Q3 2020 Illinois Tool Works Inc Earnings Call

At this time I would like to welcome everyone to the conference call.

All lines have been placed on mute to prevent any background noise after the.

After the speakers remarks, there will be a question answer session.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if you.

If you would like to withdraw your question press the pound cake.

But those participating today, you'll have the opportunity to ask one question and if needed one follow up question. Thank you Karen.

Parents Watcher, Vice President of Investor Relations you May begin your conference.

Okay. Thank you Julien good.

Good morning, everyone and welcome to I T. W. Third quarter 2020 conference call I'm joined by our Chairman and CEO, Scott Santi and senior Vice President and CFO, Michael Larsen during.

During today's call, we will discuss I T. W. Third quarter 2020 financial results and provide an update on our strategy for managing through the global pandemic.

Slide two is a reminder, that this presentation contains forward looking statements.

We refer you to the company's 2019 form 10-K, and subsequent reports filed with the FCC for more detail about important risks that could cause actual results to differ materially from our expectations, including the ongoing effects of the COVID-19 pandemic on her business.

This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release.

Please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO Scott Santi.

Thank you Karen and good morning, everyone.

We saw solid recovery progress in many of the end markets that we serve in the third quarter as that.

As evidenced by our revenue being up 29% sequentially versus the second quarter.

In fact demand levels returned to rates approximating year ago levels in five of our seven segments.

Well two of those construction and polymers and fluids delivering meaningful growth in the third quarter.

On the flip side demand.

Demand levels in our food equipment, and welding segments continue to be materially impacted by the effects of the pandemic.

Although we did see good sequential improvement in both in Q3 versus Q2.

You know, we talk often about the flexibility and responsiveness inherent in our 80 20 front to back operating system.

And those attributes were clearly on display in our Q3 performance.

Supported by our decision early on as the pandemic unfolded to refrain from initiating staffing reductions and to focus on positioning the company to fully participate in the recovery.

Our people around the world responded to a rapid acceleration in demand.

Leveraging the CW business model to provide excellent service to our customers, while keeping themselves and their coworkers safe.

Perhaps the most pronounced example was our auto OEM segment.

Our team executed flawlessly from both the quality and delivery standpoint, and responding to demand levels that essentially doubled in Q3 versus Q2.

And with that the Marin very demanding customer base.

Across all seven of our segments. Our teams can cite numerous examples of how our ability to sustain high levels of service.

In the face of rapidly accelerating demand resulted in incremental business for the company in Q3.

In addition to leveraging our best in class delivery capabilities.

Our divisions remain laser focused on leveraging our strengths to capture sustainable share gain opportunities that are aligned with our long term enterprise strategy.

These efforts are just beginning to take hold.

And I'm confident that they will contribute meaningfully to accelerate on accelerating our progress towards our long term organic growth goals.

The operating flexibility that is core to our 80 20 front to back operating system also applies to our cost structure, which.

Which show through and our operating margin performance in Q3.

Operating margin of 23.8% in the quarter included meaningfully higher restructuring restructuring expenses versus a year ago.

And two segments specific onetime <unk> onetime items, which Michael will provide more detail on in a few minutes.

Excluding these factors operating margin was 25.3% in Q3.

The second highest in the history of the company.

Overall, the pace of recovery in the third quarter exceeded our expectations heading into the quarter. As we delivered revenue of 3.3 billion operating income of $789 million free cash flow of $631 million.

GAAP EPS of $1.83.

In addition, after tax return on invested capital improved to 29.6% and.

An all time high for the company.

Goes without saying that I could not be more proud of how the I'd say the team is managing through this challenging period.

And I want to sincerely. Thank my 45000, plus I tw colleagues around the world.

For their continued exceptional efforts and dedication in serving our customers.

And executing our strategy with excellence.

In the face of unprecedented challenges in circumstances are.

Our operational and financial performance over the last few quarters supports our decision to remain fully invested in.

And the key initiatives supporting the execution of our long term enterprise strategy.

And provides further evidence that I tw as a company that has both the enduring competitive advantages.

On the resilience necessary to deliver consistent upper tier performance in any economic environment.

Moving forward, we remain focused on delivering strong results, while continuing to execute on our long term strategy.

To achieve and sustain I tw is full potential performance.

I'll now turn the call over to Michael for more detail on our Q3 performance Michael.

Thank you Scott and good morning, everyone.

Since the beginning of the pandemic maintaining eye to Wwes considerable financial strength liquidity and strategic Optionality has been a priority.

Our objective was to fully leverage the strong financial foundation and resilient profitability profile and we have built over the last seven years to position I tw.

For maximum participation in the recovery.

And as the recovery progress ahead of our expectations going into the quarter.

We're ready to meet customer demand and we delivered strong financial results.

Q3 revenue was up 29% or almost $750 million sequentially versus Q2.

And on a year over year basis organic revenue declined only 4.6%.

Compared to a 27% decline in Q2.

The impact of last year's divestitures was 1% and it was essentially offset by 0.7% of favorable currency impact.

Product line simplification was 30 basis points in the quarter.

Despite the negative volume leverage and our decision to stay invested in our key strategic priorities Q3.

Q3 operating margin was 23.8%.

Down only 120 basis points compared to prior year.

