Earnings Call Transcript - ITW Q2 2025

Operator, Operator

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

Erin Linnihan, Vice President of Investor Relations

Thank you, Janine. Good morning, and welcome to ITW's Second Quarter 2025 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 2025. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2024 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. Chris?

Christopher A. O’Herlihy, President and CEO

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, the ITW team outpaced underlying end market growth and delivered solid financial performance in the second quarter. Total revenue increased 1% as foreign currency translation increased revenue by 1% while product line simplification or PLS accounted for a 1% reduction. We achieved GAAP EPS of $2.58, operating income of $1.1 billion, an operating margin of 26.3%, which are all second quarter records. We continue to execute well in controlling the controllables as evidenced by enterprise initiatives, which contributed 130 basis points to operating margin and pricing actions that more than offset the tariff cost impact in the quarter. Furthermore, I am very encouraged by the meaningful strategic progress we made in the first half of the year, diligently advancing our next phase growth priorities to make above-market organic growth powered by customer-back innovation defining ITW's strength. We remain firmly on track to deliver on our 2030 performance goals, including customer-back innovation yield of 3% plus. These results are a direct testament to the strength of the ITW business model, the quality of our diversified and resilient portfolio and the unwavering dedication of our global ITW colleagues to serving our customers and executing our strategy with excellence. Looking ahead, ITW is inherently built to outperform in uncertain and volatile environments. And therefore, we are raising our full year guidance, confident in our ability to successfully navigate the current environment and deliver differentiated performance through 2025 and beyond. 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. Michael?

