Hi, 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. I also wanna welcome the folks who are joining us by webcast. Just to let you know, we will post the slides at the end of the program. With that, I do want to share the perfunctory warnings here. We will be 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.
With that out of the way, we'd just like to share with you're gonna hear from our senior leaders, starting with Scott Santi, who's our Chairman and CEO, and followed by Chris O'Herlihy, our Vice Chairman; Michael Larsen, Senior Vice President and Chief Financial Officer. We're also joined by three of our segment Executive Vice Presidents. We have Axel Beck with Food Equipment, and Xavi Gracia with Automotive, and Patty Hartzell with Test & Measurement and Electronics. They'll elaborate on their segments as part of our program today. Just a little bit about the agenda before we get started.
Scott's gonna 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 gonna set the stage for what's to come in the next decade. Chris is gonna share our growth agenda, the priorities, and the deliverables for our next phase. Our EVPs are gonna 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. They'll give you some examples and insights into how they think about it and what they've been doing.
Michael's going to share our 2030 performance framework and targets. Scott will make some closing remarks. We will take a 15-minute break, and then we'll go to Q&A. 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. 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.
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. 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. 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 as the ITW Business Model. We were grossly under-leveraging those capabilities back in 2012. 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. What was much less common were examples of companies actually following through and delivering on those strategies. We saw an additional opportunity to differentiate ITW, and the term we coined for it internally, this just shows you how brilliant our marketing is do what we say execution.
Candidly, if we didn't right out of the box deliver on what we said we were gonna 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. 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 .
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 2022 than we did in 2012 on that 11% less revenue base. That's 80/20 in action. Operating margin and return on invested capital are two foundational measures of the relative strength and competitiveness of a business. It's what Warren Buffett likes to refer to as the moat around a 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 in operating the business and the discipline of management in allocating it appropriately. As you can see from this slide, we've 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.
This slope-slide shows an example of just that in comparing operating margins for each of our seven segments to the average of their major market peers in their respective industries. 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. 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 position to fully leverage the performance power of the ITW Business Model.
We had a lot of work to do on our portfolio, 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. 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. 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 and our global competitiveness, through our strategic sourcing initiative, have generated over $900 million in aggregate savings over the last decade.
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. After a lot of work, I can safely say that we have never been better in terms of our, the quality of our practice all over the company. Peer group number one in operating margin, consistent 35%-40% incremental margins and accelerating organic growth. 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. Today, we are number one in the peer group, as you saw in return on invested capital.
We've increased dividends by almost 3.5x . That's, by the way, after a 59-year consecutive track record of dividend increases. We've added high quality acquisitions in EF&C and MTS. 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 delivered a compound TSR of 16.4%, which is well above the proxy, our proxy peer group and also the S&P 500. We've delivered a lot of shareholder value. You don't mind if I just hover on this slide for a second, do you? Over the last decade, simply put, we've gone from kind of a middle of the pack industrial company to a leading industrial company.
A fair question to ask is where do we go from here? As Karen mentioned in her summary messages, two key things we're gonna focus on today. One is that we have significant room for further improvement on our path to ITW's full potential. Michael will lay that out for you in more depth during his section of the presentation, including giving you an update on our updated 2030 performance goals. 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. 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.
The core principles on which it's founded, we feel like are gonna be even more robust in the next phase, given some of what we'll talk about in a minute. On the second one, Chris and our team of EVPs are gonna dig into the second one of these major focus areas in our next phase as we go forward here in the presentation. I'm gonna spend a few more minutes teeing up Chris and team, and then we'll turn it over to them. When we talk about ITW's Business Model and our core Strategy Framework being as powerful and differentiating in the next phase, there'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 years-10 years will do nothing but increase in terms of the level of volatility, risk, the pace of change, you name it. You know, I think the simple answer is which is who among us saw a pandemic coming two or three years ago? The level of the way the environment is changing and the pace at which it's changing, I think we've come to a view that predicting the future is an absolute impossibility. Companies that have capability, that are, that are nimble, that can use those capabilities to read, react, and respond to what's going on around them are gonna be in an advantaged position. We certainly believe that we have those capabilities in spades.
The second dimension in terms of why our current capabilities and our current strategy framework are gonna 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 two things going forward. One is driving consistent, high-quality, above-market organic growth, which is our 80. The second is extending ITW's long-term organic growth potential through selective, high-quality, and financially prudent acquisitions. Anybody that remembers the to-do list back in 2012 knows that that's a very focused agenda relative to where we were back then.
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. You know, our core competitive advantage doesn't reside in a 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 deploy it very well in seven 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.
The second part of that is we've earned the right through our performance, the equivalency of our performance across seven different businesses to be a diversified industrial company and in an overall environment where, as you know, that's not a particularly popular strategy. That diversity does give us, in terms of our portfolio, does give us great advantages in terms of our ability to think and act long term. I, again, I'll go back to the pandemic, and I'll talk about it in some, you know, 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 gonna affect us like it'll affect other companies, but certainly not to the degree that it might affect other companies who are front and center on, you know, oil and gas or aerospace or you pick it. That gives us, you know, as I said, big advantages in terms of our ability to power through some of those issues, to continue investing and executing our strategy. Again, in a world that's very volatile, those issues are gonna arise. You know, 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 derive from our operating culture.
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. 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.
That capability allows us to be a fast reactor 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 gonna, you know, the level of accuracy in that is, it's just impossible. The third element is really that we are an incredibly efficient cash generator. The operating margins that we generate translate directly into, you know, cash that we generate in our Business Model. Best-in-class margins give us an incredible cushion in terms of withstanding some of those, you know, 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, you know, it gives us an ability to consistently execute through the cycle versus have to take a time out or take a pause. I'll give you the best example I can give you, which is in the global pandemic. Two 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. From the cultural standpoint, the pandemic came up. We basically had to issue three 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. The third was, stay invested, get positioned for the recovery. That was it.
That was the memo that they got. Amazing things happened. Our businesses around the world mobilized. They took those three directives and decided how to implement those in their particular part of the company. We didn't have to have big meetings. We didn't, you know, that was done in about a week. Off to the races we went. Our people did amazing, heroic things based on just those three elements of guidance, let's call them, that framework. It's a great example when we talk about flexibility in a framework in terms of how we operate. 80/20 is a set of principles. It's not a set of instructions. You know, all the different frameworks we operate are sort of guide thought. 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. You know, puts a lot of customized thought in play because all of it's customized around the particular context of our various divisions around the world. Again, my colleagues will spend some more time talking about that. On the financial side, revenues dropped, as it says here, almost 30% overnight. Margins dropped to 17.5% from low 20s. The average of our peer group operating margins in 2022 was 14%. 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. In terms of ability to stay invested, stay focused, power through these issues, we're not immune.
In terms of that resilience and that ability to, again, think and act long term and not, you know, 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. We, you know, 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 out 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. We generate a lot of cash. You know, the big issue at the time was liquidity, right? My last point, and then I'll turn it over to Chris, is really around this issue, that, this idea that all the heavy lifting is behind us. This on the screen represents our to-do list that we committed to back in 2012. This is what's left. If, as we think about all the time and effort in the last decade that went into implementing all the things in 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 years-3 years of really focused effort. We couldn't really do much else. 800 different P&Ls down to 84. On 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 years of work. All of those to-dos are now off the plate. We've done all of those things. Those are in place. We can't ignore those things. We have to continue to focus on maintaining them. They are certainly not gonna be the multi-year focuses that they were in the past. Think about all that organizational energy that now is devoted to really driving those last two remaining things.
We are now all in on growth and the highest quality growth and doing it consistently. With that, let me turn it over to Chris. I don't think there's an elegant way to do this, is there?