If you set aside the impact of higher restructuring expenses and two onetime segment items that I will describe in a moment.

Operating margin would actually have increased year over year to 25.3%.

Strong execution on our enterprise initiatives was a big contributor once again at a 120 basis points as all segments delivered benefits in the range of 70 to 190 basis points.

As expected.

Our decremental margins were a little higher than normal at 46% in the third quarter.

Excluding the two onetime items that I, just mentioned and higher restructuring expense, our decremental margins would have been about 20% significantly better than our historical decrementals of 35% to 40%.

Operating income was 789 million and GAAP EPS was $1.83 within.

With an effective tax rate of 21.3%.

In line with last years, 21.6%.

Solid working capital performance contributed to free cash flow of $631 million and a conversion rate of 108% of net income.

On a year to date basis free cash flow was 1.9 billion.

The conversion rate of 127%.

Pair to 105% last year.

We now expect free cash flow to end the year significantly above 2 billion.

Our balance sheet remains strong.

At quarter end, we had $2.2 billion of cash on hand, no commercial paper and.

And a two and a half billion dollar undrawn revolving credit facility.

Tier one credit ratings and total liquidity of more than 4.7 billion.

In terms of our debt structure, you can see an increase of $350 million in the short term debt, which is simply a reclassification from long term to short term as our 2021 bonds are coming due in less than 12 months.

So in summary, a very good quarter operationally and financially.

As the recovery progressed, well ahead of our previous expectations.

Moving on to slide four for a closer look at the third quarter recovery and response by each segment.

You can see that every segment responded effectively to the increase in demand recovery and improved sequentially on both revenues and operating margin.

I would highlight just a few things that Scott mentioned, including the fact that our automotive OEM segment was able to essentially double their volumes in a quarter or just 90 days ago.

As operating margins went from negative 20% plus.

In addition, six or seven segments had operating margins not segment margins operating margins above 20%.

Fag food equipment was just below 20%, but we expect them to get above 20% in Q4. Despite the fact, there they are operating in a pretty challenging environment.

Next to slide five starting with a quick look at organic revenue by geography.

As you can see customer demand improved in every region.

North America declined by only 5% in Q3 compared to down 26% in Q2.

Europe also improved significantly down only 8% the sequential improvement of almost 30 percentage points.

Asia Pacific turned positive this quarter up 3% and China was the standout up 10% as the recovery continues to take hold in China.

In China, specifically, automotive OEM polymers, and fluids and specialty products all grew double digits.

So in summary, broad based geographic recovery in the quarter.

Now, let's walk through each segment, starting with the one that experienced the most pronounced recovery automotive OEM.

In a matter of weeks, our customers went from being shut down to operating close to full capacity and the team responded by leveraging their experienced workforce local supply chains and flexible operating system to quickly ramp up and meet customer demand.

Overall organic revenue was still down 5% year over year, with North America down, 10% and Europe down 5%.

China, which had already turned positive last quarter at 6% also improved sequentially and was up 15% this quarter.

Lastly, as discussed on our last call. We did initiate a few restructuring projects that were part of our 2020 plan pre pandemic, which.

Which will lead to a reduction in operating margins of 150 basis points to 20.8%.

Turning to slide six.

As expected food equipment was the hardest hit segment in the quarter as organic revenue declined 20%.

A significant improvement, though from being down 38% in Q2.

North America and international organic revenue were both down about 20%.

Quitman sales were down 21% and service was down 17%.

Institutional demand was down about 30% and restaurants, including QSR, we're down a little bit more than that.

On a positive note retail which includes grocery stores grew more than 30% supported by the rollout of new products.

Despite the significant negative volume leverage and higher restructuring expense operating margin was still 19.6% Ics.

Excluding the higher restructuring impact margins would have been 21.4% and I think it's worth noting that in this most challenging environment.

The segment generated almost $19 million in operating income.

In test and measurement and electronics organic revenue declined only 2% with test and measurement down, 6% and electronics up 2%.

While demand for capital equipment remains soft.

The segment benefited from considerable strength in a number of end markets, including semiconductor.

Health care and clean room technology.

As you can see from the footnote the reported operating margin of 23.7% included 350 basis points of unfavorable impact from the removing.

Potential divestiture from assets held for sale.

Excluding this impact the operating margin would have been 27.2% which is.

Which is a much more accurate representation of the underlying profitability of the segment.

Given the current environment, we simply decided to defer this the best Sicher for now.

Speaking of divestitures, let me make a broader comment on our portfolio management efforts and specifically the 2018 decision to divest seven businesses that we determine no longer fit our enterprise strategy framework with revenue of approximately $1 billion.

We expect that the completion of these divestitures will improve our overall organic growth rate at the enterprise level by approximately 50 basis points, an increase enterprise operating margins by 100 basis points.

In 2019, we made good progress competing for divestitures with revenues of approximately 150 million.

And we are seeing the benefits financial this year, including 20 basis points of operating margin impact.

Well the pandemic put a hold on our efforts this year our view regarding the long term strategy fit of the remaining divestitures has not change.

Accordingly, we will resume to the sales process for these businesses when market conditions normalize.

Okay, turning to slide seven.

In welding demand for capital equipment was down year over year as organic revenue declined 10% Hello.

