Good morning. My name is Kathleen and I will be your conference operator today. I would like to welcome everyone to ITW's Third Quarter Earnings Conference Call. All lines have been muted to prevent background noise. Thank you. Erin Linnihan, Vice President of Investor Relations. You may begin your conference.

Thank you, Kathleen. Good morning and welcome to ITW's third quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris O'Hairlehy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer 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'Hairlehy. Chris?

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, during the third quarter, the market demand environment continued to moderate across our portfolio with further softness in the Automotive and Construction markets. Overall, third quarter revenues came in approximately half a percentage point, or $25 million below what they would have been had demand held at the level we were seeing exiting the second quarter. That said, the slowdown in Q3 was less than in Q2, where revenue came in approximately one percentage point, or $50 million below run rate. As a result, third quarter organic revenue declined 1%, with five segments down year-over-year, partially offset by growth in two segments. This 1% revenue decline compares to our end markets, which we believe were down in the low to mid-single digits. As we have all year, the ITW team continued to successfully navigate and overcome these market challenges with strong operational execution. Those efforts resulted in operating income of $1.05 billion with an operating margin of 26.5%, which included a 130 basis point contribution from enterprise initiatives. With little operating leverage, six of seven segments still increased operating margin, resulting in segment operating margin expansion of 110 basis points. EPS grew 4% to $2.65, excluding the gains from the divestiture that Michael will review in more detail. The continued contribution from enterprise initiatives, regardless of volume, speaks to the power and resilience of our business model. And it is notable that for the first time, three of our segments delivered operating margin above 30% in the quarter. And we are well on our way to achieving our goal of a 30% operating margin for the company by 2030. Our continued focused execution and typical operational excellence have enabled ITW to effectively counter persistent market headwinds and achieve increased profitability, where we continue to invest to maximize growth and performance over the long term. Consistent with our long-term commitment to return surplus capital to shareholders by an attractive and growing dividend, on August 2nd, we announced our 61st consecutive dividend increase, raising our dividend by 7%. And year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Today, we are raising our full-year GAAP EPS guidance by $1.33, from a range of $10.30 to $10.40, to a new range of $11.63 to $11.73, to incorporate the impact of the divestiture gain and a lower projected tax rate for the full year. Based on current levels of demand exiting Q3, we are maintaining our previous operational guidance for revenue and organic growth to be approximately flat for the year and our operating margin to be between 26.5% and 27%. While the ITW team has done a commendable job managing the short-term challenges this year, perhaps more importantly, we continue to deliver solid progress on our next phase enterprise strategy priorities. As we outlined to you a year ago, the central focus of the next phase of our enterprise strategy is to elevate high-quality organic growth and customer-backed innovation as key ITW differentiators, on par with our best-in-class operational capabilities and financial performance. This quarter, we made further progress in our journey to achieve this strategic goal. We believe that customer-backed innovation, or CBI as we call it, is the most impactful driver of our ability to consistently grow revenue above market. In essence, the customer-backed innovation revenue of today fuels the ability to drive market penetration and share gain in the future. Over the past few years, we've made progress on expanding our revenue from CBI from less than 1% in 2017 to approximately 2% today. And at our September Leadership conference, we launched the next phase CBI framework for our 84 divisions around the world. Just as we successfully focused the entire organization on 80-20 front-to-back over a decade ago, we are now doubling down on customer-backed innovation. I can feel the energy, excitement, and momentum from our team as they implement this strategy at each division. With our continued laser focus on our typical do-what-we-say execution, I am confident that we will build above-market organic growth fueled by customer-backed innovation into a defining ITW strength. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and dedication in serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I now turn the call over to Michael to discuss our Q3 performance and full year guidance in more detail. Michael.

