ITW - Earnings call transcript Q2 2022 | Illinois Tool Works Inc.

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Operator

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the ITW Second Quarter Earnings Conference Call. [Operator Instructions] Thank you, Karen Fletcher, Vice President of Investor Relations.

You may begin your conference.

Karen Fletcher

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

about During statements. Slide results XX-K filed X quarter risks a cause reminder XXXX ITW's important our today's our call it's press actual Form the a presentation and for you expectations. presentation is will my now with contains to this for to uses GAAP and to to over those the comparable company's forward-looking guidance turn XXXX. reports and Chairman results our and in more of refer could the update contained second release. Santi. year full that call, and pleasure we to We subsequent measures detail financial Please CEO, that This SEC measures differ discuss the materially is Scott directly most turn from certain to the reconciliation measures X, non-GAAP Slide

Scott Santi

and Karen, The invested GAAP supported and another across front-to-back of by organic good everyone. you, capabilities. of margin on $X.XX. XX.X%, and of portfolio, Thank second the capital saw In we continued delivered after-tax growth strong execution XX.X% operational performance with of return strong financial XX.X%, EPS ITW quarter quarter, our driven operating operational team of morning, demand XX/XX our

do our to job our organic accelerate of exceptional continue and an Recovery Win market the executing teams strategy and Our growth. delivering penetration aggressively profitable for customers to

by in year. half by being our this advantaged our and evidenced are performance, additional execution delivery share operational with As of as growth of rewarded the organic XX.X% our a result first we customers meaningful

we some chain fronts input issues on supply remain and both While did inflation see challenging, in QX. stabilization cost

margin improved adjusting input job to our pace negative offset QX cost increases dilution price in fact, input the from somewhat. cost price/cost an basis XXX magnitude basis the X excellent in inflation, of XXX moderated do as of businesses first time sequentially continue to points negative and headwind for points years, In in QX to and

delivered teams basis the quarter. long-term from execution results and of half financial they of the another in enterprise results midpoint, demand supply XX the continuing year, XX% margin at projecting XXXX, first meaningful range to current our record our Importantly, our of which we operational initiatives the for maintaining enterprise the EPS improvement Based on to company. these strategy. progress XX% in rates delivered midpoint, drive be points strong guidance and the And on through of while our and at full organic the an would are balance of growth $X.XX of margins with all-time year GAAP and X.X% for the

in tax years, both of items Excluding this EPS onetime growth XX%. represents

uncertain, quarter the ITW's to and near-term to our on I'll full of our and beyond. strongly continue ITW to differentiated certainly will call macro back Michael? environment shareholders, positioned the continued the over performance remains our that, is and year deliver on global the And While to with full service for to outlook. who provide customers and more half path performance turn year progress our the Michael, potential challenging through the detail remains differentiated

Michael Larsen

MTS $X acquisition organic growth and revenue. quarterly grew strong XX.X%. with In X% Scott, time contributed morning, revenue X% the to exceeded you, good everyone. first Thank XXXX, QX, and for since of billion The

China the percentage X%, XX/XX reduced growth organic China estimate front-to-back from dilution quarterly and versus the the was growth X Margin our by second in EPS cash revenue was XX.X% from headwind. restructuring XXX Asia enterprise to with operating $X.XX projects. Free basis acquisition was of half. of basis growth increase Operating flow $XXX geography, down international impact lockdowns included highest Despite to rate Europe expense recover X% organic that margin in basis points higher which from the points about second a X% headwinds and expect X%, of year-over-year expense, we By X% of grew leverage we grew and Pacific. XX GAAP currency basis And and related margin EPS was an ever. headwind was $X.XX was North translation translation MTS fully initiatives. points each $X.XX, with higher million, currency points. EPS XXX cost the America restructuring in Foreign enterprise level, QX. price and and of point XX% the XX foreign XX% at

growth, working onetime intentional to audit committed tax levels service may as customers. QX a tax of support U.S. key resulted in benefit. of a our year chain had remain risk tax onetime capital to resolution supply And The $X.XX. you $X.XX investments we mitigate benefit a So last in recall, for and sustain routine