Yeah, yeah. Please go ahead.
After you.
Thank you. Okay. Thank you, Scott, and good afternoon, everyone. I'm gonna cover the next phase of our strategy here from 2023- 2030, in terms of where we have two key priorities, as Scott outlined, to execute on our, on our growth agenda with our primary focus on organic growth, both in terms of delivering 4% + 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. While growth is certainly our primary focus, we'd 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.
As Michael will highlight later, accomplishing both of these priorities will result in double-digit compound annual TSR. In this next phase of our strategy, organic growth is the most important priority we have as a company, as Scott mentioned. 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%-40% incremental margins. 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.
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 we have a strong conviction that this is a goal we will achieve by 2030. Getting to segment growth targets. For reasons that I will describe here on the next slide, our planning assumption is that all seven segments are capable of averaging 4%-7% organic growth over the long term. With a base assumption that market growth in the aggregate will be in the 1%-2% range.
Net market penetration, so that's penetration net of PLS in the 1%-2% range, and Customer-Back Innovation in the 2%-3% range. Stands to reason with any with seven segments at any given time, we'd always have some segments that will have headwinds and some that will have tailwinds. The resilience of this diversified high-quality portfolio does give us a much higher probability of delivering consistent 4%+ organic growth at the Enterprise level over the long term. 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, you know, 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, over the last two years, we've outgrown our peers by 3%. We're delivering above-market growth now, and certainly well-positioned to achieve 4% through the cycle going forward. 4% + through cycle going forward based on the attributes that are listed on this page, starting with portfolio management. 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. 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. 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 two 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've 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 one 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. Finally, you know, as I mentioned earlier, in this phase of our strategy, the 80 focus of our entire organization. We've made a lot of progress, as reflected in our growth rates in the past two years. Just like every other part of our business, we will look to continue to improve on growth execution, you know, going forward from here. 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 fuels, you know, the ability and to drive market penetration in the future. Very important, the most critical driver. 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 solution for our customers' most critical pain points. It's been a very successful approach for the company for a long, long time. More recently, as part of our increased focus on organic growth, we have developed a very effective Customer-Back Innovation framework, which is in use in every one of our divisions. We've also, where needed again, made the appropriate investments in strategic marketing and innovation to drive our progress.
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. Very much a serial innovation approach. Every one of our 84 divisions is working on a continuous new product pipeline of 10-15 differentiated customer solutions. Just think about that. 84 divisions, each has 10-15 differentiated projects, accumulates to about 800 projects-1,000 projects being worked across the company. We call this more of a kind of a singles and doubles approach. 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.
It's this high probability aspect that drives very efficient utilization of our innovation resources. In that every one of these 800 projects-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. In this regard, we've over 19,000 granted and pending patents, and we file them at a rate of about 1,700 per annum. This was the case even during the pandemic.
Even in 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. Given that fact, today, roughly half our revenues are protected by patent or trade secrets. Moving to acquisitions and importantly, where they fit. Just to reiterate, we've said it a lot today, but we'd say it again, organic growth is our number one priority. As Michael will highlight, we don't need acquisitions to deliver differentiated returns to our shareholders over the long term. We only look to supplement our organic growth focus with high-quality acquisitions that are compelling, meaning they're 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% + 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 what we believe to be a compelling organic growth opportunity. In terms of size, our sweet spot, we believe, and where we've been most successful in the past, is in the $200 million-$500 million acquired revenue size. As opposed to larger, say, greater than a $1 billion acquisitions, where in our view, and we come onto this, we would see more challenges.
These $200 million-$500 million-sized acquisitions would either be bolt-on to existing segments or would be a suitable entry point/building block, if you will, for a new segment. With respect to this building block concept, you know, we have two compelling examples here of where this has been a very successful strategy in both Welding and Test & Measurement and Electronics. The summaries on the slide here, but if you think Welding started with the Miller Electric acquisition in 1994, added quite a 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.
Today, organic growth in that segment is above 7% in the 2019- 2022 timeframe. Now, bearing in mind, this also is during the pandemic. 7% + in over the last three years in the middle of a pandemic. No surprise, but obviously the margins here in Welding, as we've talked about on many occasions, have increased substantially to 31% today. A very analogous situation in Test & Measurement, where we started with the Instron acquisition in 2005, 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've owned Welding 10 years longer.
10 years from now, we'd expect to see, given the growthiness of this segment, a similar growth profile here in Test & Measurement. Again, today, over the last three years, pandemic included, a segment that's growing at 6.5%, with operating margins now heading into the high 20s. 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. On the back of that, you know, we get this kind of performance. Both of these characteristics are very clearly demonstrated in the results and in the shareholder value created.
You know, 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 arose. The comment here in terms of challenges with larger acquisitions. You know, from our standpoint, you know, no surprise, but all acquisitions consume leadership time, energy, and effort, and larger acquisitions exponentially more. Of course, from our lexicon, 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. If we look at the example of the Premark acquisition. Premark was an ITW acquisition, 1999, $2.5 billion acquisition. In acquiring Premark, we acquired five business segments. Today, we have one of those segments.
We divested four segments. The one we have is a very valuable one. It's Food Equipment. The reality is a lot of time, effort, and attention went into divesting those parts of the business. Obviously, that's time that could've been spent growing our business organically. Of course, you know, we're standing here and talking about lessons that we learned, you know, 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, you know, over the next 10 years here. You know, we feel we can be pretty selective of which opportunities in this context we ought to pursue and in an acquisition context for all the reasons I just outlined.
$200 million-$500 million sized acquisitions are generally a better fit for us on this basis. This wraps up the growth section of the priority. Moving now to the second priority, which is sustaining foundational strengths in the quality of Business Model practice, and in the quality and depth of leadership bench and pipeline. 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. Each of the three elements that we talk about creates competitive advantage in their own right.
80/20 creates competitive advantage in terms of how we operate. Customer-Back Innovation in terms of how we innovate, and our decentralized entrepreneurial culture in terms of how we execute. Today, you know, we are at a point, as Scott referenced, where this Business Model has never been more powerful nor more consistently applied across the company. 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. I'll 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. 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 one of our 84 divisions. 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. Data informs the strategy, right? Strategies tend to be rooted in reality, much more realistic, much more likely to be achieved. As Scott referenced, even though we're a better 80/20 Front-to-Back now than we've ever been in our history, you know, we have a strong commitment to continuous improvement. In this regard, every division has a rolling 3 to 5-year implementation schedule. 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 on this. As Scott referenced, I mean, there's enormous opportunity here for individual experimentation. This is not an instruction manual. 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 around strategic clarity, right? Again, data informs the strategy. Data really helps us understand, you know, 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. Again, data informs the strategy. As mentioned earlier, you know, this Business Model creates significant competitive advantage in terms of customer-facing metrics, quality, part availability, and so on.
The bottom line is that if you are an ITW customer, you absolutely love 80/20 because it sure as hell, you know, delivers value for you in terms of all these very important metrics like quality and product availability. We see this in every segment, every division, every segment. It's not confined to any one part of the company. It's right across the company. Of course, this was really reinforced to us, as I said before, over the last few years here. The result of all of that is that we get best-in-class financial performance and high-quality organic growth. 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 use to describe the culture inside ITW.
With the framework being, you know, 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. Of course, our Business Model, which is the value add from being part of ITW. Within the confines of that framework, every one of our divisions have the flexibility, you know, to make decisions to maximize the impact of the strategy and the Business Model relative to their particular business context, right? You know, a way of thinking about this, there's really a dual purpose here. 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, you know, 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. 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. Every one of our divisions is a fully functional P&L.