Thank you, Chris. And good morning, everyone. Starting on Slide 3, and as expected, the third quarter ended up looking a lot like the second quarter with continued strong operational execution in a moderating demand environment. Total revenue declined 1.6%, with organic revenue down 1.4%. Foreign currency translation reduced revenue by 0.4%, and acquisitions increased revenue by 0.2%. On a geographic basis, organic revenue declined about 3% in North America. Europe was down 0.5% and Asia Pacific was down 1% with China essentially flat. In this environment, the ITW team continued to focus and execute well on the things that we can control as evidenced by six of our seven segments, expanding operating margin, driven primarily by enterprise initiatives that contributed between 70 and 180 basis points to each segment and a 130 basis points at the enterprise level. Third quarter operating margin was 26.5%, up 30 basis points sequentially from the second quarter and flat with the prior year due to a tough comparison. As you may recall, last year's Q3 margin of 26.5% expanded 200 basis points compared to 2022 due in part to the favorable impact of a few corporate items that we discussed on the call last year, including a one-time insurance recovery. Excluding those one-time items last year and looking just at segment operating margin, which is included in the press release tables, our segment operating margin increased by 110 basis points compared to the prior year, which is more in line with our typical margin expansion on a quarterly basis. GAAP EPS of $3.91 was up 53% and included a $1.26 gain from the divestiture of our non-controlling equity interest in Wilsonart. Excluding this gain, EPS of $2.65 was an increase of 4% year-over-year. I want to spend a minute on the previously announced Wilsonart divestiture. The proceeds from the transaction, net of transaction costs, were approximately $395 million, which we reduced to minimize our commercial paper balance. The transaction resulted in a pre-tax gain of $363 million, and income taxes on the gain were more than offset by a discrete tax benefit of $107 million related to the utilization of capital loss carryforwards, which resulted in the favorable GAAP EPS impact of $1.26. Free cash flow was $783 million, which was 102% conversion of adjusted net income. As Chris mentioned, in the third quarter, we raised our dividend by 7% to an annualized payout of $6 per share, which marks our 61st consecutive year of increases. And as planned, we repurchased $375 million of our own shares during the quarter. The effective tax rate in the quarter of 14.9% was below our typical tax rate in the 24% to 25% range. As you can see from the reconciliation in the press release, the tax rate was favorably impacted by several discrete items in the quarter, including the Wilsonart transaction. Excluding these discrete items, our core tax rate was 23.7%. So in summary, the third quarter looked a lot like the second quarter with moderating, but also stable demand and solid operating margin and profitability performance as we continue to focus and execute well on the things that we can control. Please turn to Slide 4 for a look at our year-to-date segment margin performance. And as you can see from the table on the left side, six of our seven segments have expanded their already best-in-class margins year-to-date and three segments by more than 100 basis points. Food Equipment is a bit of an outlier due to the growth investments in our service business and specifically the near-term inefficiencies associated with onboarding of new service technicians to support accelerated organic growth in this business. This margin headwind is now largely behind the Food Equipment segment as evidenced by a 110 basis points of margin improvement in the third quarter. Total company margin is up 180 basis points, which in fairness includes a 100 basis points from the one-time LIFO adjustment in the first quarter, but still solid performance in the current environment. Moving to the segments and starting with Automotive OEM, organic revenue declined 3% in the third quarter as industry build rates continue to come down. North America was down 6% as D3 customer bills were down 9%. Europe was down 5% and China was down 2%. Compared to the automobile industry build data, the segment has outperformed bills by about 200 basis points year-to-date, and we expect similar outperformance in the fourth quarter. The segment also delivered solid operating margin performance of 19.4% and a 50 basis points increase despite lower volume, and we expect more progress in the fourth quarter and next year as we continue to work towards our long-term goal of achieving operating margins in the low to mid 20s by 2026 in this segment. Turn to Slide 5, organic revenue in Food Equipment was about flat against a tough comp of plus 6% last year as equipment was down 4% and offset by service, which grew 7%. Regionally, North America was down 2% after being up 10% last year, with institutional sales about flat as healthcare was up mid-single digits and restaurants were down about 10%. International