Q3 2022 Illinois Tool Works Inc Earnings Call
Okay.
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the I T. W. Third quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply.
Star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one for those participating in the Q&A you will have the opportunity to ask one question and if needed one follow up question.
Karen Fletcher Vice President of Investor Relations you May begin your conference.
Okay. Thank you Rob.
Good morning, and welcome to Itw's third quarter 2022 conference call I'm joined by our Chairman and CEO , Scott Santi and senior Vice President and CFO Michael Larsen.
During today's call, we will discuss Itw's third quarter financial results and our updated guidance for full year 2022.
Slide two is a reminder, that this presentation contains forward looking statements. We refer you to the company's 2021 Form 10-K, and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.
This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most directly 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, Thanks, Karen and good morning, everyone.
And what remains a very dynamic and challenging operating environment. We were pleased with our Q3 performance.
On the top line, we delivered 13% revenue growth was 16% organic growth from our base businesses.
While we did see some softening in channel inventory reduction actions in our businesses serving the construction.
Auto aftermarket commercial welding and appliance markets.
Five of our seven segments delivered double digit organic growth.
Led by automotive OEM up 25%.
In food equipment up 23%.
With regard to margins, we were glad to see our incremental margins in Q3 returned to our normal 30% plus level.
For the first time in five quarters as the impact of volume growth enterprise.
Initiatives pricing actions and some moderation.
And the pace of input cost inflation drove incremental margin of 39% and a 130 basis point improvement in operating margin in our base businesses.
We've lost roughly 250 basis points of margin due to price cost during this period of rapid inflation.
Which we fully expect to recover over time once the current inflationary environment stabilizes and.
And it was certainly good to see a nice solid first step in that direction in Q3.
On the bottom line strong growth and margin performance resulted in GAAP EPS of $2 35 up 16%.
Versus Q3 of last year.
And that 16% growth includes 13 cents of negative impact from currency.
Excluding currency earnings per share were up 23%.
Looking at our current performance our decision to stay invested in our long term strategy and then our people during the pandemic.
And the quality of our teams execution of our win the recovery strategy coming out of it are fueling the strong organic growth and financial performance that we are currently delivering.
While the economic outlook is becoming increasingly uncertain.
Demand remains solid across the majority of our business portfolio and as a result the.
Our company is well positioned to deliver a strong finish to what has been a very strong year.
With that I'll now turn the call over to Michael who will provide more detail on the quarter and our updated guidance Michael Thank you Scott and good morning, everyone.
In Q3 revenue grew at 13% to 4 billion with strong organic growth of 16%.
The MTS acquisition contributed 3% to revenue.
Foreign currency translation was a 6% headwind compared to a 4% headwind last quarter.
And despite 13 sense of year over year EPS headwind from foreign currency translation GAAP EPS was $2 35, an increase of 16%.
Excluding MTS incremental margin in our base business was 39%, which as Scott said was a welcome return to a normal historical incremental margin rates.
As a result of our strong revenue and margin performance operating increase income increased 16% to $983 million, which was an all time quarterly record.
Operating margin was 24, 5% with operating leverage of almost 300 basis points and 10 basis points of enterprise initiatives.
Excluding 60 basis points of margin impact from the MTS acquisition operating margin expanded 130 basis points to 25, 1%.
Free cash flow was solid at $612 million, an increase of 46% versus Q2 and 12% year over year.
The conversion rate of 84% is lower than our typical Q3 performance.
We remain committed in the near term to intentional working capital investments to support double digit organic growth mitigate supply chain risk.
And sustained service levels to our key customers.
Finally share repurchases in Q3 were $500 million.
And our effective tax rate was 24% versus 21% in the prior year.
With that let's turn to slide four and starting with organic growth by geography.
We delivered growth in the mid teens across all major geographies led by North America up 17%.
Europe , which represents about 23% of our sales grew 14%.
Led by automotive OEM up 26% in food equipment up 15%.
