Illinois Tool Works (ITW) 1 Aug 232023 Q2 Earnings call transcript

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. you. Thank Instructions] [Operator

President Relations, Vice your may conference. of Fletcher, you Investor begin Karen

morning, ITW’s CEO, welcome conference Rob. CFO, and Thanks, Good to Senior President joined our Michael Larsen. and call. by second Chairman Santi; and Scott Vice and I’m XXXX quarter

measures on we’ll is update Form a statements. actual this important contains full measures, today’s reminder the release. provide press call, expectations. materially financial to more directly We of This is detail and outlook. reports SEC to GAAP filed our subsequent forward-looking to a and XXXX ITW’s that and for risks XX-K discuss contained During about that year from in the measures refer non-GAAP could quarter XXXX second cause most those results results the presentation an our reconciliation X certain company’s uses you the Slide presentation with differ comparable

to over to it’s Slide now Please Chairman and Santi. pleasure Scott our CEO, to my X, turn call the turn and

Thanks, Karen, everyone. good and morning,

environment, record to XXXX back above are solidly goal point contribution a XX.X%, levels. margins XX%. XXXX toward saw XXX we the history. our XXX a X% operational company progress And quarter team strong points this another release performance. delivered in a now from time billion price/cost earnings are from normalizing for morning, expanded year-on-year second of of ITW basis and $X for operating exceeded with the income to enterprise the our quarter and financial initiatives. Quarterly with Operating grew margin making first ITW’s Operating execution you basis As

in performance. tax at ITW’s was GAAP in company of impacted inventory partners by markets growth industrial end QX response and excluding supply organic this X% X%. one-off for by in EPS – as was was the customers end record growth years, points revenues, offset and chain of EPS grew stabilizing demand also to both to $X.XX partially that grew the in our We channel stable many X.X items point regard organic X underlying to quarter. a With estimate reductions

normalization underlying and Looking ahead, while stable continued of several a customer to demand strong expect be quarters channel for performance next least, the and at and through we the margin factor the profitability will year. balance continue inventory

As a guidance XXXX our the $X.XX are we result, raising full EPS year midpoint. by at

over the QX now I’ll to in performance to guidance call year our turn and discuss Michael more detail. full Michael?

morning, with good Thanks, and everyone. X%. of by divestitures growth X%, Scott, grew organic and by revenue X% reduced revenue QX

quarter headwind with portfolio. our since markets impact in the neutral translation for demand of majority time about XX% currency softness and some the was across first Underlying a remains end not Foreign our third of stable the of XXXX.

organic at As channel customers reduced level. Europe was X.X% Scott grew XX%. flat, our X%, that enterprise inventory our end partners mentioned, by reduction to geography, Pacific and By with the China X% grew by XX%, businesses up efforts estimate growth America Asia North

for On the exceeding ever. income operating the billion first grew $X bottom line, X%, time

impact of Price/cost and XX.X% costs basis they real Enterprise benefit lowered contributing by quarter QX, new record basis points. with basis to were highlight a margins wages margins as higher a contributed XXX Operating in Initiatives QX while margin this around XXX points improved points. XXX

EPS recorded of and segments, our equipment an three EPS six excluding highs. one-time construction and XXX our X%, increase in X%. quarter, and initiatives. fund including both GAAP to $X.XX, food was years, margin to improvement in, the margin points strategies tax items continue support all-time All additions we of addition, welding, basis our growth expansion In with in them, delivered seven of in products, organic growth investments, grew of headcount we

chains said, currently mitigate income, inventory end about of reduce levels cash Like since first supply almost inventory and it normal Our normalize. to reduction we grew $XXX our QX QX added Free of us months points two years a levels until X% likely our to challenges on the our over last an chain are hand billion months hand million, percentage record. $X flow inventory XX% cash get flow beginning supply That year-end. XX new on net of year our next cash as about of take customers above two. by would free levels to performance being partners, was to average, of channel was strong historical half as also back and the inventory from divisions to X.X helped XX% our

that for for Overall, record expect execution our channel including across and board, operating the EPS. income, be same partners it and much margin the performance QX, excellent operational customers. of GAAP operating many We will and financial

