Q3 2023 Illinois Tool Works Inc Earnings Call
Okay.
Good morning, My name is Krista 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 answers.
Speaker 1: Good morning, my name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the ITW third quarter earnings conference.
Speaker 1: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and 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. And if you would like to withdraw your question, again, press star one.
Session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again press 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. Thank.
Speaker 1: For those participating in the Q&A, you will have the opportunity to ask one question and if needed one follow-up question. Thank you, Karen Fletcher, Vice President of Investor Relations. You may begin.
You, Karen Fletcher Vice President of Investor Relations you may begin.
Okay. Thank you Christa.
Speaker 2: Good morning and welcome to ITW's third quarter, 2023 conference call. I'm joined by our chairman and CEO Scott Santy, vice chairman Chris O'Hurley, and senior vice president and CFO Michael Larson. During today's call, we will discuss ITW's third quarter financial results and provide an update on our full year 2023 outlook.
Good morning, and welcome to Itw's third quarter 2023 conference call I'm joined by our Chairman and CEO , Scott Santi, Vice Chairman, Chris, who Hurley and senior Vice President and CFO Michael Larsen.
During today's call, we will discuss Itw's third quarter financial results and provide an update on our full year 2023 outlook.
Slide two is a reminder, that this presentation contains forward looking statements. Please refer to the company's 2022 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.
Speaker 2: Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2022 Form 10K and subsequent reports filed with the SEC are more detailed 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.
Speaker 2: 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.
Speaker 2: 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, a good morning, everyone.
Please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO Scott Santi. Thank.
Thank you Karen and good morning, everyone.
Speaker 3: As you are all aware on September 7th, we announced our CEO Succession Plan wherein I will be turning over the CEO role to my colleague, Chris O'Hurley, at UN.
As you're all aware on September 7th we announced our CEO succession plan, where he and I will be turning over the CEO role to my colleague Crystal Hurley He at year end.
Chris is an exceptional leader with deep expertise in Itw's highly differentiated business model.
Speaker 3: Chris is an exceptional leader with deep expertise in ITW's highly differentiated business model. Our focus strategy to leverage it to full potential in the company.
Our focused strategy to leverage it to full potential.
The company's unique one of our current culture.
Speaker 3: He has been an invaluable partner in collaboration with me over the past 11 years.
He has been an invaluable partner and collaborator with me over the past 11 years.
Speaker 3: We have worked closely together to prepare for this transition.
We have worked closely together to prepare for this transition.
He is more than ready and he will do an exceptional job as Itw's next CEO .
Speaker 3: He is more than ready and he will do an exceptional job as ITW's next CEO .
Speaker 3: If you allow me a brief bit of reflection on the last 11 years.
If you allow me a beef a brief bit of reflection on the last 11 years.
I will simply say that everything we did was driven by our fundamental belief in the performance power of the differentiated set of strategic and operational capabilities and practices.
Speaker 3: I will simply say that everything we did was driven by our fundamental belief in the performance power of the differentiated set of strategic and operational capabilities and practices that we refer to as the ITW.
We referred to as the ITW business model.
And this past phase, we focused on getting the company properly positioned to be able to leverage them to their full potential.
Speaker 3: In this past phase, we focused on getting the company properly positioned to be able to leverage them to their full potential over the long term.
Over the long term.
With this as our foundation ITW enters our next days in.
Speaker 3: With this is our foundation, ITW enters our next phase in a position of great strength.
In a position of great strength and resilience.
With these unique skills and capabilities sharply honed.
Speaker 3: with these unique skills and capabilities sharply home.
Speaker 3: I wholeheartedly believe that they will be an even bigger source of competitive advantage and differentiate performance in the company's next phase than they were in the last one.
I wholeheartedly believe that they will be an even bigger source of competitive advantage and differentiator performance and the company's next phase than they were in the last one.
Speaker 3: especially if you believe as I do that the level of volatility and unpredictability of the world will only increase from here forward.
Especially if you believe as I do that the level of volatility and unpredictability of the world will only increase from here forward.
I have absolutely no doubt that Chris and the incredibly talented ITW leadership team behind him will utilize all of the differentiated tools at ITW disposal to read and react to whatever comes our way.
Speaker 3: I have absolutely no doubt that Chris and the incredibly talented ITW leadership team behind him.
Speaker 3: We'll utilize all of the differentiated tools at ITW's disposal to read and react to whatever comes our way.
Speaker 3: and lead the company to even greater heights in our next phase.
And leave the company to even greater Heights in our next phase.
Let me close by saying that is that it has been both a privilege and honor to lead this great company for the last 11 years.
Speaker 3: Let me close by saying that it has been both a privilege in an honor to lead this great company for the last 11 years.
Speaker 3: And I offer my deepest gratitude to all of my ITW colleagues past and present.
And I offer my deepest gratitude to all of my ITW colleagues past and present for.
For all of their support and for their unwavering commitment.
Speaker 3: for all of their support and for their unwavering commitment to working every day to be the best ITW that we can be. With that, it is now my-
To working every day to be the best ITW that we can be.
With that it is now my pleasure to turn the call.
Speaker 3: And in a few months, the company over at Chris or early Chris already you. Thank you Scott.
And then a few months the company over to Chris <unk>, Chris over to you.
Thank you Scott and good morning, everyone.
First I want to thank Scott and our board of directors for their trust and confidence and electing me as Itw's next CEO .
Speaker 4: First, I want to thank Scott and our board of directors for their trust and confidence in electing me as I get to views next CEO .
Speaker 4: I'm incredibly humbled by the opportunity to lead the Squared Company, or exceptionally talented leadership team, and our 46,000 dedicated colleagues around the world.
I am incredibly humbled by the opportunity to lead this great company.
Our exceptionally talented leadership team and a 46000 dedicated colleagues around the world.
As Scott said as a result of the work done over the last 11 years in executing our enterprise strategy to leverage the ITW business model to its full potential our company has never performed better or been better positioned for the future.
Speaker 4: Scott said, as a result of the work done over the last 11 years in executing our enterprise strategy, to leverage the HW Business Model to its full potential, our company has never performed better or been better positioned for the future.
Speaker 4: The central focus of the next phase of our enterprise strategy is to elevate high quality, organic growth and customer-back innovation as key ITW differentiators.
The central focus of the next phase of our enterprise strategy is to elevate high quality organic growth and customer back innovation as key ITW differentiators on par with our best in class operational capabilities and financial performance.
Speaker 4: on power with our best in class operational capabilities and financial performance. Our leadership team and I are deep-
Our leadership team and I are deeply committed to doing just that.
Speaker 4: in delivering on HW's 2030 Interplace Performance Schools.
In delivering on ITW is 2030 enterprise performance goals.
Now, let's turn to our Q3 performance.
The strength and resilience of Itw's proprietary business model and high quality diversified portfolio. Once again drove strong operational execution and financial performance this quarter.
Speaker 4: Strength and resilience of ITW's proprietary business model and high quality diversified portfolio once again drove strong operational execution and financial performance in the squatter.
Starting with the topline organic growth was 2% on an equal days basis as demand for Capex slowdown in test <unk> measurement and electronics and welding.
Speaker 4: Starting with the top line, organic growth was 2% on an equal day's basis, as demand for capex slowed down in test and measurement and electronics and welding. Or margin and
Our margin and income performance continues to be very robust.
Speaker 4: Operating margin improved 200 basis points a year over year, and 26.5% as enterprise initiatives contributed 140 basis.
Operating margin improved 200 basis points year over year to 26, 5% as.
As enterprise initiatives contributed 140 basis points.
Quarterly operating income grew 9% to $1 1 billion.
Speaker 4: Quality operating income grew 9% to 1.1 billion.
Speaker 4: Gap DPS grew 9% to 255 and free cash removal was up 40%.
GAAP EPS grew 9% to $2 55, and free cash flow was up 40%.
Yeah.
With three quarters behind Us we are narrowing our EPS guidance to a range of 965 to 985.
Speaker 4: With three quarters behind us, we are narrowing our EPS guidance to a range of 965 to 985.
Speaker 4: which non-corporates a 12-cent adjustment for the impact of the autostrike in Q4.
Which now incorporates a 12 <unk> adjustment for the impact of the auto strike in Q4.
Yes.
Looking ahead at the balance of the year the company remains well positioned to deliver another year of differentiated performance.
Speaker 4: Looking ahead at the balance of the year, the company remains well positioned to deliver another year of differentiated performance.
Speaker 4: I'm no time to fall over to Michael to discuss our Q3 performance and full year guidance in more detail. Michael, thank you Chris and good morning everyone.
I'll now turn the call over to Michael to discuss our Q3 performance and full year guidance in more detail. Thank.
Thank you, Chris and good morning, everyone.
Organic growth in the third quarter was essentially flat and plus 2% on an equal days basis. As Q3. This year had one less shipping day compared to Q3 last year.
Speaker 5: Organic growth in the third quarter was essentially flat and plus 2% on an equal day's basis as Q3 this year had one less shipping day compared to Q3 last.
Speaker 5: Foreign currency translation impact was favorable by 1.5%, and divestitures reduced revenue by 1.2%. The net result was revenue growth.