There are no matrix 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. The business planning process is bottom-up, you know, based on market reality. Strategies and action plans coming out 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 a do-what-we-say company. We're a do-what-we-say company because our divisions do what they say. This is based on performance metrics which are simple, clear and consistent. Our divisional metrics are organic growth, operating margin, and ROIC is obviously very highly correlated to our Enterprise performance.
The end result of all of this is that our people really thrive in this environment, this flexibility with the framework culture. They think and act like owners. They are accountable. As the results over the last number of years have shown they deliver. Given the competitive advantage created by all three 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 know, 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 regression as we increase our focus on organic growth. A key way we do this is to build capability in Business Model excellence through our talent management system.
A Business Model is really only words on paper unless you've got the leadership talent who can execute it at a high level. For this reason, Business Model expertise is our most important leadership attribute in ITW. It's not something we can hire from the outside. We 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? It takes time. A key way we do this is through build this expertise through substantive leadership experiences across our businesses, usually three years at a time.
To accomplish this and to enable it, you know, we have a policy inside that our Enterprise leadership team owns the placement decisions for our top 200 leaders, right? manages all moves involving them. That is the dual purpose of, you know, balancing our business needs with individual development needs and making sure we're putting the right people in the right spots to accomplish both. 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. As a result of doing this, you know, for quite a number of years now, we are really well positioned again to sustain Business Model practice excellence as we go forward.
This facet, you know, in turn ensures that we're really well positioned to handle whatever the next seven years throws at us, right? Whatever economic conditions or uncertainty, we're positioned to handle it 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. By way of illustration of everything that you've heard so far, we're now gonna 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%-7% organic growth over the long term in each segment a high probability.
With that, I'm gonna turn it over to Axel Beck, who's gonna come up here and tell us about Food Equipment.
Good afternoon, ladies and gentlemen. It's great to be here. Axel Beck, the EVP of the Food Equipment Group. 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. 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. 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%, and our organic growth over the last three 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 undercounter machines, hood and door-type machines, conveyor machines, washing thousands of dishes every day for our customers. 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, undercounters, 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. The last, food machines with mixers and weigh and wrap business predominantly to the retail market. Our full product range is supported globally by our own service organization that around the world with more than 2,000 own technicians. So we are supporting our customers over the lifetime of the products 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 and 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 their local market as premium brands. 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 healthcare market, with hospitals, care homes, and then business and industry. Typically, 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. 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. What are the market trends that we are seeing in these markets? All the market trends or the market trends are pretty common across all these sub-markets that we are seeing. 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 customer 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 reusables. When I talk about reusables, it means generally plastic ware. 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 to 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 is 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.
Finally, the trend to better food quality and new concepts, 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 needs for equipment, different equipment, addressing the specific needs and pain points of the consumers that wanna 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, 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.
Our leadership position in sustainability with the lowest water, energy and water consumption and new technologies to address the needs of the reusable transition. Last not, but not least, best in class delivery performance. A great foundation for share gain and accelerated growth. Where are we coming from? Our journey, which started 2012, the first part, 2012-2017, 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 80/20 of the business and mobilizing the organization around the most profitable parts of the business, driving margin improvement. We radically simplified the 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 focused on 80 customers, profitable 80 customers. Based on our 80/20 findings, we radically simplified our operation, inlined, introduced Kanban, improved, and implemented consistent 80/20 Front-to-Back. As key result of our 80/20 Front-to-Back, we gained a deep understanding of our profit levers, 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, 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%.
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 a 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, an inconsistent application of our innovation process, and a 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. 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, enhanced the quality of our sales talents, and upgraded about 40% of our commercial leaders over the last five years. We did significant investment in sales systems and digital marketing. Did provide sales process rigor and a 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 five 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%-2% over the last years. Overall, the results of our pivot to growth transformation has significantly improved our organic growth rate from 2.7%- 6.3% over the last three years. Let me talk a bit about a great example from North America, a great example about a 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, hood types, 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.
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 filled pipeline with new innovation products reaching out more than five 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%-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 and the fast-casual market. The big players out there, the big Ms and the KFCs of this world. There are plenty out there that have issues, and they still wash with manual sinks. 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 ware that is being more and more introduced with these customers, and which is very difficult to dry with a dishwasher.
Total cost of ownership, which relates to energy, water consumption, but also the need for less manual labor in the 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 plastic ware. 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. We come to the last slide that is really demonstrating where we are.
We are moving into the next phase, growth opportunity for ITW. Our addressable market, $70 billion-$23 billion. Our market growth, the traditional market growth in the food service market has been in a range from 1%-3%. We are expecting, and we are targeting 1%-2% share gain consistently over time, 2%-3% CBI contribution, and are confident and well-positioned with the Food Equipment business to drive a 4%-7% organic growth rate sustainably over the future. A great foundation for our business and a great outlook for the future. Thank you. I hand over to Xavi, who is the EVP of the Automotive OEM business.
Thank you, Axel. Good afternoon, everybody. My name is Xavi Gracia. I'm responsible for the ITW Automotive OEM business. 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. Let me start by spending a little bit of time introducing you the Auto segment. We are a $3 billion segment that is highly focused on each supplier of components and fasteners for Auto OEMs. 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 three main regions. Yeah, sorry for that. As we can see in the slides, our revenues are split in three 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 the 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, our dollars per car from $43- $47 between 2017 and 2022. This is considering the car builds in North America, Europe, and China, our main three regions. If we take a look into our product portfolio, we can split that in three 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 cold-headed fasteners, and we can find these products mainly in interior and exterior applications to fix panels and trims. 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. We can find in this category door handles for interior and exterior, fuel filler housing, coolant regulators, and air resistors. The third category are products that are specifically for electrical vehicles.
This is where we can find the charge ports 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 points that we have found and using our Customer-Back Innovation process. Let's take a look into the market trends in this industry. As you know, the Automotive industry is rapidly changing according to the transition from combustion engines to electric 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. 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 trusted advisor partner for them.
Customer-Back Innovation framework help us to be more efficient on understanding what are the new customer problems and to solve them by providing differentiated solutions. The more than 3,000 patterns 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. That was especially important in the last years during the pandemic periods. Also our strong experience and manufacturing capabilities in terms of engineering and manufacturing capabilities in China, which is an 80/20 market for us, a growth market for us. Let's talk about the evolution of this business since 2012- 2017.
Since 2012 when we launched the Enterprise Strategy until now, our focus was to prepare this segment for a high quality growth. At the time, we saw inconsistency 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 to too much product lines, too much customers in some cases. Therefore, we were not differentiating enough our 80s 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 were producing several parts. We were mixing 80s and 20s. That was created, creating low efficiencies, high manufacturing cost, 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 these dedicated manufacturing lines in terms of automation. We align our processes in order to ensure that we have the right quality and the right capacity to grow in the future. These investments and focus on the 80s contributed into an 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. On top, we got more clarity on where we had the high profitable business, where we had 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 two 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. 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 cost, 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. The way how we are going to do that is continue recovering on price cost. That will contribute into 1 point- 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 two points of margin recovery will come from volume increases.
Automotive industry is expecting a 7 million vehicles increase, which are projected for, from now to 2026, that will contribute into these two points margin improvement. Another point will come from CBI. As mentioned in prior slides, CBI is allowing us to sell differentiated solutions, differentiated solutions means high margins for us. Finally, another 1 point-2 points that will come from the Enterprise Initiatives, which is just as we have done in the past and as we have been able to deliver it consistently, this Enterprise Initiatives in the past years. This is our plan, and we are highly confident that we will come back to these mid-20s % 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 has, also discussed in prior slide, is changing rapidly. It's transitioning from combustion engines to EVs, and we had 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. We decided to invest in new strategic marketing resources in all divisions where we identified growth opportunities with sustainable differentiation.