However, the commercial business.

Which accounts for about 35% of revenue and serves primarily smaller businesses and individual users was up 11%.

In industrial customers were holding back on capital spending and organic revenue was down more than 20% this quarter.

Operating margin, though was remarkably resilient at 27.9%.

On a positive note polymers and fluids reported record organic growth of 6% in the quarter.

The automotive aftermarket business benefited from strong retail sales to grow 10% with double digit growth in tire and engine repair products.

Fluids was up 6% strong sales of health care and hygiene end markets.

As a result of the volume leverage and strong incremental margins of 78% operating margin expanded by 250 basis points to a record 26.6%.

Moving to slide eight.

Construction had a remarkable quarter benefiting from continued strong demand in the home Center channel.

To deliver a record organic growth of 8%.

All geographies were positive with North America up 12% with double digit growth in the residential and renovation market.

Offset by commercial construction down 10%.

Europe was up 6% with double digit growth in the Nordic region.

In Australia, and New Zealand revenues grew 3% and were positive for the first time in more than two years.

As a result of the volume leverage and strong incremental margins of 59% operating margin expanded by 300 basis points.

To a record 28.1%.

And some of you may remember that when we launched enterprise strategy in 2012 construction had the lowest operating margins and the company seemingly stock right around 12%.

Certainly good performance in the industry, but not really I tw caliber.

The fact that the construction segment delivered the highest margins inside of by GW in Q3 at more than 28% is therefore pretty remarkable.

[noise] specialty organic revenue was down 5% with North America down, 4% and international revenue down 7%.

Demand for consumer packaging remains solid, but was offset by lower demand in the capital equipment businesses.

Operating margin was 25.2% and included a onetime customer cost sharing settlement.

Excluding the impact of this one time item.

Hurting margins would have been 28%.

Let's move to slide nine for an updated look.

At our full year 2020.

As I mentioned earlier the demand recovery in Q3 exceeded the high end of our expectations going into the quarter and as a result, we're updating our financial outlook for the year.

As we sit here today, we expect organic revenue for the full year to be down 11% to 11.5%.

Operating margin to be in the range of 22% to 22.5% and our.

And operating income in the range of $2.7 billion to $2.8 billion.

As I mentioned free cash flow performance continues to be strong and we expect to end the year well above $2 billion.

As you think about Q4 keep in mind, the typical seasonality from Q3 to Q4.

And that Q4 has two less shipping days also please note that we expect a slightly higher tax rate in Q4 versus Q3, and our full year tax rate is expected to be in the 22% to 23% range.

With respect to our outlook for 2021, we expect to reinstate annual guidance when we release full year 2020 results.

Early next year.

With that care and back to you.

Thanks, Michael.

Julien, let's open up the lines for questions. Please.

Certainly at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Our first question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.

Hi, good morning, and nice quarter, I guess, two questions sort of one strategically as well as we're getting to recalibrate can you sort of speak to where you've had a good opportunity to grow faster than the market and which markets do you see best positioned to grow faster than the market issue.

Sort of take advantage of the opportunity right now to an update on how the M&A is trending and then I guess my second question as we think about 2021 understanding you don't want to talk about.

You know Incrementals you had outside of volumes is there anything that you can help us with headwinds versus Tailwinds I guess.

Have some of the salary cuts that other people will be comping.

Structuring I'm just trying to think of the puts and takes in your ability to put up outsize incrementals. Thank you.

Well, maybe I'll, let me take the sort of strategic questions and then as Michael to comment on the on your second question.

What I would say overall is this is very much a dynamic situation that's still playing its way out we are.

Certainly responding from a tactical standpoint pretty well at this point our ability to remain invested as certainly and with the mission of.

Focusing on making sure we serve our customers extremely well through this period and also.

The that we are in position to seize opportunities that come our way we are we were.

We remain focused on that its I think at this point, it's way too early to sort out the sort of priorities are the rank order of opportunities other than.

Ill refer back to the comment I made in my opening remarks that every one of our segments can point to solid examples in the third quarter of where their ability to.

To have immediate availability to respond to a customer need resulted an incremental business for the company.

It remains a priority but.

I think the situation in the near term is just too dynamic in terms of having any real view at this point of.

Of what parts of the company have more opportunity than others, but I think the.

I think the thing we want to be clear about is we are focused on it and it's.

And expect those opportunities to continue to play out as we go forward.

From an M&A perspective, all all I I would really say at this point is what we've said in the past is from the standpoint of of the long term strategy of the company. We remain very open to the opposite good opportunities that come our way.

But I would also marry that up with the fact that in this environment fuse for the flip side of our own experience on the divestitures. As this is not a particularly good time for quality business the CES.

So we're not in the market for.

Distressed assets were interested in and bring quality companies in the <unk> and into the company inside teed up that we can.

That fit our strategy and ultimately that we can help even better companies and this kind of environment. This is not necessarily a great time to sell slot on a medium to long term basis.

As we have said repeatedly in prior forms it remains a core part of the overall growth strategy and profile of the company, but from a tactical standpoint short term.

Not a big instead of big focus right now.

Hi, Thanks, guys and then on your on your second question, Jamie as we've talked about before the planning process.

Set up by GW is very much a bottoms up planning process and we simply haven't gone through that process, yet with our with.