Michael M. Larsen, Senior Vice President and CFO

Thank you, Chris, and good morning, everyone. The ITW team achieved solid operational and financial performance in Q2. Our top line saw a 1% increase in total revenue driven in part by a 1% positive impact from foreign currency translation. Our organic growth rate was essentially flat, marking an improvement of over 1 percentage point from Q1. Geographically, while North America posted a 2% organic revenue decline and Europe was down 3%, Asia Pacific stood out with a 9% increase with impressive growth of 15% in China. We experienced encouraging sequential revenue growth of 6% from Q1 along with some positive signs in end markets such as semiconductors, electronics, welding, specialty products, equipment and an improved outlook for auto builds. On the other hand, more consumer-oriented end markets, notably construction products remained challenging. The ITW team continued to demonstrate strong execution on all controllable factors positively impacting our bottom line. Our enterprise initiatives were particularly effective this quarter, contributing 130 basis points to the operating margin of 26.3%. Although our decisive pricing actions more than cover tariff costs and positively impacted EPS in Q2, the overall price cost dynamic was modestly dilutive to our margin. Finally, we generated $449 million in free cash flow, representing a 59% conversion rate. Although this was modestly below our historical average, primarily due to the timing of certain one-time items, we're still on track to reach 100% plus conversion for the full year as planned. To summarize the quarter, we continue to significantly outperform our underlying end markets in a tough macro environment. Our solid financial performance includes organic growth of 1%, excluding PLS, incremental margin of 49%, operating margin of 26.3% and GAAP EPS of $2.58. Let's turn to Slide 4 for a closer look at our sequential performance from Q1 to Q2, which was quite encouraging. Revenue grew 6%, operating income improved 12%, and operating margin expanded by 150 basis points. Notably, every one of our seven segments grew revenue and expanded operating margin sequentially, with three segments exceeding 30%. Let's dive into our segment results, beginning with automotive OEM. Revenue here was up 4%, driven by 2% organic growth in the quarter. Strategic PLS reduced revenue by over 1%. Regionally, while North America was down 7% and Europe up 1%, China was a standout with impressive 22% growth. Our local team continues to innovate and gain market share in the rapidly expanding EV market with customer-back innovation efforts driving increased content per vehicle. We anticipate this strong momentum will carry into the second half of 2025 and beyond. For the full year, we project the Automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we continue to consistently grow our content per vehicle. We've updated our guidance to incorporate the latest more positive auto build forecasts, which are as follows: worldwide auto builds are now projected to be about flat, with North American bills down mid-single digits and Europe down low single digits, partially offset by mid-single-digit growth in China builds. Overall, our relevant markets are expected to be down in the low single digits in 2025, which is an improvement from the down mid-single-digit projection in our prior guide. The bottom line performance was a significant highlight for automotive OEM with operating margin improving 190 basis points to 21.3%. This marks our highest margin since Q1 of 2021 firmly placing us on track to achieve our long-term goal of low to mid-20s operating margin by next year. Turning to Food Equipment on Slide 5. Revenue increased 2% with 1% organic growth. Equipment sales were flat, while our service business grew by 3%. Regionally, North America grew a solid 5%, driven by 4% growth in equipment and 6% in service. The growth was notably strong in the institutional end markets. International, however, was down 5%. For Test & Measurement and Electronics, revenue was up 1% and organic revenue saw a 1% decline. Demand for our Test & Measurement capital equipment continues to be challenging. However, we noted encouraging order activity late in the second quarter. Meanwhile, our electronics business grew 4%, fueled by heightened activity in the semiconductor-related businesses that achieved double-digit growth. Despite being impacted by one-time items this quarter, operating margin is projected to recover to the mid- to high 20s in the second half. Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth. Equipment sales increased 4% with strong new product contributions, while consumables grew 1%. These represent the highest growth rates for both businesses in 2 years. Industrial sales also increased 1% with every region contributing to growth this quarter. North America was up 1% and international sales grew 11% largely driven by 28% growth in China, a direct result of new product introductions targeting the energy sector. Our 33.1% operating margin remained essentially flat year-over-year demonstrating sustained strong profitability. Revenue in Polymers & Fluids declined 3%, which included a percentage point headwind from PLS. Organic revenue was down 5% in polymers and 3% in both fluids and the more consumer-oriented automotive aftermarket. Let's look at Construction Products on Slide 7. This, our most interest rate sensitive segment continues to contend with global demand challenges on the residential side. Revenue declined 6% in markets we estimate are down even more significantly and were further impacted by a 1% reduction from strategic PLS. Regionally, organic revenues saw North America declined 7%, Europe was down 5% and Australia and New Zealand decreased 10%. However, despite these persistent market headwinds, the segment demonstrated remarkable resilience, improving its operating margin by 140 basis points to 30.8%, a testament to strong execution in a difficult environment. For Specialty Products, revenue increased 1% with flat organic revenue this quarter due to a challenging 7% organic growth comparison with last year. Revenue also included over 1 percentage point from strategic PLS. On a positive note, equipment sales, which rose 8% were fueled by sustained strength in our packaging and aerospace equipment businesses. Operating margin improved 70 basis points to 32.6%, significantly benefiting from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2025 guidance. We've often reiterated our high confidence in successfully navigating challenging macro conditions and delivering solid financial performance. Our decision to raise GAAP EPS guidance by $0.10 at the midpoint, narrowing the range to 135 to 155 serves as clear evidence of this capability. We are well positioned to outperform our end markets and continue to project organic growth of 0% to 2%. Per our usual process, our projection factors in current demand levels, the incremental pricing related to tariffs, our updated automotive build projections and an easier year-over-year comparison in the second half of the year. Total revenue is now projected to be up 1% to 3%, reflecting current more favorable foreign exchange rates. As we look at the second half, we fully expect to continue to execute at our usual high level on all the key profitability drivers within our control. This includes already implemented pricing actions, which we project will more than offset tariff costs and favorably impact EPS. Additionally, we expect our enterprise initiatives to contribute 100 basis points or more to the operating margin independent of volume. Notably, all seven of our segments are projected to grow revenue and improve margins in the second half relative to the first half. Our full year GAAP EPS cadence remains consistent. We expect 47% in the first half and 53% in the second half. This reflects our typical business seasonality along with expected benefits in the second half for stronger pricing and more favorable foreign exchange rates. Implied in our guidance is solid second half financial performance with reasonable organic growth, substantial margin improvement and strong free cash flows. To wrap up, we're confident that the enhanced strength and resilience of the ITW business model, coupled with our high-quality diversified business portfolio and, crucially, our dedicated people equip us to decisively and effectively manage the current environment, no matter how it evolves, and all while steadfastly pursuing our long-term enterprise strategy. With that, Erin, I'll turn it back to you.