Foreign currency translation impact was favorable by one 5% and divestitures reduced revenue by one 2%.
The net result was revenue growth of 0.5%.
Speaker 5: Third quarter operating margin was 26.5% an increase of 200 basis points year over year. As enterprise initiatives contributed 140 basis points and price cost margin impact was positive 210 basis.
Third quarter operating margin was 26, 5% an increase of 200 basis points year over year.
As enterprise initiatives contributed 140 basis points and price cost margin impact was positive 210 basis points.
Speaker 5: Gap EPS of 255 was up 9% and included 7 cents net of favorable corporate items on a year-of-a-year base.
GAAP EPS of $2 55 was up 9% and included seven.
Net of favorable corporate items on a year over year basis.
Speaker 5: starting with unallocated expense, which improved by 43 million due to lower employee related expenses, including health and welfare, and a one-time insurance recovery.
Starting with unallocated expense, which improved by $43 million due to lower employee related expenses, including health and welfare and a one time insurance recovery.
This favorable item was partially offset by $16 million of lower other income primarily due to lower investment income.
Speaker 5: This favorable item was partially offset by $16 million of lower other income, primarily due to lower investment.
Speaker 5: As I said, the net effect of these two items was favorable 7 cents net per share.
That said the net effect of these two items was favorable.
<unk> net per share.
Free cash flow grew 40% to $856 million with a conversion to net income of 111% as we continue to make solid progress on.
Speaker 5: Free cash row grew 40% to $856 million with a conversion to net income of 111% as we continue to make solid progress on returning to our normal historical inventory level.
On returning to our normal historical inventory levels.
Speaker 5: We repurchased 375 million dollars of our shares this quarter and raised our dividend by 7% to an annualized payout of $5.60 per share.
We repurchased $375 million of our shares this quarter and raised our dividend by 7% to an annualized payout of $5 60 per share.
Speaker 5: which marks our 60th year of raising the dividend.
Which marks our 60 <unk> year of raising the dividend.
Speaker 5: In summary, Q3 with another quarter of strong operational execution and financial performance.
In summary, Q3 was another quarter of strong operational execution and financial performance.
Speaker 5: Turn to slide four, an organic revenue growth by geography. As you can see, North America was down 2%, Europe was about flat.
Turning to slide four and organic revenue growth by geography, as you can see North America was down 2% Europe was about flat.
Speaker 5: Asia Pacific was up 6% with China up 8% driven by the automotive OEM segment. Excluding auto
In Asia Pacific was up 6% with China up 8% driven by the automotive OEM segment.
Excluding auto China was down 1%.
Speaker 5: Moving to the segments and starting with our automotive OEM, organic growth was 4%.
Moving to the segments and starting with automotive OEM organic growth was 4%.
North America was down 5% Europe was up 5%, China was up 18%.
Speaker 5: North America was down 5% Europe was up 5% China was up 18%
Speaker 5: There was essentially no impact on automotive OEM segment revenues from the AutoStrek in Q3.
There was essentially no impact on automotive OEM segment revenues from the auto strike in Q3.
But as Chris noted that will not be the case in Q4.
Speaker 5: But as Chris noted, that will not be the case in Q4.
As a reminder, our north American automotive OEM business represents approximately 40% of total segment revenues.
Speaker 5: As a reminder, our North American automotive OEM business represents approximately 40% of total
And within that 40% approximately two thirds of our annual sales are tied to <unk> automotive customers.
Speaker 5: And within that 40%, approximately two thirds of our annual sales are tied to D3 automotive.
Included in our updated earnings guidance today is our estimate that the impact of the auto strike will reduce our Q4 earnings by <unk> 12 per share which is essentially based.
Speaker 5: Included in our updated earnings guidance today is our estimate that the impact of the autostrike will reduce our Q4 earnings by 12 cents per share, which is essentially based.
Speaker 5: on October D3 domestic production levels continuing through the remainder of the
On October <unk> domestic production levels, continuing through the remainder of the quarter.
Speaker 5: Turn to slide five, food equipment delivered solid organic growth of 6%.
Turning to slide five food equipment delivered solid organic growth of 6%.
Speaker 5: equipment was up five percent and service grew nine.
As equipment was up 5% and service grew 9%.
Speaker 5: North America grew 10% with institutional sales up in the mid teens, restaurants up high single digits, and retail up in the
North America grew 10% with institutional sales up in the mid teens rare.
The restaurants up high single digits and retail up in the high teens on the back of new product Rollouts.
Europe , However was flat and Asia Pacific was up 6%.
Speaker 5: Europe , however, was flat and Asia Pacific was up 6%.
In test and measurement and electronics organic revenue was down 4% weighed down six percentage points by semiconductor related demand, which represents about 15% of segments and for context, only 3% of ITW revenues.
Speaker 5: Intestant measurement and electronics, organic revenue, was down 4%. Weighted down 6 percentage points, per semiconductive related demand, which represents about 15% of segments, and for context only 3% of ITW revenues. Overall,
Overall test and measurement grew 2%.
As demand for Capex slowed in the quarter and electronics declined 13%.
Speaker 5: is the Maniford Capac's load in the quarter, and electronics declined 13%.
Moving on to slide six welding organic revenue declined 2%.
Speaker 5: Moving on to slide six, Welding's organic revenue declined 2%, as equipment revenue was down 3% on the back of softer demand for.
As equipment revenue was down 3% on.
On the back of softer demand for Capex.
Consumables were down 1%.
Speaker 5: as industrial sales declined 9% versus a tough comparison of plus 30% last year.
As industrial sales declined 9% versus a tough comparison of plus 30% last year.
Speaker 5: Commercial however was up 6% against an easier year with your comparison.
Commercial however was up 6% against an easier year over year comparison.
<unk> down 10%.
Speaker 5: Overall, though North America revenue was down 3% and international was a potentially flat.
Overall, though North America revenue was down 3% and international was essentially flat.
Parmesan fluids organic revenue grew 3% as automotive aftermarket grew 10% due to the launch of new products.
Speaker 5: Palmer's own fluids, organic revenue grew 3% as automotive aftermarket grew 10% due to the launch of new products. Palmer's was about 1%
<unk> was down 1% and fluids was down 4%.
Speaker 5: margins were solid as operating margin improved 280 basis points to 28.1
Margins were solid as operating margin improved 280 basis points to 28, 1%.
Speaker 5: Turn to slide seven. Organic revenue and construction was down 2%.
Turning to slide seven organic revenue and construction was down 2%.
Speaker 5: North America grew 2% with residential up 2% with some strength on the residential renovation side which was up 7%.
As North America grew 2% with residential up 2% with some strength.
On the residential renovation side, which was up 7%.
Commercial construction was down 2%.
Speaker 5: International markets were soft with Europe down 8% and Australia New Zealand down 4%.
International markets were soft with Europe down, 8% and Australia, New Zealand down 4%.
Speaker 5: margins were solid, and the operating margin improved 420 basis points.
Margins were solid as operating margin improved 420 basis points to 29, 9% with strong contributions from enterprise initiatives and price cost.
Speaker 5: 29.9% with strong contributions from enterprise initiatives and price costs.
Speaker 5: Finally, specialty products, organic revenue was down 6%.
Finally specialty products organic revenue was down 6%.
Speaker 5: Note that America is about 9% and international grew 1%.
North America was down 9% and international grew 1%.
Speaker 5: Consumables were down 9% and equipment revenue, which represents about 20% of the segment, was up 9%.
<unk> were down 9% in equipment revenue, which represents about 20% of the segment.
It was up 9%.
Moving to slide eight and our updated full year 2023 guidance as.
Speaker 5: Moving to slide eight and our updated full year 2023 guide.
Speaker 5: As you saw this morning, we're narrowing the range of our Gap EPS guidance to a new range of 965 to 985, which as I mentioned earlier.
As you saw this morning, we are narrowing the range of our GAAP EPS guidance to a new range of.
965 to $9 85, which as I mentioned earlier.
<unk> includes a <unk> 12 adjustment for the estimated auto strike impact in Q4.
Speaker 5: includes a 12-cent adjustment for the estimated auto strike impact in Q4.
Speaker 5: based on current levels of demand exiting Q3, and including the estimated impact of the auto strike, we're projecting organic growth of 2 to 3% for the full year.
Based on current levels of demand exiting Q3.
Including the estimated impact of the auto strike, we're projecting organic growth of 2% to 3% for the full year.
We are raising our full year operating margin guidance to 25% to 25, 5% to.
Speaker 5: We are raising our full year operating margin guidance to 25 to 25.5% to reflect our stronger margin performance exiting the third quarter. And we expect that margins for the full year will improve by 150 basis points at the midpoint, including a contribution of more than 100 basis points from enterprise initiatives.
To reflect our stronger margin performance exiting the third quarter.
And we expect that margins for the full year will improve by 150 basis points at the midpoint, including a contribution of more than 100 basis points from enterprise initiatives.
We are projecting free cash flow conversion of more than 100% of net income for the year.
Speaker 5: We are projecting free cashflow conversion of more than 100% of net income for the year.
Speaker 5: So while the overall demand environment clearly has some uncertainties in the near term, inventory normalization, elevated interest rates, increasing capex caution, and the auto strike, just to mention a few.