With our businesses and so I can't really comment in great detail I will I promise that when we provide guidance on our next earnings call.

Ill be able to address your specific questions in detail I mean, I'll just point to the obvious ones.

At this point that the.

Comparisons in terms of year over year growth, obviously, what the.

But they are which is fairly high.

Easy.

And then specific to your question around Incrementals are long term incrementals are still in that 35% to 40% range.

I will say that as you saw this quarter in both Palmetto fluids and construction.

That when we get a reasonable amount of orders.

Organic growth the incremental margins tend to be significantly higher it's certainly in the near term and so you may see some of that.

When we give you the detail for 2021.

Okay. Thank you I appreciate the color.

Your next question comes from John inch from Gordon Haskett. Please go ahead. Your line is open.

Thanks, Good morning, everybody.

John.

Good morning, guys, Hey, Scott what are you and your auto to saying toward the prospects.

To return to sustainable growth in North America, and Europe in other words.

How much pent up demand that quickly is key.

Is creating for our runway do you think beyond sort of a quarter or two what the pent up stuff for.

Backtracking and I'm just wondering if you also think a couple of companies have commented on this and it seems intuitive.

Publix, avoiding mass transit in big cities and driving more as they did in China. During their experience do you think that add some juice to the potential recovery in auto next year.

Certainly potentially I would say.

Our our thinking on that has not yet, particularly deep, which we're still in the tactical mode.

I think beyond what you the.

Situation that you just talked about are the shift in.

And demand related to this covered experience on a median basis that might result from what you talked about there. We also are looking at dealer inventories that remain at five year plus low single there certainly.

So I don't know that in our own thinking we're sort of out.

You know yet long term, we'll we'll do some of that as part of the our our planning process and and as we think about how to.

We want to.

Adjust our positioning around that sort of trend long term.

But I do think that based on just the.

Sort of more current.

Current conditions in the marketplace that certainly Q4, we expect to be solid and into Q1 at this point.

And we'll have a better view when we.

Announce our results and we'll have our 2022 plans 2021 and 22 plans baked.

In early February.

No Thats fair I just wanted to also just follow that up let's stick with the auto theme I've got a couple of contacts that OE is and what they told me is right now there is a pretty substantial problems with supplier quality and lot of it made actually nothing to do with the fact that a lot of workers are booking off time and it just not coming into work and it's creating a lot of stress in the city.

Adam for requirements for the always to work overtime, and do rework and stuff like that.

Is this firstly are you seeing qual.

Quality issues with respect to your own supply chain, who feed IBW. His plans and secondly, this actually I wondering creating an opportunity because you guys can leverage 80 20 to drive some incremental share just based on.

Just based on the fact that you can fulfill.

Quality versus perhaps what others are doing I realize you've got a business. This kind of program by program. That's why I'm kind of asking the question, you're not Delphi or whatever.

Yes, there's something going on there.

This program by program, but we are not sole sourced in a lot of the programs that we participate in so certainly there is some of the issues you've talked about we're absolutely.

President and were part of our overall results in auto in the third quarter and we expect that to the certainly continues to be an incremental opportunity. There are certainly lots of parts of the auto we supply chain that we don't participate in so we're not and we're not going to solve the problem.

Certainly in the areas that we that we serve our customers we are.

Laser focused on making sure they're aware that we stay in a way that we remain in a very strong supply position that we're there to help them to the best of our ability to deal with some of the issues that you talked about.

And from the from a quality standpoint, and we've talked in the past about the fact that this company operates with localized supply chains strong commitments to long term relationships with our key suppliers and the.

Going back to the second quarter. Our planes route has been to make sure that we that that supply chain for us remains in place.

In position robust and ready to flex with us Thats thats. It thats not a new thing for us that's inherent in our business model and the way we operate.

And so far.

We should have probably also thanked our supply base in my opening comments because they've been remarkable today.

Got it thanks, Scott appreciate it.

Your next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Hi, good morning.

Maybe a question for us Michael just around the free cash flow outlook I think you'd mentioned on the previous call that you should have a big.

Down in second half free cash 600 million or so.

During Q3, certainly that the free cash flow.

Looking pretty robust. So just wondered if you had any updated thoughts around sort of working capital management, and what kind of pressures that could put on on the cash flow.

And how do you think and managing that working capital now as the sales are starting to improve.

Yes, it's a good question Julian I mean, I think as a result of the the fact that the recovery progressed ahead of our expectations into the quarter, our free cash flow performance was also.

Significantly better than what we expected going.

Going into the quarter and we expect something.

Something similar here in the fourth quarter like I said year to date, we're at 1.9 billion and we should end the year significantly above 2 billion I will say this I think that the working capital performance inside the company give.

Given the recovery here in Q3 was was pretty remarkable the teams did an excellent job focusing particularly on the on the receivable side.

Early on we put some focus on our credit and collection efforts.

And that was as a result of that if you look at our you can see that from the outside but inside the company. When you look at our past due performance.

We are right in line with where we are historically, which given the pressures here. During the pandemic is quite remarkable. So you should expect drilling continued strong free cash flow performance and we expect to end the year well above 100% as we as if things stay the way they are here in the in the fourth quarter.

Thanks, and then just a quick follow up perhaps for Scott.