We built new engineering capabilities, new competencies that we didn't have in the past to support this transition to EV, 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, 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%. Also, despite the market declines in 2017, our penetration, our dollars per car is increasing from $43- $47, which means 2% annually. I would like to share how do we see the Electrical Vehicle opportunity for us at ITW.
Let me first explain what are the main product lines that we have in this space. This is mainly fasteners used for EVs, deep-drawn for the cans of the batteries, deep-drawn cans for the batteries, flush door handles, and the 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. 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.
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. That means more than $1 billion revenues in EV markets by 2027. 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/ car. If we compare it to the combustion engines, it's $220, so $80 more of opportunity. That means for us that despite combustion engines, volumes will decline progressively. We see more opportunities than risk with this transition.
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. They increased revenues from $76 million- $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, latches, 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. In terms of $ per car, we are more than doubling the dollars per car that we have with combustion engines, 13 versus 6. I think that this is just showing the opportunities that we have ahead 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 as an average $19 per car, and we are expecting to be at $42/ car by 2026.
More than doubling our revenues. 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 on a specific example of CBI in the EV space. We at ITW, we are market leaders in fuel filler housing for combustion engines. We are selling this product line in most of the Automotive OEMs, and we have a very strong customer relationship with them. We are a trust advisor for them. As OEMs are transitioning to EVs, we leverage our strong position, our strong relationships with them to understand what are the new pain points, the new problems that they had with battery charge.
Using our CBI process, we have been able to develop a patented innovative solution, which you can see in this picture. 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/ car opportunity as an average. Again, increasing our opportunities to grow.
We expect to grow more than $100 million in this product line by 2026. 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 had with combustion engines, thanks to the new competencies that we added in the business. Finally, as you have seen, we are very well positioned 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 a strong CBI capabilities. We have high confidence level that we can deliver this 4%-7% organic growth.
The way how we are going to deliver that is keeping focus on these three regions, which is an addressable market for us of 58 million-70 million builds, considering North America, Europe, and China. We expect to deliver 1%-2% on growth from market growth and price. Another 2%-3% will come from market penetration. Another two points from CBI, and that gives this 4%-7% projected growth. High confidence that we will deliver that. That's all from my side. Thanks for your attention. With that, let me turn over to Patty.
Good afternoon, everyone. My name is Patty Hartzell. I came to ITW through the Instron acquisition. As Chris shared, Instron was the first company acquired as part of the Test & Measurement segment. 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 three-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 ElectroPuls 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, Simco-Ion, Texwipe, and Rippey. 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 solder for use on printed circuit boards. About 15% of TME portfolio is from weighing and inspection equipment. This includes brands like LOMA, Magnaflux, 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 healthcare industry. Pictured here is just one example, a test characterizing the performance of an auto-injector device like the EpiPen I carry for my daughter's allergies. Finally, the automotive industry is experiencing many changes, as you heard from Xavi. All of these changes are demanding more testing and more products. Light weighting of vehicles, battery development, the introduction of new EV models, and increasing safety standards. Pictured here is one of our crash sleds testing pass-passenger safety systems like seat belts and airbags. These are just three of our major markets. We serve many other industrial markets as well.
The three 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. 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 design 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 in 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 number one or number two players in the markets that they serve. Unlike many of our competitors, our divisions are very global in scale, and most include local aftermarket service capability. 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. 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, 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 five 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 VPGM went through extensive training, we continued 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 five 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 Magnaflux and Buehler were soon offering products to customers same day or next day. Businesses making capital equipment, like the one where I came from, went from it 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 five years, TME margins expanded 700 basis points, 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 five 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 2012- 2017 was slightly negative, and we contracted 0.6%.
In 2017, we committed to focus on organic growth, 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. In typical ITW fashion that Scott talked about, VPGM 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 continued 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 five years of focus, I'm proud to say that our say do commitment, as Scott said, in organic growth is shining through. Our three-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 in the TME team along those two 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 manufactures measurement and control devices in four 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. As you can see, over the last five years, Brooks grew on average 10% per annum. 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 etch 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 two lines that are designed in or now specified by all of our 80 customers. We have two patents granted so far, four 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-$20 billion markets to grow between 1%-3% in the future. 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 gain shares. Finally, as we continue to improve our capability in CBI, we expect another 2%-3% of growth from innovation.
In total, we are positioned for high-quality organic growth in the 4%-7% range in the years ahead. With that, I'll now turn it over to Michael Larson, who will talk about our 2023 through 2030 performance framework and our 2030 performance goals.
Great. Thank you, Patty. Good afternoon, everybody. 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. Finally, we'll get to the 2030 performance framework and give you a sense for what the company might look like in just seven years from now. 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. The HR people got a hold of 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." I will acknowledge that. Nevertheless, this is an unbelievable Business Model in terms of the significant free cash flow that we generate consistently. As you know, we have a really strong balance sheet. When we talk about these best-in-class cash flows, what we talk about is obviously the profitability, the fact that our margins are now in the mid-twenties and headed higher from there, and that we're an asset-light Business Model. 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.
A lot of the metal bending and more capital-intensive steps, like I said, are outsourced to our suppliers. Incremental margins, consistently 35%-40%. A little bit higher right now. We can talk about that later. We describe 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 two 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, you know, this company generated $2.6 billion of free cash flow in 2020. Consistently, we've averaged over the last 10 years a conversion rate of about 103%, consistent with the target we laid out of 100%+ . 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%-25% of our operating cash flow goes to internal investments. That is our number one 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 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.
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%- 2.5% of revenues. Customer-Back Innovation, about 2%. To be honest, we probably don't capture every single dollar that goes into CBI, especially with the increased focus from the leadership team, in every one of our divisions at this point. Front-to-Back, you know, these are what's feeding our Enterprise Initiatives 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, you know, our capital allocation strategy is completely aligned with our Enterprise Strategy.
Like I said, these are, 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 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. 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.
As 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. It has contributed about 15% of the TSR, the 16.4%, that Scott was referring to in the opening comments. Going forward, we anticipate that the dividend will continue to grow in line with our long-term earnings growth rate, 7%+. 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. I'll tell you why that is in just a moment.
If you look at this slide here, you can see, you know, our track record, 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 a penny or two. Acquisitions, I'll spend a little more time on that. You know, 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. 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. That $1.5 billion-$2 billion basically means that 2%-3% earnings growth, earnings per share growth is locked in on an annual basis.
The portfolio, Chris talked about this strategically, why it is so important and why we're aggressively managing our portfolio to make sure that 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 investment.
For us, that is an obvious choice in terms of where we wanna spend our time and where we wanna spend our shareholders' capital from an investment standpoint. Acquisitions, like I said, and a very important part of our Enterprise Strategy. Criteria number one is if the goal of the company is to grow at 4%+ , we shouldn't acquire anything that can't grow at 4%+ . 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 may 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. That gives us a huge competitive advantage in terms of de-risking 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, you know, mid to high teens on margins and mid to high teens also on the return on capital on an after-tax basis. 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, you know, margin improvement potential through the implementation of the ITW Business Model, that was a no-brainer. Third, a valuation that to us made it worth our time and effort. To be candid with you, writing the check was the easy part. You know, taking leaders from ITW and sending them up to, Patty's laughing, up 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. 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.
This was kind of what made this a no-brainer for us. You know, 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 Model, 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%+ operating margins in our Instron business and growing in the high single digits. The beauty of this is Patty came with the Instron business, and now she's responsible for integrating MTS. Here's just a status update. We're a year into this, maybe a little bit more, you know, standard product. You can see kind of the operational efficiencies.
