ITW - Earnings call transcript Q2 2018 | Illinois Tool Works Inc.

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Operator

Welcome, and thank you for joining ITW's 2018 Second Quarter Earnings Call. [Operator Instructions]. Today's conference is being recorded.

If you have any objections, you may disconnect at this time. I will now turn the call over to Karen Fletcher, Vice President of Investor Relations.

begin. may You

Karen Fletcher

Michael morning, Conference Good CEO, to Second and ITW's Santi; Thanks, I'm and joined XXXX CFO, President Vice Call. with and by Quarter along Brandon. Senior welcome Larsen. our Scott Chairman

During update for on and financial you we'll today's of the XXXX. discuss call, remainder quarter results second the outlook

other a that Also, our on I year the the third for measures to CEO, for to slide. to get reconciliation remind XXXX from we cause you company's could forecast well measures let our to me results to the our identified Form most risks comparable detail and Scott? you this more differ XXXX and contained and financial release. certain full expectations. uses forward-looking call that press We GAAP refer in the Before Form materially the about over results, Chairman and Santi. XX-Qs of important presentation is this this subsequently will as as those presentation statements contains the actual measures, quarter turn filed now Scott non-GAAP XX-K

Scott Santi

that's growth you, translation was X%. expectations Thank good delivered organic ITW strong EPS a with $X.XX currency ahead a and despite prior revenue prior and And X% headwind. of the morning. quarter, $X.XX year versus guidance. up up our XX% another and Karen, of of versus headwind

and organic million, our X% Michael North delivered evidenced unfavorable had into through they the auto ended of basis impact we we margins. up share in And details builds, more company XX we higher at in year-on-year. key up heading -- little down of segments. growth later that the XXX points first growth cost strong $XXX growth points X%. the offset trends by an the of versus points. ROIC ongoing of sequentially If you cost We versus quarter received quarter. all saw those forecast teams geographies, continued operating material results in exclude on up momentum positive addition, basis. the the basis the Product strong in of on growth Measurement and more our will environment, we up to material segments be raw on In on impact basis Underlying call. a organic the an to XX basis, margin delivering X including operating Line up despite dollar-for-dollar the with Welding financial our increases And would income basis Food And raw organic second have despite in Simplification offset we and a American rising Overall, a half, and benefit year, cost Overall, points; QX. XX.X%, major settlement Electronics points delivered EPS to after-tax from & X%; quarter. last particular, in basis spur raw XX.X%, demand growth being are up continue, Equipment, Test X% metrics, year-over-year all demand material legal from IHS working remained business of CapEx-related increases was quarter XX in as the which in strong improving XX% XXX expand

continued business proprietary returns. the margin business first teams our half to progress our XXX apply model points to solid deliver with as best-in-class basis our implementing and benefit contributed Continued QX in margins in Initiatives growth Enterprise and in

of the we to full account roughly year guidance QX our foreign the guidance. compared second XX% last rates, at when ahead, to have for we which, end current a exchange present the to current adjusted Looking levels, impact updated half

well, XX% deliver we accelerate as execute year for expand to continue margins. full to the and EPS growth expect organic We growth

strong continued to enter on of deliver to turn for quarter. the Michael year. second over the now with more positioned results well the the that, Michael? call are half as I'll detail And we We

Michael Larsen

Thanks, we're for year-over-year, translation seeing of our our share Food Simplification and and and geography. versus of growth a around Organic particularly growth We $X.XX the above in Earnings Specialty portfolio X% half. across a was side with QX business those evident currency the the X%. was despite of XX impact. XX% overall XX growth X% have in been up foodservice and Scott. followed business, good Measurement equipment auto this revenue North $X.XX organic in on basis American growth by versus good outlook total growth demand forecast in Operating our XX.X%, margins prior half $X.XX heading would By and Equipment Test was really we a $X.XX QX and major way this organic our the points per of was second at XXX reduced $X delivering drag sequentially, our Welding of repurchased in America basis to continued a at following every up unfavorable million, quarter momentum flow we midpoint industry and were than positive in excluding quarter our North guidance year. led up in XX as cash the strong momentum of for $XXX million first mentioned sequentially. points up legal by prior segment, organic good XXXX. settlement, Product growth up shares the X% more was XXX sequential and Line billion XX% of XX the Electronics year Free basis softer points quarter And points, basis both add growth; builds the & organic rate. basis points growth. accelerate, XX% back, right Scott into

strategy execution I strong #X by QX, Initiatives year from said, strong basis Enterprise last to year-over-year. points was margin. organic versus continued cost And points higher basis adjustments XX.X% raw margin up more to from Like sequentially and on cover Chart we to excluding our a cover tariffs improvement. of with continue prior points XX. on growth price on Similar leverage and Slide this inflation across basis basis. as detail as XX margin in another margin company Moving the Operating added dollar-for-dollar I'll performance material operating year's operating settlement. margin our the when in and of teams a XXX Pricing improve XX legal actions contributed quarter. execute to benefit of volume