Turning are of to on are we and on spend in to ITW’s and of above of quarter-over-quarter, performance goal in margin wanted and XXXX. only in one progress margins our Slide now quarter. pre-pandemic year-over-year the highlights solidly the terms I X. at but a Like of expand operating did margins QX. significantly also back towards making We said, XX% minute track XX.X% levels, Not

Operating North results, to impact led margin and automotive more path Europe at improvement XX% America XX%. first OEM, out was which points segment China move in of growth Investor starting price/cost expanded that we the positive in and strong organic margin for grew years time growth with all grew three Day. recovery and segment basis than up Let’s segments XX%. to the turned the and our XXXX the on with regions. laid continues XX.X%, as margin positive X% XXX this

executing a margins three a tougher segment in half some next growth improvement Organic we’re in the second back we the and in sequential continued As QX. reflects years. over solidly expect XXs in QX operating plan into margins the this OEM comparisons, meaningful auto to and get reminder,

strength support grew service Pacific Europe revenue, customers, basis up XX%, existing X% record in all-time A which the an to XX%, delivered a Turning X%. to and ninth food product with market of growth across continue continued points and XXX X. up XX.X%, International was were end strong real Asia North with revenue installations equipment for X% X%. Food markets Slide up double-digit America organic Operating with highlight also we new equipment board. Institutional quarter up expanded grew with share. the to growth row margin the segment. gain as X%,

slowdown to segment, for of bottoming Test which on however, percentage measurement by delivered XX% with and Test demand some XX% the rate out. positive XX% Instron, The capital the electronics points. X%. about growth growth and grew equipment XX%. continued measurement organic semiconductor show X of and Electronics signs which of evidenced, semiconductor-related grew declined which segment represent revenues, reduced example, is, beginning by strong for as in softness,

against Industrial of growth a against really comparison X% Moving with on Welding year. international on organic in XX% the comparison flat up last sales XX% down year. of North Equipment prior of grew commercial was X% solid organic plus about delivered Slide revenue the in as America were the top XX% to year, was essentially expected while was the of revenue X%, were consumables tough side prior X%. X%. growth and plus flat X. and

the a is and a not never definitely Divestitures and margin the revenue improve fluids little XX% improvement and comparison and up the mindset down expansion by plus the so to revenue that points X% highest Polymers of fact across segment a new by example This bit, X% America company. polymers against X% for impacted X%. margin our satisfied and X%. operating core and of difficult segment just a was And year. last XX.X%, quarter’s basis, margins and good was culture ITW company. record to the Automotive basis fluids down continues was is of X%. for the On continuous highlight declined aftermarket geographic North XXX to down organic mindset international grew a X%,

was construction to which and of last plus Organic with Slide comparison was U.S. construction, North down against commercial construction a of X. about X% year. XX% Turning and X% represents down X%. conditions, X% XX% revenue down segment. expanded America operating residential in XX.X%, points down X%. end record and XX%, basis margin was Despite Europe XXX challenging market an region, Zealand Products Construction was the the down some down for Australia all-time New to

which channel was from line from international percentage and revenue X product grew customer simplification revenue, an X the X%. was organic X%, and Equipment down inventory points reduction headwind segment, X% included consumables about and represents and North was efforts. of Specialty Finally, point end of estimated down which were X%. up down America XX% XX%,

XXXX an on update to that, year full our let’s With guidance. X Slide for move

continued strong and performance for the you year. As first a new with and EPS GAAP performance balance GAAP EPS stable profitability of strong $X.XX we on of our of raised guidance with based by morning, expectation record first and half our demand midpoint underlying $X.XX the half $X.XX through saw margin this the

projected of more from XX.X%, of margin points range a than XX.X% of inventory guidance that will activities growth to includes balance demand expand overall to XXX to our basis includes through basis is Operating the end and X% of organic year. channel by midpoint our of Our more normalization X% the points at at expectation to enterprise contribution least than which the customer modestly XXX continue impact initiatives.