You've mentioned.

Very low inventories in the auto Oems sicko.

Just wanted to looking across the disparate portfolio at IP W. How would you characterize that the state of inventories at channel partners and customers when you're looking at the other businesses are you seeing much restocking for example in general.

Yeah, we've talked about this in the past that we have very little visibility there.

No comment I made was more around dealer inventories, which is obviously a step removed and their approaches there are certainly their own.

And it's a number that's reported.

And is obviously very visible.

In terms of most of our other channel partners given the.

The fact that you order from us today.

We ship it to you tomorrow, there's very little buffer in terms of inventory. So I think from the standpoint of destock restock, it's not a big factor for us really ever.

Great. Thank you.

Your next question comes from Andy Casey from Wells Fargo. Please go ahead. Your line is open.

Thanks, a lot good morning, everyone.

Good morning.

A question on the outlook if I.

Take the midpoint of.

The numbers that you provided it seems to imply Q4 revenue kind of.

Kind of flattish with both Q3 and last year, but that.

But the margins.

Our expected if I'm doing the math right to decline to about 22% to 23%.

From Q Threes, adjusted 25.3, and then last year's 23.8.

Is that entirely mix or.

Or should we consider something else.

Yes, I think any of the major.

Driver up the guidance, we're providing the framework we're providing for Q4 is really the fact that if you go back and look historically Q4 is.

As tends to be.

Lower than than Q3 from a revenue and margin standpoint, really primarily as a result of the fact that there are two.

Two less shipping days in the fourth quarter, what I can.

What I can tell you in terms of.

The underlying sales trends.

That we obviously significant sequential improvement here in as we went through the third quarter.

Those have remained on trend.

As we sit here in October so that's certainly encouraging.

And then the margin performance again, its you should expect there is nothing unusual here in the fourth quarter.

I will say that I pointed to some one time items.

Here in the third quarter.

Obviously, we don't expect those to repeat in the fourth quarter. So hopefully we provided enough information here for you to put together your your own view of what the fourth quarter might look like with your own assumptions, but what's reflected on the on the page in the deck is really our current view us as we sit here today for the for the full year.

Okay. Thanks, Michael and then.

If I may last quarter, you gave us some information about market share when benefit too.

Annualized revenue would you be willing to share where the company stands on that metric meeting did it increase this past quarter and it's so yes.

But magnitude about how much.

Yes, I think what we gave you last quarter was just a couple of two or three.

Real examples that had already started to play out as we were reporting our results. It. This is not a list that we're keeping inside the company. This is.

Certainly a major focus across all seven of our segments.

Our son, I guarantee you that our segments are tracking it.

Yeah.

Very diligently but at this point I would assume it's certainly continued to broaden out and.

Yes, it would just be impossible, given the thousands and thousands of customers that we have that we were keeping our running tab of all this stuff and reporting on his wouldnt.

That wouldn't be practical nor nor would it be accurate probably.

Okay I'll pass it along thank you.

Thank you.

Your next question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Good morning, guys nice quarter.

Morning.

Scott or Michael if you look at a couple of your segments in the quarter, such as construction or polymers and fluids.

Growth rates, we rarely ever see in these segments. We know most in much of the growth is coming from your strength for instance, in construction renovation or auto aftermarket, but you've also done a lot of pls in these segments, which you mentioned are helping the margin side. So we also seeing the fruits of the labor on the revenue side too or is this just pandemic related.

Coverage and what could that mean for the sustainability of growth in these particular segments in 2021.

Yes, Mike.

My answer to Andy is that some of both.

There are certainly certain mark.

Market sectors or product categories within both of those segments that are.

Benefiting from some pandemic related demand weakness, we actually talked about that very question with the leaders of both of those businesses.

And beyond those sort of pandemic related benefits in the near term.

Both of their results also reflect a solid progress in terms of impact.

Improving the overall growth posture in profile in those two segments.

Scott that's helpful. And then maybe about food equipment could you give us more color in a sense you mentioned institutional was up there.

30% would rest.

Restaurant down a little more than that the grocery stores were up 30 as you look out over the next few quarters do you see continued recovery in institutional and sustained strength in grocery and can you see your food. It couldn't sales continue to recover if the restaurant facing pushing the business stays weak.

Yes, so we think that the recovery here will we.

We'll probably be on the slow side of things it will it will take a while as you look across the portfolio food equipment is probably the segment, where the recovery for obvious reasons will will take a little bit longer.

Yes, I can give you a bit of detail maybe on the on the quarter in terms of the end markets the institutional side down.

Down about 30%, which was the same as in the second quarter within that health care is is doing slightly better and the drag really is.

On the lodging side as you might expect.

Restaurants, QSR did improve.

Sequentially versus the second quarter, and then obviously a big improvement here on that.

On the retail side.

Supported a part of that was market and part of it was.

New product Rollouts share gains.

And so that's why that business was up almost 40% on the retail side, but to answer your question this will be.

As we sit here today, we think this will be.

A fairly slow recovery in.

In food equipment in the near term I think in the long term our view hasnt changed in.

In terms of.

How attractive this businesses.

Both in terms of our ability to grow above market and and our ability to do so at.

You know a very attractive margins and I think you saw in the quarter here.