XX CapEx growth our Finally, amounted we and to points. growth in accelerate basis investments strategies. invest continue to and support further long-term to people These

half segments #X half positive geographies there growth. Chart up contributed major the share We board, to Initiatives, first company's our with in continued actions again, X% margin basis and contributing organic at the for most into operating just have offset points. with and increases second execution organic of half and Across a on we heading Pricing XX the basis All excellent the points the history strong operational XXX improvement growth profitable growth per improved performance And look performance. first completed Turning dollar-for-dollar cost was good X%, momentum delivered revenue really earnings Enterprise up in margin a with first half. and XX%. basis. margin as

second segments remain based can includes for and segment points. we for summarizes for The with except PLS I growth basis to first confident of Table in year margin quarters the #X across margins X XX that and where the X% second sequentially, will on table was X% as actions improved And building, rates. organic we're impact and segments see to a auto shows take out organic improving all to you in the current pricing and by little the left Overall, hold. QX, on take first which, growth mentioned, the performance. longer good performance initiative organic strong Chart X as We X% operating deliver move sequentially. growth of QX board run full segment quarter. momentum segment growth on also with Let's

chart business. growth and moving the QX. was overview from X%, right an of side our of Now in Automotive Organic to X% up the

regions, at quarter. points Looking America builds, the of actually X% down which above were growth in North X% X was the our percentage

up continues X above that percentage higher, points builds. from have our PLS impact Had Europe IHS strong growth well was roughly region. the call, in at segment growth in build North very to up had below a point XX%, You'll to was point X%. X total remember at above builds, our Overall, shared be that mix in organic PLS North QX. forecast on and original I China American X%, QX Automotive, been plus forecast, rate And been last organic on X.X percentage growth the the X mostly points earnings builds X%. American would

inflation in the Enterprise XX new these weighted points Finally, quarter. regions, major basis and if rate. basis about you X with was offsetting build average XXX product penetration cost penetration across Initiatives above expanded by Margin look points, the our

steady. ahead, with in we the growth expect organic second holding X% half, Looking around margins

to points note, we Chart revenue see retail. product education, sales, was offset Food in positive by was Equipment did continue year-over-year up sales #X. in institutional the very X%, were quarter the not down Initiatives. margin restructuring Equipment. slightly have but offset from and of mix, year versus benefits XX.X% by in significant impact margin basis decline equipment recovery as to organic up partially particularly up a sequentially in on strong Food higher to in unfavorable XX foodservice in XX% Price/cost quarter, this due on partially prior Moving a Europe a and Operating Enterprise

timing equipment margin orders was growth organic points XXX & strong flat CapEx which & expand expect strong up Looking in Test Electronics up once Food basis in Test spending and particularly half. again, and primarily to assembly. the segment large driven accelerate X%; to was margins organic in of by X%. to quarter, improved Measurement forward, the this by Electronics electronic second due XX.X%. revenue Measurement, was we Equipment performance Operating

& Welding's North Now onetime XX%, essentially the margin increases operating Chart construction Chart demand of end with Margin chemicals, gas. growth Asia was QX, North partially were half American anchor global growth despite in points consumables XX%. and to impacted organic the delivered by quarter X% residential growth in for significant second equipment all growth was across looking offset with by America North X% and of resins. growth organic markets, rate very continued basis Polymers to a XX% flat and X% good. X%, to was oil #X. and expanded XXX accelerate Construction growth backlog was tied in up Pacific. wedge strong organic issue. in commercial we cost with America XX.X%. European XX% silicone by Organic product and and declining is where including up Fluids, growth X. X% flat the was up

Operating construction margin quarter. was at growth organic XX%. equipment percentage by up also from X% initiatives PLS this Specialty Excluding quarter, This segment the strong was X%. had impact was that issue, this point a driven flat X commercial essentially were down sales XX.X%. in up

Moving on raw Chart material costs #XX an tariffs. with and update on to

As to on before, we've half. to pricing expect talked about strategy a we year-to-date the that basis. cover cost done to dollar-for-dollar actions our and execute second the We've in same do with continue inflation

perspective, full X% For projected spend. impact, total represents year tariff of inflation, approximately including cost our

you to represent tariffs. our of we produce in total sell. our approach model associated many mitigate risk know, XX% projected XXXX. cost By of helps tariffs our to this significantly estimate, inflation is with As and about And XX% the of source where impact the

X% ITW's of sourced is from In addition, material China. only spend

combination on materials model The underway the the the and our movement "produce coupled cross-border now, delivering margin expansion XXXX. bottom will mitigate products very of with over XXX line certainly we and excellent tariffs. is our model Initiatives, progress raw high-quality which and business helps sell" of is resiliency of Enterprise Our in right of and for growth, basis from drive limited that strong growth organic ITW impact who continued the where teams earnings portfolio points our execution and continued strength are business the operation and in

points of XX expansion basis this realized year, half. following margin reflects basis points first midpoint guidance in Our XX the about