So while the overall demand environment clearly has some uncertainties in the near term.
Inventory normalization elevated interest rates, increasing capex caution and the auto strike just to mention a few.
The entire team at ITW remains focused on leveraging itw's unique strengths and capabilities to optimize our ability to continue to deliver differentiated long term performance with that Karen I'll turn it back to you.
Speaker 5: The entire team at ITW remains focused on leveraging ITW's unique strengths and capabilities to optimize our ability to continue to deliver to French-aided long-term performance.
Speaker 2: With that, Karen, I'll turn it back to you. All right, thank you, Michael. Chris, please open the lines up for questions.
Alright, Thank you Michael and Christoph Please open the lines up for questions.
Speaker 1: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, well pause for just a moment chicken pile the Q&A roster.
Your first question comes from the line of Scott Davis from Melius Research. Please go ahead. Your line is open.
Speaker 1: Your first question comes from the line of Scott Davis from Malia's research. Please go ahead. Your line is a
Speaker 6: Good morning, Scott and Chris and Michael and Karen. Morning, morning. Good night, Scott.
Good morning, Scott and Chris and Michael Caron.
Good morning, Good morning, Scott.
Yeah.
Yes I was.
Speaker 6: The price cost positive 200 basis, 210 was better. I think we were thinking just in simple math, kind of more like.
The price cost.
Positive 200 basis 210 was better I think we were thinking just in simple math kind of more like.
Speaker 6: you know, 100 to 150. What were you able to get more price in the quarter, or was it lower costs or a little bit of both, or just a little color there, would be helpful.
100, 150 watt.
We're able to get more price in the quarter or was it lower costs are a little bit of both or just a little color. There would be helpful. Thanks, Yes. So let me give you a bit of.
Speaker 5: Yeah. So let me give you a little bit of context here. So we are definitely on track to recover the margin impact now from more than two years of unprecedented inflation, which now appears to have stabilized. There's definitely still some pressure on the cost side, on the labor side, components, as well as energy.
Context here. So we are definitely on track to recover.
The margin impact now from more than two years of unprecedented inflation, which now appears to have stabilized there is definitely still some <unk>.
On the cost side on the labor side.
<unk> as well as as NRG.
Speaker 5: That said, we've made some good progress. Price cost was...
That said we've made some good progress you know price cost was <unk>.
Speaker 5: positive 190 basis points in Q1, 216 in Q2, which was the peak, and then 210 here in the.
Positive of 190 basis points in Q1, two six in Q2, which was the peak and then 210 here in the.
Speaker 5: in the third quarter. And we're now looking at somewhere around.
In the third quarter, and we're now looking at somewhere around.
Speaker 5: 150 basis points on Q4 and that will put us around 200 basis points recovery for the full year Price is holding and we're seeing a little bit of deflation on the more in the commodity side so these would be the metals
150 basis points in Q4, and that would put us around 200 basis points recovery for.
For the full year.
Pricing is holding and we are seeing a little bit of dip.
Deflation on the more on the commodity side. So these would be the metals in particular, which drove.
Speaker 5: in particular which drove the stronger performance here on price cost in the third quarter.
<unk>.
To stronger performance here on on price cost in the third quarter.
It's helpful.
Speaker 6: couple Chris, I know it's, if early, you've got another couple months, but is there kind of a plan for the first?
Chris I know, it's early you've got another couple of months, but.
Is there kind of a plan for the first.
Speaker 6: 90 days or where do you see the, you know, I guess the focus shifting, is there a little bit more emphasis on, on portfolio or...
90 days or where do you where do you see the.
I guess the focus shifting is there a little bit more emphasis on.
Krista: Good morning, my name is Krista and I'll be your conference operator today.
On portfolio are.
Krista: At this time, I would like to welcome everyone to the ITW third quarter earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker 6: I know you mentioned kind of driving higher growth rates, but they're just given the diversity of end market you sell into there just so much you can do On that front, but maybe just a little color and where you plan on spending your first, you know kind of three to six months and and focus
I know you mentioned kind of driving higher growth rates, but theyre just given the diversity of end markets you sell into there just so much you can do.
On that front, but maybe just a little color on where you plan on spending your first.
Krista: After the speakers remarks, there will be a question in 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. And if you would like to withdraw your question, again, press 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.
Three to six months and focusing.
Yeah, So Scott I would say in general.
Speaker 4: Yes, Scott, I would say in general, our plan is very much in line with what we outlined at our investor day in terms of really ensuring that we continue to strengthen our foundation, which is our business model. And obviously then building organic growth as a core strength on a power with our operational capabilities and financial performance over time. I think the first 90 days, I'm just learning the job. Just go out and
Plan is very much in line with.
What we outlined at our Investor day in terms of really ensuring that we continue to.
Strengthen our foundation, which is our business model and obviously then building organic growth as a core strength on a power with our operational capabilities and financial performance overtime I think the first 90 days I'm just learning the job.
Karen Fletcher: Thank you, Karen Fletcher, vice president of investor relations, you may begin. Okay, thank you, Krista.
Just go out and.
Karen Fletcher: Good morning and welcome to ITW third quarter 2023 conference call. I'm joined by our chairman and CEO Scott Santy, vice chairman Chris Oherlihy, and senior vice president and CFO Michael Larsen. During today's call, we will discuss ITW third quarter financial results and provide an update on our full year 2023 outlook. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2022 form 10K 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-GAP measures and a reconciliation of those measures to the most directly comparable GAP measures is contained in the press release.
Pretty good understanding of our business is already but obviously working with our businesses to make sure that our strategy is as well part of downward our businesses, which of course it is.
Speaker 4: pretty good understanding of our businesses already, but obviously work with our businesses. To make sure that our strategy is well part of the deal with our businesses, which of course it is, that's really the plan for the fourth thing it is, I would say. But it's really in the context of being very committed to this strategy for the next phase, which is to sustain the strong foundation we have on our business model, we're really leaning in on continuing to build our organic growth capabilities, to be on a power with our operational capabilities and our financial needs.
That's really the plan for the first 90 days I would say, but it's really in the context of being very committed to this.
Our strategy for the next phase, which is to sustain the strong foundation, we have on our business model, we're really leaning in on continuing to build our organic growth capabilities to be on a par with our operational capabilities and our financial performance.
Okay Best of luck, thanks, Thanks, Alan and congrats Scott.
Speaker 6: Okay. Best of luck. Thanks. Thanks, all. And congrats, Scott. Fantastic.
Fantastic.
Fantastic Ron really exceptional so thank you all I'll pass it on thank you.
Speaker 6: fantastic run really exceptional. So thank you all.
Yes.
Speaker 1: Your next question comes from the line of Pammy Zakaria from JP Morgan. Please go ahead. Your line is open.
Your next question comes from the line of Tami Zakaria from Jpmorgan. Please go ahead. Your line is open.
Speaker 7: Hi, good morning. Thank you so much. So my first question is, I want to understand the operating margin expansion a bit better, 200 basis points, enterprise initiative 140, price cost 210. So what was the drag to get to the 200 basis points expansion? I remember you were investing in labor and compensation this year. Is that still there? And when do you expect that to taper off, especially as you look into 2024?
Hi, good morning. Thank you. So much. So my first question is I wanted to understand the operating margin expansion a bit better 200 basis points.
Scott Santy: Please turn to slide three and it's now my pleasure to turn the call over to our chairman and CEO Scott Santy. Thank you, Karen. Good morning, everyone.
Enterprise initiative 140 price cost to 10, so what was the drag to get to the 200 basis points expansion I remember you were investing in labor and compensation this year.
Scott Santy: As you are all aware on September 7th, we announced our CEO succession plan wherein I will be turning over the CEO role to my colleague, Chris Oherlihy at your end. Chris is an exceptional leader with deep expertise in ITW's highly differentiated business model. Our focus strategy to leverage it to full potential in the company's unique one of a kind culture. He has been an invaluable partner in collaborating with me over the past 11 years. We have worked closely together to prepare for this transition. He is more than ready and he will do an exceptional job as ITW's next CEO.
Is that still there and when do you expect that to taper off, especially as you look into 2024.
Yes, good morning, Tammy So youre right.
Speaker 5: Yeah, good morning, Tammy. So, you're right. If you look at the margin improvement year over year, another really strong contribution from enterprise industries. I think the best performance in two and a half years, which is really remarkable given where we're at in the enterprise strategy. Price-cost, we talked about 210. And then 160 basis points of
At the margin improvement year over year, another really strong contribution from enterprise initiatives I think the best performance in two and a half years, which is really remarkable given where we're at in the enterprise strategy price costs, we talked about 210.
And then a 160 basis points of.
I don't want to call it headwind necessarily because these are investments that we're making and our long term organic growth initiatives.
Speaker 5: I don't want to call it headwind necessarily because these are investments that we're making in our long-term organic growth initiatives, including new hires, as well as then obviously the regular wage and benefit inflation that everybody else is seeing. That all adds up to about 160 basis points and that's how you get there, even with all of those investments.