For this business to already be back at 20% operating margin and generating 90 million as of income given the environment that they're dealing with is a pretty remarkable accomplishment so near term.

Near term slow, but long term, we we are very bullish on this business.

Helpful. Michael Thank you.

Your next question comes from Ann Duignan from JP Morgan. Please go ahead. Your line is open.

Yes. Good morning, Thank you and most of the short term questions have been answered at this point and I thought maybe I could ask about the automotive business in terms of what you're seeing out there for future programs.

No you bid on platforms. Many years in advance and are you beginning to see more our accuser RFP is coming and for electric vehicles and electric platforms.

How does that change the dynamics within the team, especially maybe in Europe that ahead of the U.S. Thanks.

Yes, I'd say a couple of things in terms of new program activity generally things certainly got pushed out you don't.

As the.

Based on the pandemic impact and so a lot of that activity in the second quarter pretty much disappear.

Disappeared as you would expect but that in the third quarter has picked up nicely.

In terms of our engagement with our customers around their future platforms and.

Areas of opportunity for us to participate and and we've talked about the TV question, we've talked about that a lot we remain.

Pretty agnostic from the standpoint of internal combustion versus zeevi from the standpoint of the overall opportunity profile for GW in terms of the types of.

Solutions, where we can add value in fact, it's it felt slightly higher on energy on a per vehicle basis.

And as you would expect on a on a relative basis, it's not as big as the.

Volume of projects on the internal combustion side at this point, but certainly from the standpoint of.

The growth in the number of projects that were engaging on any be it for all the reasons you would expect that is certainly.

Coming up the curve faster.

Okay. That's helpful color.

That's helpful color. Thank you I appreciate that and then could you talk about it at China, and what you're seeing there and beyond just automotive we read a lot about whats going on not a lot of in China, but maybe you could just talk us through what you're seeing in the other segments in China, specifically thank you.

Yes, so maybe just to take a step back. So if you go back to the first quarter.

Sales in China were down 24%.

In the second quarter year.

Flat positive, 1% and then in Q3 as the recovery continued to.

Take hold that business actually grew 10% year over year.

Auto is actually not the fastest growing business in China, but auto was up five.

15%.

And so as was specialty.

And then our polymers and fluids business was up 30% hearing in the in the third quarter in China, and then as you'd expect there is still.

You know a slower recovery on the food equipment side down kind of in the in the mid single digits.

Range so.

But certainly encouraging trends and as as the recovery continues to take hold and in China.

Okay I appreciate that I'll leave it there and turn it over thank you.

Q.

Your next question comes from Scott Davis from nucleus Research. Please go ahead. Your line is open.

Hi, good morning, guys.

Scott.

The.

Results, obviously construction or.

Really amazing overall.

Can you give us a little bit color on whether you put up those numbers, despite maybe some product shortages or other product shortages what.

I guess kind of a natural follow up is that what what rolled price play in the strong results might have been.

Might have been able to get a little bit of price given the supply demand environment.

Yes, I mean the.

The the results in construction were driven by.

Our ability to.

Supply some of the most demanding customers that we deal with so there were no shortages.

Scott said earlier, I mean, I think lot of credit to.

To the operating team and a lot of credit to our own supply chain, our local supply chains and their ability to respond and.

Me.

So really strong activity in the home centers.

If you look at you know the residential renovation business was up almost 20% in Q3 after a strong Q2.

So.

But like I said. This this was goes all the way back to our decision I think do not.

Initiate aggressive headcount reductions in Q2 and focus instead on winning the recovery and Thats. What you are seeing here in construction, our ability to supply and take care of customers.

And do so at at record margins, which by the way are not driven by price there.

They are.

Driven by a range of things in this quarter in particular your volume leverage was certainly helpful.

The enterprise initiatives continue to contribute in a big way.

And price was really not a factor in this.

Its price something that you generally petru towards kind of the end of the year.

Regular cycle on price or is it more optimistic.

But it's it's.

More ups.

A planned process, it's an annual cycle.

Yes that is certainly not something that you.

We are.

In a position to be very tactical about it yes.

The goal is to.

Yes, Scott offset any raw material cost inflation.

And there is very little of that.

In the current environment and so.

Price was really not to answer your question a significant factor here.

Okay.

Okay, well, that's that's good I'll pass.

Good luck guys. Thank you.

You too.

Your next question comes from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.

Hi, Thanks, good morning, everyone.

Hi, Joe.

Maybe just starting off just just on kind of the near term and thinking about that Fourq you implied gross number Michael I think you mentioned in your prepared comments that theres going to be two less shipping days I just want to be clear. The two less shipping days is that on a year over year basis is that or is that versus threeq, you and does that account really for.

That deceleration.

Yes, that's versus the third quarter I think theres. There are 64 days in Q3, there are 62 in Q4.

And that is exactly the same set up as last year. So on a year over year basis. There is no.

And I would add and its very technical but some of the shipping days between Christmas and the new year holiday are typically.

Let's just say thats, not very robust yeah, well I think like more than two and maybe Joe what you're really asking is are you are seeing.

Are you implying that things are decelerating and I think thats certainly not the case.

I think.

So we have not seen.

Anything to suggest that things are slowing here in the <unk> in the fourth quarter.

Got it okay.