Let's go to guidance. Chart XXXX and #XX

XXX sight basis trends with that mentioned, strength at and we see improvement margin contribute to expansion Initiatives activities line clear demand As points Enterprise of this year. least of our segments again strong margin across will projects in from another and continued

updated in no Again, an guidance actions material to continue dollar-for-dollar in operating price to is is this impact offset impact confident expect to earnings. inflation a half, second there those is impact. point on will margin price/cost margin margin cost reflected margins raw percentage with so impact, the cost to a we're that basis, XX% we we While strictly our impact to negative XX%. not earnings of The increases

rates in As the guidance has of for time in we we've always the place as last impact we guidance foreign here rates second the do, quarter. we versus updated at exchange exchange updated $X.XX half today, a sit at end which the

and full midpoint underlying at year XX% in share result, which $X.XX by share, for the adjusting of in guidance earnings XXXX. the EPS $X.XX the $X.XX EPS represents earnings midpoint a $X.XX range per XXXX, we're to the As growth versus the per expect

On flow point versus expect the percentage top conversion X impact in to With prior XXX% cash, year be better. Through half. to line, the in currency shares half, quarters. QX expect be repurchased is free of to cash billion the a $XXX we QX income to first we and respect repurchase an additional net our or of second million and $X expected now

$X.XX providing dividend ratio of significantly quarter for subject in the As plan to board $X.XX we a ITW's of share flow. we're $X.XX a to cash also raise QX, we to our XX% approval to range free versus reminder, August, payout dividend third per XXXX. in guidance as increase Today,

As had last settlement. quarter benefit in a a a year $X.XX legal we third the from reminder,

Finally, run X% on we expect to organic X% rates. growth based of current

So see positive effective execute continue businesses. continue we We're On in wrap price/cost, to and to our the to to underlying growth manageable. XXXX. an deliver continue impact and up, strong strategy trends on expansion earnings positioned we margin to well is demand well across

balance execute level flows. continue guidance with mark year in high Karen, Our today year-over-year strong XXXX. earnings XX% the and another best-in-class a through solid and performance halfway All to margins supported our at you. ability including cash back of to reflects our the organic by and strong growth growth confidence ITW's to in, at returns,

Karen Fletcher

lines let's Michael. open Brandon, questions. for go Thanks, the ahead up and

Operator

our is Kaplowitz with And Citi. first Andrew question from

Andrew Kaplowitz

your have or but margin, been bit more outside little arguably seems to very of quarters, you of Scott cost. in last volatility Michael, be versus nitpicky know is the this over question there high going margins has a it some still that because like price a we segments' couple just

if XX basis basis about investment an but of quarter maybe it, quarter. talked to look cited us. was you after in So the you investments, least XXX said level, you guys last surprise, down at other, company a people being this Food year-over-year down at at Equipment, And you points which but points growth,

Are do noise of You moving as increased you did the do more mention PLS Equipment. think or you've PLS this the company in a in having investment whole? at to thought you Food people forward? And you than diminish more level mentioned will

Michael Larsen

the think was So laid we about. percentage the just the a delta lot beginning out we and that's at are impact the that's is only there, but to bottom line the the very that equation, I there Andy, Really, executing meaningful of price/cost close talked we plan year. margin that that the is

second Enterprise not Enterprise of to from They're overall terms margin that. the every in In Initiatives continue expansion We're broad-based. organic in segment. done on Initiatives. growth, More and the beyond come half

margins part operating with an very and system. XX said, really businesses is growth completely the balance in like basis PLS, know, And QX, really continued positions continued growth to what in is consistent XX we Equipment. the Food just basis it about at our in progress quarter, product does On as here XX/XX Europe on item did organic in expect, pointing in well briefly, the and the Like restructuring similar what And that orders, I about QX. we points. And we as run acceleration mix organic out you're a returns. had here for run we So in Food slightly in higher integral us expansion. mentioned, way are Equipment points specifically, also of rate, QX. margin are based as is you we our we back running the But on half in here the better with

So a it's on here term. bit absolutely short the headwind little the line for right top of thing to in do the

Andrew Kaplowitz

talked plan? could or about the And in points Michael, said the investment growth basis you have least you of where that you people I Was XX at in clarify are sort people, adding you just adding people? still? of investment

Michael Larsen

Yes.

support investment if really levels organic further increase So look details, growth rate. overall accelerate in to an you we've of and seen, the at the

making in growth rate seen row. now We're that QX. the here X on in progress You've years a X% organic up

of we as is then really support to investment Enterprise people is do to portion in can as a So it And organic well need talent that products. well to well new our accelerate as CapEx-related everything rate further our Initiatives. as continue growth on execute

Andrew Kaplowitz

Last in growth gears organic see shift organic growth. Test said and you a Measurement just have could I about that lower If organic QX. growth. better you you ask thought We segments & QX Construction of it. Got and bit had all your than quarter, would little briefly

think quarter. a & In commercial with construction you Test looks bit. the Measurement, like explained I issue Construction down well in slowed Electronics the

that can about segment So in talk maybe particular. you

Michael Larsen

Andy. It's in really Electronics based some on I think really equipment flat -- mean, not mentioned, on orders. that we as I significant, business was some the large I timing, quarter,

for up Electronics If adjust to talked then X%. Construction been have adjust have you business up that's that Construction would And I X% range. X% the -- item to that, would if been you that, for were about, in the