Scott Santy: If you allow me a brief bit of reflection on the last 11 years, I will simply say that everything we did was driven by our fundamental belief in the performance power of the differentiated set of strategic and operational capabilities and practices that we refer to as the ITW business model. In this past phase, we focused on getting the company properly positioned to be able to leverage them to their full potential over the long term.
<unk>.
New hires.
As well as then obviously the regular wage and benefit inflation that everybody else is seeing that all adds up to about 100 <unk>.
60 basis points and that's how you get there even with all of those investments.
Speaker 5: that we continue to make, you're getting 200 basis points of margin improvement on a year-over-year basis to 26.5%, which I believe with a new record for the third quarter.
We continue to make you're getting 200 basis points of margin improvement on a year over year basis too.
26, 5%, which I believe was a new record for the third quarter.
Scott Santy: With this is our foundation, ITW enters our next phase in a position of great strength and resilience with these unique skills and capabilities sharply honed. I wholeheartedly believe that they will be an even bigger source of competitive advantage and differentiated performance in the company's next phase than they were in the last one, especially if you believe as I do that the level of volatility and unpredictability of the world will only increase from here forward.
Yeah.
It does that 150 basis points headwind continue in the fourth quarter and maybe in the next several quarters, how should we think about that headwind, yes, I think the normal run rate is somewhere we've been running higher than that this year.
Speaker 7: Does that 150 basis points headwind continue in the fourth quarter and maybe in the next several quarters? How should we think about that head?
Speaker 5: Yeah, I think the normal run rate is somewhere, we've been running higher than that this year. The normal run rate, and we'll see how the plans roll up for next year. I don't wanna get too far ahead of myself, but if you look at historically, that's about a hundred to 150 basis points ahead.
The normal run rate and we'll see how the plans rollout for next year I don't want to get too far ahead of myself, but if you look at historically thats about 100 to 150 basis points of headwind.
Scott Santy: I have absolutely no doubt that Chris and the incredibly talented ITW leadership team behind him will utilize all of the differentiated tools at ITW's disposal to read and react to whatever comes our way and lead the company to even greater heights in our next phase.
Got it can I ask one more quick one the 12 cents headwind.
Speaker 7: Got it. Can I ask one more quick one? The 12 cents headwind from the auto strike, you're calling out for the fourth quarter, does that assume the strike continues through the end of the quarter? And what does that mean in terms of organic growth headwind for the fourth . Today, I reckon I heard offside from our north early 2016, and I know I know I actually knew I did but I knew I found out, and yesterday that I was
From the auto strike.
You are calling out for the fourth quarter does that assume the strike continues through the end of the quarter and what does that mean in terms of organic growth headwind for the fourth quarter.
Scott Santy: Let me close by saying that it has been both a privilege and an honor to lead this great company for the last 11 years and I offer my deepest gratitude to all of my ITW colleagues past and present for all of their support and for their unwavering commitment to working every day to be the best ITW that we can be.
Yes, so Jamie let me just broaden the lens, maybe a little bit here I think given the uncertainty around auto and the fact that the strike is now in.
Speaker 5: Yeah, so, Tammy, let me just broaden the lens maybe a little bit here. I think given the uncertainty around auto and the fact that the strike is now in the sixth week here, we decided that we'd take a more prudent approach, which is basically based on.
In the sixth week here, we decided that.
We would take a more prudent approach, which is basically based on <unk>.
Chris OHerlihy: With that, it is now my pleasure to turn the call and in a few months the company over to Chris OHerli, Chris, over to you. Thank you Scott and good morning everyone. First, I want to thank Scott and our board directors for their trust and confidence in electing me as I could have used next CEO. I'm incredibly humbled by the opportunity to lead this great company or exceptionally talented leadership team and our 46,000 dedicated colleagues around the world.
Speaker 5: what we're seeing in our businesses right now, maybe with room for things deteriorating a little bit further from where they are today.
What we're seeing in our businesses.
Right now maybe with room for things deteriorating a little bit further from where they are today.
Speaker 5: And if you take that quarter to date impact and extrapolate through a year and that's how you get the 12 cents of EPS.
And if you take that.
To date impact and extrapolate through year end, that's how you get 12 cents of EPS.
Speaker 5: adjustment that's now embedded in our guide.
Adjustment that's now embedded.
In our.
In our guidance.
Speaker 5: So assuming to answer your question, they will continue through year end. If this strike ends before year end, obviously we'll do better than that. If it gets worse, our businesses will do a great job.
So assuming to answer your question that it continues through.
Chris OHerlihy: As Scott said, as a result of the work done over the last 11 years in executing our enterprise strategy to leverage the ITW business model to its full potential, our company has never performed better or been better positioned for the future. The central focus of the next phase of our enterprise strategy is to elevate high quality organic growth and customer-back innovation as key ITW differentiators on power with our best in class operational capabilities and financial performance. Our leadership team and I are deeply committed to doing just that in delivering on ITW's 2030 enterprise performance goals.
Year end, if the strike ends before year end, obviously, we'll do better than that if it gets worse or businesses will do a great job.
In terms of reading and reacting to the conditions on the ground.
Speaker 5: in terms of reading and reacting to the conditions on the ground. The optimist might say that, you know, some of those products that production will get deferred into next year, but obviously a lot of uncertainty. And given that we don't really want to pin down a revenue number, we're just going to give you here the 12 cents of adjustment that I just laid out for you.
The optimists might say that some of those production that production will get deferred into.
Next year, but obviously a lot of uncertainty.
And given that we don't really want to pin down a revenue number we're just going to give you here the 12.
Of adjustment that I, just laid out for you.
Great. Thank you so much sure.
Chris OHerlihy: Now let's turn to our Q3 performance. The strength and resilience of ITW's proprietary business model and high quality diversified portfolios once again drove strong operational execution and financial performance in the squatter. Starting with the top light, our organic growth was 2% on an equal days basis as demand for capex slowed down and test the measurement and electronics and welding.
Your next question comes from the line of Andrew Open from Bank of America. Please go ahead. Your line is open.
Speaker 1: Your next question comes from the line of Andrew Open from Bank of America. Please go ahead, your line is open.
Hi, guys good morning.
Speaker 8: morning uh... so question uh... i think before you were talking about sort of twenty five percent of the portfolio slowing structural of the past couple of quarters have any of those markets bottom like electronics and have any new market started to slow is at the same twenty five percent just how do you look at the world
Good morning.
So question.
Before you were talking about sort of 25% of the portfolio.
Boeing structural over the past couple of quarters have any of those markets bottom like electronics have any new market started to slow or is it the same 25% just how do you look at the world.
Michael Larsen: Our margin and income performance continues to be very robust. Operating margin improved 200 basis points year over year to 26.5% as enterprise initiatives contributed 140 basis points. Quality operating income grew 9% to 1.1 billion. Gap EPS grew 9% to 255 and free cash flow was up 40%.
Hey, Andrew.
Speaker 5: Hey Andrew, so there's definitely some puts and takes. I think for example, if you'd asked me that question last quarter, I would have said Automotive OEM. Automotive aftermarket would be in that category. They were up 10%. So just an example of things moving in and out. So I'm not sure.
Definitely some puts and takes I think for example.
If you'd asked me that question last quarter, I would've said automotive OEM automotive aftermarket would be in that category. They were up 10%. So just an example of things moving in and out so I'm not sure.
Speaker 5: You know, it's really that relevant to look at. But if you just look at what we would say now is kind of slowing the 25% on a combined basis, those businesses were down year by year, 3% in the third quarter. However sequential.
It's really that relevant to look at but if you just look at what we would say now is kind of slowing the 25% on a combined basis those businesses were down year over year, 3% in the third quarter, However sequentially.
Michael Larsen: With three quarters behind us, we are narrowing our EPS guidance to a range of 9.65 to 9.85, which non-corporates a 12 cent adjustment for the impact of the auto strike in Q4. Looking ahead at the balance of the year, the company remains well positioned to deliver another year of differentiated performance.
Sequentially they did improve.
Speaker 5: from the second quarter by a percentage point, which I would say fairly stable. Talking about electronics and semi-specifically, I think consumer electronics remains.
From the second quarter by a percentage point, which I would say fairly.
Stable.
Michael Larsen: Another time to call over to Michael to discuss our Q3 performance and full year guidance in more detail.
Talking about electronics and semi specifically I think consumer electronics.
Michael Larsen: Thank you Chris and good morning everyone. Organic growth in the third quarter was essentially flat and plus 2% on an equal days basis as Q3 this year had one less shipping day compared to Q3 last year, last year. Foreign currency translation impact was favorable by 1.5%, and divestitures reduced revenue by 1.2%. The net result was revenue growth of 0.5%. Third quarter operating margin was 26.5%, an increase of 200 basis points year over year.
Remains fairly weak.
Speaker 5: On the semiconductor side, you'll recall that we've talked about
On the semiconductor side, you'll recall that we've talked about.
And expectation from.
Industry experts I'll call them as well as our customers that they would be.
Reacceleration of demand here in the second half of this year and that now looks like it's been deferred.
Probably until sometime next year now obviously.
We remain.
As we as we now do.
