Good morning. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference.

Thank you, Audra. Good morning, and welcome to ITW's second quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy.

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, during the second quarter, the short cycle demand environment continued to moderate across our portfolio. At the total company level, second quarter revenues came in approximately 1 percentage point, or $50 million below what they would have been had demand held at the level we were seeing exiting the first quarter. Second quarter organic revenue was down in three segments with declines year-over-year in CapEx-related products such as welding, test and measurement, and construction. These declines were offset by revenue growth in four segments, resulting in overall flat organic growth year-over-year at the total company level as compared to our end markets which we believe were down in the low single digits. As usual, as the quarter progressed, the ITW team executed well on all the elements within our control. As evidenced by record second quarter operating margin, which improved by 140 basis points to 26.2%, supported by 140 basis points of benefit from enterprise initiatives. Operating income grew 4.5% to a second quarter record of $1.05 billion, and GAAP EPS came in at $2.54, up from $2.48 last year. As per our normal practice, we are adjusting our full-year guidance in line with demand levels in our businesses as they exist today. Current run rates exiting Q2 projected through the remainder of the year results in about flat organic revenue for the full year. The moderating demand is partially offset by stronger margin performance, and we are raising our margin guidance to 26.5% to 27%. Factoring in both of these elements, lower market demand and stronger margin performance, we are lowering the midpoint of our EPS guidance by 1% as we narrow the range to $10.30 to $10.40. While the combination of moderating manufacturing CapEx demand and lower automotive bill forecasts for the second half has us operating in a challenging near-term environment, we will continue to drive our usual high-quality execution on all the elements within our control while remaining focused on managing and investing to maximize the company's growth and performance over the long term, as we build above-market organic growth fueled by customer-backed innovation into a core ITW strength. In this regard, we are very encouraged by the progress we are making on customer-backed innovation in each of our divisions. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our second quarter performance in more detail, as well as our updated full-year guidance.