We’re strong XXX% over flow of also net a conversion projecting of cash free income. with performance

of for we tax around year in rate, an the typical on and half our was XX%, second first full expect rate half XX% Finally, rate our XX%. the expected

financially. and as half, through year. a continue we deliver summary, And In operationally performance in differentiated head balance we both to into strong are second first strong a of position the to the half, the

you. it that, I With to Karen, turn back will

the Thank right. up All lines Michael. please questions? you, you open for can Rob,

And Jeffrey Research. our from Instructions] first line Sprague from the Vertical [Operator question comes of

Your line open. is

everyone. Thank Hello you.

Hello Jeff.

I the price-cost could you. algorithm the we the Michael, address for of remainder now. just thank hi, of Yes if kind year wonder

up QX. to I know there, some You work do in in Automotive. you still are got more XXX bps particularly the

handle back So of you total that basis? margins towards year two you into ITW the there? how And address Automotive progressing a the see on on maybe margins that half could do

sure, Yes, Jeff.

the inflation, period years track over from overall, So price-cost, margin we’d a which now unprecedented has two think recover the last we’re say stabilized. impact I on on to of

the price-cost the points, points enterprise range. in full the basis basis looking to positive was at we’re the more XXX normalized XXX basis somewhere for XXX for to year, level. the XXX should year, points quarter, of XXX And QX at recover basis we points around and balance first XXX So, a

enterprise QX in we end somewhere exit we with think and the specifically and I is remain half up is encouraging of in OEM combined case we segment your [indiscernible] every in XXXX. as we And improvement segment, year. expect teens now positive, the the including back for the for margin expect the was high Automotive should that sequential initiatives, what to question Automotive and QX

to low mid-XXs, over a to is at that years to We’re out the get way the three still path back which to laid Day. the long Investor two kind to we go next of

got And some the could Great. comments Typically, if normalization pretty chain and kind businesses. level backlogs, we you in clear, kind normal a give backlogs, but rate? just your about of on normal perspective have supply getting to you you us don’t of Xx big Where the at everything run right? number are of back ITW but I your your the to wonder were and things

we are to above about Yes, happened, we’re also continues call, supply this still improve. backlogs that starting what our our point, the at talked come I to to last performance down. chain And levels. And think, as on normal similar

true levels, look and Food those down performance pretty are as Equipment, example, we’re you we where Welding. the coming carry do improves. some backlog I is normal at businesses running at for But quickly same as chain supply said, backlogs the Xx in If

Thank you much. very

Sure.

Suisse. comes Credit from line Your next Jamie of from Cook question the

Your line open. is

then And what’s Construction expectations? are in considering sales reductions half your to as your morning. guide impressive And last good you is it A were from X.X inventory partners. and decline. despite that, the year? Exactly follow-up X margins is better to in visit back Two points back channel the the and in revenue guide the doing so sort what’s this, Hi, a on of my year, questions. customers the embedded very the than another follow-up question half maintaining of of the

you. on that? Thank any color So

Yes.

said, that right the in underlying for embedded we in our impact run saw for run reduction QX, it at point I the our balance stable, – as you inventory is if think guidance impact here rate X.X places estimate of at in Auto year. our rates, we we Equipment. in came in strong that points. X with to like inventory line except Actually, and And the QX therefore, the really these now in and look demand, is Food if not embedded

our about here good going of assumptions feel we year. half into the So really the back

some challenging that specifically be has Your at question impressive the with markets, look on been on agree The given here keeps Europe. if that’s drivers called performance you enterprise which continue I particularly big to end the pretty initiatives, you, giving. Construction, gift

you. By

By me.

Yes.

may XXX Construction basis XXXX. company, at I And there’s some the on at points the I Construction of in initiative certainly, hit segment points high to from think catch-up if Enterprise basis still XX so. impact. segment than impact price/cost. Yes, was say and very with the total ranged then XXX average that end XXXX about was a And by harder that

to to question, And going positive the in to meaningful that, way. We Jeff’s back the rest like do a see second to we’re response for including just here impact, the like price/cost did the said in normalize of price/cost contribute still expect so but Construction in half, we in do I Enterprise begin half.

you. Thank

Sure.

question the Fargo. next O’Dea Joe comes of line Wells from from Your

open. line is Your

Hi, good morning.