was solid, up 3%, with the service business up 8% and Europe up 4%. Operating margin improved by 110 basis points due to the service margin normalizing and a solid contribution from enterprise initiatives. As we mentioned last quarter, we expect margin to continue to improve as we go through the year. Test & Measurement and Electronics, organic revenue was down only 1% after being down 3% last quarter with stable demand in Semiconductor Electronics and CapEx sensitive end markets. While Test & Measurement was down 3%, Electronics was up 1% in the quarter after being down 3% last quarter. This marked the first quarter of positive growth in Electronics since the end of 2022, and we're beginning to see increased Semiconductor customer activity suggesting that perhaps we are near a bottom for this market. As we've discussed before, we remain very well positioned to capitalize on the growth opportunities in this space when the inevitable recovery does happen. Operating margin expanded by 190 basis points in the quarter to 25.7%. Moving on to Slide 6, Welding's organic revenue declined 1%, a meaningful improvement from being down 5% in the second quarter as both Equipment and Consumables revenue declined 1%. North America revenue was down 2% but International was up 6% with solid growth in Europe and China. As we talked about at the beginning of the year, the Welding team was planning on a solid contribution to the top line from the launch of new products, which in the third quarter resulted in a 3% plus contribution to growth. This is just one of many examples inside the company that illustrates how continued progress on CBI as Chris was talking about gives our segments the ability to gain share and outgrow their end markets. Operating margin of 32.3% was a third quarter record for the Welding segment. Polymers & Fluids, organic revenue grew 1%, with Polymers up 10% due to international strength and Fluids was up 3%. Automotive aftermarket, which is tied closely to consumer discretionary spending, was down 3% in the quarter. On a geographic basis, North America declined 5% and International grew 11% with Europe again showing solid demand. Turn to Slide 7, organic revenue in Construction products was down 9% as Construction end markets took a sizable step back from the second quarter, with new housing starts down 10% on an annualized basis as compared to down 6% in the second quarter. As a result, North America declined 10%, with residential down 12% and commercial construction down 7%. Europe was down 4%, and Australia and New Zealand was down 11%. Despite the lower volume, operating margin of 30.2% was a record for the segment, with another significant contribution from enterprise initiatives. Finally, specialty products had a solid quarter with organic revenue growth of 6%, with strength across the portfolio as both Equipment and Consumables were up 6%. North America was up 8%, and International grew 2%. The 6% growth rate for the segment included about 200 basis points of PLS or product line simplification in the quarter. As we continue to make progress on repositioning some of our specialty products divisions for consistent above-market organic growth, we expect about 300 basis points of PLS in the fourth quarter and that the segment will be flat to up low single digits for the full year. Operating margin expanded 330 basis points to 31.1%, a third quarter record for the segment with strong contributions from operating leverage and enterprise initiatives. Moving to Slide 8 and our updated full year 2024 guidance. As you've seen all year, the ITW team continues to execute at a very high level and find a way to leverage our business model and high-quality diversified business portfolio to deliver solid operational and financial results in a challenging demand environment. Looking ahead at the fourth quarter, we do not expect the near-term demand environment to improve, and as usual, our guidance is based on current levels of demand, seasonally adjusted, and foreign currency exchange rates. As a result, we're maintaining our previous projection for revenue and organic growth to be approximately flat for the year. We're also maintaining our full year operating margin guidance, which is projected to be between 26.5% and 27%, an improvement of 165 basis points at the midpoint, with enterprise initiatives contributing more than 100 basis points. As you saw in the press release, we incorporated the impact of the Wilsonart divestiture gain and a lower projected effective tax rate of 21.5% for the full year into our EPS guidance, as we raised GAAP EPS guidance from a range of $10.30 to $10.40 per share by $1.33 to a new range of $11.63 to $11.73 per share. Excluding the Wilsonart gain, EPS range is $10.37 to $10.47 per share, or $10.42 at the midpoint. So, in summary, while the overall demand environment remains pretty uncertain and challenging in the near term, we remain laser-focused on leveraging ITW's unique strengths and capabilities to optimize our ability to deliver differentiated performance over the long term. With that, Erin, I'll turn it back to you.