result, a XX.X% XX.X% rate year. As our year QX to tax last this as compared was

the to to stayed inflationary XX endless ahead price months of tax we effective increases dollar-for-dollar XXX trend impact. margin year. XX.X% as neutral Throughout X-year have this much last of the have the X dilution and on covered improvement the benefits, the inflation year we projected beginning that Scott business's turn on to leveled last cycle, is decisive a mentioned. have Slide is in to of and XX% have continue tax barrage as we Based absorbed at to trend be a points and Please that margin look a expected And beginning dollar-per-dollar seemingly Thanks this half. with margin our while we onetime increases, known dilution that actions was positive the appear this these of rate dilution price/cost cost recover margin impact basis second the off Excluding the increases basis. are throughout inflationary this over basis, such on cost cycle, costs such to than more price on impact. all

impact, that confident recover going basis, margin material are As moderate on to XXXX. raw cost we're we this begins to in starting inflation year-over-year a hopefully,

delivered and consistent OEM do North not with Automotive segments. expect in half. X% prior XX%. X% In with automotive the organic point, of this and down growth second growth in Europe was XX% our to solid that China At production America. down about assumes improvement until was on situation shortage the chip production guidance levels impacting auto around remains effect, for guidance, meaningful the our XXXX. we current a Moving

more current keep we in in from excluding While process. of taking QX OEM meaningful contributor approach organic several year. terms and to enterprise as which a we sets signals balance basis restructuring mind for are positive auto of around the with usual was our that Automotive the the XX% QX our growth And getting are guidance this front-to-back a of segment levels, customers up in rate per a of our of to revenue year-over-year comps ramp-up preparing conservative overall production, ease margin XX/XX even impact in points the the second half, quarter. the XXX when Operating the through

issues organic chain confident period rates segment's supply time mid-XXs. return get the in we're some growth the to the for low that to ramps see rates an a As road down historic resolved extended strong and we'll production margin auto up, of and

XX%, were strong organic from in entirely growth X%, how rate X is in in growth way end for of as this last to and strength every growth Measurement organic Measurement of for an Let's mid-teens. accurate growth up would in the for XX.X%. up Food Electronics for growth with a Test have institutions large customer led America as and around is which end market. organic continued operating million an quarter QX XX% been with turn major X%, CapEx $XXX year. Both segment X%, XX%, the this Adjusted revenue revenues category segment. order Equipment, with retail know, due International of X%, by remain grew the Asia intake XX%. with order, about North & up XX% of evidenced margin is. strong and of of timing uncharacteristically & more equipment grew XX%, Electronics as Instron a in was to record grew revenue quarterly organic and which, that XX% you double-digit segment and which growth Pacific low semiconductor-related growth this and demand well Orders was the restaurants order Europe continued representation markets. and very strong Test with as Slide of

plus Moving On sales, QX, heavy industry another was International X. with On Industrial XX%. to Polymers X% X%. equipment at up Oil and note, points up XX% about MRO was XX%. was grew XX%. to grew Automotive strong up consumables order of Slide revenue on was XX% was a Commercial from aftermarket continued XX%, basis and geographic our America, in up XX% XX%. positive and grew and strong and business America North margin Operating Welding's the growth improved which is was X% basis, X%. Sequentially up XX% with Polymers gas and Fluids also & organic X% XX.X%. grew strength North Fluids with up intake. up XX% continued organically, up applications. grew XX

And growth QX, rising North aftermarket dealing prices. Construction organic grew up revenue grew X. with America, strong of XX%. consumers sequential in we residential On some see was business in Slide U.S. and was XX%. delivered from XX% as did While with strength demand up automotive slowing continued commercial to XX%, our gas inflation are which and

signs constraints respectively, of only on On track of America the basis, X% international in was New in slowing down are X%, as that chain revenue grow, their quarter. and towards the Australia end order organic and some XX%. segment didn't international North larger businesses and started supply the Europe While delivery was that second the of caused up orders show for equipment while was down International Specialty Zealand delay the now with a X% rates geographic to X%, the a up some half. were

Okay.