Good morning.

guess I Food calling a of market that wanted being end closely or comment underlying Auto bit perspective slowing sort of and But anything considerations to of demand on sort a out stable in on of for to little and sort I kind sort most that market sort the watching end prospects regional anymore? of Equipment. of and demand extend strong from around of terms you’re

about stable. think up we to in saw anything, remarkably it’s in portfolio. some first based the second of the quarter XX% I on overall, some our been firming quarter talked trends that If we relative

place one to between on firm. for this continue I but portfolio, point, the best Construction and rest description think, was things the of I weaken QX, saw Europe we in the is the think pretty QX at

margin full strength year, just and of like the back quarter then the think, And something suggest it. a this year half. midpoint in for the I would the also margin in Got XX.X% back about the the thinking half

I think you’ve continued of about talked sort on progress Auto.

to to improvement? think you that be the contributors else more notable anything Just that sequential

efforts, mean Yes, front-to-back second the a Enterprise be driver then points eighty-twenty in expect contribution minutes And to half. around big expect price-cost, contribution least there we the at as a about we I still sourcing few The strategic continues the ago. work we basis meaningful initiatives. XXX of and talked

to So, each to QX, around means QX quarter continue improvement. that kind from all of XX improve second look sequentially from of expect as to to QX the at to of we somewhere that XX we points and sequential QX half, margins basis maybe

about I talked very still think we looking basis in the That’s past XXX points of improvement year-over-year. good.

remarks, in So, into we’re the and and of prepared like in next our year. the through of here said I year performance really well terms the balance margin positioned frankly profitability

it So, I’ll at leave that.

you. Thank

the question JPMorgan. next from Zakaria from And your comes of line Tami

line open. Your is

Hi, good morning.

morning. Good

Thank you so taking for questions. much my

is on So, Equipment. my question first Food

on your while X%, I it up were saw I think slide, grew XX%. services

growth in is portion, Equipment any the on side? volume Equipment the there for pricing-driven? So the that entirely Was quarter

volume. market up really health up lumpy, that be up has care up X%, X%, performance XX%, end Equipment X%. XX%, And activity. certainly out Tami, it’s little different think really price equipment I but there. said North strong Retail and a you we up I’d little services versus think, still institutions break little some elements contributed we a and this, restaurants, service, XX%, softer. up strong side, international say a can I don’t know America, So, That both by

really really think strong good and Food for by looking quarter Equipment I So, QX. actually

might the healthy a equipment and little and they positioned comparisons bit really a underlying I basis. But challenging another – in demand food up second of half. are strong be again look, little the a for well think quarter. bit year-over-year remains if overall, the really back should you on that go really putting There be

That’s color. segment, interesting. though very Welding up Got very points was And basis about the I ask growth can margin it. follow-up was results thought even if helpful I a about organic Operating X%. were your there XXX

price/cost, purely leverage? margin on strong what’s else this Is very something there? there So, in operating is driving it going or

in else something on Tami. going is there, There

then enterprise what And a dose margin still mean initiatives. Construction. similar price/cost. to I healthy recovering it’s said is there So, I of a we’re answer impact think for on I the

like the we price/cost, here. but we to those expect the And main second initiatives of in the – half, into I and to and the So, said, next balance normalize I continue through into are the drivers the that that mean, Enterprise expect year year.

Perfect, thank you.

Your next the line from comes from of Kaplowitz question Andy Citigroup.

Your line is open.

morning everyone. good Hey,

Good morning.

has more of So you back and be Could seeing what may And that already are give you on bottoming into look us [indiscernible] focusing you’re the like then been color you thought in many maybe outside that markets, was say XX% Electronics? electronics-related they here say you mentioned Or which would focused including Construction, the you out. like Electronics, on of prompted just that weak, stepping seeing the European you to markets that? these business, you bottoming Electronics, mentioned? of

portion do from be second into I there half. So first. been the half first that has about think, let view step-up talked me this this year. the mean, we Really, a the the would going I semi

we’re what from our from customers. hearing Mostly

we going orders make have customer lines become view sure here the and get was say, come do. half feedback in the which, of the to you the that back support to second more has along I us, And now capacity supportive for to ready of of even course,