Erin Linnihan, Vice President of Investor Relations

Thank you, Michael. Janine, will you please open the call for questions and answers.

Operator, Operator

Your first question comes from the line of Tami Zakaria from JP Morgan.

Tami Zakaria, Analyst

All right, good morning. Thank you so much. I just wanted to ask about the new operating margin outlook. I think you reduced it at the midpoint. I just wanted to get some color on it. Are price increases causing more than expected volume headwind, which is driving the reduced operating margin outlook? Or is there anything that you didn't anticipate, but now are seeing and are expecting for the back half. So any color on what's driving that outlook versus the last time you spoke?

Michael M. Larsen, Senior Vice President and CFO

Yes, Tami, it's fairly simple. Our strategies to address tariffs have been effective, and we're ahead in terms of dollar-for-dollar impact. However, this can still lead to a decrease in margins, which I mentioned in the prepared remarks, stating that price costs were slightly margin dilutive in Q2. That's the key factor influencing this situation. Looking back to our previous discussion, we had anticipated price costs to be neutral or better. I believe our teams have done an excellent job positioning us so that while these price actions are contributing positively to EPS, they are slightly dilutive to margins, which is reflected in our updated margin guidance. We see this as a timing issue and expect to recover those margins as we have in previous cycles. It's uncertain whether that recovery will come by the end of this year or next year. However, as we've indicated before, strong companies will manage to offset cost impacts and eventually regain any margin effect, which is what you are seeing in our revised margin guidance.

Tami Zakaria, Analyst

Got it. That's very helpful color. And a follow-up on the auto segment specifically, I think margins came in at least better than what I was modeling. So as I think about the back half, should we expect sequential improvement versus 2Q?

Michael M. Larsen, Senior Vice President and CFO

So I think we're very pleased with the progress in our Automotive segment, both on the top line in the quarter and the improved outlook for the back half and also on the margin side. 21.3%, an improvement of 190 basis points. I think as you look forward into the balance of the year, I think we'll be solidly above 20% both for the second half and likely for the full year as well, which puts us in a great position to reach our long-term goal, kind of low to mid-20s sometime next year.

Christopher A. O’Herlihy, President and CEO

Just to support that, Tami. The only thing I would say on auto is that when we looked at our auto margins back at Investor Day, we forecast that we get ongoing significant contributions from enterprise initiatives and from higher-margin innovation. And that's very much what's playing out here in 2025.

Operator, Operator

Our next question comes from the line of Jamie Cook from Truist Securities.

Jamie Cook, Analyst

I have two questions. It seems like you're making progress with CBI, so can you tell me where you're experiencing the most success outside of automotive? Also, do we still expect CBI to contribute to the 2.3% to 2.5% that you initially mentioned? My second question is a follow-up: Michael, what is factored into the new guidance regarding foreign exchange? Initially, it was projected to be a negative $0.30 headwind, but it turned neutral last quarter. I'm trying to understand what's reflected in the updated guidance.

Michael M. Larsen, Senior Vice President and CFO

Yes, let me address the foreign exchange question. We have now incorporated current foreign exchange rates. Initially, we anticipated a significant headwind going into the year, but we currently expect a small favorability based on today's rates. I mention it’s modest because the contribution to our earnings per share in the second quarter, for instance, was around $0.03 a share. This isn't a large advantage from foreign exchange, but that's our modeling assumption based on current rates, assuming they remain stable, which can change rapidly, as we have experienced this year. Now, with that said, Chris, what about the CBI side?

Christopher A. O’Herlihy, President and CEO

Sure. So Jamie, on CBI, we're certainly encouraged by the progress that we're making across the company, great pipeline of new products, really across all 7 segments. It's one of the reasons that we would say we're outperforming our end markets at the enterprise level. Several successful product launches this year across the portfolio. You asked for some segment color. I would say Welding has been a standout. You've seen that in terms of welding growth of 3%. We believe our CBI contribution of Welding is above 3% right now. But also say food equipment, where we continue to have product launches across all product categories, all real tangible areas like energy and water savings and then automotive, where we see it particularly in China, where we're certainly growing market share through CBI. So off to a solid start here in 2025, to your question, well on track to deliver on our CBI yield goal of 2.3 to 2.5 this year.