Slide process, of and guidance X Per our on of guidance, update on unchanged. for actual year-to-date our year. remains results full projection XXXX of demand usual levels based turn through current Let's the is which a to year our balance an the our

of X% headwind our projected of current The from foreign of result, MTS on As versus acquisition is foreign currency is translation prior to and a X% revenue, add a projection rates, now XX% X.X%. X% remains based to unchanged. expectation the growth exchange organic to

QX range outlook. is And compared to of May $X.XX which exchange, our maintaining GAAP year offset embedded foreign to of by is benefit guidance the $X.XX. from additional $X tax in favorable now guidance EPS prior EPS are onetime the $X.XX X, headwind in We of full on our

points margin points, of XX%, basis with headwind Price/cost half Our XX% is impact in compared unchanged basis unchanged points impact dilution initiatives. neutral to about is implies second XXX which to guidance operating the that the XXX about first as contribution from margin at enterprise is basis at dilution XXX margin half.

business and ITW's XX%. a rate ability tax is competitive ahead, Finally, high that there's free Karen, the the positioned that generation I'll we back or be company to any differentiated about but best-in-class With to We've remain team's you. as flow proprietary not model full very strength to results XX% to cash repurchases obviously lie often talked high-quality continue a and environment. portfolio, our execute challenges environment, may the year of change exception. of no this leverage that in can any is confident deliver at diversified that $X.X turn very level and to our proven in is it that, We're range ITW to our is and to for to well share no year we macro the in billion, immune expected uncertainties ITW business top-tier the performance fact deliver of

Karen Fletcher

David, up open for the please. questions, Okay. lines let's Thanks, Michael.

Operator

Instructions] Citi. question first from Kaplowitz with We'll our take [Operator Andrew

Andrew Kaplowitz

focus slowdown. color capital give some versus more your little aftermarket. auto in up? could or signs we Scott Are seeing underlying know you Mike, demand in just more goods on a trends macro But you have comparison you increased demand all consumer Electronics, seeing mentioned obviously, still consumer you're moderating businesses? as demand holding tough of I slowing us on

Michael Larsen

ahead, Go Scott.

Scott Santi

Those are to then was couple And the in overall business the think, I the pretty see we're that the X arena consumers' One of that businesses logical pullback. Michael for construction combined of represent, a revenues. businesses we I and and think prices a it, did is spending things going the other to bit seeing discretionary see strong. which pockets. where aftermarket related is than international -- told you XX% a we less exactly is auto say, for that I other gas very those our company's XX%, remain little of reasons

Andrew Kaplowitz

read talked think That's million. it I you impacting Scott. then out helpful, points And I and of basis Michael, think in QX, about $XXX had of price/cost XXX

a us the commodity said half significantly pretty you of but thinking. the down year, give have prices lately. more So for on know maybe you little can come obviously, I color how second you're neutral

So that neutral is there for how long upside that And to through? second half does maybe to it take read some forecast?

Michael Larsen

explained, Well, known I I sit on today, here we price do think increases expect cost Andy, mean, and how this. we based all I we -- can as the

Scott Santi

And decrease --

Michael Larsen

cases. in certain things of cost decreases That's And decreases. those are all

project of our calculation, things into pretty we those things you And or that to in margin the second XXX-basis dilution half year. a when that swing in how first neutral no know there's impact year. year All point mechanical are of so that of today, assumption the second you the baked the And here get the half is assumption essentially on today. of the it's half relative based worse, what in get better here that's that

Operator

Morgan. we'll Next, Zakaria JP to with go Tami

Tami Zakaria

a you on what said follow-up Just earlier. quick

mentioned Is you? that I on resi end for think construction international both you markets. in non-resi some focused and weakness

Scott Santi

The is have those far Yes. biggest in both we by of positions markets residential.

they think in in and both I speak Europe residential Australia. to So the what's markets mostly side in going those on