The customer-facing metrics are starting to creep up. It used to take 4 months upon acquisition to enter the order and schedule production. We're down to less than a week for our 80/20 products. Lead times, you can see the progress there. Operating margin coming in at 8%. We're operating in the low teens. 13% is the outlook for the year. 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 gonna 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.
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 help, certainly with some guidance from the corporate team, and some oversight, as you would expect from our board of directors. This is a good example of this continuous improvement and this journey that we're on. 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. Now we're getting into Scope 3 a little bit. You heard some great examples today, about, you know, warewash, for example, that Axel talked about. This represent about 30% of our revenues now. We have a strong pipeline here of Customer-Back Innovation projects that are squarely focused on reducing the impact of our customers' products on the environment. Our people and communities, you know, I think we have five nationalities represented today.
You know, 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%. A 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. Very targeted areas where we decide, an area where we could think we can make some real progress, and frankly, also help ourselves by doing so.
Like most companies, we've got some great employee resource groups that there were 5,000+ members that provide a great opportunity for inclusion, networking, and also, frankly, are a lot of fun. 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. You can see some examples on the slide here. Let's get to the financial update here. I'm just gonna start with the total shareholder return model. 4% average annual organic growth at our 35%-40% incrementals. Now operating income grows 7%-8%. You add on top of that 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 9-10%, and you add the dividend yield on top of that grows 7%+ per year, and you get to 11%-13% kinda through the cycle over the next seven years. Not every year, but on average, that's what you as an investor should expect us to deliver. 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. If you just look at the core business, return on capital is headed towards 40%+. We believe that we will find great acquisitions just like we've done with MTS and EF&C, and that'll 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%+ free cash flow has been our metric historically.
For those of you that track free cash flow margin, this is 20%+ consistently through the cycle. Dividend, 7%-8% increase on an annual basis. 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. All of this, really, we believe we can deliver across, you know, any environment. Whatever the next seven years look like, this is what you should expect from us. With that, I'll turn it back over to Scott.
Thank you, Michael.
Sure.
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 in earnings per share growth, the key elements are 4%+ high quality organic growth with best-in-class margins and returns, 30%-40% incremental margins, and continued contribution from Enterprise Initiatives through 2030. Margins move from 25%-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's 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. 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.
At the core of it all, we've got our track record of do what we say execution. 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. Let's be clear. This is a quality of growth strategy, not a quantity of growth strategy. ITW over the next seven 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. It's probably true that ITW will never be at the top of the TSR curve in the industrial space on any one to three-year performance cycle. You know, 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 the end markets they cover. You know, 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.
From a long-term 7 year-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 year7-10 year period that's gonna generate top-tier TSR. 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 after, sorry, and we will be happy to take your Q&A, talk about whatever you wanna talk about. Thank you.
Hi, we're gonna get started with the Q&A session. I would just, We're gonna have a couple 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'd appreciate it if you would just introduce yourself and your firm. Okay?
Take the other one. Take that. Neither.
That's a business we own.
You got it. You got it. Yeah.
Hi. Thank you so much. This is Tami Zakaria from JP Morgan. Two quick questions. The bridge from 2023 operating margin of 25% to at 30%.
Mm-hmm
By 2030. The 5% increase over seven years, should we think about that as sort of a steady 70 basis points 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. The primary driver here is the 4%+ organic growth at our 35%-40% incremental margins, which includes a healthy dose of Enterprise Initiatives still continuing to contribute as we go forward.
Got it. The other question is, do you, I saw in the Food Equipment segment presentation, it 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. What we found is that it's not an area where we're gonna get best use of our Business Model, so we specifically stayed away from it as a result.
Got it. Thank you.
Julian Mitchell at Barclays. Maybe just a first question around the margin goal again. You know, you had that target for this year in sort of 28-ish range. It looks like you're doing about 25%. Maybe just help us understand kind of the learnings.
Yeah
Y ou know, what were the drivers of that, what a shortfall or delta, let's say?
Yeah.
What are the sort of the catch-up factors from here that get you a 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. That's the delta. If our midpoint of our guidance this year is 25%. If we had not had price cost margin impact, we'd be at 27.5%, 28%. That's the.
I'm a little hurt by calling it a shortfall, what we already did. I don't know.
Oh, yeah, I know. It's the delta. The delta.
Delta is a better word.
The delta.
Given it's the best in class margins in the group.
Yeah.
Anyway s o.
Okay. Yeah. Just a quick follow-up on the sort of, around, I guess, the M&A element. You know, 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. How do you see that environment right now? You know, when you're thinking about your M&A, what gives you that confidence around, you know, 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?
I'd say a couple things, and then I'll also let these gentlemen weigh in. I, you know, I think from the standpoint of where they fit, I, you know, I think we have, and several of our presenters mentioned it. There is a big opportunity cost, so we have to really love something. Our, 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's ultimately serves us well. You know, 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 takeaway from our focus on organic growth.
It's a fixed pie. you know, this idea of, you know, we're only gonna you know, 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. I think the, you know, without, you know, we've done two really nice ones in the last You know.
Six years.
Probably 10, right? In terms of the EF&C and Automotive and then MTS. I, you know, and that was with all this other stuff going on. I would say that the, you know, the incremental deltas, 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, you know, the integration formula, you know, 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. You know, we're applying the Business Model.
It's not a, you know, it used to be its own kind of rigor, now it's embedded in really how we operate the company. That, you know, it's a different set of issues we're dealing with starting at 8% than our businesses are today. The basic frameworks and methodologies apply. We'll go across.
Thanks. Hey, good afternoon. 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%-2%. Just kind of wonder if that's what you really think. You know, 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's not as good. That's kind of question one, really, that end market growth.
Yeah. I would say it's a blended number across a segment of, you know, 15, 18 divisions. Within that segment you're gonna see, you know, more opportunities depending on the division. We're also being a bit conservative in terms of that's the long term kind of, you know, market growth for our businesses that we've seen and we wouldn't expect. If it's better than that's great. If it's worse than that, we'll react accordingly.
Maybe if I can add to that. I, you know, we don't manage the company's portfolio from an outside-in perspective in that we're not chasing sort of mega trend or large growth. 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 years, 10 years, 15 years than, you know, we're looking to juice the growth rate because we're into growthier segments, because those segments tend to first of all, some of those growthier assumptions don't play out. Second of all, those only last for a while. Our Business Model, you know, takes us five years to get this stuff in in any substantive way.
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. I think, you know, part of the 1%-2% for every segment is just a conservative assumption that says we're not really, we're not really managing for relative growth rate across these segments. Maybe, maybe higher.
Usually not the main driver of our growth.
Yeah. 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 and the CBI growth, and how do you even know they're different things? How do you measure it?
Yeah. It's more of a question of timing I would say, Jeff. In terms of how we bucket our growth, we typically think of CBI as revenues kind of recognized in the first three years following the development of a product. Then those revenues get bucketed basically in market penetration, i.e. share gains. It's more of a timing issue than anything else.
They're not, they're not new forever.
Yeah. In a way. Who we got?
Oh, sorry. Hi, it's Joe O'Dea at Wells Fargo. Wanted to ask on price cost and recovery of that. You talked about the 250 basis points, I think maybe half of that you get back this year. I think Auto is the biggest concentration of it. If I saw it right, I think the Auto bridge maybe had 100 basis points-200 basis points of recovery. In sort of the medium term. You wouldn't be getting all that back in the framework. Can you sort of talk about kind of your approach to doing that, maybe why you wouldn't get all that back?