Michael Larsen: As enterprise initiatives contributed 140 basis points, and price cost margin impact was positive 210 basis points. Gap EPS of 255 was up 9%, and included 7 cents net of favorable corporate items on a year-to-year basis, starting with unallocated expense, which improved by 43 million due to lower employee related expenses, including health and welfare, and a one-time insurance recovery. This favorable item was partially offset by $16 million of lower other income, primarily due to lower investment income.
On the other.
It's an ongoing basis committed to those businesses, we continue to invest and really position ourselves for.
The inevitable recovery down the road.
Which hopefully it comes next year in 2024, and making sure that we're well positioned to take full advantage of the.
Long term growth opportunities that we do.
Believe are right in front of us in that part of our businesses.
Gotcha and then maybe you have answered. This question as you talked about the business overall, but in construction products and polymers and fluids.
The changes in variable margin on our costs was a material benefit.
To margin year over year and has been year to date.
Anything specific that Youre doing.
Michael Larsen: As I said, the net effect of these two items was favorable 7 cents net per share. Free cash row grew 40% to $856 million, with a conversion to net income of 111%, as we continue to make solid progress on returning to our normal historical inventory levels. We repurchased $375 million of our shares this quarter and raised our dividend by 7% to an annualized payout of $5.60 per share, which marks our 60th year of raising the dividend.
In these businesses and how much more runway is there.
Well Theres a lot of work that's going on in those businesses to deliver these results obviously I would say the the categories. You are familiar with the first one is.
The.
Ongoing contribution from the enterprise initiatives and so both the segments that you mentioned had a significant contribution from enterprise initiatives as well as.
Favorable price cost impact so those are really the two big drivers.
In those businesses and I think it is pretty remarkable.
That theyre, putting up record quarterly margin performance, given frankly, not a lot of volume growth not a lot of volume leverage. So you can imagine once we get the volume leverage going again as Chris was talking about Ed Incrementals kind of in that 35 to 40 range to us even more runway.
Michael Larsen: In summary, Q3 was another quarter of strong operational execution and financial performance.
Michael Larsen: Turn to slide 4, an organic revenue growth by geography. As you can see, North America was down 2%, Europe was about flat, and Asia Pacific was up 6% with China up 8% driven by the automotive OEM segment.
For for margin improvement.
Thanks, so much.
Sure.
Michael Larsen: Excluding auto, China was down 1%.
Your next question comes from the line of Steven Fisher from UBS. Please go ahead. Your line is open.
Michael Larsen: Moving to the segments and starting with our automotive OEM, organic growth was 4%. North America was down 5%, Europe was up 5%, and China was up 18%.
Hey, Thanks, good morning, and congratulations Scott.
We didn't need the welding segment it seemed like the year over year was a little weaker on the industrial side.
Michael Larsen: There was essentially no impact on automotive OEM segment revenues from the auto strike in Q3, but as Chris noted, that will not be the case in Q4. As a reminder, our North American automotive OEM business represents approximately 40% of total segment revenues. And within that 40%, approximately 2 thirds of our annual sales are tied to D3 automotive customers.
Relative to last quarter, and maybe a little better on the commercial.
Is that something that you are projecting or at least in the near term and to what extent is there a margin mix difference between those two sub segments.
Hi aware of.
So there's not a lot of difference in terms of the margin performance, but I think this is these are some great data points that illustrate kind of the dynamic nature of the environment that we're operating in and really what I tried to lay out in the commentary was what's driving this on a year over year basis or just the comparisons so it's really hard to do.
Michael Larsen: Included in our updated earnings guidance today is our estimate that the impact of the auto strike will reduce our Q4 earnings by 12 cents per share, which is essentially based on a October D3 domestic production levels continuing through the remainder of the quarter.
Any conclusions.
From the from the year over year comparisons what I think we can say broadly in welding.
As we said upfront is that the overall demand for equipment appears to be slowing down a little bit in the near term whether that will remain.
Michael Larsen: Turn to slide 5, food equipment delivered solid organic growth of 6%, as equipment was up 5% and service grew 9%. North America grew 10% with institutional sales up in the This restaurants up high single digits and retail up in the high teens on the back of new product rollouts.
At those levels on a go forward basis is difficult to to say at this point backlogs have.
Normalized we're not really a backlog driven company.
We're now back to two to three weeks of backlog at the enterprise level and then the last point I'll make is we are still seeing meaningful impact from our customers and channel partners, reducing their levels of inventory so.
Michael Larsen: Europe, however, was flat and Asia Pacific was up 6%.
If you think about at the enterprise level that was a point to a point and a half of organic growth drag. So just to maybe normalize the Q3 results a little bit on the top line, so 2% on an equal days basis.
Michael Larsen: Overall, Tesla measurement grew 2% as demand for capex slowed in the quarter and electronics declined 13%.
And then you factor in the inventory adjustments.
Michael Larsen: Moving on to slide 6, welding's organic revenue declined 2%. As equipment revenue was down 3% on the back of softer demand for capex. Consumables were down 1%, as industrial sales declined 9% versus a tough comparison of plus 30% last year.
Youre back at three three and a half.
Just to kind of put things in context, a little bit but there is no no question that the activity has slowed down a little bit.
On the welding side here in the in the third quarter.
Okay. That's helpful and then.
When would you get an idea of how your price versus cost is going to shape up for 2024.
Michael Larsen: Commercial, however, was up 6% against an easier year-year comparison of down 10%. Overall, though North America revenue was down 3% and international was essentially flat.
In a sense broadly in industrials is going to be pretty tight would you agree with that and is that something you can sort of 80 20 to kind of tilted in your favor.
Michael Larsen: Palmers on fluids, organic revenue grew 3%, as automotive aftermarket grew 10% due to the launch of new products.
Well.
So we haven't even rolled up our plans yet for next year that really happens at the end of this month and then we will have some good discussion.
Michael Larsen: Palmers was down 1%, and fluids was down 4%. Margins were solid as operating margin improved 280 basis points to 28.1%.
With our segments and we'll get a much better handle on what.
What the price cost equation might look like.
Michael Larsen: Turning to slide 7, organic revenue and construction was down 2%, as North America grew 2% with residential up 2% with some strength on the residential renovation side, which was up 7%. Commercial construction was down 2%.
I do think if you just look at the margin recovery.
The trajectory that we're on we havent fully recovered the margin impact and so I think it's not unreasonable to assume that there will be some carryover into maybe the first half of next year.
And then you add on top of that may be our normal pricing.
Michael Larsen: International markets were soft with Europe down 8%, and Australia New Zealand down 4%.
But again I don't want to get too far ahead of ourselves, we will give you a lot more detail.
Michael Larsen: Margins were solid as operating margin improved 420 basis points to 29.9% with strong contributions from enterprise initiatives and price cost.
When we give you guidance for the full year, which will be early early next year, but certainly.
If your price is holding.
Michael Larsen: Finally, specialty products organic revenue was down 6%. North America was down 9%, and international grew 1%. Consumables were down 9%, and equipment revenue which represents about 20% of the segment was up 9%.
At current levels and the raw material costs direct.
Material cost.
Equation does that has has stabilized we're not seeing significant deflation at this point, but we're also not seeing.
Anything close to the inflation, we've seen over the last two years. So that's kind of the good news here.
Michael Larsen: Moving to slide 8, and our updated full year 2023 guidance. As you saw this morning, we're narrowing the range of our Gap EPS guidance to a new range of 965 to 985, which as I mentioned earlier, includes a 12 cents adjustment for the estimated auto strike impact in Q4. Based on current levels of demand exiting Q3, including the estimated impact of the auto strike, we're projecting organic growth of 2% to 3% for the full year.
Great I appreciate the early thoughts thank you.
Yes.
Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead. Your line is open.
Okay.
Thank you good morning.
Maybe.
One area is interested in was.
Test and measurement and electronics.
Also in light of sort of progress on the integration of the acquisition, how thats going as it's been in the portfolio several quarters now and also just on the base business.
Michael Larsen: We are raising our full year operating margin guidance to 25% to 25% to reflect our stronger margin performance exiting the third quarter, and we expect that margins for the full year will improve by 150 basis points at the midpoint, including a contribution of more than 100 basis points from enterprise initiatives. We are projecting free cash flow conversion of more than 100% of net income for the year.
Very mixed reads smeal various peers in that market any color you could give us on kind of expectations for Q4 alone on electronics versus say test and measurement within that please.
Yeah, So Joe we don't give.
Quarterly guidance, but I think if you look at historical.
Michael Larsen: So while the overall demand environment clearly has some uncertainties in the near term, inventory normalization, elevated interest rates, increased in CAPEX caution, and the autostrike, just to mention a few, the entire team at ITW remains focused on leveraging ITW's unique strengths and capabilities to optimize our ability to continue to deliver differentiated long-term performance.
Information Youll see that Theres typically a ramp up in tests emersion electronics in Q4 relative to Q3.
And so we do expect some of that.
I think overall the electronics side like I said, the consumer electronics end market.
<unk> remained soft.
Just semi in isolation.
Michael Larsen: With that, Karen, I'll turn it back to you.
Is down 20%, 25%.
Karen Fletcher: All right, thank you, Michael. Christa, please open the lines up for questions. At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
On a year over year basis, and that's <unk>.