So, of you’re what And other... commentary that’s from kind color around the hearing to semi. similar

any back that baking half… our not into We’re of

in. point. is a good That’s baked None of that

So that’s... think I

them We’ll it. when take we see

our do; that normally be of would none like run Exactly in we rates, obviously.

here we see QX, to QX, – if fruition. comes really that be happy that so late we’d get if those And to

little sequentially, what you a look it’s performance And more you maybe this in, second still I the as quarter bit semi the XX% down if think a the portfolio, least at were And is really of encouraging in in the the I businesses have X% XX% the give if of was On businesses of the businesses company. XX% longer that moved X% you of Those that no is think to There are Europe first puts at a some and maybe an quarter. also at in were that about there some example look those revenues. are moved it X% only others, group I year-over-year slowing, but our quarter, are and portion improved includes takes. think Construction that sequentially. out that and and actually, businesses, down was detail, they have

as look the of to certainly half think year. So I we that’s back encouraging the

Michael, to just back to that’s really regional helpful. And I demand. go then want commentary your on

color You was feel the up which obviously have markets China of given well helpful. expect mentioned your you quarter, talked Do you think in moving several Equipment incremental weakness auto did. still peers XX% maybe improve? there, about seeing expecting Any some I your China still would exposure, forward. China of be positioned in to Food And you kind

Yes.

the we about our I think, us big QX Andy, a COVID-related second the expected of businesses. up We bounced the call, that’s we some quarter XX%. auto, with driver is strong China quarter, in this in back of and largest in on China in for QX more Based slowing first on XX% last China. all in the the auto than and up talked

at and look more that’s kind at year-over-year levels basis, you I way the of is think a of maybe half, accurate to if maybe the business representation of a look on was our a X% China up demand. first better China underlying

OEMs as something we’d auto launching that’s particularly gaining frankly, of half, in Investor that side a we mid-single digits kind and the with about phenomenal are big at products share business second expect job local it’s the on new winning time, domestic the doing for that again, region. by talked But EV out driven so Day. of all the Chinese And

positioned, for well in China for So here years business but in just the really many, second not come many half and to particularly. auto our

color. Appreciate all the

Sure.

comes Ritchie Goldman question next Your of line Joe from Sachs. from the

is line Your open.

morning. Good guys. Hey

Good morning.

you business double-click bit service a about opportunity on rate and little growth well. pretty I’m XX% in today Food expectations Can as how robust, a is longer-term sure we of guys you’re it for the kind the good that are and growth little in the bit just Equipment? margin you increasing talk maybe just maybe forward? what then Can going carries very a Clearly,

in about with I potential. the business mean market. is think for I now – Yes. us growth It long-term the we’ve a for service organic in terms differentiator this us talked a of long-time huge

service, the We our gives maintain all the service it capture then OEM down line. us has ability of that only advantages kinds and install, terms are in of capabilities, replacement and to

we So lot to come a side. service more there’s the on think

still, to COVID. recovering extent obviously from some We’re

Equipment of levels. that XXXX and so at side has still installed a If fully up, Service you look recovered particularly The expect now still with lot we actually side the there’s is to catching our base. runway

that current I’m of last not the maybe conversation base, as was globally. the at think have our I I room with current our – well what time with – installed low-XXs within is going penetration giving say our lot more just it of of estimate sort share businesses take I on that exact to but installed and grow the of doing sort don’t our that – is into base point possible, had to at best a but we the was

that there’s I point, Scott. opportunity to elaborate know Got it. don’t Maybe, on That’s if an helpful.

the being think service Food Equipment business what guys I segment. called roughly, out of you XX% the

more have improve to – to service are So your you street there? do invest penetration feed getting the the capabilities you on or in

– really from before COVID. Yes. the And for – that’s been last coming really active an strategy

we offerings this it is sell, us. competitive of for advantage the a So When think integrate service big it the some lots we we service sell is equipment, which you is point of coverage, have the – opportunity you at of of some actually is part why programming. the equipment to

all above, no way but to essentially service remotely. there’s the of it’s So do

continue about; profitability Michael techs of the strategies growth organic we the I our continue service much business North north invest. to certainly and invest what that’s America certainly how got, have got given the part of street. in X,XXX of to in to talked and we on example. the runway we’ll think, That’s We’ve a So same good And in have Europe.

