, and we can earn a reasonable rate of return that makes sense to the company and for our shareholders. MTS, we're going to end up in the high teens by year seven on an after-tax basis, maybe even a little bit better based on the progress the team's making. To the extent that those acquisitions become available, you should expect us to definitely lean in and be aggressively opportunistic when it comes to opportunities like that.
The last question is, I've been asking all the companies, what are the top two or three innovations, mega trends, or structural changes that have affected or could affect your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked in current discourse?
Again, I think you're going to be very disappointed in my.
Not going to talk about so many mega trends.
Maybe I don't get invited back next year, but I will tell you this.
Not talking about mega trends, Michael.
My crystal ball is not better than yours or anybody else's. I think what I will tell you, and maybe we'll end on this, I think I do know for sure that this will continue to be a very challenging and a very uncertain and dynamic environment. In times like this, I think you want to be positioned with companies that have advantaged business models, that have highly resilient, high-quality business portfolios, that have margin profiles in the mid-20s, return on capital 30% plus, that have the resilience and the ability to take the long-term view and really position the company for long-term performance versus having to react aggressively to a recession or whatever else might come at us. I guess what I'm saying is, for what it's worth, in times like this, I think ITW is not a bad place to hang out.
I think it's a good way to end. Appreciate the time, Michael. Thank you very much.
Thank you.