China grew 15% led by test and measurement and electronics up 32%.
And automotive OEM was up 29%.
Price cost was accretive to income in Q3, and slightly dilutive by 40 basis points to margin.
As we've said before our business teams around the world have done an exceptional job of adjusting price to offset cost increases throughout the most significant inflationary cycle that over 40 years.
And should the pace of raw material cost inflation continued to moderate.
We expect price cost to be accretive to income and slightly accretive to margin in Q4.
As Scott mentioned throughout this unprecedented two year inflationary cycle the company has absorbed as.
As much as 250 basis points of margin dilution impact from price costs, which we expect to fully recover of the succeeding six to eight quarters after input prices stabilize.
Moving on to the segments automotive OEM delivered strong organic growth of 25% with North America up 21% in Europe up 26%.
China was up 29%, which included some sequential recovery from the lockdown impact.
In Q2.
When looking at these year over year growth rates keep in mind that the comparisons are against the Q3 last year when the chip shortage led to a low point for auto production.
Okay.
We continue to make good progress on our content per vehicle growth as evidenced by our year to date organic growth rate of 9% compared to auto builds of 7% in line with our long term market.
Growth target of two to three percentage points.
Okay.
Consistent with our guidance all year, we do not expect a meaningful improvement in the chip shortage situation impacting automotive production until next year and we continue to take a more conservative approach to our guidance, which assumes that automotive production essentially remains around current levels through the balance of this year.
And as we've said before as supply chain issues eventually get resolved down the road, we remain confident that the automotive OEM segment is well positioned to be a very meaningful contributor to the overall organic growth rate of the enterprise for an extended period of time.
And as that plays out we also expect that the automotive OEM segment returns to its typical historical operating margin rates.
In the low to mid twenties.
Turning to slide five food equipment delivered strong organic growth of 23%.
North America grew 30% with double digit growth in every major category and end market.
Growth in institutional markets was 50% plus.
With strength across several categories, most notably lodging.
Restaurants were up around 40% and retail growth was in the mid teens.
International revenue grew 14% with Europe up 15% in Asia Pacific up 9%.
Test and measurement and electronics revenue grew 29% with organic growth of 17% as test and measurement grew 20% and electronics was up 14%.
Growth was broad based with continued strength in semiconductor and capex spending as.
As evidenced by organic growth of 13% in the instrument business.
Moving on to slide six.
Welding grew 14% organically with equipment up 13% and consumables up 15%.
Industrial was the standout with organic growth of 32%.
The commercial side of the welding business, which sells to smaller businesses and individual users was down 10% due to lower demand and inventory destocking in the channel.
However, due to the strength on the industrial side, North America still grew 14% and international grew 12%.
Sales to oil and gas customers were up 12% in the quarter.
Operating margin improved 150 basis points to 31, 5%, which was a new record for the welding segment.
Parmesan fluids grew 8% organically with polymers up 21% on continued.
Strength in industrial application.
Softening demand due to higher gas prices and the impact on consumer discretionary spend impacted the automotive aftermarket business, which was up 2%.
Fluids was up 5% in overall North America grew 5% and international was up 14%.
Construction delivered organic growth of 17% with continued strength in North America, which was up 35%.
U S residential grew 42% and commercial was up 17%.
That said, we did see some signs of slowing towards the end of the quarter and.
And we expect that to continue in Q4, which we have reflected in our updated guidance.
The international side of construction is slowing with Europe down 1%.
Australia, and New Zealand was up 7% against an easy comparison.
Specialty growth was essentially flat as product line simplification activities.
Resulted in the elimination of a product line in one of our consumer packaging businesses.
Excluding pls the segment would have been up 3%.
Demand in our appliance components divisions slowed which we have reflected in our updated guidance.
On a geographic basis, North America was down 2% and international grew 4%.
Okay, let's turn to slide eight for an update on the year and starting with the top line, we're raising our full year organic growth guidance to 11% to 12% due to the strength of our Q3 organic growth performance and project and current levels of demand, which remains strong across most of our businesses.