Yes.

one Okay. on just Great. And last question then maybe M&A.

and Just what pipeline whether any been updated Investor at seeing Day? today, last there’s comments since movement you’re any around you the

Yes, been that change. no there’s I’d say

flow talked a sort of We we’ve us time get And certainly for as through apple of at aperture things. wanting on about terms our continue those which in Investor given the long But standpoint take flow, look to to and MTS pretty will potential opportunities a narrow updated recently, is people we strike we’ve but it continue at the core the is all say business, we up pretty our will and overall down, done in Day, aggressive. stable. I’d to opportunistically it’s from or be been of

Great. you. Okay. Thank

line And final comes from Barclays. from Julian the your question of Mitchell

line open. is Your

Thanks. Thank Good of the to Maybe mentioned? margins context a anything destocking or you first of out cadence QX; the the there QX when of question you’re versus just you. that off, line, thinking sort about that particularly morning. call around in top

Yes.

if thing mind less look QX is this to I do Julian, QX said relative that a earlier, to QX our think lift of about one to day has to to historical have you expect year little that an going keep I The QX, prior impact. from do, in relative and so is bit shipping X%. we we think, at I as typically of sequential

the on expect don’t certainly jump on bottom expansion. rates, line current big But So QX. with based margin the run line, in on progress some here a top progress

of to points I the QX. that QX plus think somewhere from along lines basis about XX we talked

that, typical – And if right EPS – our just lot first full I the and for you’ll we EPS, see the $X.XX half, in we to our lift are cadence look that GAAP first of of head to half a we half $X.XX, our look with typically as you with to the can if might guidance in half, into add terms XX%, you here. kind it’s year what’s see and you second our confidence our as on the half. gives us we’re second at left at from averages, today, of line go, right the first in line based which historical a That’s our calculate midpoint second XX% of of half

or of Volume you’re really just second Thanks two, some constrained in very across just gain my much, largely? And follow-up a or negative; would Or Thank efforts getting of growth chain company. the you still around dried gain was maximized question market and have the the share of were when ago do year-to-date three competitors you’re normal thinking share when supply now Michael. share? up sort think years maybe very sort muted the about share gains the we’re supply you. environment, sort be

agree wouldn’t you no I Julian, how so in Well, with this characterize gains terms year-to-date. of volume

think look to our in organic – got segments, we the these continue we comps. some confidence to through we growth in as have peers if these not rates on that share good relative of lot at about I of just pandemic. an you a some I But talked market take ongoing basis, you’ve think mean, I

look take share. You and all I here of that. our in to can efforts, certainly strategies take at invest to to think including And headcount continue we’re market a growth continuing organic

confidence of continue we share. a take that So degree we high to have

And measure two. quarter you not or in something it’s a

No, think these... I

share. growth underlying take the and above that – committed our be continue think to I to goals in long growth are well in to definition by will just case organic going we we’ve and we in growth are market in view, to X that at organic growth those our did, the X Day organic Investor goals

innovation I biggest you talked our as Julian, I at we Yes. other mean, be thing, to the efforts. the And think were Day, Investor about driver I going think customer-back there is

our the continuing bright from is on the focused company efforts. a light on we’re innovation whole contribution We’re our efforts, drive growth to CBI and signing organic – up to

profitability, is And EPS of which our we long-term high-single of levels that can digit. of grow, our so plus low-double that’s highly we you all deliver confident to put kind given organic, we’re of together X% need all high kind digit,

but You not quarterly much over that from that, XX what you’re about and long-term, on you top it not year, getting about. share That’s it’s is, And should the to XX every year, which what you’re number, than asking an that ITW. expect yield dividend every think, is yes, a add more I attractive TSR of this year. market

Thank helpful. very you. That’s

Sure.

You’re welcome.

And thank you time. for disconnect participating in All today’s this conference now lines call. at may