Last year that was about a $500 million segments that we're definitely seeing.
That's what's driving these results if you take out.
The semi impact in test and measure of electronics were actually up two.
2% on a year over year basis, but we.
Scott Davis: Your first question comes from the line of Scott Davis from Malia's research. Please go ahead. Your line is open. Good morning, Scott and Chris and Michael and Karen. Good morning, Scott. I was, the price cost positive 200 basis, 210 was better. I think we were thinking just in simple math, kind of more like, you know, 100 to 150.
We expect this pressure to continue.
We're not counting on a recovery here in the fourth quarter, it's based on run rate and typical seasonality.
I'd say on an MTS overall.
Maybe Chris do you want to make some comments you were just up there. So maybe you want to yes, so I would say Julian that certainly the the assumptions we made when we acquired the MTS business in terms of strategic fit and financial rationale had been very much validated by or no two years of owning the business.
Michael Larsen: What were you able to get more price in the quarter, or was it lower costs or a little bit of both, or just a little color there, would be helpful, thanks. Yeah, so let me give you a little context here. So we are definitely on track to recover the margin impact now from, you know, more than two years of unprecedented inflation, which now appears to have stabilized. There's definitely still some pressure on the cost side, on the neighbor side components as well as energy.
<unk> has performed very well we are currently in process of implementing our business model already starting to see some real nice results accruing from that but we strongly feel this is going to be a very very successful ITW acquisition. In fact, we are taking.
Taking our board of directors up to MTS later this week for them to witness firsthand the level of progress that we've made on the integration.
In terms of implementing our business model, but like I say two years and so far so good great people, great brands, Great technology, great opportunity to improve the business model and like I said this is going to be a great ITW business in the long term.
Michael Larsen: That said, we've made some good progress. You know, price cost was positive, 190 basis points of Q1, 216, Q2, which was the peak and then 210 here in the third quarter. And we're now looking at somewhere around 150 basis points in Q4 and that will put us around 200 basis points recovery for the full year. Price is holding and we're seeing a little bit of deflation on the more in the commodity side. So these would be the metals in particular, which drove, you know, the stronger performance here on price cost in the third quarter. Helpful.
Yes, I would just add maybe to quantify what.
Chris was talking about the short term this business grew double digit topline in the third quarter and Youll recall, maybe margins coming in we're somewhere around 7% and.
And through the implementation of the business model at this point we are.
The outlook for the full year is in the mid teens, so right on track in terms of.
The potential that we thought we had when we acquired the business good progress.
Chris OHerlihy: Chris, I know it's a thoroughly, you've got another couple months, but is there kind of a plan for the first 90 days or where do you see the, you know, I guess the focus shifting is, is there a little bit more emphasis on portfolio or, you know, I know you mentioned kind of driving higher growth rates, but they're just given the diversity of end market you sell into. There's just so much you can do on that front.
That's helpful. Thank you and good to hear on MTS, maybe just a broader question perhaps.
Okay.
The sort of the <unk>.
Transition that was announced and congratulations to both Scott and Chris, but maybe on the sort of thinking about the top line a little bit.
Yes, it looks like maybe some of the share gains. The ITW had enjoyed just after COVID-19 may be <unk>.
Chris OHerlihy: But maybe just a little color on where you plan on spending your first, you know, kind of three to six months and focusing. Yeah, so Scott, I would say, you know, in general, you know, our plan is very much in line with what we outlined that our investor day in terms of really ensuring that we continue to strengthen our foundation, which is our business model and obviously then building organic growth as a core strength on a power with our operational capabilities and financial performance over time.
East.
To date, all eased in the last 12 months or so realize there's some destocking noise in various channels and so looking at market share in that context, I may not be that helpful.
But just wanted to sort of perspectives on market share across the larger ITW businesses and weather.
That was perhaps a need to redeploy a greater share of enterprise initiatives or price cost savings into sort of organic reinvestment in the base business.
Chris OHerlihy: I think the first 90 days, I'm just learning the job. Just quote, and pretty good understanding of our businesses already, but obviously working with our businesses To make sure that our strategy is as well, pot of dome with our businesses, which of course it is. That's really the plan for the first 90 days I would say, but it's really in the context of being very committed to this strategy for the next phase, which is to sustain the strong foundation we have on our business model, we're really leaning in on continuing to build our organic growth capability to be on a power with our operation capabilities and our financial performance.
Yes, maybe I'll start and then Chris you can jump in I think I'd start by saying, we completely disagree with the premise that we are not gaining market share.
Recognizing that it may be difficult for you are looking at from the outside to decipher.
Yes.
So as market share gains on.
On an annual basis.
But if you go to every one of our divisions stay will have a very clear picture all 84 of them in terms of what market growth is and what their growth rate is and what their competitors are growing at and in all cases, we would say that.
Scott Davis: Okay, best of luck, thanks, thanks all and congrats, Scott. Fantastic, fantastic run, really exceptional.
Given our competitive advantages.
Scott Davis: So thank you all, I'll pass it on there.
That we derived from the business model in terms of our customer facing metrics.
Tami Zakaria: Your next question comes from the line of Tammy Zakaria from JP Morgan, please go ahead. Your line is open. Hi, good morning, thank you so much. So my first question is I want to understand the operating margin expansion a bit better, 200 basis points, enterprise initiative 140 price cost 210. So what was the drag to get to the 200 basis points expansion? I remember you were investing in labor and compensation this year. Is that still there and when do you expect that to taper off, especially as you look into 2024?
Terms of.
The value add that our customers are getting from buying our products and we're continuing to gain share in the markets that we're focused on.
And in some cases youre able to look at public company peers, you can peel back the onion a little bit.
And if you do that work if you were to do that work Julien Youll see.
We are gaining market share.
In the areas that we're focused on.
And I might just add not only are we gaining market share, but just I'll just note the margin performance of our businesses relative to.
Our competitors, which typically we are running at two to three X. Our competitors and you can look at food equipment and Lincoln in the welding side for example, and Youll see that that is the case, but maybe Chris if you want to comment a little bit yes, I would echo everything as Michael just said in terms of the quality of our portfolio in terms.
Michael Larsen: Yeah, good morning, Tammy. So you're right, if you look at the margin improvement year over year, another really strong contribution from enterprise initiatives. I think the best performance in two and a half years, which is really remarkable, given what we're at in the enterprise strategy price cost. We talked about 210 and then 160 basis points of, I don't want to call it headwind necessarily because these are investments that we're making in our long term organic growth initiatives, including new hires, as well as then obviously the regular wage and benefit inflation that everybody else is seeing.
Of the amount of room, we have to grow in each segment customer facing performance and so on and the focused investments that we've made in areas like sales and innovation.
Coupled with the fact that we've seen a nice niche of improving yield on customer back innovation. All this goes a lot of credence to what we're hearing from our businesses that we are gaining share in most of our key markets relative to our competition.
That's great. Thank you.
Michael Larsen: That all adds up to about 160 basis points. And that's how you get even with all of those investments that we continue to make, you're getting 200 basis points of margin improvement on a year of a year basis to 26.5%, which I believe with a new record for the third quarter. Does that 150 basis points headwind continue in the fourth quarter and maybe in the next several quarters, how should we think about that headwind?
If you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Mig debris from Baird. Please go ahead. Your line is open.
Yes. Thank you good morning, and congrats Scott Chris.
A quick question on construction.
In your comments you mentioned that.
E.
Renovation channels.
Michael Larsen: Yeah, I think the normal run rate is somewhere we've been running higher than that this year. The normal run rate and we'll see how the plans roll up for next year. I don't want to get too far ahead of myself, but if you look at historically, that's about 100 to 150 basis points I headwind. Got it.
Quite well.
Maybe a little more color there is that a function of new products or anything going on in the channel just found that to be a little bit surprising given more activity and interest rates and all of that seem to be.
Yes.
Tami Zakaria: Can I ask one more quick one? The 12 cents headwind from the auto strike you're calling out for the fourth quarter. Does that assume the strike continues through the end of the quarter?
Again make you are right. This is on the residential.
Residential renovation remodel side of things. So these are.
Typically sales through big box retailers names that you'll be familiar with and I think if you look at I think somebody asked earlier about market share. This is a great example of really strong market share gains.
Michael Larsen: And what does that mean in terms of organic growth headwind for the fourth quarter? Yeah, so let me just broaden the lens maybe a little bit here. I think given the uncertainty around auto and the fact that the strike is now in the sixth week here, we decided that we'd take a more prudent approach, which is basically based on What we're seeing in our businesses right now may be with room for things deteriorating a little bit further from where they are today.
In this particular end market because I agree with you. If you just look at the underlying data.
You might be a little surprised that that part of the business is up 7% year over year in the current interest rate environment and like I said this is essentially all volume and share gain through the big box retailers.
And presumably that has some staying power beyond this quarter.
Well.
Michael Larsen: And if you take that quarter to date impact and extrapolate through a year end, that's how you get the 12 cents of EPS adjustment that's now embedded in our guidance. It continues through year end. If this right ends before year end, obviously we'll do better than that. If it gets worse, our businesses will do a great job in terms of reading and reacting to the conditions on the ground. The optimist might say that some of those products that production will get deferred into next year, but obviously a lot of uncertainty. And given that we don't really want to pin down a revenue number, we're just going to give you here the 12 cents of adjustment that I just laid out for you.