Yeah. In Auto, how we choose to get it back as was evidenced in the bridge, some of it certainly is price cost recovery. In auto, a way that we've always managed to get price is innovation. Innovation is always gonna be a natural component of being able to recover margins. There are obviously you've got the operating leverage, on the basis that, you know, for all particular geographies, we are gonna see, you know, a $7 million-$8 million increase in car bills between now and 2023.
Unified.
Unified, sorry. between now and 2026, 2027. Right there we got the leverage as well. In auto it's gonna 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 recovery of about 3% CAGR in our car bills over the next four or five years.
I would just add, embedded in that assumption that you saw on the slide is that raw materials stay where they are, right? To the extent that, you know, we're starting to see some deflation in some of these commodities, that the price cost margin gap's gonna be more favorable to us. The assumption in this margin improvement plan is that costs kind of stay where they are.
I wanted to circle back on the mega trends comment, 'cause you don't really talk about them as a driver. When you think about something like Welding and Test & Measurement, what are you seeing out there, and is there evidence of these trends that you're seeing as sort of growth tailwinds? If you could describe maybe, you know, what inning we're in. I mean?
In terms of what?
Nearshoring sounds like the biggest one.
Say that again.
Nearshoring, I would think of as maybe one of the biggest ones. You know, just any evidence.
Yeah.
That there's some distinction between that and normal market growth?
I guess where I have a bit of a hard time answering that is I think there's always puts and takes in these industries. So onshoring is certainly helping domestically, but it's not helping us internationally. We're global. You know, there are, you know. I think the way I would describe, you know, the critical characteristics for us again is these are industries that are embedded in the fabric of large global economies. They are doing value add. What they're able to do is hard to do. I think it's more, you know, in, you know, this three-year period, something like that might affect Welding more than it won't, but there'll be something else that'll either be a pro or cons.
You know, there's a lot of puts and takes given the diversity of the portfolio. I think, you know, for us, I think we have a, you know, it 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, you know, we want scale. $20 billion global markets, we're a small piece. We're not depending on mega trends. That's part of that conservative 1%-2% market assumption. We're gonna generate our own growth through innovation, through penetration, through our ability to out-deliver, out-quality. You know, that stuff will help or hurt as it goes.
That maybe sounds a little, I don't know what, you know, sort of un-visionary, but it really is the reality of what works with our Business Model, right? We, you know, we study and follow and get really close to our customers and wherever they need to go next, we help them get there, that's the formula.
Hi. Jamie Cook-
Yeah.
Credit Suisse. sorry, right here.
Oh, hi.
Back to the M&A again. When you're thinking about M&A, is it 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? You know, that's my first question. My second question back to Julian on M&A. Again, acquisitions, you've done some good ones, but they've been, you know, less than people have expected. 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? Thank you.
Well, I'll take a stab, and then you guys can jump in. 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, you know, the consumable versus capital good. You know, none of that really is a factor. You know, we wanna set up in great businesses and grow in those businesses. Whether, you know, in all of these, you know, as long as all seven 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.
Mm-hmm.
It's really, you know, it's not really productive time for us in terms of trying to you know, sort of again outthink our end markets or try to get too cute because what looks good today in terms of portfolio construction might not look so good in four or five years. It's, you know, it's, you know, you've seen it happen before. People go all in on these certain expectations of the future, and they, and they never work out the same. I think the, you know, the methodology we have, which is setting ourselves up in the most profitable evaluated components of industries that are gonna be around for a long time, you know, seems to be the right path for us. On the M&A side, what was the second one? I'm sorry.
The second one, just you know, casting a wide net.
Yeah.
In terms of the type of, whether it's end market, you know.
Yeah. That one, you know, my answer to this may scare you, and I don't wanna do that. Our approach to M&A has always been opportunistic, which basically means we're gonna look at businesses that are for sale. 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 a look at a great business in Miller Electric. Same is true of Test & Measurement. We've tried some of that stuff before. It's just not productive. You know, we're never gonna find something before somebody else does. You know, trying to find water filtration or what, you know, whatever the hot thing is, and it's, you know.
We're not making a big bet, you know, 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 wanna scale it, that's great, like we did with Welding or T&M. The worst case is we drive the margins up, and then we get back out of it if we don't like it or we, you know. It's, you know, we're much more, I would say, strategically opportunistic in the M&A space than sort of out there, you know, with our feelers trying to look for things because it just works the best for us.
My name is Scott. I'm the less successful, but-
Yeah.
-maybe better looking.
I know. You wrote a book, man. I didn't.
I do like your haircut. Eventually you'll-
Yeah, right.
You'll grow into down my path.
I'm heading there. Yeah.
It's, it's happening. Guys, you went from 800 divisions to 84. 84 still sounds like a lot? You know, I don't do what you do. Does that 84 go to something simpler or is there further opportunity for simplification?
If it does, Scott, it's because it happens by, you know, by natural. It's not being mandated by us. I mean, 84 is not a number that we picked. It basically arrived there on the basis of, you know, what's the right level of scale? We acknowledge that we need to scale up the company, right? We were always gonna be a decentralized company. We need to scale up the company because to implement the Enterprise Strategy we implemented with 800 businesses would have been absolutely impossible. You know, it's the right number that basically acknowledges we'll always be a decentralized company and the advantages that that brings us. You know, balanced with a level of scale that we can implement a strategy like this.
The 84 is an outcome, and you know, it shouldn't change very much from there, but if it does, it'll be for a good reason, I would say.
Okay. you know, in M&A, and it's a little theoretical, but have you found at least in your ten years, Scott, in particular, that 80/20 works particularly well with certain types of assets. Where you would have a competitive advantage in a, in, you know, 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? Is there a certain, you know, type of asset that seems to fit particularly well with what you guys do?
I mean, outside of the criteria that Michael and Chris laid out, probably not. You know, we've got to in the end, it's got to be in a market where we can differentiate, where customers want will pay for product performance over, you know, what's the cheapest. You know, good enough is good enough and how cheap can I buy it? I think that's back to that, you know, 12% versus 2% argument versus, you know, 2% industry, 12% return or a 25% return on a 15% industry. Differentiated industries tend to be higher return overall. We can get the same incremental performance in either one using 80/20. The issue is the bang for the buck. It takes the same effort, same amount of capital, all that stuff.
Why, you know. It's rather obvious to say we'd rather be the 25, you know, work on the 25% potential business than the 12. You know, we used to think, you know, we, you know, we had there were differences between capital goods, you know, sort of versus our consumable businesses. I think we've dispelled all of those differences in terms of our experiences. Geographically, you know, we're agnostic. You know, we used to think you can't make as much money in Europe or China. We make the same money all over the world. I, you know, I think it comes down to the nothing different than the fundamental characteristics that Michael and Chris laid out.
Thank you.
Thank you. Cliff Ransom. You guys have helped me over the last 25 years understand culture and process. 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%+ ROIC. At one point, you said 40%+ . Was that a slip of the tongue or was that a number that we should take home?
That was not a slip of the tongue. That was very deliberate. What I was trying to say, Cliff, is the core business, ex acquisitions, is headed to 40%+ return on capital by 2030. If you layer in acquisitions.
Got it.
That's the 35 number. I would just reiterate, those are not targets.
No, I know.
They are pure mathematical outcomes of how we allocate capital and how we run these businesses.
Okay. Given your Business Models, I don't know how to ask this question politely. Why should we believe that you have 35%-40% incremental margins? I would've thought they'd be much higher.
'Cause of the reinvestment rate. Yeah.
Well, a lot of that goes to buyback and dividend.
No, no.
Reinvestment rate in the business in terms of overhead to support growth.
I'm sorry. Would you say that again?
Reinvestment in our business, overhead to support growth.
The 35%-40% is after we've made all the investments that we need to make in the business.
