Or largely trends have remained stable versus the second quarter based on the – of the seven segments.

Yeah, I'd say, Tammy, really I would say the big thing about Q2 is the acceleration on the top line relative to Q1. So 7% sequential growth compared to our historical 2%. It was really across the board. Every segment came in above their historical kind of typical sequential growth rate with the largest improvement in welding and test and measurement as well as in polymers and fluids. As we went through Q2, April was off to a really good start, sustained that in May, and June was even better than that. And we're off to a good start here to Q3, right in track with where we want to be and consistent with the updated guidance that we're providing today, which implies that we can sustain the growth here in the back half of the year at 4.5% organic. So I'd say that that was kind of the big new news, the acceleration in demand that we also talked about in the last earnings call. It really continued throughout the second quarter and into the third quarter.

Understood. That's very helpful. And then more of a longer term question. I think you you're targeting 30 percent operating margin by 2030 and three of your seven segments are already at or above that. So of the remaining four, which ones do you expect to see more outsized margin growth in the next, you know, 12, 24 months? Or are we thinking about it the wrong way in the sense that the three segments that are already above 30 have room to go even higher?

Well, Tammy, I mean, I think in the spirit of continuous improvement, which is so embedded in our DNA here at ITW, We would expect, and the segments themselves would expect, that margins will continue to improve here as they move towards their full potential. And certainly as long as the incrementals are, margins are significantly above 30 and we're guiding to 40% for the full year, you know, those margins will continue to improve as the businesses grow. At the same time, obviously, you know, we've talked about margin improvement in automotive OEM approaching kind of the target we laid out in 2023 at Investor Day and kind of the low to mid-20s. Still a lot of runway in test and measurement. You saw a nice improvement this quarter, 200 basis points plus improvement in test and measurement. That will continue. There's no reason why food equipment shouldn't be at 30% plus over time. And Palmas and Flu is putting up a new record this quarter at 29% plus. And, oh, by the way, construction, with very little help on operating leverage, is putting up 30% plus. So I think really across the board, every segment will continue to improve. And as Chris said, in the second half here of the year, in the near term, we expect every segment to improve their organic growth rate and every segment to improve margins. and there's no reason to believe that that's going to stop anytime soon. And as Chris also said, we are well on our way to our 30% plus enterprise targets by 2030 with the big driver, obviously still the enterprise initiatives, the organic growth and the operating leverage that comes with it. And then the other big factor here is all these new products that are coming in that Chris talked about with a CBI contribution of 3% are coming in at higher margins. And so, you put all of these things together, and at least from our vantage point, you see a very clear path to that 30% plus that we've committed to.

Understood. Thank you.

Our next question comes from Scott Davis from Melius Research. Scott, go ahead. Your line is open.

Good morning, Chris and Michael and Aaron. Good morning, Seth. numbers look solid overall uh the cbi number really caught my eye and i don't want to i don't want to hit a dead horse but it feels like that's the key here in the quarter um give us a sense of of how you measure it and how how you kind of think about the contra account meaning any cannibalization you know that that potentially occurs from you know from iterative new products versus kind of you know clean sheet paper stuff just help us understand how you guys kind of think about it measure it incentivize it that'd just be helpful color I think sure yes so the CBI number is a truly incremental number Scott it's it's basically

incremental revenues from from new products introduced within the last three years it doesn't I mean, cannibalization is taken out, so it's all new. This is all really, you know, these are new actual revenues. Obviously, we audit these and so on and so forth. So, you know, these are subject to a very high level of scrutiny within the company. In terms of how we incentivize, you know, this is one of our four long-term metrics that we incentivize inside the company. We just introduced this as a metric actually last year when we launched a framework. So basically, everybody from the divisions on up are compensated on progress in this. But it doesn't measure cannibalization, it nets that out and measures true new products year-over-year incremental revenues, and it measures them for three years, at which point these roll off and you've got to have a new product coming along, otherwise the CBI number falls off.

Yeah, that makes sense. I didn't realize it was part of compensation. That's good. So just switching gears a little bit, you're doing a lot of buybacks, which is great, still a very clean balance sheet. The M&A pipeline, have valuations come down at all? I know in some areas they have and some they haven't, but in stuff that you guys are looking at, have you seen much movement there that could potentially make things worthwhile?