Andrew Kaplowitz

to So in balance, either overall year of for say? segment would you no the terms changes

Michael Larsen

say, I'd Automotive. close. talked all, pretty about We They're

here Welding And balance continue Food We the also of year. Equipment. and, fairly, good X% at progress acceleration conservative then have hopefully, the a in for hopefully, to we on assumption some see

Operator

Ritchie Our Goldman next question Sachs. Joe from is with

Joseph Ritchie

item, guess guys job question, I done say just years the little you few bone So line have this either think investments to you got driving or too -- margin CapEx. now focusing great I control. my better. will expansion, obviously on in good reinvest again. a and guys people bit strong a at folks to cost maybe to perhaps that first I last the guess if you I have close the just want the if understand growth -- look some

where about growth So today are you half need even from little perspective a and XXXX. that maybe year the maybe a and think talk on to your -- second into in you investment the of that make bit you the

Michael Larsen

support look if do back you everything we -- need in invest nothing our over rates. Joe, X organic that Yes, growth acceleration and in last the to to we to growth years, continued organic have an

significantly So different. nothing there's really

fairly We at are here CapEx spend which seeing were to rate. rapid -- in increase support a our our a customers, an really growing

if -- is you So dollar that and call on It that be basis I the at meaningful, something a happens we number a big basis. really margin points that XX not look on it, out just walk. here to

Scott Santi

and the of I This and a terms to little would is quarter. what The not last more growth. is been ultimately, these been those have but we've XX% Well, X had doing embedded, that ongoing add when is years. growth are trying number. investments talk how in the for years. -- new be is last different, we X presentation we we're item investing They're in embedded something incrementals, in this transparent long-term we're This about for investments a that

new the is heard and new that -- changed that investing have of presentation years. to what last it just happened X kind item. a given a reflect, are investments the These we over are isn't about, consistently have X on progress been that made "Are given last you've a you this these quarter. this the item last for This enough X just is of taking some -- over We've not years?" margin place investments So So the years. growth in going been these bit the

Joseph Ritchie

know the on I the helpful I baked for builds. focus conversation can second. to bit That's seen little quarter Scott. organic you in maybe and actually it. auto think global back If Got for is turn a got But you've we've this clarification, first Auto a guys half. X% under-pace I growth just specifically the

happened And quarter, so be there a talk more what helpful. that maybe this just little about bit would specifically

Michael Larsen

we global significant presence. have not have a a Yes, includes build do geographies number where I the do presence it's pretty or straightforward. mean, not

So look like even if Brazil, you for in places India, at Japan, example.

that were points, way is range future. really weighted the below. we like way And basis, penetration it. right X, in a the we we've up at average already, last percentage slides all in which X laid the And And out Europe, geographic we of X North see X at that look in been to you America, expect and and point points; on to basis, China, range gains the activities it to that PLS in years. this there; a is So based slightly X in projects booked mix, said, we I on there basis in can X some the points remain that on are for XXX the described

Joseph Ritchie

an on repatriation, maybe this Michael, last buyback did the one I update $X missed the are with year? far along And, one. share guys repatriating and you that it, have The you Okay. billion how but may expected you give

Michael Larsen

Yes.

progress. So we made some good really

slightly are ahead year-to-date and $X billion above We of schedule.

So those are the cash how to that you $X the funds obvious those -- been billion. allocate little repatriation, is, question that going over repatriated, have

short-term debt our $XXX million. we've reduced So about

Our for repurchases, target $XXX year, up, a increase got just took million. dividend we the by coming. share We've the it

we If you here 'XX. we up as of then for And that $XXX know, have hand out, the in pencil the the year. have coming cash a million on more some And term. about near maturities half you slightly first in increase that's

that very the bring So the good plans funds U.S. accelerate really to with to we back were I'm those able pleased progress. and fact the

Operator

Merrill from Gilardi with Lynch. America Our next is question Bank of Ross

Ross Gilardi

trying understand better. be moving a Initiatives offset seem dollar-for-dollar. I'm you to to forward to little material reduction continue mean, the on say margin you I outlook costs raw you'll just and the Enterprise the bit to

has actually on margin So a standpoint? what changed

Michael Larsen

again, the you're hearing which on will basis are the and not not percentage a margin here, XX I our of expand today. midpoint from balance price/cost you're still at seeing expanded It's updated just what we've current standpoint, year-to-date, year-to-date here, price/cost, guidance only full for the -- we're impact points. think to -- does With margins the we from again, guidance for view I to not margins margin operating updating to -- year. the seen now we EPS, we're our we've expect impact half that, reflection how of through of overall for what the year. our Well, expectations first points not it's a want the us our point and year. basis that just purely for out, It's margins XX an

here, really the driver that's So only Ross.

Ross Gilardi

Okay.

just the So is be price/cost. margin -- to EPS is to FX. clear, The to reduction the reduction is outlook for for outlook the purely

Michael Larsen

That is correct.

Scott Santi

Correct.