Thank you, Michael. Kathleen, will you please open the queue for questions?

Your first question comes from the line of Jeff Sprague of Vertical Research Partners. Your line is now open.

Hello. Good morning, everyone.

Good morning, Jeff.

Good morning. Hey, I just wanted to sort of pick up sort of where you left off there, Michael, with kind of the trends into the fourth quarter. I don't know, unless my math is wrong, I think kind of sequentially you're looking at revenues of maybe 4% or 5%, when normally they declined slightly. So, was your exit rate in September or your early read in October kind of better than what we saw in the quarter in aggregate? Or maybe you could just clarify if I'm missing anything there.

Yeah, sure, Jeff. So, let me start by saying, as you know, we don't give quarterly guidance. And as you were trying to do based on our year-to-date performance and our full-year guidance, you can get pretty close in terms of figuring out Q4. But maybe let me try to help out a little bit. So, I'd say at a high level, Q4 looks a lot like Q3. Typically, what we see from a seasonality standpoint is a sequential improvement in revenues from Q3 to Q4, about a point to a point and a half. And that's going all the way back to 2017. So, at current run rates, typically we're up a point to a point and a half. We do have easier comparisons in the fourth quarter, and for what it's worth, there's also an extra shipping day in the quarter. So, you add all that up, we get to about flat revenues on a year-over-year basis. We expect, again, our typical margin improvement of about 100 basis points on a year-over-year basis. So, that is a slight decline from Q3 to Q4, which is kind of the typical seasonality. And the main driver here remains another strong contribution from the enterprise initiatives. And then factoring in a more kind of normal tax rate for us in that 24%, 25% range. And you get to EPS at the midpoint. And I'm just doing the math. I'm not giving guidance that's in that 2.51 range for the fourth quarter. So, I'll just add, while we're talking about the fourth quarter, we do expect a strong quarter, again, from a free cash flow standpoint. And we're projecting some meaningful improvement on our inventory levels in the fourth quarter, which is not easy in the current demand environment. So, hopefully, that's helpful, Jeff.

Yes. No, it's very helpful. Thanks for that color. And then just kind of secondarily, your business in China is not huge. It's very important for Auto, though. And it was just kind of interesting that China Welding was solid. A lot of cross-currents there. Like, we had some pretty ugly China numbers out of Trane and Otis today. Those are different businesses, obviously. But maybe this is for Chris. Can you just maybe give us your bigger picture view on what's going on there? And also just kind of given the importance of Auto, anything in this kind of China-Europe tariff spat around Automotive influence your view or outlook at all?

I believe that from the perspective of the Auto sector in China, vehicle production is anticipated to increase by 1% this year. In contrast, we expect our growth to be 8%. This indicates that our business is making significant progress in penetrating the Chinese market. Electric vehicles play a crucial role in this, considering that China manufactures about 60% of the global EVs. We're seeing strong growth in EV market penetration in China, which reflects the overall market expansion. For conventional auto production, we expect an increase of a couple of percent, compared to flat production levels this year, which could have been worse at a decline of 2%. Traditionally, we've expected to maintain this growth trajectory moving forward. This positive trend has been evident across all three regions: Europe, North America, and most notably, China.

So, let me just add a little bit of color. So, I think if you look at the third quarter, about flat with Auto, as we said, down 2. And certainly some challenges also in Test & Measurement down single-digit, low single-digits, same in Food Equipment. So, strength in Welding which is tied to oil and gas, LNG, transportation, and also some strength in our specialty products, appliance business. So, you all add up, you get to about flat for the quarter, up 6% year-to-date. We think in the fourth quarter, as Chris said, we'll see a pickup on the Automotive side, continued strength in Welding. So, Q4 should be kind of flat, maybe up a low single-digit and the full year up in that 5% range. So, as we sit here today, I think we feel pretty good about China. I know there's a lot of talk about stimulus and so forth. We haven't seen a lot of that yet. So, if that's still to come, that would certainly be helpful. But as we sit here today, we feel pretty good about China.

Okay. Thank you for the color.

Sure.

Hi, good morning.

Morning.

I have two questions. One, I was impressed with the specialty growth in the quarter despite headwinds from PLS, and I know Specialty is special because there's a lot of different businesses in there. Can you just sort of break down what you're seeing within that business? What segments drove sort of the organic growth? That would be my first question. And then I'll give you my follow-up after that.

Yeah. So, Jamie, I think a good part of the Specialty story is strengthened Aerospace. We have one particular business that's focused on Aerospace. And again, we saw about 30% growth in that business this quarter. We saw, I'd say, pockets of strong demand throughout the segment, areas like consumer packaging. Consumer packaging equipment were also pretty strong. And we did have some favorable comparisons in Specialty versus last year. But even with all that, we expect Specialty to be up kind of low single-digits for the full year. It's really strengthening our conviction that on the basis of the strategic portfolio positioning we've been doing in that segment, which involves some, as we said before, some product line pruning throughout the segment which is certainly choppy and it's creating a bit of a drag, as Michael just indicated a couple of hundred basis points this year. But what it does, what this is all doing is really strengthening our conviction that the objective to make Specialty a 4% grower in the long term is well on track here. Everything we've seen this year gives us a strong belief that we can do that.