Okay. That's helpful and then.

You don't want to dig into the food equipment segment for a second you mentioned the retail part of your business was up 30% in something.

And some of that was driven by product Rollouts I'd love, a little bit more color on that.

What you're doing there specifically and whether there was any benefit that you saw from just pent up demand for not being.

For not being able to potentially shift into Q I'm, just trying to trying to understand that 30% number and food equipment.

Yes, I mean, there was some of that I think.

In Q2, it was a little difficult to get in there with the product Rollouts, but this is part of the annual.

Cycle in food equipment, where we rollout.

New products with added features.

So.

I also think it's if you were to ask our team. They would certainly suggest that there was some pretty significant.

Share gains here in the <unk> in the third quarter as a result of that.

These new products being rolled out so hopefully that answers your question.

Yeah, that's that's helpful.

That's helpful. Thanks, guys I'll get back in queue.

Okay.

Your next question comes from Jeff Sprague from vertical research. Please go ahead. Your line is open.

Thank you good morning, everyone.

Maybe just one more around the kind of short term.

So.

So.

Looks like you Didnt really see any like inventory whipsaw effect and Scott you explain but clearly how your business operates but did you get a sense that the.

But he was caught off guard.

And you know there is a fair amount of catch up from Q2 and Q3. So it may not be an inventory effect per se, but it's just kind of a.

Yes, a snap back that does in fact create some.

Somewhat down as we move into Q4, it sounds like you're not seeing that yet but.

I just wonder you know you're kind of antenna on the ground is there any sense that there is that kind of dynamic at play here.

Yeah.

This is not going to be helpful.

Helpful answer, but it's really hard to tell Jeff I think at this point is this is obviously a fairly unprecedented situation.

On.

So many respects all we can do is stay in position.

Somebody, but our pet the dog.

Yes.

That's not that's not here [laughter].

You know I.

You know that some of that may very well be be a factor.

It's just impossible to tell I mean, all we can do is is what's within our control which is to stay in position to serve our customers.

You know were third quarter was certainly the first part of the recovery from an completely unprecedented comes.

Complete shutdown of wide swaths of our customer base and the economy in.

So I wouldn't certainly rule out.

Any any any and all of the above in terms of impacting the conditions right now and we'll see how they play out from here, but.

All we can tell you is what I'll go back to what Michael said earlier is at least through obviously through the third quarter and through October.

We've seen no pull ins.

Pulling back.

Right.

Yes, I am doing my part here the healthy economy got a construction guys showing up and my dogs Barking Adam So.

Yes.

Can you also just give us an update on your thinking on share repurchase here. It sounds like M&A is probably sliding to the right. The cash is obviously gushing.

Doesn't look like you did anything in the quarter, maybe I'm wrong, but what's your.

What's your current what's your current thinking thanks.

Yes so.

Yes at this point.

Our primary focus is really on running the business and getting our plans together for next year.

And so we suspect.

Suspend the buyback back in in Q1, we've done.

We spent $706 million at somewhere around a $167 a share and we're essentially done for the year.

And our focus really is on.

Running the business and getting our plans together and then we had a.

And to give you our thoughts on what 2021 might look like we'll give you an update at that point also one on share repurchases.

Great. Thanks for the color.

Your next question comes from Stephen Volkmann from Jefferies. Please go ahead. Your line is open.

Hi, good morning, gentlemen, Karen.

Good morning.

Just a couple of quick follow ups, if I could in terms of the strategy to sort of when the recovery. It seems like maybe automotive might be amongst the most fertile ground as you're able to fill orders that may be competitors can't and I'm. Just curious maybe it's way too early for this but.

Is it 10.

Potentially possible to think about your historical wins relative to the the auto build increasing is it too early to think about that.

Well I think it would be I think what I would say Jeff is this gives us an opportunity.

Two.

Demonstrate to our customers the value equation I'm, sorry, Steve I was just the last one thanks Karen.

Sorry, Steve.

Yes.

But it was it was the dog the dog is still throwing me.

[laughter].

Yes, my apologies the.

What I was saying is that I think this is a phenomenal opportunity for us to demonstrate the value equation around TWC.

Roland and the auto OEM supply chain from the standpoint of a comprehensive.

Our ability to serve you through thick and through them and so I would expect that the that are.

Customers experience with us through this particular peers.

Particular period, we will certainly be contributing to our ability to on as we go forward to secure more business based on this.

The sort of full range of the value add that we can bring include.

Including our ability to supply one when things are dicey.

Okay, all right fair enough and then just quickly on specialty product I think Michael you mentioned something about cost sharing I'm. Just curious if there is any detail there anything we should be thinking about going forward.

Uh huh.

This is a onetime item and it.

And it relates to an agreement with a customer they added.

For obvious reasons I can't give you a ton of detail but.

I think the important thing this was a onetime item and.

You're not going to see it again.

Got it thank you guys.

Thank you.

Your next question comes from Nicole Nicole Deblase from Deutsche Bank. Please go ahead. Your line is open.

Yes. Thanks for the question good morning, guys.

Hi, Nicole.

Hi, there so maybe we can start with just the cadence.

The quarter did you see continued improvement throughout the quarter.

The organic growth kind of similar across each month.

Yes, I think the.