But we are also anticipating further slowing in the end markets, we talked about including global residential construction.
Automotive aftermarket commercial welding and appliance components that combined represent about 20% of total company revenue.
The MTS acquisition is expected to add 3% of revenue and at current exchange rates currency translation will reduce revenue by 5%, resulting in total revenue for the year up 9% to 10%.
For Q4, we are well positioned to deliver a strong finish to a very strong year.
With organic growth of approximately 10% and GAAP EPS growth of about 40%.
In Q4, and consistent with our previously announced plan to divest certain business units, we completed the sale of a division within the polymers and fluids segment.
With an estimated after tax gain of 45 per share.
We have included this Q4 gain in our updated full year guidance.
Per our usual process, we have narrowed the range for the year with one quarter to go and updated our guidance guidance to reflect current foreign exchange rates, which resulted in additional foreign currency headwind versus versus our prior guidance.
So as a result of including the gain on sale and updating guidance with current foreign exchange rates, our updated full year GAAP EPS guidance range.
945 to $9 55.
We're projecting operating margin of approximately 24% for the full year, which includes approximately.
100 basis points contribution from enterprise initiatives about 200 basis points contribution from volume leverage and.
An estimated 100 basis points of negative margin impact from price cost and about 50 basis points of margin dilution from the acquisition of MTS.
We expect free cash flow conversion of approximately 80%, which as we've talked about is below our typical 100% plus conversion rate due to the intentional near term working capital investments.
To support the company's double digit revenue growth mitigate supply chain risks and sustained customer service levels and finally <unk>.
Share repurchases are now expected to be $1 75 billion for the full year, an increase of $250 million versus prior guidance.
Going forward, we're obviously not immune to the macro challenges and uncertainties that may lie ahead.
But through the execution of our enterprise strategy, we positioned this company to deliver top tier results in any environment.
As reflected in our differentiated performance at the depths of the pandemic.
And in the very dynamic and challenging conditions that are characterized recovery over the last two years.
We remain confident that the combination of the powerful competitive advantages, we derived from Itw's proprietary business model, our high quality business portfolio and our team's proven ability to consistently execute.
At a very high level help us well prepared to continue to outperform in whatever economic conditions emerge in 2023 and beyond.
And with that Karen I'll turn it back to you.
Okay. Thanks, Michael Rod lift open up the lines for question.
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 the line of Scott Davis from Melius Research. Your line is open.
Hey, good morning, Scott, Michael and Karen.
Good morning.
I'm not very good at math, but just thinking through this with your guidance on the full year on price cost I think it implies that youre actually going to be in.
Meaningful positive territory on price cost in Q4 is that am I reading that right.
Debt.
Is correct. So we are.
We're expecting that if.
Inflation stays where it is and so based on the known.
Increases and decreases and based on the.
The price that we expect to realize in the fourth quarter that price cost will be.
Accretive on a EPS basis and also for the first time.
In awhile accretive on a margin basis as well.
Okay, that's super helpful.
How do you I mean.
It seems like we're walking into a construction recession, but how do you guys.
I mean are you planning how do you plan for that given 2020.
And just the business model that you have its not like Youre going to go do a bunch of restructuring, but how do you get ahead of that so that you can limit the impact of it.
Well, we've talked about this before but one of the fundamental.
Elements of 80 20 is that we are.
That we have a very flexible cost structure. So we are we are we do a lot of.
Outsourcing upstream we want to assemble we want to control the manufacturing elements that really <unk>.
Matter from the standpoint of control of quality control of delivery.
But we don't necessarily have to blend all the metal we don't have to necessarily do all the upstream work and so what that gets us fundamentally in fact, we prefer not to ultra.
Ultimately that gives us is a relatively flexible cost structure. So.
We are a read and react company our businesses are going to respond to whatever the demand as it sits right in front of them. We've talked about that before we don't do a lot of forward forecasting we are producing today, what our customers bought yesterday.