I would like to add that when examining the margin performance at ITW, it becomes clear that achieving a bit of operating leverage can elevate margins into the 31% range. This is very encouraging and reinforces our confidence in reaching the 30% target at the enterprise level, especially since three segments surpassed 30% this quarter for the first time. Notably, this was achieved with minimal operating leverage, which is very encouraging as we look ahead to next year regarding the company's margin performance momentum.

And that's helpful because I think some of the bears think the 30% plus is challenging for you guys to do. So it's nice to see that. I guess one more follow-up. Chris, you talked about market outgrowth in Auto. You talked about Welding from the new product introductions, and even on Food, the increased service effort. As you go through CBI, and you've been with ITW forever, but CEO for a longer period of time. Are there any businesses that you think are more challenged over the longer term that you think are going to be tough to get to the organic growth targets that you have? You don't have to say which ones, but just understanding if there's any difference in how you're thinking about the portfolio relative to when you first took over. Thanks.

Not at all, Jamie. If we reflect on Investor Day from last year, we clearly stated that we believe all seven of our segments can grow at least 4%. This belief is even stronger now. Regarding the CBI opportunity, it is significant across all seven segments, although we are at various stages of development. Everything we’ve encountered suggests that there is a rich environment for innovation within these segments, addressing critical customer challenges that need solutions. We are coordinating the company in a manner similar to our approach with front to back a decade or so ago, focusing on capabilities and allocating resources effectively, with increased leadership attention on CBI. We have a strong innovation practice throughout the company that we have formalized into an efficient framework, mirroring the successful strategy we applied to the 80-20 front-to-back initiative. This work is not new; we have been making targeted investments in CBI for several years now, evident in the improved yields we have experienced. We are confident that the yield improvement, which has increased from one to over two, will exceed three in the future. We have a clear strategy to achieve this, which will enhance growth in all of our segments, ultimately achieving our goal of each segment growing at 4% or more.

Hey, good morning, everyone.

Morning, Andy.

Chris and Michael, I know you've been hopeful about a turn in Test & Measurement for much of this year. You did mention more positive discussions with Semiconductor customers, and you did see Electronics turn positive. So maybe you can give us some more color on the conversations you're having. The outlook obviously, you're always going to predict run rates, but as you go into ‘25, do you see a better outlook for the segment?

Yeah, I think based on the customer conversations that we are having, we're starting to see a bottoming, particularly in Semi. Just to characterize, Semi is about 15% of Test & Measurement. It represents a couple of percent of ITW's revenues. So just to put it in context, but there's no doubt that we saw a bottoming and slight improvement in this, I think, in the third quarter. Electronics, similarly, had been down for quite a while, significantly down earlier this year. It's starting to bottom there as well. And then I think an important kind of bellwether for us, the Instron business, which is a critical business within Test & Measurement, had very solid growth during the quarter. That's certainly encouraging as we look for the balance of the year and on into next year.

It's helpful, Chris. And then, Michael, I think you mentioned, I think, what you call the solid step back in Construction markets in Q3. Do you see any hint of stabilization as you go toward the end of the year in those markets? I mean, obviously, we started a U.S. rate-cutting cycle. Maybe what changed in Q3 versus Q2 in your businesses that led to this step down?

Well, I think, Andy, we're talking about our most interest rate-sensitive segment. So, I think what we're seeing here is a market that's down in the low teens. I pointed in the script to kind of the housing start numbers being down 10% on an annualized basis, which mirrors our business in North America. Maybe we're a little bit better than that. And then we're seeing similar type of softness in Australia, New Zealand, which is a meaningful part of our business. At this point, it's really too early to point to any signs or indicators that things are getting better here. Over the long term, certainly the fact that interest rates appear to be coming down has been a leading indicator, but we've not seen anything to suggest that things are picking up in Construction at this point. And I'll just say in that context, I think it's even more remarkable that we had margins of 30% plus here in the third quarter in an environment that's challenging. About as challenging as we see across the company at this point in the cycle.

Appreciate it, guys.

Hi, good morning, Team ITW. Hope you're doing well.

Good morning, team Tami.