Operator, Operator

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

Andrew Alec Kaplowitz, Analyst

Chris or Michael, you mentioned encouraging sequential growth of 6%. I think usually, you get a couple of percentage points of growth sequentially in Q1 to Q2. I think you had one extra selling day, if I remember correctly for Q2. But would you say you're seeing incremental continued improvement in short-cycle businesses such as semicon that you saw last quarter? And how are your longer-cycle customers? What are the conversations like? You mentioned Welding a little bit better, you mentioned Test & Measurement getting better at the end of Q2. Maybe you can give a little more color on that.

Michael M. Larsen, Senior Vice President and CFO

Yes. I think, Andy, those are fair points on the sequential. I think really the point of putting that slide in there was that this is certainly not a company that's slowing down. We were really encouraged. If you look back to where we were on the last earnings call, we were talking about the slowdown and some real concerns around tariffs. I think at this point, we're talking about some really encouraging positive momentum. And you can see what happens when you get just a little bit of growth, 6% growth equated to 12% income growth on a sequential basis, incremental margins sequentially are above 50% and year-over-year 49%. So that was really the point that we were trying to make here. I think we still see some challenges, as you heard, as we went through the segments on the consumer-oriented side. Construction product is the obvious one, which I think is not going to be a surprise to anybody at this point. A little bit of softness maybe in automotive aftermarket, which in Polymers & Fluids, which also tends to be more consumer-oriented, but also some positive signs as we went through the quarter in the kind of the more general industrial CapEx space. We saw order activity really pick up in Test & Measurement towards the end of the quarter. We saw a significant increase in the number of big orders that were taken relative to last quarter. We saw some good progress also in Welding. We talked about the growth rates there. Semi which is a fairly small percentage of our total revenues, about 3%. I think it is last time we looked at it, growing double digits. And so that's really what we want to try to highlight that there are some positive things going on here. The automotive build forecast improved. And I think all those things are obviously not just market tailwind, but it's all the work that we're doing around customer-backed innovation and new products to gain market share. And if you were an optimist, I would say we're seeing the first encouraging signs that this is really working. And it gives us a lot of confidence not only going into the back half of the year, but also going into next year and the commitments we've made kind of in terms of our long-term performance goals that even when macro conditions are maybe not very supportive of the growth that we're trying to achieve, we're still delivering solid performance and in a position we're halfway through the year, we can raise our guidance. So that's how I would characterize it, Andy.

Andrew Alec Kaplowitz, Analyst

Michael, to that point, you've always been good in China, but it seems like you're getting better, particularly in China Automotive. Chris talked about CBI. If I look by region, China just such a standout versus your other regions, especially versus other industrial peers. So is it really just CBI or maybe it's just China EV. Is there anything that you can do for the other geographies to really sort of support or improve that growth and maybe the durability? I think you just answered it, Michael, durability in China it seems there.

Christopher A. O’Herlihy, President and CEO

Yes, Andy, I would like to add that we definitely observed a 15% growth in China's automotive sector in 2022. This growth appears sustainable for several reasons beyond just automotive. Our business in China is well-differentiated across all segments. A notable point is that our margins in China match those of North America and Western Europe, highlighting our focus on differentiation. We have robust customer-centric innovation initiatives in China, which generates a significant number of our patents aimed at protecting customer solutions. Furthermore, we maintain long-term, strong partnerships with customers in China; for example, our automotive business has been established there for nearly 30 years. It's important to note that we produce in China primarily for the local market. Additionally, we have a very experienced leadership team that specializes in the ITW business model and executes effectively for the company every day. We feel well-positioned across all seven segments in China. While innovation is a key factor, our strong relationships, the quality of our team, and our commitment to sustainable differentiation are what really support our future growth potential in China.

Operator, Operator

Our next question comes from the line of Julian Mitchell from Barclays.

Julian C.H. Mitchell, Analyst

Maybe just my first question, trying to understand the sort of FX dynamics in the EPS guide. So I think maybe sort of versus the beginning of the year, there's about a $0.30, $0.40 tailwind to EPS from the FX change, what are sort of the offsets in that sort of blunting that because the drop-through to the overall EPS guide is much smaller, and I think price cost is dollar positive?