Ross Gilardi

is up Anything tariffs of making on portfolio like XX% material inflation? that these you can little the Okay. And auto just U.S. clarify back trade obviously, impacting business? war feel from the various bit on raw exports to companies. autos. And I other of mean, having are Where seen impact more I to complaining there you disruption? And about your specifically already was some an a seeing in auto going announcements you showing any mean, that signs Daimler XX% about on you've China. your up? is

Michael Larsen

Yes.

not in So I place. around our what seen may they little we've may movement short think, for not early tell. with still be There's be too to tariffs answer anything and the customers. a how long these Ross, question some your to is be or may might It

that. So and mitigated the "produce and tariffs a by where sell" are again, we significantly company, from we is impact

year come will majority it's impact, small that metals, will first round tariff tariffs. the say which tariffs. as the pretty And tariffs. of the aluminum, The project and that XX% pretty from really XX% the across pretty In full was related the steel Section XXX China -- terms to of we impact of overall broad-based but a so overall the to of portfolio I'd from then is -- from tariffs that, small, result for fairly of what --

Operator

Our is question Raso from David with Evercore ISI. next

David Raso

it, give the Maybe then on you price/cost And I margins, number and year? now the some on us also drag the XQ missed is XQ. insight can if what for

Michael Larsen

the Yes. point. projecting half, XX consistent We're is what range this in points with first at that to basis XX -- we're

David Raso

quarter? For each

Scott Santi

the X% X% And on that's recovery price in place. the

Michael Larsen

Correct.

Scott Santi

margin... little So

David Raso

similar? drag Third both cadence the quarter year-over-year quarter, is [indiscernible]... for similar again, But fourth is

Michael Larsen

Yes, it's similar.

You yes, for assumption -- for it's and could QX the same QX.

David Raso

But when ask, to margins third The third I year-ago legal quarter, adjusting implying for fourth settlement, is reason fourth I seem And third down you the the a for to get a the bit. grow EPS even over quarter X.X%. little faster quarter, the the to I the quarter, implied be you see need, quarter, the then about the margins margins, the X%; XXX flattish for points. the quarter, operating in for do organic to to fourth are basis try

drag up on down, was fourth quarter, of actions that case, the maybe not lot the If maybe they So explains to year-over-year? third the to seem take pricing on pop less. margin some guide hear the the but hold of and that's explain I relief, -- can But the flat easier, a back you the in why becomes were quarter making margins in third was some quarter that it. fourth kind There's right, hoping drag price/cost greater the quarter.

Michael Larsen

Yes.

we factor your but model is and I -- you currency. knowing to what So QX and be so or not estimated delta the specifically, is guidance QX, The QX have in to big don't -- and for modeled don't the and give price/cost margin in impact same really QX.

the at from impact the So if in the half negative versus being currency you the in year a year-over-year first look half. second positive of on basis is

but really the of driver the So model know that's for half here don't your how the main year. updated I that, back in you've

David Raso

that the you ran, the least -- it. of piece ideally, year a segments, each I We at gave numbers a that year big on went implies the Welding But second you're full thinking the sales Okay. full you the offsets, Auto, segment, quarter, organic on take make when XXX I number quick like And I for was organic, maybe mean, if offline. or mean, it us basis down to the other the gave you us I about about give the can XXX Auto, can assume for bps how half it up would lower But points. first it organic for just...

Michael Larsen

Yes.

can do that like we I for Auto. I outlook sure So I'm I David. for adjusted the said, think not But you,

been I forecast be think the year-to-date. haven't the IHS not seen most may we've reliable data -- most point the

And are so couple Auto. back -- in acceleration but mentioned, here, for Equipment. for rate takes some we've the then in are that's like growth really Food a improvement There's the other puts of half drivers. the ones. really and a I the big put The Welding, X% those and big Those is

Operator

is question Jefferies. next Steve Our from with Volkmann

Stephen Volkmann

question sort PLS well is same The a couple just in of second as XQ, the half headwind same? of Maybe the the clarifications. first as XQ the Michael, And cadence -- half.

Michael Larsen

I basis the first -- half would the points. Yes. half, right same XX for around the so as second

Stephen Volkmann

And again, XQ pretty similar? XQ,

Michael Larsen

Yes.

Stephen Volkmann

Okay, great. evenly remaining with repo, that should $XXX and third And to million respect of the fourth is just quarters? spread -- over then that we the

Michael Larsen

from think good to that's probably way a perspective, do it. planning a I

Stephen Volkmann

move as will at And on? then to kind renormalizes, say, goal system this everything and is the leave all Or get final my dollars? quickly will we again, one, XXXX, do that? just of once at Or the dollars do of just Okay. back the your cover a the thing. think point and leave pricing margin kind dollar-for-dollar on the you it it just price/cost well the it there through is and Is as we come

Michael Larsen

ahead -- the In No, at will say, dollar-for-dollar. on little increases come mode, We the we're lag at see We And catch-up bit pricing. covering through. costs be absolutely positive I ahead we're in a we good still, of cost When a operating this, point. of point. we're get is would react this a I eventually, will a margins what point. raising we of here always but get you're some bit a little some of here. term, really to think a near when doing But

Scott Santi

a cost roughly response. of one-quarter lag in terms average There's price on versus

Michael Larsen

Right.