Thank you. So, my first question is on margins. Very nice margin performance in the quarter. I'm curious, what was price cost in the quarter? More broadly, how are you thinking about Enterprise initiative and related margin improvement potential in 2025? It seems like almost like an endless well at this point, and I mean it positively. So, any forward-looking comments about Enterprise initiatives and what you're expecting for next year would be helpful.

Yeah, let me do price cost and then, Chris, if you can add some commentary on Enterprise initiatives. But I think at this point, Tami, as we said before, price cost has normalized. This is no longer a distraction as it was back in ‘21, ‘22, and ‘23. At this point, price dollars are ahead of costs on a dollar basis and modestly positive from a margin standpoint. Now, that, just to be clear, doesn't mean that costs are coming down, particularly Electronics, Energy in certain geographies, components that have labor content. We're also seeing it in our employee costs, health and welfare, and other pockets, overhead costs such as just to point out, rental expense, leases, software licenses. We have to continue to be very diligent in this area and make sure that we get price to offset all of these pressures. But overall, nothing significant to point to on the price cost equation. And then maybe on the Enterprise initiatives, Chris.

Sure. So Tami, as we said, Enterprise initiatives continue to be an important contributor to results. How we think about these initiatives is that they are independent of volume, and they're really an outcome of the continuous improvement mindset that's very much part of ITW's DNA. This drives this divisional quality of practice and 80-20 front to back in sourcing. Typically very bottom-up initiatives driven by our talented people in our divisions at a very granular level. Most of these initiatives are in the couple of hundred thousand dollar range and in terms of individually. But when you have 84 divisions, these add up to a very meaningful number. The divisions have a lot of visibility, ownership, and accountability on these. The track record has indicated over the last 11 years our divisions are going to do what they say when they forecast these. Our confidence on enterprise initiatives going forward is that this will continue, really an outcome of this strong ownership and accountability that resides in our divisions and the strong continuous improvement mindset that I refer to that is hardwired into our divisions at this point. In the case of 80-20, as we know, this is the gift that keeps on giving. We certainly see an ongoing contribution from Enterprise initiatives going forward, including in 2025. This is a fundamental part of how we drive differentiated execution in any environment.

Got it. That is very helpful. Thank you. My second question is more strategic. There are a lot of optimism around data centers, AI, power generation, power demand, so on and so forth. How do you assess these opportunities internally? Do you see an opportunity for ITW to increase exposure to some of these trends, maybe organically or through acquisitions? How do you evaluate some of these scenes?

So, I think as it relates to data centers specifically, we have standard characteristics of businesses that we would pursue for acquisition based on sustainable differentiation. If an opportunity came along that was data center related and met our normal criteria, then we'd be all in based on the characteristics of having a business that could grow above market, that we could leverage our business model, and we could acquire at the right valuation. That applies to everything, not just data centers. We don't have a specific focus on data centers; we kind of look at all these things on an equal basis in terms of their long-term attractiveness for us.

Hi, good morning. First, I just wanted to ask on, and kind of specific to North America, but interested in kind of CapEx versus OpEx trends, and I think appreciating a pretty quick book and ship model. I'm not sure how much you would see this, but we do hear about inquiry activity being better than order activity out there. So, I'm curious about the degree to which you see some of that or hear some of that from your salesforce and customer tone. As I think about rates starting to come down, I think some folks are waiting for getting post-election, and just the idea that you're getting a sense that there is some pent-up demand that hasn't moved forward with some uncertainty overhang, and thoughts on that potentially moving forward nearer term.

Well, I think, Joe, I'd start by saying we're not economists and we're not trying to predict the impossible here, which is where the economy is going. We are, as you said, much more short cycle. Our divisions do a great job kind of reading and reacting to what's going on in their respective end markets. I would just make a broader comment based on what we saw in the third quarter, which is some stability in the more CapEx sensitive businesses. So, I'll point to Welding, as I mentioned. I'll point to Test & Measurement, including our Instron business, which was up in a meaningful way on a year-to-year basis and improved kind of quoting and order activity. So, maybe that squares with what you were talking about. The softness in Q3 was really much more tied to Construction and Automotive production, specifically with our customers with the T3 customers. But certainly some stability in CapEx, and we'll see where it goes from here. We're modeling based on current run rates. What we're seeing in our businesses today, and we'll see how it all plays out as we go into 2025. Interest rates may be a little helpful if they came lower for sure.