Yeah, I would say, Scott, we haven't seen a lot of movement in terms of coming down you know as we said before I think we would characterize our approach LM&A is as active but disciplined I would say you know we're sticking to our discipline portfolio management strategy here obviously we believe and we're now starting to realize this really compelling opportunity on organic growth and so to the extent that we can find high quality acquisitions that can extend our long-term growth potential then we're certainly very interested and obviously the second aspect of that is that we've got to be able to leverage the business model to improve margins. So, you know, we review opportunities on an ongoing basis. We're pretty selective, given all the organic growth potential that we have in our core businesses. As I said, active but disciplined. And, you know, when we find, you know, those opportunities and when we do those opportunities, you will hopefully appreciate that we will have subjected them to this, you know, level of screening and ensure that they will be long-term, you know, good long-term businesses for ITW. Obviously, MTS is the last significant one that we did, an example of an opportunity that ticked all the boxes. And three years in, three, four years in now, this has turned out to be a great acquisition for us. We had one bolt-on acquisition in the semi-manufacturing space late last year that had all the high-quality growth attributes that we look for.

And so we're very open to doing more deals like that, but we're prepared to wait for them, particularly given the compelling organic growth opportunity that we have. yeah makes sense i i only ask because you guys are great operators and so you can typically make other people's mediocre pretty darn good so that's all i gotta say i appreciate that thank you thank you i'll uh i'll pass it on thank you our next question comes from joe ritchie from goldman sachs Joe, your line is open.

Good morning, guys. Good morning. So it seems like you guys are in a pretty good spot from a capacity standpoint. I think you called it out in test measurement and the electronics segment. Increasing capacity, you know, recently. I guess when I think about, like, your growth rate still being behind your orders, I'm just wondering, like, maybe you can give a little bit more color on what you're doing to make sure that you're matching the demand environment. And are there particular areas across your portfolio where you feel like you need to invest today?

Yeah, so, Jordan, that's a natural locum of how we do 80-20 is we use it to balance and match capacity. We never allow ourselves to get in a situation where we run out of capacity. We're very proactive in ensuring that we add capacity in advance of growth. And effectively, that's what we've been doing for the last number of years. If I cite Semi and Electronics specifically, obviously, there's been a bit of a down cycle the last couple of years. But, you know, given our belief, you know, in the business, in our differentiation in that space, we continue to invest meaningfully over the last couple of years. I know that's really helping us as, you know, the Semi industry particularly starts and has been ramping for the last six months. we are really well positioned to capitalize on that growth. But that's an approach we take in all of our businesses. It's a natural outcome of how we do 80-20 in terms of ensuring that we balance capacity and that we invest proactively so that we don't get caught in a situation where we have growth, but we can't basically satisfy the growth because we don't have enough capacity.

Got it. That's helpful, Chris. And I guess the following question, I just wanted to touch on the welding margins for a second. Obviously, the growth rate there was incredibly good, better than we expected this quarter, and I guess better start to the year, but nice to see the progress there. From a margin standpoint, we've been kind of like 32%-ish, you know, 32, 33% now for several quarters.

Are we hitting kind of like a natural ceiling on that business from a margin standpoint, but just would have expected maybe a little bit more torque on the growth that you're seeing yeah so I'd say Joe we we definitely expect further margin improvement in the welding segment and I'll go back to you know we had a little bit of near-term headwind from a raw material cost inflation standpoint and the lag between the price to offset those costs and so once we get through that our incrementals will return to kind of our typical 40% plus. And as we grow, margins will improve from there. So that's really the big driver here. When I look at the margin walk for the welding segment, the operating leverage is really good. The enterprise initiatives are really good. A little bit of pressure on price cost. And then obviously when you're growing at 14% organic you are going to be paying out slightly higher commissions to your your partners that help you achieve those growth rates so that's really what we're talking about here but like we said in the second half of the year margins we would expect them to improve as well as well into the future into next year and beyond so okay great thank you guys sure thank you our next question comes from the line of Jamie Cook with Truist.

Jamie, your line is open.

Hi, good morning, and congrats on a nice quarter. I guess just two questions. One, Michael, just on the guide, just given the increase in organic growth, I'm surprised we didn't raise our margins. And I know you're implying a 40% incremental margin, typically. I mean, that's nothing. I mean, that's a high quality incremental margin. But I'm just wondering if there's upside to that 40% or what's limiting that and why we didn't increase our margins on the increased organic growth. And then my second question, sort of similar to the last one, but just on specialty, the organic growth was up. I think margins were down 110 bps. Any color behind which product line was driving that? Thank you.