Michael M. Larsen, Senior Vice President and CFO

Yes, I believe we are still taking a fairly cautious approach. As we mentioned in Chris' opening remarks, we remain in a very uncertain and volatile environment where changes can happen quickly, whether it's regarding tariffs or foreign exchange rates. This is why we haven't raised our guidance by $0.30, as we are maintaining a conservative stance given the current macroeconomic conditions. Nevertheless, considering these conditions, we are pleased with our performance. We are confident about the second half of the year, and based on what I've outlined, we anticipate reasonable organic growth in our guidance of around 2% to 3%, plus an improvement of over 100 basis points in year-over-year margins in the latter half, alongside strong incremental margins and significant free cash flows. Given the current environment, we feel we are in a strong position as we approach the latter part of the year.

Julian C.H. Mitchell, Analyst

That's helpful. And then maybe just a second one kind of trying to follow up on sort of within the back half, third versus fourth quarter? I know there was a little bit of conversation of that already. But any sort of shift in terms of demand patterns, let's say, in recent weeks into Q3? And when you're thinking about that price cost margin headwind, how are we thinking about that in sort of the third versus the fourth quarter, maybe just sort of flesh out anything?

Michael M. Larsen, Senior Vice President and CFO

From Q3 to Q4, we typically see a sequential increase in revenues, with growth from Q2 to Q3 and continuing into Q4. However, the usual run rates are less precise this time due to the price increases we’re experiencing. These tariff-related price hikes are just starting to impact our results in Q3 and Q4, which is why we're guiding for performance slightly above our typical expectations. We anticipate good sequential improvement from Q2 to Q3 and then from Q3 to Q4, with enhancements across all key areas, including top line and margin improvement. Each segment is expected to boost both margins and revenue in the second half compared to the first half, without relying on a demand surge. This projection is based on current run rates and price adjustments, along with updated automotive outlooks and about half a point of easier comparison in the latter half of the year. Overall, this combination leads us to predict a strong second half. Regarding Q2, there was nothing unusual apart from June being our strongest month, as it usually is, and we saw more encouraging signs concerning order activity and capital expenditures as we progressed toward the end of the quarter.

Operator, Operator

Our next question comes from the line of Stephen Volkmann from Jefferies.

Stephen Edward Volkmann, Analyst

I understand you prefer not to discuss this in great detail, but based on your 0% to 2% organic growth, I assume your volumes must be experiencing low to mid-single digit declines. I'm curious because it seems you're achieving good incremental results despite lower volumes. When volumes return, will the enterprise initiatives lead to higher incremental margins, or how should I approach this? I apologize for the complexity.

Michael M. Larsen, Senior Vice President and CFO

No, that's okay. Let me just start by saying that your volume assumptions are not entirely correct, even though we don't guide volume versus price. And then your second point, we put up incremental margins of 49% year-over-year in Q2. And that is some of these price cost actions related to tariffs are basically coming through at a fairly low incremental. So if that's the case, you have to believe that the core incrementals are significantly higher at this point in time relative to our kind of historical 35% to 40%. And I think you can see in a couple of places here. Automotive is maybe the better example this quarter. What happens when we get just a little bit of growth. I mean automotive with 2% organic margins are up 190 basis points. And so you look at the sequential growth and the incrementals from Q1 to Q2. So to answer your question, it's reasonable to assume that incrementals are above historical and you'll see some of that in the second half. We expect reasonable kind of 2% to 3% organic growth with some very strong incrementals.

Christopher A. O’Herlihy, President and CEO

And Steve, over the long term, the strong incrementals are primarily driven by the quality of the portfolio and continuous improvements in that quality, along with the execution of the business model. This is ultimately what leads to higher incrementals.

Stephen Edward Volkmann, Analyst

Got it. Okay. And then maybe specifically on construction, sort of amazing to see 140 bps of growth on 6% decline in revenue. And it doesn't look like it was a geographic mix issue there. Was that all just kind of enterprise or CBI? Or is there some sort of mix there? Any detail there would be great.