This the sales trends in Q3 were pretty strong right out of the gate in July I think we talked about that on our last earnings call and really remain that way.

Through August September and and so for.

So far what we've seen of tobar.

Okay got it and then just an update on the restructuring I know that on the last call you guys kind of noted that you expect to spend around 60 million in the back half, but given that top line is kind of coming in probably better than you would have expected. It 60 million still the plan for the second half and if so can you maybe parse out what was done in Threeq.

And what you expect to do in the fourth quarter.

Yeah, you're right because it's we now expect it to be a little bit lower than the 60 million that we talked about on the last call.

Let me just say first that just a reminder that the projects that we're doing this year are essentially the projects that were in the pre pandemic plan if you like.

Theres very little specific.

Tied to the pandemic from a restructuring standpoint.

And part of the reason for that is obviously the recovery is now progressing.

At least in the third quarter at a.

A pace that exceeded our expectations. So we have done 30.

$37 million a year to date.

And we expect to end up somewhere around 50 million for the for the full year.

Okay and that probably means that you guys were kind of expecting one to one payback as we think about the impact to 2021 somebody else's effects.

I think it's more like 50 million for next year is that fair.

Yeah, I mean, if I, yeah, I mean, I think the the payback as we've talked about before on these projects. These are really the the projects that are coming out of our front to back.

Process are typically less than 12 months, so that would be a reasonable assumption okay.

Okay got it thanks.

Your next question comes from mid Galbraith from Baird. Please go ahead. Your line is open.

Okay, great. Thanks for squeezing me and good morning, everyone.

Just.

Quick question on on on margin here, especially sort of the margin algorithm going forward.

Looking at.

Gross margins it was very nice to see them above 42% again and I'm wondering here just conceptually as volume we get back to volume growth at appointing point in time do you see.

Opportunities continue to expand to drive gross margin or is this mostly a.

Exercise of.

Leverage on its DNA in terms of driving incremental margin.

Well I think we've demonstrated over the last seven years that.

We have a pretty good track record in terms of continuing to.

Drive improvement in our cost structure, both on the variable side as well as on the on the SGN a size. So so we would expect both and I should have said this upfront.

As we begin to think about 2021, I mean that is and the enterprise initiatives specifically they didnt, we didnt talk a lot about that but they contributed a 120 basis points of.

Margin expansion here in.

In the in the third quarter.

Year to date were above 100 basis points and were seven years into this and so.

I think it's certainly a lot of positive momentum going into not just the fourth quarter, but also.

But also into next year as these enterprise initiatives continue to contribute to our.

Margin improvement in a meaningful way, both variable and on the M&A side and on the on the fixed cost side.

Got it Okay, and then my follow up.

Going back to welding.

And I appreciate the color that you guys gave there I'm wondering if you can provide a little bit more.

In terms of.

So what you're seeing going forward arguably speaking some of your customers in areas like heavy equipment and such.

Might be seeing some of the production schedules bottom out do you have any sense for how demand my progress here and at what point in time, we could be in this segment, we come back to growth.

Well I think mitigates just as you look at Q4, I think Q4 will.

Thats your question will look a lot like.

Q3, probably.

I think we haven't done the plans yet for next year and and that when we when we get together next year, we'll give you a little more color by segment, including welding, but.

It's really a little too early to tell at this point, so I mean like as I said upfront.

The comparisons year over year are going to be relatively easy so.

So just on that basis.

Thats certainly helpful. As we think about next year, but we'll give you a better answer Mig.

When we provide guidance for for 2021, okay.

Appreciate it good luck.

Sure.

Your last question comes from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.

Thanks, Good morning, everyone. Thanks.

Hi, guys.

Sure obviously become a look around here.

I do want to go back to restructuring.

50 million this year that does that.

The 100 basis points for next year does that provide some upside potential to that number.

Well.

You know I think.

Im not going to let you pin me down on the number yet for next year, because we haven't gone through the specific projects and activities that support that number for next year, but I think it's reasonable to assume a meaningful contribution again next year.

From our enterprise initiatives, and which includes 80 20 work.

As well as the work that's being done on the strategic sourcing side. So.

That's probably the best I can do right now is expect another meaningful contribution.

From the enterprise initiatives next year Okay.

And then a quick one on.

On tools.

Very impressive performance and I was surprised because I think I'm right in saying that you have as it used to be a pro choice.

Channel that there's very limited exposure to that so it seems like this is all driven by new residential construction renovation would have been I assume still quite quick.

Quite anemic is that the case and.

What are you seeing in terms of newbuilds versus renovation trends.

I think your view, let's change or your assumption so renovation weve got a lot of exposure.

I'm sorry.

So our residential construction exposure is both on new and and and remodel and the remodel is really where the strength a lot of the strength was.

In Q3, yes, that's exactly right.

Just maybe.

Maybe a little more color Nigel since you had to wait until the end to get your question.

We did see some builder activity also picking up in in other parts of the business. So.

Hopefully that's helpful.

You said that the channel checks suggest for demand remains quite anemic. So I was little bit surprised but that's that's helpful color. Thank very much.

Okay.

I would now like to turn the call back over to Ms., Karen fighter for any closing remarks.

Okay. Thanks, Julien and thank you everybody for joining us this morning have a good day.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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