Thank you, Chris, and good morning, everyone. In the second quarter, revenue decreased by 1%, with organic revenue down by 0.1%, remaining nearly unchanged from the previous year and showing a slight improvement from a 0.6% decline in the first quarter. As Chris mentioned, demand softened sequentially, and overall company revenues increased by 2% from the first to the second quarter, which is slightly below our historical growth rate of 3%. Despite the moderated demand, the ITW team effectively adapted to the situation and achieved record margins and profitability in the second quarter, indicated by a 4.5% growth in operating income and operating margins of 26.2%, an improvement of 140 basis points. Our enterprise initiatives were again the major contributors to margin and profitability, adding 140 basis points this quarter and with more improvement expected in the second half. GAAP earnings per share of $2.54 rose by 2%, or 5% when excluding a one-time tax item from 2023. Our free cash flow stood at $571 million, reflecting a 75% conversion of net income, slightly below our historical average of around 80% as we aim to lower our inventory levels to pre-pandemic amounts without compromising customer service. We repurchased $375 million of our shares during the quarter as planned, while the effective tax rate increased to 24.4% from 21.4% the previous year, which affected EPS by $0.10. Additionally, foreign currency translation presented about a $0.05 headwind year-over-year. In summary, we executed strongly in Q2, with the effects of a moderating short cycle demand offset by solid margin and profitability performance. Please refer to Slide 4 for details on organic growth by geography. North America saw a 2% decline, which was better than the 3% decline in the first quarter. Europe posted a 1% growth, and Asia Pacific grew by 3%, with China increasing by 5%. In segment results, the Automotive OEM segment reported flat organic growth in the second quarter compared to a 16% increase in the same quarter last year. North America declined by 4%, Europe was down 2%, and China grew by 7%. In the first half, Automotive Builds were flat, with the Automotive OEM segment growing 2% above market expectations. For the full year, we continue to anticipate solid above-market growth with typical penetration gains of 2% to 3% and ongoing outgrowth in China. Our guidance now includes the latest automotive build projections, which have been adjusted to negative 2% for the full year. When we initially provided our guidance in February, Automotive Builds were expected to remain flat. On a positive note, the segment recorded a strong operating margin of 19.4%, an improvement of 260 basis points as we aim to achieve operating margins in the low to mid-20s by 2026. Turning to Slide 5, Food Equipment's organic revenue increased by 2.5%, compared to a 7% increase in the second quarter of the prior year. Equipment sales rose by 1%, while service grew by 5% against a backdrop of a 16% increase last year. In North America, revenue rose by 2%, with service up by 3%. The institutional market experienced mid-single-digit growth, while the retail market saw high single-digit growth. International revenue grew 3.5%, primarily driven by Europe. As we mentioned last quarter, our current margin performance reflects our focused capacity investments in the first half of 2024 to support and enhance continued above-market organic growth, particularly in our attractive service segment. We expect margins to sequentially improve throughout the year. Turning to Test & Measurement and Electronics, organic revenue decreased by 3%, continuing the softness in semiconductor, electronics, and capital expenditure-sensitive markets, with both segments experiencing a 3% decline this quarter. Moving to Slide 6, Welding reported a 5% decrease in Q2, with equipment declining 5% and consumables down 3%. Geographically, North America saw a 6% decrease, with industrial sales off by 7% and commercial by 6%. Internationally, sales grew by 3%, showing some strength in Europe. We achieved an operating margin of 32.9%, supported by effective enterprise initiatives. In Polymers & Fluids, organic revenue increased by 3%, led by a 10% rise in Polymers, while Fluids grew by 4%. The Automotive aftermarket fell by 2% this quarter. On a geographic level, North America declined by 4%, whereas international sales increased by 13%. Our operating margin improved to 28.2%, more than a 200 basis point gain. Please refer to Slide 7. Demand for construction products continues to face challenges globally, as organic revenue fell by 4% in Q2, in a market we believe has contracted in the mid to high single digits. North America’s revenue decreased by 2%, with residential and renovation sales down by 2% and commercial down by 9%. International markets struggled, with Europe declining by 7% and Australia and New Zealand down by 4%. On a positive note, specialty products experienced a strong quarter with a 7% growth in organic revenue, driven by significant strength in our aerospace equipment division and some increased demand across our portfolio. Consequently, international sales rose by 10%, and North America saw a 5% increase. As we discussed earlier, results may fluctuate as we work to reposition the Specialty segment for consistent above-market organic growth, which entails strategic portfolio adjustments and notable product line simplification, contributing 230 basis points in Q2. Our operating margin improved by 590 basis points to 31.9%, bolstered by strong contributions from enterprise initiatives and operational leverage. With that, let’s proceed to Slide 8 for an update on our full-year 2024 guidance. In spite of a challenging macro demand environment in the first half, the ITW team successfully delivered solid operational and financial results. Excluding one-time items, we increased operating income by 4% in the first half, with margins improving by 130 basis points to 25.8%, benefiting from a 140 basis point boost from enterprise initiatives. GAAP EPS rose by 10% -- 5% when excluding one-time items. Looking ahead to the second half and our updated guidance, we do not foresee improvement in the short cycle demand environment. As part of our standard process, we are adjusting our full-year guidance in accordance with the current conditions. Present run rates, adjusted for seasonal trends and the latest automotive build forecasts through the rest of the year, indicate roughly flat organic growth in markets we believe are down in the low single digits. This is a change from our previous organic growth guidance of 1% to 3%, impacting EPS by roughly $0.25. The reduced top-line guidance is somewhat mitigated by improved margin and profitability performance, which we expect to persist into the second half, including a substantial contribution of over 100 basis points from enterprise initiatives. Consequently, we have raised our margin guidance to 26.5% to 27%, as we continue to make progress toward a 30% operating margin by 2030. The enhanced margins will positively affect EPS by about $0.10. The net effect of these factors, as indicated this morning, results in us lowering the top end of our full-year GAAP EPS guidance to a new range of $10.30 to $10.40, reflecting a decrease of $0.15 or 1% at the midpoint from $10.50 to $10.35, with six months remaining in the year. To conclude, we showcased solid performance in Q2 and the first half amid a challenging demand landscape, and have updated our full-year guidance to align with current demand levels. With the strength of our competitive advantages, the resilience of the ITW business model, and our diversified high-quality portfolio, we are well-prepared for any economic conditions that may arise in the latter half of the year. Erin, I will now turn it back to you.

Thank you. Audra, will you please open the line for questions?

We'll go first to Andy Kaplowitz at Citigroup.

Hey, good morning, everyone.

Good morning.

Good morning, Andy.