And as demand rates start to decline in places like construction. Then then those adjustments will take place real time.
Okay. That's a helpful reminder, thank you guys I appreciate and good luck.
<unk>.
Your next question comes from the line of Tami Zakaria from Jpmorgan. Your line is open.
Hi, Good morning, how are you doing.
Good morning.
So I have two quick one.
First one is can you comment on which end markets, you're anticipating further slow down meaning.
The 10% implied fourth quarter organic growth.
Are you evaluating that but.
Further slowdown and hence youre guiding to about 10%.
Yes, that's correct. So this is not our typical run rate this has been adjusted.
With some anticipated further slowing in the end markets that we talked about.
Are you able to share what the current run rate is.
Yes.
It is higher than the 10%.
Got it got it okay.
Okay.
That's helpful and then.
And the second one.
Can you comment on the price versus volume you saw in the third quarter because the last time you raised organic growth guidance earlier. This year I think you had mentioned that you saw some volume pick up.
Did that sustain.
Like what's the expectation for price versus volume in the fourth quarter.
Yes, so as you know Tammy we don't report price.
And volume separately.
But what I think we can tell you is that we're seeing in Q3, we saw meaningful volume growth.
Across the company, including particularly and if you look at the strength in auto.
Food equipment test and measurement.
Youre not going to put up numbers like that without a meaningful contribution from volume.
Got it and you expect volume to sort of sustain.
And most of these end market in the fourth quarter as well.
Yeah, I think thats a reasonable. It's obviously this is a very dynamic environment, but there is a lot of strength in the businesses that I just talked about that more than offset some of the slowing we're seeing at about 20% of the company. So I think we're really well positioned for.
Our strong finish here in in Q4, and if you look at the implied guidance.
We're looking at organic growth like we said double digit we're looking at margin improvement of more than 100 basis points.
GAAP EPS growth of 40%, 15% excluding the.
Divestiture gain that we talked about earlier, so a really strong finish to what's been a very strong year for the company.
Okay perfect. Thank you so much sure.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good morning, everyone.
Andy.
Scott, maybe just focusing on construction for a second last quarter, you mentioned, some potential incremental weakness in Europe and Australia. It seems like those are hanging in there obviously north American residential at 42% you talked about a little bit of weakening. So is it just strong share gains for ITW that of <unk>.
That these businesses within construction I know you mentioned you saw some slowing late in the quarter. If you could give us more client to the right of that slowing going forward.
Well I think the.
What we've seen is a primarily a slowdown on the residential side, which is about 80% of our business.
And we've talked about some softening on the international side here on our call.
Last quarter, and so we did see Europe down, 1% and I think that's pretty broad based.
UK Continental Europe at this point given some of the challenges that's probably what you would expect Australia. New Zealand is also slowing here and as the comps get a little more difficult you're going to see those growth rates start.
Start to come down.
I think in North America.
Still a fair bit of obviously strengthened the business.
And then late in the quarter were really starting to see the order rates starting to come down on the residential side. So.
Yes.
I would add that it is among the most interest rate sensitive.
And markets that we serve and so youre seeing in the housing start data and a lot of other things.
Sure.
The rapid pace of interest rates rising is certainly starting to bite in the housing markets.
At this point to the fact that it remains.
Very strong very profitable business for us and our points of just the value of the diversified portfolios, we're going to see some.
Some pressure in some places, but we got plenty of other places that are more than picking up and thats and thats really by design.
Thats.
That's how we're trying to position the company ultimately to outperform in any environment.
Totally understand and then maybe just backing out what you're seeing across your industrial businesses. I mean, we talked a lot about the consumer businesses.
Honestly most of those businesses in the 20% of our consumer facing have you seen any incremental weakness in your capex type businesses are they generally holding up.
Not yet.
Should be enough thanks, guys.
Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open.
Thanks, Good morning, everyone. Good morning.