Scott Santi

And so slightly it if the different can I that coverage dollar-for-dollar, in say lag. factoring a way, is that

have to we're continue minimize the -- the the the So able EPS tomorrow, stop positive should beyond increases impact through will But dollar-for-dollar. then near still actions carry to pricing cost those and impact a cover in term.

Michael Larsen

Correct, yes.

Operator

with next Dobre Our is Baird. from question Mig

Mircea Dobre

comment clarify to looking you on Just a made Food.

back X% I And expectations the there or in full guidance, half to it, here Is to guidance back thinking the understood and up that this -- would your Even pretty imply can could I'm your X% that thinking this your was that Welding talked front what where acceleration half? guess prior of wondering ticked that in in about to what organic we low in of you've backlog done the I the X% As Auto. end is versus growth. be year. it half enough towards significant year organically visibility because offset the north of Food grow that,

Michael Larsen

Food Are Equipment? talking you about

Mircea Dobre

Yes, I am.

Michael Larsen

Yes.

the going on things saw acceleration launches in So going from a got strong well and product is One number benefits you're half really there. some the institutional pricing as get number the backlog new we've the you and going the of side back to on the half as of second of into a year.

Mircea Dobre

Okay.

is this what driven sort rather end internally saying. So more you're that's of than market-driven,

Michael Larsen

the I they just comps you be improve. Well, to certainly side foodservice look side going tailwind here half. the also a improving. on second to at the if basis, the We And expect then a in are is think year-over-year don't retail

Mircea Dobre

may to when you've you new question this, I that guess, if investments this looking are standpoint, investment bridge \guidance. for expect at wrong, it incremental we this growth here, as this this Initiatives way a so wrong? my about on. at go drag I'm Okay. as offsetting should essentially back that interpreting on and and typically price/cost Obviously, And this forward? from investments point. If talk going be but broken I'm I'm is out present this looking And Enterprise to at growth then volume, I in Initiatives that's why Enterprise to as what well

Michael Larsen

from of basis we're have also think extrapolate it I to -- going offset going quarter good the why that assumption points assume do necessarily it points a and forward. I that not think we're XX first QX the calling be But XX every very wouldn't would I So out. explained Initiatives. all, to Scott well Enterprise basis

margins really we've That's now to XX% relative really Enterprise that way Initiatives in that. think expect while in saying way unchanged done years, this -- that's from range, about which we continue incrementals normal is improve been that you for of to So we've in top think is environment really macro how the a supports here. the a to this. what core prior plus that is And I the think to on about to what

Mircea Dobre

Initiatives case table, included at know. -- seems To read that and if don't this different, me, materially growth Enterprise was and it something leave is the I But in I I as that. I'll previously to be just guess

Michael Larsen

what's saying correctly. I can and it offline. you're don't we the chart on take what think interpreting we're Well,

Operator

Ann JPMorgan. from next with Duignan question is Our

Ann Duignan

should this think Can little mentioned? the half toward negative bit that? about we more that your model mix you that specifically of PLS is how What And we the back about in a year? talk

Michael Larsen

of that's model. as -- really in this well OEM point, becomes Well, with at by terms -- it by as mixed

read too -- into And that. was much so There not again, one would quarter. it's I

look that when in it of kind around new main when historically, the The off kick at numbers terms in. of on move can the depending you team being penetration was builds work models PLS driver the If a these here bit, roll and quite is below doing. models really slightly

Ann Duignan

Okay.

So appear, might platform of loss loss as OEM or we an it's customer? the the a of not,

Scott Santi

The are. basis a up, when as quarter obviously, going the that what on the for quarter -- being But behind Michael launched scenes on we model when X-quarter good in is preparing year Michael of model and not Europe a year. is jump numbers that. on The do chain gauges. things work around, supply And -- a on said, goes some are deliver in annual based penetration numbers said, continue new -- gains a a No. absolutely penetrate will the basis penetration to in full what as this

Ann Duignan

point I then clarification. Sure. that. And appreciate another of

you I you half? said outlook about product On the what and the commercial means and you for issue. what think back side had the the that a that Can construction side, talk construction is commercial for

Michael Larsen

Yes.

commercial. has North America think you our down some this wedge with in to flattish for if said So really while quarter, event would limited were X% a exclude onetime down in that have been I We the you event, Construction for adjust construction I up been in X%. onetime When slightly, kind commercial returns, here now. of resulting anchor product

Ann Duignan

Okay. talk sort to quality ITW problems, have of for uncharacteristic the about anchor It's you issues, but can then wedge And [indiscernible]. those?

Michael Larsen

had We labeling know. inaccurate the and had we to correct some I Yes, for on that. packaging,

Ann Duignan

Okay.

issue? a product not quality So

Michael Larsen

No.