Good morning. Chris and Michael, you continue to have unusually strong results in specialty products in Q2 after I think you said in Q1 that it was a bit unusual and Q2 would normalize. I know you mentioned aerospace. I don't think I've heard that particular business mentioned before. So could you give us more color on what's going on there and what is the probability that segment could continue to outperform?

Yes, we've had a very solid first half in specialty. The strength in aerospace has been a notable feature throughout this period, along with other areas of strong demand. We had favorable comparisons in specialty and benefitted from the timing of some orders, particularly in the first quarter for our European equipment businesses. We're currently undergoing some strategic portfolio repositioning in this segment, which involves more than the usual product life stages and is more strategic rather than just maintenance. This will likely be a drag on revenue for the full year. We expect specialty to be slightly above flat, possibly flat to low single digits for the year. However, the key takeaway is that we are making significant efforts to ensure this segment achieves a 4% growth rate in the long term, and based on our progress this year, we are confident we can achieve that.

Very helpful. And then Chris and Michael, you mentioned that demand continues to moderate in Q2, but could you give us a little more color regarding the cadence of the demand you saw? Has demand stabilized at lower levels across your short cycle businesses, or would you say it's still getting worse? And then with the understanding that you're forecasting the exit rate of Q2, you do have much easier comps in the second half. So just at the enterprise level, are you digging in any conservatism or is it really just on run rates?

Well, so I think in terms of the cadence, I think we saw as we were going through the quarter is the demand continued to moderate as the quarter progressed. And by segment, definitely auto, as auto builds came down, the CapEx businesses that Chris mentioned, Test & Measurement and Welding, were maybe a little bit more impacted than some of the other businesses. I think on a positive note, I just might add that June also had really strong margin performance. So I think we got some good margin momentum heading into the second half. In terms of the back half of the year, as we said, per our typical process, this is based on current levels of demand that we're seeing in these businesses adjusted for seasonality. We do have, as you recall, some more favorable comparisons here in the second half of the year. If you look at last year, we were up 4% in the first half of '23, and we're flat in the second half of '23. So, the comparisons definitely get easier. We also have the benefit of two additional shipping days in the back half, one in Q3 and one in Q4. And then the last thing I would add is we've updated the automotive build forecast, as we saw a decline there from previously about flat for the year to down 2%. And we expect to outgrow that per typical 2% to 3% and we continue to outgrow by a little bit more than that in China as we've talked about previously. So those are all the elements that kind of went into the top line guidance. I might just add, if you look at the reduction, 1 to 3 organic now to about flat, and you look at kind of the flow-through on that, that's about a 20% decremental, just given how strong the margin performance is and how flexible our cost structure is so that we can continue to kind of read and react to whatever demand environment we're dealing with in the second half.

Appreciate all the color.

Sure.

Hey, good morning, guys.

Good morning.

Good morning.

I know I probably asked this in prior quarters, but M&A is, I assume, no change in strategy there, more bolt-ons? Or we have heard of some larger assets that are going to become available, would you guys be comfortable casting a wider net there?

Yes. So, Scott, I think our posture on M&A hasn't changed much. I mean, as we shared at our Investor Day, we have a pretty disciplined portfolio management strategy and we're certainly staying consistent to that. From our standpoint, we have a pretty clear and well-defined view of what fits our strategy and our financial criteria. So, for us, it's a case of just finding the right opportunities. Very much focused on high-quality acquisitions that can extend our long-term growth potential, growing at a minimum of 4% plus at high-quality. We've been able to leverage the business model to improve margins. So we review opportunities certainly on an ongoing basis, pretty selective given what we believe to be pretty compelling organic growth potential that we have in our core businesses. And if I go back to the MTS acquisition from a couple of years ago, that was certainly an acquisition that ticked all the boxes and only a couple of years in here and already turning out to be a great ITW business. So to the extent that we can find acquisitions like that, then we'll certainly be very active.

Okay. Fair enough, Chris. And then I was just looking back at your investor deck and your growth, your long-term growth targets, 4 to 7, 2 to 3 points of that were coming from customer-backed innovation, and you did mention that in your prepared remarks. But are you still confident that you can drive that kind of growth from customer-backed innovation? It seems like a lot to me, but you guys would have a better feel for that.