Yeah, Jamie. So, I think on the incremental margins would have been 40% in Q2 if it wasn't for the headwind on the price cost timing lag that we just talked about. You know, margins, instead of being up 40 basis points year a year, would have been up 80 basis points. And we do expect this lag will probably be with us a little bit into Q3, certainly some progress on price costs. And then in Q4, you know, there will be further improvement on price cost. And the guidance and what I'm talking about is based on all the known price and material cost increases as we sit here today. Obviously, as we just saw in Q2, it can be a pretty volatile environment. And particularly what we saw in Q2 to be a little more specific was some of the crude oil derivatives like our resin purchases in automotive and in specialty coming through and the associated price increase is lagging a little bit. Now, the good news is those resin include oil prices are trending downwards in Q3 and the price increases are coming through. And that's exactly, to your question on specialty, what you're seeing in specialty. And so, you know, I think reasonable growth and operating leverage, good progress on the enterprise initiatives, and then headwind. Actually, the segment with the highest headwind on price cost in the second quarter was specialty. And so, you know, it just takes a little bit longer to get those price increases through in specialty and in automotive to some extent, but they are coming. And the other thing that's happening is, like we said earlier, all these new products with the progress on TBI are coming through at higher margins. And so So you'll continue to see specialty margins improve in the second half and into next year.

But I guess on the total for the full year guide, would it be reasonable to assume more the mid to high point of the margin ranges is probably more reasonable versus the low point? Or are we still, you know, just with, you know, inflation, tariffs, whatever, it's still too uncertain to make that call?

Well, yeah, I think, Jamie, if it wasn't for price costs, we would definitely be talking about the high end of the range. And so just given what we're working through right now, we're providing the range, 26.5 to 27.5. Incremental margins for the full year, about 40%. If it was of a price cost, that would be in the mid, maybe even in the high 40s. So it's just a temporary price cost lag that we're working through. And we worked through it before. If you go back to the first round of tariffs, the second round of tariffs. And as you know, companies with highly differentiated products will not only be able to offset the cost of the dollar piece, which is what we're doing right now, but will ultimately recover the margins down the road and maybe do a little bit better than that.

Okay. I appreciate it. Thank you.

It's a pretty dynamic environment on the price cost front right now.

Okay. I appreciate it. Thank you. Congrats.

Yeah. Thank you.

Our next question comes from the line of Steve Volkman from Jefferies. Steve, your line is open.

Good morning. So you almost touched on my question just there, Michael.

But I'm curious just to hear your thoughts about how we should be thinking directionally about the incrementals in 27, assuming there's no more changes in all the things that have been changing. yeah well um we haven't done the annual plans yet for 2027 and so um so so i won't really have an accurate uh view until we get closer to the end of the year and early next year but i think the long-term algorithm here um if you go back and look at our tsr model uh has been incrementals in that 35 percent range we've said previously that's now in the 40 to 45 percent range uh in a normal environment and so i would characterize you know the current price cost environment as a little unusual and kind of a temporary um headwind but i think as we go into next year i think when we roll things up if we don't see you know 40 plus i think we would be a little surprised Yeah, Steve, I would say fundamentally what drives our incremental in the long term is the quality of our portfolio and the quality of execution of our business model.

And the quality of our portfolio has continued to get better through the ongoing kind of portfolio pruning we've done through PLS over the years. The quality of our business model continues to get better in terms of the quality of 80-20 execution. And you couple that with the increased progress on CBI, then all those things would auger for a very strong incremental in 2027.

Great. Okay, that's helpful. And then maybe just sort of philosophical, it feels like we're sort of inflecting on organic growth, which is great to see. Do you sort of do a little less on enterprise initiatives as you grow faster, you focus more on growth, or are those two things kind of not necessarily related?

No, I think we're definitely focused on not having any regression, you know, operationally and sustain the momentum on the enterprise initiatives. As we rolled up our long-range plans this summer, we see a continued contribution from enterprise initiatives into, you know, the next three to four years. And so we would expect that to continue, and it's not mutually exclusive with organic growth. And so all those things kind of work together.