Operator

is next Andy Wells question Securities. Our with from Casey Fargo

Andrew Casey

mentioned how expected how you understand a that for second your us OEM, North Could Auto of be I'm you you some what treating including... to the American to half Or treating help in may you of On impacted chain but the impact be is? Are X% would you are wondering customers? have not QX be outlook. supply appeared specifically you're organic extrapolating disruption, just growth. as you

Michael Larsen

rate but Automotive Hopefully, growth No. about conservative Yes, may QX QX. Not issues kind the you're of growth our so the put in higher guidance significantly today. calls in have those be the and right. risk-adjusted we QX. in for conservative America us, reasons were There what There and issues that's here specific in have a of North time. talked half. to one approach We that and in some QX IHS last IHS off. took that X% were out be some and back numbers to turns assumption, we for here specifically for that was -- forecast we why a a in

Andrew Casey

investments. another Okay. guess I And the at then round growth

You mentioned comments. to may future? part and I'm understand have CapEx constrained opportunities of you it. offer segments restock the been any Are may CapEx market seeing just the where trying in production

Michael Larsen

No.

CapEx part these grow, sales percentage as all it's And in even sales CapEx. think I quality on We've our it on done seeing we as grow, to continue invest of read as typically, right wouldn't we is time really a here. CapEx that just for -- that. and as us support basis. is continue beyond you're mean, this numbers to around with of X years best-in-class a today. And businesses customers the for our Again, I I service and X%. the it that go much into really to global up, and as that's spent

Andrew Casey

one Okay. one it. And on then last

-- lumpy the mentioned extrapolating or you'll be against than points. quarter cautioned the more in XX in you that Was basis half? seeing second You the what

Michael Larsen

be the a I this Yes, can quarter. investments? growth little to circumstantial think the On

I margins need we will to think to these investments to make we margins, in well expand lean continue that and as businesses. further as support continue on organic our growth accelerate to in core

is this ongoing. So

is it not not this specific. thing. may ongoing we It's I We'll called in time. reaction an response the out to And given the anything to think call it out this today, we future. a have But see.

of inside flow. We're only invested fortunate are here. our project XX% company, -- they every fully by even cash these We fully funding investments good that consume operating the

So we on that's that you're what not to And seeing invest. we're highlight to constrained. We'll that wanted and continue today, side.

Operator

from Fisher next Our is with question Steven UBS.

Steven Fisher

outperformance I negative the business of since market, versus last flip auto When really European moderating to the second back quarter. look at the this with build the obviously of to year going the your -- been it's quarter

the visibility been in And the So to has trend gives down for of kind all second half? last the mix positively what you that along that that then in year? inflecting back

Michael Larsen

is X sold is on the think this comment, we have comment, in years this visibility Automotive, we've global that not projects based already. Well, we a are European and X.X, I fortunate a out

to a new annual move On to has We big are And to basis, visibility per to on our play the know in that look we'll bit. kind the is some But above global to There go-forward continue to we build the off. is launches. on basis. said on going in a way be content know our what vehicle highly little and on that what's quarterly this point absolutely Scott it at be those range a as rolling continue around basis changed an what we're of Europe in on out, So can X a can that really -- these confidence percentage that's variables, of growth but basis. global auto really nothing our is confident numbers. mix outperform model do in terms X, X

Steven Fisher

do right Europe But now? outperformance half, to like in that the inflect have that basically It second is first half the so sounds X you for have visibility would positively.

Michael Larsen

in I offline. average, look global did on first the above about and this talk mean, think percentage we mean, again, Well, weighted if points I just of Europe can had X.X% at a has X the we We you quarter. changed. I nothing penetration basis,

Steven Fisher

to that construction, excluding over I the commercial, minus X% just was the to make numbers shifting then wedge on the sure product all And right. issue? commercial The anchor Okay. heard

Michael Larsen

XX% We -- have for this we're have down wasn't it would been been if Yes. would item. XX%. X% onetime down We

Steven Fisher

down was the in And quarter. think X% Okay. it first I

comparison between are So weakness? where you just issue and of generally a QX incremental that year-over-year? is Or seeing sort QX

Michael Larsen

think performance the segment would our much side. is driven XX% really Commercial on and about renovation issue. that that's Construction is I a by residential the business. growth continued more the rounding of of the And really of more

Scott Santi

Construction the business, Of not the commercial.

Steven Fisher

Okay.

you quick your you So Did repatriation, maybe in quarter? were reducing about talking thought just I talking one And debt go the when short-term were said about debt. clarification. short-term a up lot you

Michael Larsen

correct. that's Yes,

of So are 'XX. that's a coming that talked the reclassification about that of the maturities in half I first due

within months, that's And that some into we're So short-term have March XX maturities, that billion. we slips because and April $X.XX category, why. -- debt the

number. If down the debt, by same you we're long-term the look at

Operator

is Nicole with DeBlase question Our next from Bank. Deutsche

Nicole DeBlase

the issue. around price/cost question first just guess I So

within kind little Food impact. of from I to bit about that where has would said helpful not is. be talk not happening Equipment, you where could it it's a issue it -- know the know perspective kind but it's most significant of segment you a If a or

Michael Larsen

Yes.

for Everywhere is So it cost to the basis. a offset actions, segment we're increases. little longer a price can bit on where take Automotive in products the else, positive largest year-to-date really impact new those

Nicole DeBlase

That's then And it. the helpful. got other really Okay, question.

really Welding margins, at strong looking were incrementals quarter. the this Just

clearly they target. think to tend you XX%, I like what above were

a like guess the is what's that into expansion level about the driving I the incrementals just little second or And sustainable thinking year, into of bit margin of the second Just outlook half of strength. the half?