Okay.
Incremental sales, incremental engineering, R&D, manufacturing capacity.
Got it. Thank you, gentlemen.
I like your thinking. I'll say that, Cliff. Thank you.
Well, there's a point there.
Spoke like a CFO. There you go.
Yeah, yeah.
There's a point there because there are many of us, and I'm happy to have you respond to this, that say when you spend that much of your, let's call it free cash flow, on dividends and buybacks, you don't see enough opportunities in your own business to meet your standards. How would you answer that?
I think you gotta start with we generate a lot more cash per dollar of revenue than.
That's one point.
Yeah. We invest, as Michael said, we invest every dollar in our businesses that we can invest.
That you can invest.
Yeah. Because it's good projects. That means, it's strategically aligned. It's a fit with our strategy. It's. When I say we can invest, it's because the business needs it. You know, we wanna grow our businesses. We wanna build our profitability. We're not holding back on investment. That 20%-25% allocation to reinvestment is we're doing everything-
That we're being asked to do.
-our businesses wanna do. We don't do stupid stuff. As Michael said, we don't throw capital at them in buckets and say, "Go find a way to use it." Doesn't mean we're not investing. It doesn't mean we're trying to restrict investment at all. Those are byproducts of how we run the company. Everything we wanna do and we think is a good idea to, and I don't mean just us, I mean in our divisions, gets done, gets funded. It's just a byproduct of the fact that we generate this much cash. There's a lot more, we generate a lot more cash than we need-
Available
-to reinvest in the business.
Our businesses are very focused on the 80/20.
Which is part of that long-term TSR benefit, right? We can consistently allocate to not only reinvest and grow the business, we can consistently allocate to a growing dividend, consistently do buybacks, and consistently do acquisitions as those opportunities present themselves. We don't have to tilt the, you know, the bank account in any particular direction. We can do it all.
I've said to three of your predecessors, you violate every one of my rules for good business. Please don't ever change because you're doing a fantastic job. Thank you.
Thank you.
Andy Kaplowitz, Citigroup. You gave us 4%-7% for all the segments, right? For instance, there's one segment that is not above 2019, you know, pre-pandemic levels. Maybe talk about, like, what you need to do, 'cause you, to your point, you're always active around portfolio management. B ut you haven't done maybe as much bigger stuff over the last five years. Do you need to do any bigger stuff? You know, if I'm thinking about that one segment or anything else to sort of get all the segments to be 4%-7%. Do you have confidence in all the segments being 4%-7%?
I'm not sure which segment you're referring to.
Specialty Equipment.
Specialty. Well, I mean, let's be honest, that's sort of a collection of businesses. There's some things there that are not related. They're, you know, not related to specialty at large, a couple of businesses. you know, I think we've gotten the portfolio to the point, if you look at the margins we generate, you know, there's not a bad business in the portfolio. That wasn't true 10 years ago. They're gonna all have different growth rates, you know, but they're all gonna be able to grow above market given the level of differentiation they have. I think that's, you know, that's sort of the overall point is we're not trying to, you know, First of all, an assessment of growth potential is, you know, it's an educated guess at best, right?
It's also gonna be a factor of what's going on in the macro of that particular business in this particular year. What we're trying to say is really we got seven segments that absolutely can average somewhere between 4%-7% growth over the long term given their characteristics. You know, my view is there's not a big move that needs to be made. There's just some businesses that are, you know, sort of right now in a position, whether it's the pandemic or some particular issues that I don't necessarily think we need to get into, but it's very you know, sort of right now, it'll get addressed and they'll all contribute.
Maybe let me ask a similar question, Scott, around margins. Like, clearly we talked about Automotive, you know, price versus cost is gonna help it. If I look at the different segments, are there any segments that are still, you know, somewhat less mature on the sort of Enterprise Strategy side that, you know, contribute, you know, more in the sort of margin ramp-up? Is everybody or are all the horses kind of in line now? If you go back five years ago, you know, I'd argue Test & Measurement was behind a little bit. Now clearly from this presentation it's, you know, right there at the head.
Yeah. Well, here's the way we manage that. It's really, you know, we have, I think, learned in a very positive way that we are better served as a company by not attaching some terminal value to something as a goal. Whether it's operating margin or growth rate, all the planning in the business is how are we gonna be a little bit better next year than we were this year. I'll take you all the way back to 2012, and you were there, I think. If you remember right, what was the margin goal that we said was gonna? Yeah. Where are we today? We thought 20 was a home run.
The point being, if, you know, as soon as you sort of create some terminal value around a goal, everybody goes to it and that, and then we're done. From a growth rate and from a margin standpoint, I don't know what the top end is. I don't think we'd wanna try to anticipate what that is. I think we can definitely tell you that all seven of our segments have room to get better, which is how we get better as a, you know, get to 30 as an Enterprise. We've also always done these goals based on something that's already happening in the company and just applying, you know, sort of getting there in a larger way. Every Enterprise Strategy goal we've ever issued is not, you know, sort of out of thin air, right?
It's looking at who's at the front end of the curve. We have a segment that may get to 30 this year. There's, you know, we see a path to get the rest of them there. That's as sophisticated as we get, I think.
Hang on, Steve. I've been waiting a few turns. Hi.
Hi.
Way in the back.
Hi.
Nicole DeBlase from Deutsche Bank. Thanks for the question. Maybe just first if you guys could talk a little more about Enterprise Initiatives. I mean, this has been a factor for as long as we can remember now. At some point, do you start to see a waning in that 100 basis points annual contribution that we've been seeing for, you know, many years? Second question is just a clarification. In the 9%-10% organic growth framework, does that include the benefit of capital allocation, like inorganic growth or buybacks, or is that above and beyond the 9%-10%? Thank you.
Let me do that, and then you can do the Initiatives. The 9%-10% EPS growth includes 2 percentage points-3 percentage points of EPS growth from share repurchases and/or acquisitions, some sort of combination. I think we also said that the types of acquisitions we're talking about, we could maintain the share repurchase program. The 2 percentage points-3 percentage points alone is share repurchases, and then acquisitions, such as MTS, for example, would be incremental. We said year one MTS, we really don't expect much GAAP EPS contribution. That turned out to be the case. This year it's about one point of earnings growth from MTS. Maybe that helps you kind of think about that. Enterprise Initiatives.
On Enterprise Initiatives, Nicole, I'd say there's definitely more room to run. I mean, we've been obviously starting out 10 years ago, we were of a view that this is probably short term as well, but what I suppose reemphasize is that these are all granular projects in every one of our divisions that are committed to continuously improving year-over-year. And 80/20 is ongoing. I said the gift that keeps on giving. With this spirit of continuous improvement, both in 80/20 and in sourcing, you know, we expect Enterprise Initiatives to continue here for some time to come. Obviously, we're getting 100 basis points this year. No forecast for next year yet, but it's this bottom-up planning, this bottom-up commitment to continuous improvement that's driving this.
Like I say, these are the amalgamation of a whole bunch of granular projects that are well within the compass of every division. Very likely to be realistic and very likely to be achieved.
We can see them about a year out.
Yeah.
Yeah.
Yeah.
I've learned not to comment on Enterprise Initiatives because as it has been pointed out, I've been consistently wrong on this. I also think there's an element here of certainly continuous improvement in terms of the tools and techniques that we are applying front to back. 80/20 Front-to-Back is way more powerful than it was 3 years, 4 years, 5 years, 10 years ago. I think our people are much better at applying these tools than they were, you know, in the past. The raw material, these businesses keep getting better and better. I think a number of years ago, we said the more work we do, the more opportunity we find.