Michael Larsen

I are seeing we strength mean, also And would of that. in the company. add of parts lot other I Yes. to just a

while slowdown & Test than off of may in here XX% a little Electronics experiencing Welding, a Measurement, to less be start QX. are Food of segments, a other the So strong bit really Equipment, some

at the a overall basis, you If on company, we're our look just numbers July XX%. for up year-over-year

up that where July, from we typically are monthly organic segments So actually, X are Sequentially, down are we rate June, and we've that growing is year. in the X of all double seen highest digits. growth

July of lot about. the offsetting at in in of a there's we've of company the are strength the talked least slowing we've of of the So that other parts company the that seen some parts for month

Tami Zakaria

I growth color. Europe thinking your term? some it are be in helpful has since And the the in half. same changed would Europe in expectation in beginning for alter Does year? reason near that for ask That your organic of seems super the like the the is line, the along region overall The recession a people back expectation

A –Michael Larsen

we low we are current think last growth to which I on I call, our said think pretty Europe of again expect type on run we close rates were single-digit we based where in kind rates.

kind of change we’re As in the other macro not you seeing we’re any know, today. assuming what than

– and I ramp-up say, in said production are are here We baked we should in we our sit getting Europe, are some QX. terms not I customers script, like in positive from in positive hearing the as our signals, some likewise, And September guidance in today. in that’s we automotive potential into of here

company. second puts overall, I And the we’re the there’s takes track you So on half for across and a a get lot of the company. really strong hope to sense

Operator

Next, we'll go to Vertical with Jeff Sprague Research.

Jeff Sprague

the you pressure XX% XX%. Michael, or company total that. Before not my up the When clarify, interesting for in up July, can question, under we July that's XX% thanks just is on say color is

Michael Larsen

is Yes, XX% July. company. the in EBITDA basis, company here total on auto up an The

Jeff Sprague

hear. and I'm maybe perhaps interesting X%. I stronger that would that and would guessed Welding. curious gas Welding to That's Good on number than been just stronger oil have surprising. that seeing up in have

it So the like of across into. that have pretty it must broad-based most been kind markets sounds you see strength can of

both on market on you from going And color the what's maybe color in bit standpoint? on any what's of a there Welding, a could going So channels? in give little vertical maybe

Michael Larsen

side strength you mean, and you up was business XX%, up And business where consumables North resides. China strength that's that's And the up was heard equipment Europe know, XX%. oil I primary XX%. the industrial XX% lockdowns which and our Yes. as is XX%, in up the and of down, was then where then exposure was, really, our the X%. up gas And international again. was And commercial. America,

So of strength operating a if And recover margin. lot year. I the like expecting But down of back to are of North X%. about performance business out sure. here point XX% said the I be didn't fully we, the north America And I margin that the would for earlier, of half remiss in in

strong good So quarter a the really really looking welding and is far. so business, QX for

Scott Santi

little a real there Industrial in additional maybe color. the just The side. strike And is QX

projects. sold part is of users a specific that's product that for in -- are not to a significant Jeff, a products channel, your was think, and channel. more inventory into category of I systems machines question related the of larger, the typically are degree they typically complex products, These and end and

there's channel So of any a products. those inventory lot point at not on

Operator

Next, with we'll Davis Scott go Research. Melius to

Scott Davis

disclose guys, up don't clear, price you going up? still be and is know realized still to net Just price price but explicitly, I going

Michael Larsen

there -- from in see we know, is you still we the catch-up increases cost X basis. time and still talked second half are mode to between the That lag on realized. the on are X being is of quarters, We price a as dollar here and in also here, basis, the Obviously, the a year. somewhere is a we about that to margin

Scott Davis

wanted clarify. I has what you I That's Can -- remind businesses trade FX impact, but impact. know, Okay. doing I to translation then what the are it much can thought. us export just have you -- obviously, a And what a

Scott Santi

do -- yes. We almost

Sorry it's say, from de We was of here our I mean, producing the finish export just X% your revenue. like to but really let our to I question. a input Yes, something off, locally. side we I'll of or bit It's it's on very the little something X% are going locally you like. cross-border do and China. minimis. there, side. There's less than Scott. you little are to commerce, cut sell either imports

sell we company. a where produced are We

so is Our are suppliers exposure our largely local translation. are local, our customers

of selling that producing sourcing in currency are cases. majority the and vast we same are in we So the