I think that overall construction in North America actually remains fairly stable I'd say, maybe a little bit more concerned on the international side, which has been weak.
The market demand has been a lot softer on the international side, but.
North America keep in mind that in the fourth quarter typically we talk about seasonality.
Tami Zakaria: Great.
By segment as a test and measurement usually does better construction is one where for obvious reasons. The fourth quarter is typically a little bit lower than the third quarter.
Tami Zakaria: Thank you so much. Sure.
But in terms of the share gains and our strength in this particular part of the business.
That absolutely has staying power.
That absolutely has staying power.
Great then my follow up maybe on food equipment.
I'm curious as to how the supply chain.
Bob for you here and where your lead times are I know you've got a number of verticals within this segment.
Some contracts there would be helpful.
And also where are you from a backlog perspective are you seeing any sort of noise in the channel from Destocking or is this segment, perhaps less impacted than others. Thanks.
Andrew Obin: Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead. Your line is open. Good morning. So question.
Yes.
So maybe just from a lead time perspective, I would say that a natural outcome of our business model is best in class lead times and cost efficiency performance and we're very much back to where we were pre pandemic in terms of our ability to supply our customers.
Andrew Obin: I think before you were talking about sort of 25% of the portfolio, slowing structural over the past couple of quarters, have any of those markets bottom like electronics and have any new market started to slow is at the same 25% just how do you look at the world? Andrew, so there's definitely some puts and takes, you know, I think for example, if you'd asked me that question last quarter, I would have said automotive OEM automotive aftermarket would be in that category, they were up 10%.
In terms of.
The channel, Yes, I think it's an area, where there is a little bit of inventory in the channel. We are seeing that coming down it's probably still out there. It's one of the segments. It has been impacted I think by.
By channel inventory likely to come down over the next couple of quarters here, but its there are known for sure.
Yes, and then just on the backlogs were back to normal levels.
Which in our case.
Andrew Obin: So just an example of things moving in and out. So I'm not sure. You know, it's really that relevant to look at, but if you just look at what we would say now is kind of slowing the 25% on a combined basis, those businesses were down year over year, 3% in the third quarter. However, sequentially, they did improve from the second quarter by a percentage point, which I would say fairly stable.
Given our customer customer delivery performance is two to three weeks. So we're back to kind of normal levels here.
Alright I appreciate it thank you.
Alright, thank you.
Your next question comes from the line of Joe O'dea from Wells Fargo. Please go ahead. Your line is open.
Hi, good morning.
Thanks for taking my questions and congrats to both Scott and Chris.
Andrew Obin: Talking about electronics and semi specifically, I think consumer electronics remains fairly weak on the semi conductor side, you'll recall that we've talked about an expectation from industry experts, I'll call them as well as our customers that they would be a re acceleration of demand here in the second half of this year. And that now looks like it's been deferred, probably until sometime next year. Now, obviously we remain as we now do on an ongoing basis committed to those businesses we continue to invest and really position ourselves for the inevitable recovery down the road, which hopefully comes next year in 2024 and making sure that we're well positioned to take full advantage of the long term growth opportunities. We believe are right in front of us in that part of our businesses. So, gotcha.
I guess I wanted to stay on that topic in terms of the channel inventory normalization something you talked about last quarter I think size pretty similarly last quarter and so the question is just you know any any changes that you've seen from kind of June July into where we are now in terms of the trends on some of.
That inventory rationalization by other regions end markets pace of it or if it's all kind of trending in line with expectations as of a couple of months ago.
I would say this is trending right in line with expectations that we kind of.
Laid out on the last call.
As I said.
The drag on the organic growth rate of one to one 5% was pretty broad based every segment.
Had some impact very similar Q3 as Q2, and we think this will probably be with us.
For a few more quarters and I would just say if you just look at our own inventory.
Lori levels, we are currently running.
Slightly above three months on hand, where typically we are running at low twos and we estimate that in our case it will take us.
Andrew Obin: And then maybe you've answered this question as you talked about the business overall, but in construction products and polymer and fluids, the changes available margin across was a material benefit to margin year over year and has been year to date. Anything specific that you're doing in these businesses and how much more runway is there? Well, there's a lot of work that's going on in those businesses to deliver these results. Obviously, I'd say that the categories you're familiar with and the first one is the ongoing contribution from the enterprise initiatives.
Probably until kind of early mid next year to get back to normal inventory levels.
As we worked through the exact same things that our customers and channel partners are working through.
And I might just add here that that's obviously going to continue to drive some really strong.
Free cash flow performance for for ITW as <unk>.
Inventory levels of working capital continues to normalize as a result of supply chain.
Having stabilized.
Andrew Obin: And so both the segments that you mentioned had a significant contribution from enterprise initiatives, as well as favorable price cost impact. So those are really the two big drivers in those businesses. And I think it is pretty remarkable that they're putting up record quality margin performance. Given frankly, not a lot of volume growth, not a lot of volume leverage. So you can imagine once we get the volume leverage going again, as Chris was talking about, incremental kind of in that 30 factor 40 range, there's even more runway for margin improvement. Thanks so much. Sure.
And then how does that kind of compare relate to some of what youre seeing from your customers right now I think in the prepared remarks, you talked about maybe a little bit of slower kind of capex demand trends out of your customers.
What youre seeing in sort of test and measurement or welding and the degree to which what youre hearing from customers is this is more inventory related or if it's something that's a little bit of a pause that's more maybe macro uncertainty related.
I think it's really hard to tell I mean, I think overall the demand environment as we said there is clearly.
Some uncertainties here in the near term.
Steven Fisher: Your next question comes from the line of Steven Fisher from US. Please go ahead. Your line is open. Thanks. Good morning and congratulations Scott. Wouldn't the welding segment seem like the year over year was a little weaker on the industrial side relative to last or maybe a little better on the commercial. Is that something that you're projecting at least in the near term and what extent is there a margin mixed difference between those two sub segments that you're aware of?
Inventory as part of that the interest rate environment.
Everybody being maybe a little bit more cautious on the capex side.
And then in one of our segments, particularly the auto strike. So there is a lot of things going on here.
It is a pretty dynamic environment. It can change pretty quickly the only thing we know for sure is that.
The ITW team will continue to read and react to whatever conditions are on the ground.
And I think if you just look at our track record we will continue to deliver.
Differentiated.
Steven Fisher: So there's not a lot of difference in terms of the margin performance, but I think this is a, these are some great data points that illustrate kind of the dynamic nature of the environment that we're operating in and really what I try to lay out in the commentary was what's driving this on a year of a year basis are just the comparisons. So it's really hard to draw any conclusions from the from the year where your comparisons.
Long term performance and so that's really our focus is on continuing to do just that.
Understood. Thank you.
Thank you.
Yeah.
Thank you for participating in today's conference call. All lines may disconnect. At this time have a wonderful day.
[music].
Steven Fisher: What I think we can say broadly and welding. As we said up front is that the overall demand for equipment appears to be slowing down a little bit in the near term, whether that I will remain at those levels on a go forward basis is difficult to say at this point. The backlogs have normalized, you know, we're not really a backlog driven company. We, we're now back to two to three weeks of backlog at the enterprise level.
Steven Fisher: And then the last point I'll make is we're still seeing meaningful impact from our customers and channel partners reducing their levels of inventory. So if you think about at the enterprise level, that was a point to a point and a half of organic growth drag. So just to maybe normalize the Q3 results a little bit on the top line. So 2% on an equal days basis. And then you factor in the inventory adjustments.
Steven Fisher: You're back at three three and a half, just to kind of put things in context a little bit, but there's no question that the activity is slowed down a little bit on the welding side here in the third quarter. Okay, helpful. And then when would you get an idea of how your price versus cost is going to shape up for 2024? I'm getting a sense, you know, broadly industrial is going to be pretty tight.
Steven Fisher: Would you agree with that? And is that something you can sort of 80, 20 to kind of tilt it in your favor? Well, so we haven't even rolled up our plans yet for next year. That really happens at the end of this month, and then we'll have some good discussion with our segments. And we'll get a much better handle on what what the price cost equation might look like. I do think if you just look at the margin recovery trajectory that we're on, we haven't fully recovered the margin impact.
Steven Fisher: And so I think it's not unreasonable to assume that there will be some carry over into maybe the first half on next year. And then you add on top of that maybe our normal pricing. But again, I don't want to get too far ahead of ourselves. We'll give you a lot more detail when we give you guidance for the full year, which will be early early next year. But certainly, if you're, you know, price is holding at current levels.
Steven Fisher: And the raw material cost direct material cost equation, those that has stabilized. We're not seeing significant deflation at this point, but we're also not seeing anything close to the inflation we've seen over the last two years. So that's kind of the good news here. Great. I appreciate your early thoughts. Thank you. Yeah.
Julian Mitchell: Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead. Your line is open. Thank you. Good morning. Maybe one era is interested in was a pest and measurements and electronics. Also, you know, in light of sort of progress on the integration of the acquisition. How that's gone as it's been in the portfolio several quarters now and also just on the base business. You know, very mixed reads from your various peers in that market.