So nice to see nice to see the incremental margins ex MTS come back just given the comments that.
But you are making around price cost and turning positive.
If inflation kind of hold at these levels and work closer to peak inflation.
Would you expect to continue to achieve.
Same type of incremental margins going forward.
I think it's reasonable to assume that our incremental margins will be a little bit higher than our normal range just given the recovery on price costs that we talked about so.
Assuming again Joe that.
From a.
On the inflation side that things stay where they are.
Or.
Continue to moderate then there will be a reasonable expectation.
Okay, Okay, Great and then you mentioned Michael.
23% of your business in Europe , obviously, theres a lot of concern out there.
As we head into the winter on rising energy costs, and you see a potential recession in the region.
I know that your guidance given already some color around trends, but just.
Maybe maybe anything else that you can kind of tell us about that region and then specifically from a cost perspective, how that impacts your business.
Well I mean I think.
There is certainly.
Reason to be a little bit more concerned about Europe . Just if you look at the macro picture I think the fact is our businesses are performing at a really high level right now.
And so if you just look at Q3 I'll just go back to a little bit of commentary on Europe specifically.
We had six segments growing between 9% and 26% and so double digit growth in <unk>.
Five of the seven segments and only construction was down one and.
And it's not all auto if you take out auto Europe still grew 10% I think obviously, we expect those growth rates.
To moderate here in the fourth quarter.
But I think we're really well positioned in Europe to deal with just like the rest of the company deal with whatever it's ahead.
And if we have a little bit more softness maybe in Europe , maybe we are a little more strength in other parts of the world.
That's kind of how the company is set up as Scott said so.
We will read and react we'll deal with whatever is ahead of us, but we're confident that we'll continue to outperform on a relative basis.
Okay, great. Thank you.
Okay.
Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open.
Hi, good morning, and congrats on a more water.
My first question I know on the topline you address the trends that youre seeing in construction I was surprised a little bit on the on the margin in the quarter. So if you could first.
Provide a little color.
Around that that would be helpful.
Yes.
Yes, Jamie it's all price cost and construction, so a little bit more headwind here than in some of the other parts of the company and so I'll also say that.
25, 7% operating margin in construction is not too shabby at this point, so but still you're right relative to prior year were down due to the.
Price cost dynamic.
Okay, and then I know you didn't want to answer in terms of as we're thinking about the organic growth, which surprised on the upside I don't I know you don't want to answer what youre seeing in terms of price versus volume, but is there any update you can provide on which segments youre seeing are the most success in terms of gaining market share and how sustainable you think this market share is.
Going forward. Thank you.
Well I think from the beginning in terms of the sustainable So one where we're confident that we are gaining market share across the.
The portfolio in the <unk>.
The Kennedy.
The guidance was only strategic long term market share gains and not opportunistic kind of one time orders from new customers. So we've really focused on serving our customers as we call them, our best customers better than anybody else and because of our win the recovery positioning.
We're doing that.
And as a result of the gaining market share.
It's hard to we have 83 divisions, so it's hard to point to.
Specific areas, but if you just look at our overall at the enterprise level organic growth of 16% in the third quarter I think relative to.
Other industrial companies that will probably compare.
Pretty well.
Okay. Thank you.
Your next question comes from the line of Joe O'dea from Wells Fargo. Your line is open.
Hi, Good morning, Hi, Good morning can you can you talk about the raw materials and source components weighting within Cogs and then.
What you anticipate in terms of the timing of seeing each of those start to sort of flow through with maybe a more favorable situation in the P&L.
Yes so.
If I understand your question. So we're currently running at about three months on hand, our typically we're running at two months on hand in terms of inventory.
And as supply conditions here begin to normalize in <unk>.
We are we're going to see.
A return to normal levels in that two months on hand.
When exactly that happens.
Is difficult to predict but we are starting to see some signs that supply chain is improving so I think it's reasonable to assume.