I think, there's a long tail ahead of us here in terms of further contributions from 80/20 Front-to-Back, as well as the strategic sourcing efforts. Those, by the way, I might just add, are independent of volume. If you, if you're, worried about where things might be going in terms of the macro, it's another element of being able to go into a year with 100 basis points of margin kind of in the bag from these projects and activities, that's a great starting point. Sorry. Where were we?
Which Steve? Go ahead.
All right. Stephen Volkmann with Jefferies. I'm curious, seven years feels like kind of a long time. Is there some degree of PLS or divestiture kind of baked into this math as well?
I would say on an ongoing basis, 50 basis points of PLS.
Yes
Is reasonable.
Maintenance kind of.
You know, from a divestiture standpoint, we've got one left to do on the package that we talked about.
Yeah
A couple of years ago, but beyond that, there's nothing baked in. That doesn't mean we wouldn't do one if we thought it was right to do, but.
Got it. Okay. Then, I thought it was interesting, and just say no if the answer is no, but Patty said something interesting, which was that she had to kind of rejigger the compensation programs t o kind of get people to focus more on growth, which is something I've not heard from ITW before.
Yes.
Is there something going on in terms of the way you're changing compensation?
No. We very intentionally, when we pivoted to growth back in 2016, 2017, changed our compensation system to be basically 60% operating income year-over-year growth and 40% based on organic growth. That's across the company.
Yeah. I think she was talking about maybe, incentives for the sales team and-
Yeah
-channel partners. That's certainly an ongoing process to revamp those efforts.
Yeah, I don't think in our company it's a matter of we got to bribe people to do the right thing. I think you want the incentives to line up with the outcomes that you want, for sure. I don't think it's sort of the front- end of execution. I think it's the back- end of, you know, paying for the right outcomes.
Thank you.
Steve Fisher with UBS. First, an Automotive specific question. I'm wondering how you would compare the competitive dynamics on some of that higher content BEV material that you talked about. How is that compared to the competition on ICE components? Have you had enough time to really assess what content you wanna pursue in that market?
That's a large part of what our teams do, Steve, in terms of competitive intensity, it's just as competitive because other companies like us are seeing the same trends in the industry. They're having to kind of, you know, modify themselves to go after and get ready and skill up. And we've had to skill up in terms of engineering skills in certain disciplines that we didn't have before to go after the EV market. In terms of, a crucial part of your question is where, you know, where do we play? There's a big EV space out there. Again, it comes down to where can we achieve sustainable differentiation and ITW caliber margins, and we've been very intentional about doing that.
If you look at the China example that was cited, that's a division that's making above caliber segment margins in that division, and it's obviously our most, one of our most penetrated divisions on EV because they've been very intentional about specifically which applications they're gonna go after where we can create value for which the customer is willing to pay, as opposed to, "Let's be big in EV somewhere.
I would say we've done enough study to see $300 a car potential relative to $220 on ICE, it, you know, just because there's some interesting things going on from a need profile. Whether, you know, I for sure wouldn't say that that $300 is it. You know, as we learn more, we'll, you know, the likelihood is that we'll see more potential there. You know, there are some different needs from an electric vehicle, things like noise. You know, people don't think about, but those cars are so quiet that the standard, you know, from the standpoint of our fastener business, for example, and the, you know, the little squeaks and rattles are a much bigger deal in an electric vehicle than in an internal combustion engine.
Just as an example. That's right, you know, it's right in the core technology, that's part of why that 300 is actually, you know, the EV potential for us is actually larger. I'm for sure can tell you that we don't understand all of those sorts of nuances around EV relative to ICE. There's a lot more that we can learn as we go.
Great. I have one more follow-up on this, is that one of the things you said in the beginning is that about the environment, that you need to be prepared for a faster changing environment going forward. You also talked about, you know, that deciding where to play is really a critical foundation in being able to achieve your targets. I'm sure there's some degree of rapidity or rapidness how you assess that where to play now. Do you think you're gonna find yourself needing to reassess much more often that where to play question, and are you prepared to do you have the process in place to do that?
We absolutely have the process is the Front-to-Back process because, you know, the first phase of that process is all about deciding where to play. Because of the decentralized structure and the ownership and accountability, we are more likely to be more nimble at doing it than some of our competition.
The metrics are, we start seeing margin squeeze, then we're seeing something that's heading in the wrong direction. It's not like, you know, it's not a wholesale. It's not gonna be a big, you know, big bang change in one of our segments, but we are looking all the time at, you know, profitability trends, growth trends. As soon as we see some nose over in growth rate or some start, you know, start to see a little bit of compression in margin, it at least gets our businesses to start thinking about, is this commoditizing? Is something going, you know, whether are we, you know, what we used to rely on in terms of contributing meaningfully to organic growth, maybe that's running to the end and we've got to go open up some new avenues of growth.
You know, it's not a very subjective thing, is my point, is there's metrics that are leading indicators that we're looking at way before it's an issue.
Thank you.
Hey, Sabrina Abrams, Bank of America. I'm not going to ask for a specific price disclosure, but does the 4% target today include more or less price than the 3%-5% target from 2018? Following the period of inflation the past couple of years, are you thinking differently about your ability to get price going forward?
It's based on a normalized price environment. Whatever that means in the future, we'll read and react accordingly if it's different to that.
It's about the same as in the old 3%-5% target. I will say this, I mean, I do think we've realized some things in terms of how differentiated these businesses are now and how much pricing power. We're not alone. I think peers would probably tell you the same thing. They're, I think, we are kind of on our way back to a more normal pricing and cost environment. If that changes on the cost side, we will definitely react just like we did last time and go after more price. It's, we're kind of, I'd say, back to where we were, and that's kind of the assumption on a go-forward basis.
Just to follow up, how should we think about having 4%-7% growth targets for the segments versus the Enterprise target for 4%+? Just trying to understand, why have different targets there.
Effectively, you know, we would assess all our segments as having the ability to grow at 4%- 7%. Acknowledging that at any given time, we're going to have tailwinds, we're going to have others that are going to have headwinds. Given the diversity of the portfolio, the quality of the portfolio, given that they can all grow 4%- 7%, we should be at 4%+ at any given time. Adjusting for headwinds and tailwinds in one or two segments here and there.
Thanks. It's Cliff Ransom again. Have you tried to apply or can you talk about your experience applying 80/20 to what I call the transactional world, carpet land, HR, accounting, R&D, et cetera? What have been your experience there 30 years of doing it.
Finance? You forgot finance.
Yeah, yeah. I thought you were doing me a favor here by not bringing up finance. I think, what we have recognized, and this is nothing new, is that the fundamental principles of 80/20, and this idea of really simplifying your processes, focusing in the area with the greatest impact, you're gonna get better outcomes as a result of that. Those principles are just as applicable, at the corporate office as they are in our business units. I will tell you, though, the real 80/20 Front-to-Back, everything that we're talking about here happens in the real world of ITW, in the operating units, and not at the corporate office.
We apply it everywhere.
Everywhere. It's holistic.
The principles apply, and that's part of the Enterprise initiatives benefit, is we're simplifying HR, we're simplifying finance. You know, all those functions have an 80 and a 20, and we adjust how we manage them accordingly.
I'm not looking for a name here. You've made very clear that your preference is the sort of $300 million- $500 million sweet spot on acquisitions. We used to say that every five or 10 years, you'd go out and do something that was $1 billion or $2 billion. Have you looked at something larger than that in the last three years? Have you gotten to the ninth and tenth hour? I don't need to know what, but has it even been on your radar?
No.
Thank you. Thanks.
Okay. Out of gas. Thank you. It's. Thank you. Appreciate you being here.
Yeah. Thank you.
Thanks very much.
See you soon.