Julian Mitchell: Any color you could give us on kind of expectations for Q for on electronics versus say pest and measurement within that, please. Yeah. So, you know, we don't give quarterly guidance, but I think if you look at historical information, you'll see that there's typically a ramp up in test and measurement electronics in Q4 relative to Q3. And so we do expect some of that. I think overall, you know, the electronics side, like I said, the consumer electronics and market remains soft.
Julian Mitchell: You know, the semi in isolation is down 20, 25% on a year-to-year basis. And that's last year. That was about a 500 million dollar segment. So we're definitely seeing that's what's driving these results. You know, if you take out the semi impact in test and measurement electronics, we're actually up 2% on a year-to-year basis. But we, you know, we. We expect this pressure to continue. We're not accounting on our recovery here in the fourth quarter.
Julian Mitchell: It's based on run rate and typical seasonality. I'd say on MTS overall, maybe Chris, you want to make some comments and we're just up there so maybe you want to. Yeah, so I would say Julian that certainly the assumptions we made when we acquired the MTS business in terms of strategic fish and financial rationale have been very much validated by or no two years of owning the business. The business has performed very well.
Julian Mitchell: We are currently in process of implementing our business model already starting to see some real nice results with cooling from that, but we strongly feel this is going to be a very, very successful ITW acquisition. In fact, we are taking our board directors up to MTS later this week for them to witness first hand the level of progress that we made on the integration in terms of implementing our business model. But like I said, two years in so far, so good.
Julian Mitchell: Great people. Great brands, great technology, great opportunity to implement the business model. And like I said, this is going to be a great ITW business in the long term. Yeah, I would just add maybe to quantify what Chris is talking about in the short term, right? This business grew double digit top line in the third quarter. And you'll recall maybe margins coming in were somewhere around 7% and through the implementation of the business model.
Julian Mitchell: At this point, we are the outlook for the full year is in the mid teens. So right on track in terms of the potential that we thought we had when we acquired the business of good progress. That's helpful. Thank you and good to hear on MTS.
Julian Mitchell: Maybe just a broader question perhaps, you know, amidst the sort of the CO transition that was announced and congratulations to both Scott and Chris. But maybe on the sort of think about the top line a little bit and you know, it looks like maybe some of the share gains that ITW had enjoyed just after COVID maybe has eased to date or eased in the last 12 months or so. Realize there's some destocking noise in various channels and so looking at market share in that context may not be that helpful.
Julian Mitchell: But just wanted sort of perspectives on market share across the larger ITW businesses and whether, you know, there was perhaps a need to redeploy a greater share of enterprise initiatives or price cost savings into sort of organic reinvestment in the base business. Yeah, maybe I'll start and then Chris, you can jump in. I think I start by saying we completely disagree with the premise that we are not gaining market share. Recognizing that it may be difficult for you looking in from the outside to decipher, you know, those market share gains on an annual basis.
Julian Mitchell: But if you go to every one of our divisions, they will have a very clear picture all 84 of them in terms of what market growth is and what their growth rate is and what their competitors are growing at. And in all cases, we would say that, you know, given our competitive advantages that we derived from the business model in terms of our customer facing metrics in terms of our, you know, the value add that our customers are getting from buying our products.
Julian Mitchell: And we're continuing to gain share in the markets that we're focused on. And in some cases, you're able to look at public company peers, you can peel back the onion a little bit, and if you do that work, if you want to do that work, you'll see that we are gaining market share in the areas that we are focused on. And I might just add not only are we gaining market share, but just note the margin performance of our business is relative to our competitors, which typically we are running at two, three X, our competitors, and you can look at food equipment and Lincoln on the Baltic side, for example, and you'll see that that is the case, but maybe it, you know, Chris, if you want to comment a little bit.
Julian Mitchell: Yeah, I would echo everything. Michael just said in terms of the quality of our portfolio, in terms of the amount of room we have to grow in each segment, customer facing performance, and so on, and the focused investments that we've made in areas like sales and innovation. Copying with the fact that we've seen a nice, nicely improving yield on customer back in the innovation, unless there's a lot of credence to what we're hearing from our businesses that we are gaining share in most of our key markets for our competition. That's great.
Julian Mitchell: Thank you.
Krista: If you would like to ask a question, please press star one on your telephone keypad.
Meg Doobry: Your next question comes from the line of Meg Doobry from Baird. Please go ahead. Your line is open. Yes. Thank you. Good morning and congrats to Scott. Chris, quick question on construction in your comments. You mentioned that the Rezzi renovation channel is done quite well. Maybe a little more color there. Is that a function of new products or anything going on in the channel? I just found that to be a little bit surprising, given where activity and interest rates and all of that seem to be.
Meg Doobry: Yeah, so again, Meg, you're right. This is on the residential. Renovation remodel side of things. So these are typically sales through big box retailers, names that you'll be familiar with. And I think if you look at, I think somebody asked earlier about market share, this is a great example of really strong market share gains in this particular end market, because I agree with you, if you just look at the underlying data, it, you might be a little surprised that, you know, that part of the business is up 7%.
Meg Doobry: Year by year in the current interest rate environment. And like I said, this is essentially all volume and share gain through the big box retailers and presumably that has some same power beyond this quarter. Well, you know, I think that overall construction in North America actually remains fairly stable at say, maybe a little bit more concern on the international side, which has been weak. You know, the market demand has been a lot softer on the national side, but, you know, North America, keep in mind that in the fourth quarter, typically, we talked about seasonality, you know, vice segment. I said, test and measurement usually does better.
Meg Doobry: Construction is one where, for obvious reasons, the fourth quarter is typically a little bit lower than the third quarter, but in terms of the share gains and our strength in this particular part of the business, that absolutely has staying power.
Meg Doobry: Great, then my follow-up, maybe on food equipment. I'm curious as to how the supply chain has sort of evolved for you here and where your lead times are. I know you've got a number of vertebrates within the segment, but some contact could be helpful. And also, where are you from a backlog perspective? Are you seeing any sort of noise in a channel around the stocking, or is this segment perhaps less impacted than others?
Meg Doobry: Thanks. So Mick, just from a lead time perspective, I would say that a natural outcome for a business model is best in class lead times and customer facing performance. And we are very much back to where we were pre-pandemic in terms of our ability to supply our customers. In terms of the channel, yeah, I think it's an area where there is a bit of inventory in the channel. We're seeing that coming down.
Meg Doobry: It's probably still out there. It's one of the segments that has been impacted by channel inventory likely to come down over the next couple of quarters here, but it's fair enough for sure. Yeah, and I just know the backlogs. We're back to normal levels, which in our case, given our customer delivery performance is two to three weeks, so we're back to normal levels here.
Meg Doobry: All right, appreciate it.
Joe Odia: Thank you.
Joe Odia: Hi, thank you. Your next question comes from the line of Joe Odia from Wells Fargo. Please go ahead. Your line is open. Hi, good morning. Thanks for taking my questions and congrats to both Scott and Chris. I guess I wanted to stay on that topic in terms of the channel inventory normalization. You know, something you talked about last quarter, I think size pretty similarly last quarter. And so the question is just, you know, any changes that you've seen from June, July into where we are now, in terms of the trends on some of that inventory rationalization, whether regions and markets, pace of it, or if it's all kind of trending in line with expectations as of a couple months ago.
Joe Odia: I'd say this is trending right in line with expectations that we kind of laid out on the last call. Like I said, the drag on the organic growth rate of one to one and a half percent was pretty broad base. Every segment had some impact, very similar Q3 as Q2 and we think this will probably be with us for a few more quarters. And I'll just say if you just look at our own inventory levels, we are currently running slightly above three months on hand.
Joe Odia: We're typically we're running at, you know, low twos. And we estimate that in our case, it'll take us probably until kind of early mid next year to get back to normal inventory levels. As we work through the exact same things that our customers and channel partners are working through. And I might just add here that that's obviously going to continue to drive some really strong free cash flow performance for ITW as inventory levels working capital continues to normalize as a result of supply chain having stabilized.
Joe Odia: And then how does that kind of compare relate to some of what you're seeing from your customers right now? I think in the prepared remarks you talked about maybe a little bit slower and a cat-backed demand trends out of your customers, what you're seeing and sort of tested measurement or welding. And the degree to which what you're hearing from customers is this is more inventory related or if it's something that's a little bit of a pause that's more maybe macro uncertainty related.
Joe Odia: I think it's really hard to tell. I mean, I think overall the demand environment, as we said, there's clearly some uncertainties here in the near-term inventory. It's part of that. The interest rate environment, everybody being maybe a little bit more cautious on the cat backside. And then in one of our segments, particularly the auto strike. So there's a lot of things going on here. It is a pretty dynamic environment. It can change pretty quickly.
Joe Odia: The only thing we know for sure is that the ITW team will continue to read and react to whatever conditions are on the ground. And I think if you just look at our track record, we'll continue to deliver differentiated long-term performance. And so that's really our focus is on continuing to do just that. Understood. Thank you. Thank you for participating in today's conference call. All lines may disconnect at this time.
Krista: Have a wonderful day.