Once conditions normalize it will take us about six to eight quarters to get back to two months on hand, and obviously.
Just like our conversion rate is below our historical typical levels at this point theyre going to be above for that period of time as we benefit from significant working capital release whenever when exactly that plays out is difficult to say, it's not all going to come back in one quarter. I mean, we've built this up over two years.
It takes some time.
To get it back out again, but we're confident we have added the right level of inventory and.
It's really put us in a great position to serve our customers mitigate supply chain risks.
And like we said take market share.
I think just been around I think the question was more in terms of our cost of goods what percentage of those are material costs.
Correct me again, just kind of no.
Yes.
That was helpful and I guess related tenants, just working with raw mats coming right, we'll raw mats flow through okay.
As components that you source, where you get costs down on that or do you think that's a trickier dynamic.
Well, there's a lot of factors that go into the last part of your question I think the simple answer on your first one is that the percentage of material is.
The material cost percentage as an overall.
Versus the overall Cogs is going to vary, but let's just say roughly <unk>.
60, 65%, 35%.
Great Labor.
Other.
Other elements of the cost structure of that helps.
Yes.
Okay, and then I wanted to ask one about the fourth quarter margin, excluding the divestiture I'm getting something like a 50 basis point sequential decline from <unk> to <unk>.
If if thats accurate can you just help with the bridge.
Hi.
I assume there is a little bit of.
Sort of sequential decremental on lower revenue, but then price cost should be more favorable.
Just any other items to consider in that bridge, yes, I think if you look at historically, we typically Q3 is our highest quarter and we'd go down in Q4. The primary driver is that there is just less shipping days.
In the fourth quarter, So I think this year.
There are 61 shipping days in Q4.
There were 64 in the third quarter and so thats really the main driver here.
On EPS, obviously implied is slightly lower than what we just did in Q3 and the Delta there is the foreign exchange piece.
Got it thank you.
Your next question comes from the line of Steven Fisher from UBS. Your line is open.
Thanks. Good morning, just wanted to clarify on the construction side of things you mentioned the slowing in Q4 on the U S residential piece, but I didn't hear any follow up comments on on the commercial piece is that expected to slow to.
While usually residential is kind of a leading indicator. So we just haven't seen it yet.
On the commercial bank.
Yes.
Okay. So maybe that will be something more like a 2023.
I guess related to that have you done any analysis to kind of look at the various stimulus programs that have been put in place.
Kind of to assess how that might end up flowing through your businesses.
Okay.
No we haven't really.
If you have any great ideas send them over but.
We are a short cycle company, we read and react to what's in front of us and trying to predict what the government is going to do.
I think has not really been a winning equation for us anyway may may work well for others, but.
Not in our case.
Okay, and then just one clarification maybe on the last question about the margins in Q4.
I guess are there any particular segments that you are.
Anticipate margins actually improving in the fourth quarter or any that stand out kind of one direction or the other.
I think the fourth quarter looks a lot like the third quarter accept the organic growth rates are coming down and so.
From a margin standpoint, it's pretty close to.
To the third quarter.
Okay.
Okay. Thank you very much.
Your next question comes from the line of Stephen Volkmann from Jefferies. Your line is open.
Hey, good morning, guys, sorry, maybe being a bit of a dead horse here, but I just wanted to make sure I get this right because it feels like Theres a lot of <unk>.
Declining prices in various inputs from commodities to transportation even energy.
You seeing any of your input costs actually declining yet.
Yes, we are I mean, we saw a meaningful decline here in Q3 from Q2, and we expect to see the same thing in Q4.
Okay that makes sense. Thank you and then.
Just curious can you update us on where you are with the various divestitures as theyre mutually be expecting more here are you kind of ramping that back up or is it just kind of whenever it happens.
I think there is maybe a one more potentially here in the near term.
And then we'll have to assess the remainder and whether now is a good time to move forward with those.
But I think our views haven't changed in terms of.
The portfolio and the raw material that we need.