Operator

Wells to O'Dea Joe Fargo. with Next, we'll go

Joe O'Dea

a durable little of and of than kind tied of the you talking be talked more where help But pressures you bit a were we to tied that overall on to broad in consumer would have of consumer. think little of would little where you've maybe that sort demand And start consumer more not that I exposure something would previously or kind slowdown? consumer and terms terms exposures about. you to to a broadly as of tied wanted maybe the what and sort might segment half XX% I a bit have where think bit less over to that of you like confidence can trends consumer as related about in revenue

Scott Santi

X I the think, residential really automotive aftermarket which business. construction, Joe, highlighted then we big and ones, is the

The other amount our fair one specialty would we maybe add in of a business, that consumer packaging. I do is

So have contraction, that to like staples resilient generally think and during pretty products closures consumer resealable and beverages cheese for be I of things food times basically. other economic proven

Joe O'Dea

very And extended then July, still mean, I times. mean on supply PMI lead for showing the yesterday chain, I

but that point not little I talked that, think bit getting timing that chain you a of from have you talk are stabilization? that to visibility I'm a better. sort to into stabilization, things of about you starting of means improve any exactly assuming supply Can

Scott Santi

What improvement. I would have say any overall is visibility to no we

We are it. get will point. it that sure not I'm planning at some on better

way I and been remains, computer changes, have. to working in And on name easy. not think been it that's And -- a way our challenges, that it's terms has it, issues business very doing it. we're their think, we we we not the resilient you think and I that what until have chips, through finding posture are we're various of we're and but customers, still our serve I changing

Operator

to Stephen go Jefferies. with Volkmann Next, we'll

Stephen Volkmann

linear I at price/cost to the we there's of rate small that a assuming a some is still relationship go tailwind. could and that expectation? exit XQ reasonable dilution maybe probably chart. I'm sort is just here probably wondering XQ headwind and Is if a back the a was margin

Michael Larsen

as yes. we reasonable sit I think here expectation, today, that's I think a

Stephen Volkmann

a way than be they and some what to and done? are, 'XX 'XX about of here all from incremental you've just in start And so might think whatever restructuring and of have sort of a volumes, think they'll price/cost look kind few think when bit Michael, moving margins of sort that further little dilution going but to I'm trying MTS terms the to you're rather done. to things of is about like Any said into and in

Michael Larsen

Yes.

is I There incrementals, price/cost, right, tell that our I the we so you peel are back think talked the onion MTS, for you're of on going on. right a all lot kind margins Steve. range. is and about, adjusting as is the just and anything core What can you we restructuring what planning back done we expect in yet, range XXXX. XX% should Obviously, incrementals expect in term kind now, at that haven't but of from that different that's right we XX% in our wouldn't incremental us long things you

Operator

with Dobre go we'll Next, Baird. to Mig

Mig Dobre

year. thinking for while, this earnings but I'm amount to these you the doing kind to to good the looking to a butchered contribution through on going perspective, follow top question you're curious, always to been 'XX. line 'XX is that's this at calls. there carryover put up top of Steve's the had that from my 'XX Maybe relative about line? I've think pricing of into way to a Is on go a here about name as

Michael Larsen

to right I now would be little for some try you, carryover. helpful. Mig. that will think a be clearly, there But it's quantify I don't too think and mean, early, I

Scott Santi

is that's to process, a We've reasonable got we'll view I November-ish to that, planning about really the on we're get appropriate before talking our time. it think have which and

Michael Larsen

expectation that time. thing you is to remarks begin this point margin would this I is impact only we margin normalize, that add cycle last things year I over these the as prepared price/cost think will I XXX up year the impact recover mean, I said and of what over during Yes. to basis points, if is in dilution about back the that

XXXX. it's that reasonable and impact But play will of assume sit entire in today. here some exactly will how I think not as clear Now we that the out to that be is around timing there -- will that be

Mig Dobre

probe guess, bit This your this. about overall I as and that little thinking 'XX the up few years. topic, on we're production the able over may a business will to I'm confidence degree if been big of trying outgrow I right, has be to Okay. industrial past a follow beyond.