Nope, I appreciate that color. And then just wanted to ask on CBI, as we think about it becoming sort of a growing initiative. Just what it means on the R&D side and the degree to which you can keep R&D relative to sales at sort of similar levels or what you're doing there, as we would think to drive more innovation you might need to allocate a little bit more there.

Yeah, so for us, spending in R&D or innovation is largely an outcome of basically request from more divisions. Basically, we fund all the good projects. We've been making very focused investments in areas like innovation and strategic marketing. We expect that to continue. But if that number was to go up, that's not a problem for us. It's really an outcome of funding all these good projects. Our teams are really focused on their 80 opportunities in their markets with their key customers. Whatever we spend in R&D typically is an outcome of that. We're very happy to spend it because it's typically money well spent based on the degree of focus that our businesses have.

Yeah. And just from a numerical standpoint, I'd say, R&D spend the way we've defined it here over the years is about 1.8% of sales. So as sales grow, so will the R&D dollar spend. And we don't foresee any significant change in that as we go forward. As Chris said, we really fund every project that our divisions put forward, and that's important to them. That's how we approach it here. It's an outcome of this process that Chris described.

Hi, good morning. As a follow-up to some of the CBI commentary and questions, I think back at your investor day, the framework for CBI for segments was about 2% to 3% contribution and its most meaningful driver to reach long-term targets. Are you on track for that this year? I understand it's relevant to all seven segments. But maybe if you could provide any color on which segments you think are more mature in this journey.

Yeah, so we're very much on track to do 3% plus inline with our target by 2030, if not indeed before that, based on the progress that we are making. We're at varying levels of accomplishment currently across our seven segments. I would point to Welding as an example. This year, as we've highlighted, Michael highlighted in his commentary, our Welding business is suffering some significant end market challenges, but we're getting north of 3% contribution CBI in Welding. As we forecasted at the beginning of the year, several new product launches. So Welding will be one, Test & Measurement, Electronics, obviously an area of significant attractiveness around innovation in the context of what's going on in those markets. New materials being developed, all of which require testing. Increasing stringency in areas like R&D and quality control requires more sophisticated testing equipment, which really speaks to our competitive advantages. The other one I'd highlight is Food Equipment. Food Equipment, sustainability in areas of energy savings, water savings is a very fertile innovation environment, and we've managed to leverage that for several years. The other one, of course, I point to is Auto. Auto, given the disruptive nature of Auto right now, particularly with the increased penetration of electric vehicles, provides enormous opportunity for innovation. We're capitalizing on that as evidenced by the fact that our electric vehicle penetration into electric vehicles is higher than the market average. I feel pretty good about all seven segments, but those are the four that I'd highlight right now. Thank you.

It seems some of the above-average PLS in Specialty products is behind us and that business is growing nicely. You guys got rid of Wilsonart. Moving past some of this portfolio rationalization, is there more appetite to do M&A, given some of these divestitures are behind us?

Yes, I would say our posture on M&A hasn't changed. Since we outlined this at the leadership conference, we've got a pretty disciplined portfolio strategy. We believe clear and well-defined view of what fits our strategy. It's a case of us finding the right opportunities. We're focused on high-quality acquisitions that extend our ability to grow at a minimum 4% over the long term. That's the first criterion. The second criterion we look at is that we're able to leverage the business model to improve margins and then, obviously, acquiring the business at the right valuation to provide a decent long-term return for our shareholders. We review opportunities on an ongoing basis but we're very selective based on these criteria. If I could point to MTS as an example, MTS was an example of an acquisition we did 2.5 years ago, which fulfilled all of our criteria. Thanks to a very strong execution, that's now turning out to be a home run based on being pretty selectable on the criteria going in, strong execution when we acquired it. We have a business that in the long term will be a superb ITW business.

Hi, good morning. I was hoping this might be one call I could escape AI data centers, but I think they got dragged in minutes ago.

We didn't bring it up, just for the record.