In order to continue to deliver the type of results that we're delivering and so.
We have about a handful of businesses that we had.
Flagged for potential divestiture, we just completed one <unk>.
Maybe one more to go and then the balance we'll kind of reassess in the new year.
Got it thank you.
Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Yes.
Thanks, very much and good.
Good morning.
Maybe one other one I just wanted to dial in so again was around sort of inventories in the cash flow outlook. So the conversion only around I think 80% now this year, which is obviously some way below you'll you'll very high.
<unk> I think Michael you will quite guarded as to the pace of when that cash flow conversion.
Comes back up so maybe help us understand.
How you see inventories at the customer level.
The pace of your own inventory liquidation and how youre thinking about capital spending within cash flow.
Yes.
Maybe start on the first part with regard to inventory and that is that we haven't seen enough stability yet on the supply chain side to make us comfortable that we can start backing off so our first priority is to preserve our ability to serve our customers and so at this point, we are still in the motives keeping inventories where they are.
As we start to see things become more let's call it reliable and consistent there then we'll certainly start making a move but as of right. Now we have we are not in the mood of.
In the mode of starting to reduce inventories.
Yes, so it's not a matter of whether or not we're going to benefit from working capital coming back down to normal levels that we're sure of we just don't know when.
And in the near term, we are absolutely committed to what Scott talked about which is intentional working capital.
Including inventory to support.
Double digit growth and mark and significant market share gains. So we will update you if and when that changes and then we'll let you know what we think exactly how it might play out from a free cash flow standpoint.
There was a question on Capex Capex I mean, I think we've always funded.
Every good project inside of the company, including during the pandemic and I think.
That's going to continue we're really fortunate that we are not a capital intensive business.
We're pretty asset light business model as Scott described earlier and so.
At maybe less than 2% of sales Capex doesn't suck up a significant amount of our of our total cash flow. So we're we're very comfortable with continuing to invest in the business as we have done.
For many years, including throughout the pandemic.
Thank you and then just my follow up would be on the demand outlook in test and measurement.
<unk> very good growth there in Q3.
There's obviously a lot of noise.
Different customers on electronics in particular within that division, but youre still putting up mid teens organic growth.
So maybe sort of help us understand some of the exposures in that piece and do you think this strong growth is sustainable again, given what's going on in terms of a lot of customers in consumer electronics semi cap equipment.
Semiconductor devices.
How are you managing to grow at this rate.
Well, yes so.
We think that the growth is sustainable we have not seen anything to suggest that it's slowing down we're obviously a big beneficiary from.
All the growth on the semi side of things.
But also on the Capex side with our in store business, which I think youre familiar with where we're seeing double digit growth.
And so everybody is electronics business I think there is a little bit different I think when I just look at the businesses in there, including electronic Assembly contamination control.
The pressure sensitive adhesive adhesives, we're still showing really solid double digit growth.
North America up 18 international up 16 so.
There is still some supply chain issues, but.
I think the team is doing a great job staying on top of those and gaining share and so we feel very good about the outlook for the <unk>.
Test <unk> measurement electronics business.
Great. Thank you.
Okay.
Your next question comes from the line of Mig <unk> from Baird. Your line is open.
Yes. Thank you good morning, everyone.
Michael just just wanted to go back to make sure.
Correct.
The implied fourth quarter guidance, you said it was going to be down sequentially relative to Q3 can you be a little more specific as to what the midpoint implies and then I'm kind of curious as we're thinking about the year over year bridge relative to 'twenty one.
I mean last year in the fourth quarter, we added 200 basis points from price cost. This year. It seems like we're going to be soundly positive.
I'm sort of curious.
How do we bridge that and then think about the incremental volume and also whatever's going on in terms of your internal initiatives that are flowing through.
Okay.
Yes, I don't know Mig that I can tell you something I didn't say already.
I think if you take our full year guidance.
Fourth quarter kind of implied.
As we've said.
<unk> growth.