Yes, I was going to say, Scott, that we're even more confident now than we were at Investor Day. Our confidence has certainly continued to grow. We're very encouraged by what we're seeing in our businesses. It's one of the reasons that we believe that we're outperforming our end markets right now. And our view on customer-backed innovation is that we're going to lean into customer-backed innovation in the same way with a similar approach that we utilized in really reinvigorating our enterprise strategy in terms of our intention around it, in terms of the rigor and capability build that's going on all over this company right now. And in doing so, increase our contribution from what was approximately 1% in 2019 to north of 2% today, and what will be north of 3% in the not too distant future. So everything we see on customer back and the work we're doing in our divisions gives us an even stronger sense of confidence that this is going to be really impactful in terms of our ability to grow 4% plus in the long term.

Okay, thank you, Chris. I'll pass it on, appreciate it.

Sure, Scott. Thank you.

Hi, good morning. Thank you so much.

Good morning.

Good morning.

So my first question is about North America which saw a negative 2% organic growth while other regions are positive. Are you still experiencing destocking headwinds in North America or any other region? Or is the market softening now more due to demand rather than destocking?

Yes, I think it's more the latter, Tami, that demand is a function of where we are in the economic cycle. And so destocking, which was a headwind all of last year, is no longer a significant factor at this point. I think if you look at just North America, down 2% was really driven by Welding, down 6%. And then Auto, Polymers & Fluids down 4%. And then some positive momentum in Food Equipment up 2% and Specialty up 5%. But again, that's really more a reflection of kind of where we're at in the cycle versus anything going on from a destocking standpoint.

Got it. That's helpful. And then just a bit of clarity on the new operating margin guide. So operating margin expected up about 165 basis points on flattish organic growth. Can you help me understand that 165 basis points, how much of that is enterprise initiatives versus the 140 you saw in the first half? And then is there any price cost or volume or anything else that's adding to that 165 basis points year-over-year?

Yes, we are not expecting much volume leverage as we are guiding towards flat growth for the year. The main driver continues to be the enterprise initiatives. In the first half, we saw an increase of 140 basis points, and the outlook for the second half is promising with more than 100 basis points expected. A reasonable estimate for the total could be between 100 and 140 basis points. The price-cost dynamic is providing only a modest contribution, as we are back to a typical price-cost environment, which is not significantly influencing our results. The key driver, as noted, is the enterprise initiatives, which continue to provide substantial contributions despite the volume situation. This positions us well in the current challenging and uncertain environment. Looking ahead, we anticipate another solid contribution in 2025 and beyond.

Understood. Thank you.

Sure.

Hey, good morning, everybody.

Good morning, Joe.

Good morning.

Can we go back to Specialty for a second? You guys talked about the strategic positioning efforts there, and when I think about that business, it's a hodgepodge of a bunch of different businesses that seemingly don't have a lot to do with each other. And so I'm just trying to understand what the overall strategy is with the businesses within Specialty. And then what are you guys really doing to kind of drive this margin expansion sustainably higher over the long term?

Yes, so Joe, specialty is indeed, as you said, a collection of high-quality, high-margin businesses. There is a concentration around consumer packaging, both on the equipment side, on the consumable side. There's also a bit of a concentration around appliance components. And then there's a collection of smaller businesses, one of which is primarily lined up alongside aerospace, that are very attractive and certainly capable of growth. So we're going through a strategic repositioning of some of those businesses in terms of heavier leaning on product life stages. We haven't seen much growth in Specialty over the last few years, as you know, so that's what caused us to really look at the portfolio. But we feel very good about the progress we're making in terms of there's a lot of high differentiated product lanes in that segment. And this repositioning will put us in a position where we accentuate the growth of those, we resource those, and we maybe de-resource some other ones that are not in a position to grow. But overall, I would say it's a nice portfolio of businesses with a strong differentiation running through it. And as I say, we are well-positioned to grow to some 4% plus in the long term.

Okay, great, Chris. And then maybe just to follow up to that, sometimes companies will go through this addition by subtraction exercise, and it sounds like you guys are in the process of improving the margins. The margins are already good. But it also kind of seems like there's an opportunity then for you guys to potentially divest some of those assets going forward, whether it's in the specialty business or beyond in the rest of your portfolio. How are you guys thinking about that equation in the divestiture side?

Yes. So, we look at our portfolio on an ongoing basis. We believe we've got a very high-quality portfolio and if the opportunity comes to divest, we would certainly do that. I would say that as we think about portfolio management today, it's more likely to be in the realm of product-lane pruning as opposed to divestiture. Now, that could change, but as we look at it today, it's much more along the lanes of pruning within businesses as opposed to divestiture of businesses, I would say.