No, totally fair, totally fair. If we think just for a second, Michael or Chris about sort of inventories, just curious about your own levels and those of your customers or distributor partners. I think your own inventories dollar-wise are pretty steady sequentially this year, but still running a little bit high as a share of revenue versus pre-COVID, maybe 11% versus something like 8% five years ago, six years ago. Is 11 sort of a good run rate from here? Or no, it should come down over time, but gradually just as the revenue picks up? How do you assess the state of play of inventories that your distributors and customers, so they kind of generally right-size now after two years of being leaned out?

Yeah, I think that's right, Julian. Let's start there. The channel, I think those inventory levels have normalized. Our channel doesn't carry a lot of inventory because they're used to our place in order today, we ship you tomorrow. With that level of customer service, there's no incentive for them to carry a lot of inventory. Then I would kind of pivoting to our own inventory levels. I'd say just more broadly on free cash flow, it was good to be above 100% again here in the third quarter, more aligned with the typical levels you expect from us. We expect to continue to make meaningful progress again in Q4 on the inventory and free cash flow. We talked about reducing our months on hand, getting back to kind of pre-COVID levels of about 2.5 months on hand, we're about 3. The difference here is in that $300 million to $400 million range of additional inventory that we'll expect to come out Q4 and then into next year. We view that the same way you do as a big opportunity to drive above-average free cash flow for the company here in the near term. We've made some progress down, I think it's 6% year-over-year. Last year, inventories came down 17%. We agree that there's some opportunity here and we want to do that, reducing inventory levels while maintaining those customer service levels, which is where I started because we believe they're a real competitive advantage for us. Lastly, all of this, the fact that maybe we're a little bit lower this year in free cash flow than in prior years, doesn't impact our capital allocation plans. We’re investing in our businesses for growth and productivity; all new products are funded. We raised the dividend 7% in August, and we're buying back $1.5 billion of our shares this year as planned. I agree that there's definitely an opportunity here and we're going after it in every one of our 84 divisions in a meaningful way.

That's a very good answer. Thank you. And then just my follow-up, sort of thinking again about that customer-backed innovation and driving up organic growth and market share. I think as you said, sort of R&D to sales is pretty steady. So maybe flattish dollars year-to-date versus last year. CapEx was sort of flattish year-to-date, down somewhat in the third quarter year-on-year. So when we're thinking about kind of the levers of getting that market share up, and it's in the context of a sort of decentralized operating structure where you're sort of letting the businesses ask you for R&D dollars. Maybe give us one or two examples of how you're driving up that share? How does that interplay work between trying to get more dollars of spend into different businesses with a high return versus that kind of decentralized nature? Any sort of examples around that might be helpful for me at least.

Yes. I would say Julian, that our spend in innovation has been rising over the last two or three years. We've seen double-digit increases in spend on the basis of pretty focused investments in strategic marketing and innovation across the portfolio. A lot of this goes beyond spend. It really comes down to a much higher level of, I think, leadership time and focus. As I said, we're already doubling down on this in the same way we doubled down on 80-20 front-to-back last time. We've been investing in building capability really for the last few years here. I think you can see that in the increased yield that we've had since ’17 ’18, where it was about 1% to now about 2%. We're already seeing the investments. This capability build is in our divisions but also at our segment level to enable our businesses to be able to achieve this. A lot of this comes down to the quality of the framework. We have a lot of great innovation practice across the company. We've codified that. Now we want to make sure that it resides everywhere in every division in ITW. This is the exact same approach that we took on 80-20 front-to-back that was very successful last time. We're on a great path here; we've already seen the outcomes. We expect to see continuous improvement in CBI contribution every year from here on out, starting in 2025.

Hey, good morning. This is Adam Farley on for Nathan. I wanted to follow up on Welding. What impact do you believe the upcoming election is having on the sentiment in the underlying industrial market? Do we potentially see an improvement in ‘25, maybe post-election?

Maybe I'll... Do you want to jump in?

Yes. So at a high level, Nathan, I would say, look we're a short-sighted company. So, we're kind of reading and reacting to what's in front of us. There's nothing overt or specific that we're hearing from our customers related to the election, I would say.

Yeah, I would agree with that. I think there's some, other than anecdotes, there's really nothing specific that we can point to. And I think that we'll kind of leave it at that.

And Kathleen, I think that ends the call for us today.

Yes. There are no further questions at this time. Thank you, everyone, for participating in today's conference call. All lines may disconnect at this time.