Of about 10%.
Solid incrementals.
In our normal range, maybe a little bit higher than that.
Operating margins improved more than 100 basis points.
On a year over year basis, we would expect another 100 basis points from enterprise initiatives.
Price cost.
Those from negative to slightly positive from a margin standpoint and also positive.
Accretive to income as I said, so those are kind of the.
The high level the high level view on the on the fourth quarter and again, we're not as well.
We've adjusted our run rates on the top line, which is a little bit different than in prior years. We are just wanting to be a little.
Conservative hopefully and account for some of the softness we're seeing in about 20% of the company, but also incorporate our strength in the businesses that we that we talked about including.
Auto food equipment test <unk> measurement welding and so that's that's maybe.
Or kind of them.
The key elements of the fourth quarter.
No I appreciate that I ask because I'm also not very good at math.
Kind of looking at your guidance here to me it looks like you raised your revenue by call. It 300 million you reduced your operating income margin by 50 bps.
That's more or less neutral to operating income EPS came down 15 on a core basis. So I'm trying to understand that if something below the line going on here that we don't.
No I think full appreciation for.
I think I said this earlier make the reason why.
We're taking the EPS number down as incremental foreign currency headwind by incorporating current foreign exchange rates like we always do so that's what's accounting for the EPS adjustment.
Alright, well ill leave it there thank you.
And your final question comes from the line of David Raso from Evercore ISI. Your line is opened hi. Thank you you mentioned earlier your capital spending businesses are not yet seeing a slowdown I assume we're getting close enough to where you have had some conversations with those customers about their twenty-three planning.
Are you getting capital budgets for 2003 that are also very supportive of solid growth or is that very much. A 90 day type comment even though you would think capital types of businesses. Much give you must give you better visibility of them.
A quarter at a time.
Yeah go ahead, I was going to say.
David We don't it's a little.
Early in the planning cycle for us in terms of 23 number one number two.
I would say given our.
Sort of a traditional delivery lead times, which are relatively short we don't get a lot of forward visibility even in our in our capex businesses. So.
Regardless of what anybody has to say in terms of their outlook for the year and that's going to certainly be a number that's going to move around in our.
Core operating ammo is that we're going to we're going to produce what based on what orders we're getting today, we're not going to.
By the end of forecast no matter, how optimistic or pessimistic and we have the flexibility in our systems to do that so I don't have a lot of forward, we don't throw a coming back to our businesses and our customers. We don't have a lot of input.
In terms of strong points of view, one way or the other at this point.
I appreciate that and I have a quick follow up on the M&A environment. The divestiture, obviously, a nice gain there can you just give us an update on how youre looking at further divestitures and M&A versus obviously, you bumped up the share repo.
Yes, So I think I said earlier, we have one more.
<unk> divestiture that we're working through.
And then we have three that are kind of in the pipeline that we're going to spend a little bit more time on next year and determined whether now is the best time to.
Sell those businesses they are all performing at.
At a high level significantly better than obviously pre enterprise strategy and so it's just a matter of timing of timing on those divestitures.
On the other side of this we talk about the M&A pipeline on most of these calls I mean, nothing has really changed I mean, I think to the extent refined.
Acquisitions that.
We are a good fit for us strategically.
Which really means that they can grow at 4% to 5% organically over a sustained period of time.
We have significant margin improvement through the implementation of the business model and we can.
And the valuation as is reasonable in the sense that we can generate a rate of return that makes sense for.
For the company then just like we did with MTS when those opportunities come along we're definitely going to lean in.
And I think we've called our posture.
Aggressively opportunistic so when those come along we don't have a lot of those but where we do see them, we're definitely going to.
Lean in hard just like we did with MTS and Theres nothing.
In the pipeline here in the near term.
What I can offer so that's helpful. Thank you very much alright, thanks, David.
And thank you for participating in today's conference call. All lines may disconnect at this time.
Okay.
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Yes.
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Okay.
Okay.