Hi, good morning.

Good morning.

Maybe just a question around the free cash flow conversions, because I think it's sort of 67% in the first half, the year's guided at a 100 plus. Doesn't seem like there should be a lot of working cap liquidation in the second half because the quarterly revenue run rate is kind of stable at $4 billion. So maybe just to flesh out the confidence in the cash conversion step up, please.

Yes, sure, Julian. I mean, I think you're right. We are slightly below our typical conversion range here for the first half. And I think on the last call, we talked about our focus at the divisional level on reducing our inventory months on hand from we're right around 3.1 right now as compared to pre-COVID, 2.5 or even a little bit lower than that in some of our segments. So, we've made some progress. Inventory is down a double-digit on a year-over-year basis. But I would agree with you that we can definitely do better. We fully expect to take advantage of this opportunity in the second half to reduce inventory levels and generate above-average free cash flow while, as I said, maintaining our typical ITW commitment to customer service levels. So big focus on this in the second half. And just given our track record around, kind of do what we say, execution, we feel like we're really well-positioned to generate above-average free cash flow in the second half.

That's helpful. Thank you. And then just my second question would be around the sort of, it looks like the second half run rate on the total company sales and margins, very similar to Q2, as you normally guide, with sort of 26% margin, $4 billion revenue a quarter. You mentioned, Michael, the day sales effect in Q3, Q4, but just wondered, anything else in terms of seasonality for total company you'd remind us of for the third versus the fourth quarter? Any big moving parts on the segment margin as we step into the back half? I think Specialty, you've talked about Polymer & Fluid, I'm also curious about the margin outlook there, please.

Yes, I think those are all good questions, Julian. I would say that Q3 looks similar to Q2. We usually experience a modest revenue increase from Q3 to Q4, and I want to emphasize that it is modest. Additionally, we generally see a slight improvement in operating margins as we progress through the year—from Q2 to Q3 and then into Q4. There's nothing out of the ordinary happening there. As you mentioned, we do benefit from having a few extra days in the second half, along with more favorable comparisons. Another factor not included in the run rates is the increased contribution from new products that come in at higher margins, which Chris discussed earlier. We believe we've taken a conservative approach going into the second half, consistent with our historical guidance. While things can change rapidly—improving or deteriorating—understanding the impact of revenue growth or decline in Q2, along with the $50 million decremental we talked about, should help you adjust your numbers accordingly. If you're feeling more optimistic, feel free to make adjustments. That's our perspective on guidance for the second half.

Great. Thank you.

You're welcome.

Good morning. Thank you, Chris and Mike. I wanted to follow up on the guidance and make a comment regarding your first question about how it seems like June may have improved slightly for some of the capital goods sectors, such as welding and possibly others. Could you elaborate on whether the macro industrial weakness is starting to improve?

Well, yes, I think June showed a continued moderation, particularly with Auto Builds being softer. On the CapEx side, Welding has followed the commentary from our peers in the welding industry. In Test & Measurement, while we haven't seen an uptick in semiconductor or electronics or CapEx, I would say the semiconductor sector has not worsened either; it's more or less stable. I would also note that we are really well-positioned for the eventual recovery ahead. If you look at some segments with positive organic growth in Q2, like Specialty and Polymers & Fluids, the operating leverage we've achieved on modest organic growth is quite impressive. We are continuing to invest and maintain a strong focus on new products, but we haven't seen a pick-up in those markets yet. Nevertheless, we remain well-prepared for the inevitable recovery in the future, whenever that may occur.

I completely agree with that. Regarding the Food Equipment segment, which is experiencing growth, you seem optimistic about the retail chain despite the recent bankruptcies. Could you provide more details on how that part of the business is performing?

Yes, I mean, I think the retail growth similar to in the first quarter, I think up 9% here in the second quarter. It's all driven by new products. So this is all new equipment and new product rollouts. And I'd say our customer base is not part of the population that you may be alluding to that's having trouble financially. I mean, these are all the big grocery store, retailers, chains that you would expect. And so we're not seeing any impact there from them being in trouble financially. Quite the contrary.

Okay, great. Okay, congratulations for that. Thanks.

All right, thank you.

That concludes the question-and-answer session. Thank you for participating in today's conference call. All lines may disconnect at this time.