All right. Much appreciated.

Good luck.

Sure.

Our next question comes from the line of Stephen Fisher with UBS. Stephen, your line is open.

Thanks. Good morning. You had a very big improvement in year-of-year growth in the polymers and fluids in Q2 versus I wonder if you could just help us with how much of that was comps versus underlying true demand, because the comps did get a bit easier. But you did mention some new products and share gains. I'm just curious how much more runway you have on those specific initiatives. Maybe that brings us back to some of the TBI discussion, but I'm curious for any help Yeah.

Yeah, so in terms of polymers and fluids, obviously a very strong quarter, up 7%. Nice margin improvement as well of 160 basis points. But the encouraging thing for us was that the strength was very broad-based. We saw strength across all three platforms, automotive aftermarket, polymers and fluids, with a very healthy contribution from CBI. CBI was almost 5% in that segment in the quarter. So that was really what drove. And I think what this highlights, because of the sustainability of the CBI efforts that we are making, this just all highlights for us the fact that this segment is really well positioned to be a 4% grower for the enterprise on a sustained basis.

That's very helpful. And then I wonder if you could just give us a little more colour on the automotive trends between Europe and China. Clearly some differences there, and maybe there's some export dynamics or what have you. And I'm just curious, what does greater penetration of China auto globally mean for you?

Well, I think just to start with China, I mean, I think what's driving and has been driving the growth there for a long period of time has been our penetration with local Chinese EV manufacturers. And, you know, if you look at EV production in the quarter, we're still up in the mid to high teens globally, and EVs are now almost 20% of global production. And so that favorable dynamic will continue to benefit our Chinese business. You know, certainly a little bit of a mixed bag here in North America, if you look at it by OEM, some of our customers had a strong quarters. Others had a little bit more challenging from a production standpoint. So North America was up 1% bills, about flat here in North America. You know, Europe, a fair bit of PLS in our European business, you know, Europe down 5%. And then we don't talk about it much because it's still fairly small, but there's a lot of strength in our India business, which hopefully we'll be able to talk about that the way we talk about our Chinese business at some point in the future. So, you know, overall, certainly from a production unit standpoint, we are not expecting a lot of growth. You know, this year we said down 2 percent. We're not expecting a lot of growth either next year. But we are fully expecting that we'll continue to outgrow the underlying production numbers by, you know, 200 to 300 basis points, which is what we've done historically, and which is how we're running the business and incentivizing the team is all about how do we grow our content with existing and potentially new customers. So that's kind of how we would position the automotive business. I will say this. We expect continued margin improvement. We've seen some nice progress over the last few years with more to come. And I think, again, a little bit of near-term headwind on price-cost, which we'll work through. But all these new products, all this new content that we're talking about is coming in at meaningfully higher margins because they're solving real problems for our customers. And so that's what's really encouraging in the automotive segment.

Sounds good. Congrats. Thanks.

All right. Thank you.

The next question comes from the line of Mig Dobre from Baird. Mig, your line is open.

Hello, Meg, are you there?

It seems that Meg has disconnected from the call. In the meantime, we'll move on to Andrew Obin from Bank of America, and we can circle back to Meg if he rejoins. Andrew, your line is open.

Yeah, Andrew, we can hear you.

Okay, excellent. Sorry. Yeah, so just a question on inflation. It just would appear that there is quite a bit of it, And I think you've sort of said that the timing of inflation is what influenced incrementals this quarter. What are you seeing six months out, and what levers internally do you have if inflation continues to persist?

Well, it's certainly true that we are seeing meaningful inflation this year. You know, the kind of the Q2 impact was primarily from crude oil derivatives. So we're talking resin and chemicals and logistics, transportation, freight costs. Electronic components continue to be fairly inflationary. And so the biggest lever we have is obviously the price lever that we talked a fair bit about, but it's also driving productivity across our businesses and our strategic sourcing efforts, which are part of that enterprise initiative number that we report on a quarterly basis. So those are kind of the big levers that we're working. I'd say inflation is, for ITW, very manageable. Everything we know about is included in our guidance. We have this unique ability, given how we're organized in this highly decentralized environment, our divisions are so good at reading and reacting to what they're seeing from an inflationary standpoint. So, you know, we're highly confident that we'll be able to manage our way through this with some of the levers that I just described as kind of the more obvious ones.