You talked investing and recovery about winning downturn. through the the

maybe see you if curious to on can I'm growth. continue us bit we out a So update can confidence degree your of little that

Scott Santi

can know #X America don't tell what exactly I America, than going be to we from every and I of do reassure we've South think got North ITW of you other continues to Well, you forward. to opportunity it Europe dominant priority the terrific to to to member that China a it is, certainly,

We and in of ourselves pudding. But have lot and done execute happening. proof in it's terms to a the be of already things investing it positioning will the on

Michael Larsen

I think year, and mean, Yes. Mig. recovery results at put some we organic look up was I granted agree far, here, XX%. there's in with that, up the so last if but you I

half year. first is The up XX% organic this

a we I kind ago. of think just compared few gap closing where relative the years we're to to peers, were certainly

of the we're think making the to the are headed be here tell but proof up. there in more rate that sure. you a also do, But So that will we degree yes, right high put growth I certainly, going progress. numbers we are will to direction significant in confidence organic Lots for is I

Operator

take we'll Julian Barclays. our And from final with question Mitchell

Julian Mitchell

that. about Sorry

up XXX XXX, or I because for the points on implies year-on-year the basis margin are the Just maybe suppose the guide or rate year margin outlook wanted fourth quarter the margin clarify something. margins to

back that's guide. roughly way of And the margin maybe to what about main drivers confirm half are the big to think right that wanted Just fourth quarter the uplift? that,

Michael Larsen

the in Yes. in XXX points is half, of not second to is second I the which we half here dilution that's repeat big mean, the price/cost basis driver projected just margin the for talked impact what about, half. first

So that's driver. biggest probably the

factor if also those revenues to easing on are project because and you just QX just and think take I current into QX rate that basis, if to leverage our you comps the up year-over-year a have back lot you -- incrementals in a something -- all rates to some our in the organic operating year. and incrementals meaningful we'll of the be half closer with returning historical the growth the are putting run

of year-over-year half here, the for price/cost the headwind with year. growth And more are less incremental kind margin of so normal significant XX%, range maybe big those drivers margins that organic back in the plus and

Julian Mitchell

I understand. flow. a just And then on follow-up cash free

sort cash your second think on guide think, free implies, of XX% year-on-year year growth odd sort of in XX% I in the the cash, half. conversion the free that I for

us because do because just big get easing? any cash Is a sort inventory sort of just a company. how chains Maybe understand destock help is that that So around just for you color flow monstrous of of mass are that supply free expansion. sort a move it a of

Michael Larsen

growth service about of a It's that than the you as I are line, at terms higher we're know, the investments flows we've levels supply mean, talked still chain half been mitigate to support the half. second usual. working than bigger is double-digit our in cash fact sustain little that then significantly seeing very It's for and customers. a capital top which the reality growth intentional our We've risk, bit the first our always historically, a little more time. this

So do those we need we to things. will whatever inventory carry

months slight hand, If And free months hand. X we at running on on get numbers. we're improvement you only around to to our in look need cash really on right the in hand months flow a those that

do today, we're balance have for by second our low still in end do it's do dividend. of of at smart half. change of the the said, our this of we line ramp-up we capital we So if in a But anything We'll customers. still terms growth it the I this, support buyback. obviously, of taking do, range, sit to We'll as do to investments. sight everything year. think We'll in still use And a from the say come trying will sheet here organic the standpoint a we allocation won't like the an I to care plans

the so ramp for doing cash And half flow what sight there's of we'd have. year. have And aware number, hit here. like But we of line it's really we more the are a to that obviously, the bit little that of and than to a obviously we no normally trade-off free back

Operator

This concludes today's conference call.

You may now disconnect.

Illinois Tool Works (ITW) 2 Aug 222022 Q2 Earnings call transcript