Michael Larsen

organic Welding this Yes. typical what with of think this No, growth. frankly type I seeing is in we're for

for that's -- of are reasonable a assumption for the year. those back So incrementals half the

Operator

from is Jones question with next Our Nathan Stifel.

Nathan Jones

A bit in still uncertainty philosophical build Auto thing. start spending maybe guys seeing customers' thought Instron some your as that that kind their -- Maybe the of on the decisions. have impact to led all of and on impact I good. would CapEx uncertainty question the all investment the under a pretty you on of trade of weighs of more OEM. in some of this was some would

market you're in kind hearing what weakening going there way economic out guys terms commentary customers just are have, of the you seeing in the of, any outlook are people kind confident Are here? economy the you in forward? in still about Just any of thinking the

Michael Larsen

look you see to Nathan. Specialty we Measurement, of not that, seen I Welding, continued the see. if continue investment, CapEx accelerating at I we've & demand. Test No, business to think segments exposed mean, And cycle, most the to equipment side

So we standpoint. not from have a seen demand impact any

Nathan Jones

seem catch & something have of Polymers to Is be as should oil Specialty more a you be through in a improvement impacting expecting bit Fluids guess, a history little and relatively bit in both there? -- you of see Products flat that that that. there's going probably with here. increases cost should kind more to recent we that pricing figure I margins I the, up more

Michael Larsen

as on. you But those are certainly, -- going margins. near are specifically so I term, through think there continue out, we silicones, work pressure the in chemicals, as once segments to resins, expand some putting some point to that,

Nathan Jones

housekeeping And Okay. just then one one.

forecast you that in You that this the pick significantly Can it your up a talk guidance? quarter. had for just up? the your drove line X income model? do what you fairly other about in is Or in And number

Michael Larsen

and bit is of The interest I that what's in bucket on some always Well, can around income. really mean, majority move there's a basis. a it takes. puts quarterly little

to we current is a the a do and increase the quarter-by-quarter in bucket. about, said, the I linked significant assumption like we bit basis. in a pretty so levels. some around around repatriation do little which include And back on saw an the can also talked We it we guidance, other half, for of But move income right

Operator

is from Research Jeffrey with last Vertical Our question Partners. Sprague

Jeffrey Sprague

here. couple a of things Just

I on and Welding no little there's about where customers little indication give goes most a raised more rapidly us spirit, X you Welding. on bit love strength that seeing just in color talked get any the I in behavior up see customer First, could Lincoln, to color unpunished, of deed We're there. for right? if a or the You a price example, good right? I'd any Do guess if today. are But that ask you're chasing has And perhaps in months, pre-buying. the as the this result X business. in that? unusual of last X you pretty price times channel

Michael Larsen

commercial color, America of little I represents Equipment then business, up double-digit. XX%, with the We think key which really Consumables I overall, side side up talked in of quarter. high offshore know would really be more our auto XX%, a is digits to continues that before, equipment, bit up up the Welding XX% give really moving industrial driver the guy. sales. single And than I We big so about heavy haven't. this strong, more XX%, mean, the you're the you a North and

pickup overall, which have oil We encouraging. in in X% certainly not quarter, the but seen here was and a offshore, up gas is

Jeffrey Sprague

of if And as just on real but not in back you're you Auto your Great, part the QX any European half seasonality in that, your With see negative do quick. guide? then sure that's WLTP, helpful. this Auto I'm business familiar logjam, disproportionate with testing

Michael Larsen

In Europe specifically?

Jeffrey Sprague

specifically, Europe In yes.

Michael Larsen

Yes, no, have seen we not that.

Jeffrey Sprague

me. And then for just one last one

have semi of color the bit there Measurement/Electronics, that kind in looks a on Do of what is maybe a Maybe visibility helpful. cetera, little like business? & There electronics and half extra specifically. you pressure whole et Just more just the on noise rippling Asia. be the a through supply chain, Electronics back CapEx, in particularly Test little lot would

Michael Larsen

Yes.

of the near overall, into we exposure a may be really We expected enough in which little QX. going looks is bit through -- little what think term but but to first here. have that then us, up half. the pick in semi needle Electronics, half to bit I do going were for seeing to the the Not the really good for a back business, the move good, half back similar a feels slowdown the of in team second in

Karen Fletcher

Okay.

of hour. the brings follow-up That concludes have call. if I'm you And everybody. us our questions, that to top the Thanks, think available. I

Michael Larsen

right. Thanks, everybody. All

Operator

All in lines this participating conference. time. today's for you may Thank at disconnect

Illinois Tool Works (ITW) 23 Jul 182018 Q2 Earnings call transcript