And then maybe a question on welding was quite a bit better than what we modeled. Were you guys surprised internally by just how good North America was? And if you could just sort of, you know, dissect, is it reshoring? Is it just the industries that you're doing well in are recapitalizing? You know, what is it that's driving America? Is it the cycle getting better? Just maybe dig into a little bit of that, what's driving the strength of welding, and if you were surprised by how good it was in the quarter.

Yeah, so we weren't surprised. We saw this happen. It really started building in Q1, even late Q4 last year, I would say. So it wasn't a huge surprise to us. As Michael indicated, growth of 14%, order intake was higher than that. I would say the growth was pretty broad-based, not just in our industrial markets like energy, infrastructure, aerospace, construction fabrication related to some data center construction. But also what was particularly encouraging was also we saw growth in our commercial platform, so areas like small fabrication. So really, it was a factor of the markets we are in are seeing some nice demand trends. And again, I would continue to underscore the importance of innovation here. We've seen real nice progress on innovation and welding over the last number of years. And we saw a lot of that momentum come through here in Q2 and throughout the first half of the year. So it's a combination of market and some great new products that we've launched in the last 12 months. And we continue to launch through the back of this year. Thank you.

Our next question comes from the line of David Rasso from Evercore. David, your line is open.

Thank you for the time. Just want to make sure I understand trying to think about the price cost impact when I think about the margin walk from 26 to 27. When you're exiting the year, what sort of baked into the guidance for price cost impact, say, in the fourth quarter? I know there was about a 40-bit drag this quarter. And maybe you can also help us for the full year, how are you thinking about price costs? Just, again, that sort of exit rate idea and then maybe the full year-over-year thought process for 27.

Yeah, sure, David. Yeah, as we said, 40 basis points here in Q2. Some improvements in Q3, call it maybe 30 basis points. and further improvement in Q4 approaching maybe the 20 basis points. And so for the full year, maybe that's what it all averages out to, so about 20 basis points of headwind. Kind of our historical normal price cost contribution from a margin standpoint is kind of plus 10 to 20 basis points. And so, again, that's based on historical. We'll see when we roll up the numbers as part of annual plan, but maybe that's a good way to think about it. And so what you'll see is, you know, still a little bit of headwind here on margins and incrementals in Q3, closer to kind of a more normal margin and incremental performance in Q4 and certainly margin improvements sequentially from Q3 into Q4. And hopefully as we go into next year, exiting Q4 will be back to kind of a normal price cost dynamic. Certainly nothing material that will prevent us from improving margins even further in 2027 as we head towards our 30% plus target by 2030.

It's fair to say with the organic growth acceleration, the baseline how you're going to budget 27, you're going to try to price for price cost still being that kind of 10 to 15 BIP improvement. Is that a fair generalization?

Well, I mean, you make it sound like we have this very sophisticated pricing model at corporate. The reality is that there are thousands of pricing decisions made at ITW every day in our divisions, and none of them are waiting for direction from the team here in Glenview. But what we have done historically, maybe that's the best way to answer your question, is we have seen a historical margin improvement from price cost in that 10 to 20 basis points improvement. And that's probably what we'd expect as we roll up the plans for next year. If we see something very different, we'll certainly let you know when we provide guidance and explain, you know, provide a little bit of context in terms of why it would be different. But I think that's a pretty good base case assumption as you think about modeling 2027. You know, the big drivers from a margin improvement standpoint will continue to be, you know, the enterprise initiatives, the new products coming in at higher margins. And so, like I said earlier, we would be surprised if we don't have incremental margins in that 40, 45 percent range as we go into 2027. And, again, what Chris said, a lot of that is because we've worked so hard on pruning the portfolio and making sure we're only in areas with high levels of sustainable differentiation where these pricing and buying decisions are not made purely based on price. They're made based on the value that our products and solutions and services can provide.

Well, that's what I appreciate. I was fishing for the idea this year maybe we're controlling costs a little bit more, just given price cost. Next year, can I get a positive price cost, or will you proactively increase your initiatives, your restructuring costs that might mute it? But it sounds like we can approach 27, sort of a pure traditional 10 to 20 bits as a baseline.

Yeah, I think, David, that's a really good base case. And like I said, if it's very different in January, when we give guidance, we'll let you know why that's the case.

Thank you. I appreciate it. Sure.

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