Michael M. Larsen, Senior Vice President and CFO

Yes. I mean the biggest driver is as usual are the enterprise initiatives were well above company average at about 160 basis points. So that's really the key driver. I think that we agree with you that the fact that we have a construction business that for over a year has been putting up margins in that 29%, 30% range in some of the most challenging end markets that we've seen in a long time is pretty remarkable. And I think the team frankly gets a lot of credit for trying to find a way to make the best of a tough macro.

Christopher A. O’Herlihy, President and CEO

Yes, and all underpinned with great brands and technology, very focused on the most attractive parts of the construction market.

Operator, Operator

Our next question comes from the line of Mig Dobre from Baird.

Mircea Dobre, Analyst

Q2 was quite an unusual quarter, not necessarily in your reporting, but rather in the overall environment. We began in April with Liberation Day and significant volatility in national markets, and by the end, we felt a noticeable shift. I'm interested in how your business navigated this situation. Throughout the quarter, did you experience any economic impact from the tariff uncertainty? The quarter, on the surface, appeared fine, so I'm curious about the pace of your business. The reason for my question is that if we face another wave of disruption due to these tariffs, based on your experiences in Q2, how disruptive do you anticipate it could be for your business moving forward?

Christopher A. O’Herlihy, President and CEO

Yes. I think it's important to note that we produced over 90% of what we sell, which significantly reduces the direct impact of tariffs. We've managed to adjust our prices effectively due to a high level of product differentiation. Both in 2018 and during the recent tariffs, we found the situation manageable. Based on current information, even if tariffs increase, we anticipate the costs will remain manageable. Regardless of future developments, we are committed to maintaining our EPS at a neutral or better level.

Mircea Dobre, Analyst

Okay. But you didn't experience that whole customer freezing up or anything of the sort, as they were seeking for more clarity. That was just not a factor in your business you're seeing?

Christopher A. O’Herlihy, President and CEO

Yes, there was a bit of that in one segment. We have a segment where we had some shipments to China from the U.S., particularly in response to customer requests. At the beginning of the quarter, the significant China tariffs caused a temporary freeze, but that has since eased. Additionally, through our ability to adapt to market conditions, we have successfully adjusted to changes. If a similar situation arises again, we have mitigation plans ready to ensure it won't cause significant issues.

Mircea Dobre, Analyst

Got it. And my follow-up, if I may, just kind of a bigger picture capital allocation question. I'd love to hear as to how you're thinking about your M&A pipeline and in terms of returning capital to shareholders, if M&A is not available for whatever reason, is there an argument to be made for taking a more aggressive approach at this point in a cycle where maybe you're dealing with lower growth knowing that, obviously, as growth accelerates eventually, you'll be able to hopefully create some value with more aggressive buybacks in the lower part of the cycle?

Christopher A. O’Herlihy, President and CEO

Yes, regarding M&A, I want to emphasize that we are very confident in our ability to achieve over 4% growth with our current portfolio. This allows us to stick to our disciplined approach to portfolio management related to M&A. We have a clear understanding of what aligns with our strategy, and it's just a matter of identifying the right opportunities that can enhance our long-term growth potential while maintaining high quality. We aim for at least 4% growth while leveraging our business model to improve margins. We continuously review M&A opportunities but remain selective, keeping in mind the organic growth potential we already have. If the right opportunities surface, we will pursue them aggressively. The acquisition of MTS exemplifies this approach, as it proved to be a valuable addition for us. We remain selective yet ready to act when the right opportunities present themselves.

Michael M. Larsen, Senior Vice President and CFO

I'll just add that we continuously review our capital allocation strategy. We believe it is well aligned with our enterprise strategy, prioritizing internal investments to support organic growth initiatives and maintain profitability in our core businesses. We offer an attractive dividend, and our payout ratio is at the higher end of our peer group due to our strong margins, top-tier balance sheet, and highest credit rating among peers. We plan to grow our dividend in line with long-term earnings and allocate surplus cash to share buybacks, amounting to about $1.5 billion this year, which represents around 2% of our outstanding shares. At this point, we feel we've optimized our approach. As Chris mentioned, we are eager to pursue M&A opportunities that meet our criteria, but the current market conditions, especially valuations, pose challenges in this area.

Operator, Operator

Our next question comes from the line of Sabrina Abrams from Bank of America.

Sabrina Lee Abrams, Analyst

I understood that there would be further restructuring in the first half. There were comments about expecting a $0.15 to $0.20 headwind in the first half, accounting for about 80% of the full year. When reviewing the components of the margin bridge, it appears that restructuring provided a year-over-year tailwind this quarter, with minimal impact in the first quarter. Could you provide any insights on the restructuring this year and any changes that have occurred? Is that still the anticipated full year figure? Additionally, how has the pace evolved in relation to your expectations?

Michael M. Larsen, Senior Vice President and CFO

Yes. Sabrina. So I think restructuring with everything going on in the quarter, a couple of things did move around. At the end of the day, we ended up spending $20 million in the first half this year, which is the same as what we spent in the first half of last year. These are all projects tied to kind of our 80/20 front-to-back process, all projects with less than a 1-year payback. We had a few projects that just from a timing standpoint, moved into July. Those have been approved and are well underway. We expect that we'll spend about another $20 million here or $0.05 a share, so it's pretty small relative to our overall earnings. We'll spend about $20 million here in the second half. And on a year-over-year basis, that will be about flat year-over-year.

Sabrina Lee Abrams, Analyst

Okay. And then just how much PLS is in the guide this year? I think there was 100 bps this quarter. I think there was 50 bps in 1Q. I think you started the year with 100 bps of PLS in the guide. Just how are we thinking about that now?

Michael M. Larsen, Senior Vice President and CFO

Yes, that's unchanged. We still have a fair bit of activity, as you saw this quarter in automotive, specialty, and construction. We're still experiencing about a percentage point of headwind to the organic growth rate from strategic PLS. However, there is a significant tailwind in terms of positioning the portfolio for future growth. Additionally, if you look at the margin improvement in the segment I just mentioned, you can observe the benefits associated with these PLS efforts.

Operator, Operator

Our next question comes from the line of Joe O'Dea from Wells Fargo.

Joseph John O'Dea, Analyst

First just on margins in the second half of the year. And when we look at sort of the walk from Q2 into the back half, about 100 bps improvement. Can you just outline cadence of that? Is that sort of 50 bps sequentially over the back half of the year in each quarter is kind of reasonable? And then the segments that are going to be contributing that the programs are going to be driving that, presumably, Test & Measurement are ones where we should see the biggest contribution.

Michael M. Larsen, Senior Vice President and CFO

That's exactly right. Test & Measurement is the most significant improvement from the first half to the second half of the year. For the segments already exceeding 30%, we have three at 33%, 31%, and 33%. You might not see the same level of increase in those, but overall, we anticipate broad-based sequential improvement from Q2 to Q3 and year-over-year growth as well. We also expect a larger increase in margins in Q4 compared to last year. Considering all of this, our guidance implies external operating margins of about 27% in the second half of the year, along with reasonable year-over-year improvement. These reflect best-in-class operating margins without much support from macro conditions, which is why we emphasize the distinctiveness of these results. There are not many companies capable of achieving this level of margin performance given the current economic environment, especially when you look at the incremental margins for this quarter and those projected for the full year.

Joseph John O'Dea, Analyst

Got it. That's helpful. And then I wanted to come back to some of the more kind of CapEx order activity that you're talking about and maybe specifically on Welding and just trying to parse kind of DBI and share versus underlying end market. I think a lot of what we hear out there is MRO trends are stable. Bigger spend projects, elongation between quote to order. So it doesn't really sound like in broad strokes, we're hearing much of a sequential acceleration. It sounds like you're seeing it a little bit more early days but the degree to which you can talk through some of the end markets within Welding, what you're hearing from those customers versus kind of CBI and that's really the answer to the better growth.

Christopher A. O’Herlihy, President and CEO

Yes. In short, Joe, I would say CBI is a better answer to the growth. And we see some pickup in activity on the industrial side. But in general, the big driver of our growth in Welding right now is CBI.

Michael M. Larsen, Senior Vice President and CFO

Yes. And I'll just go back to what we talked about earlier. I think the more consumer-oriented businesses certainly are dealing with some more challenging end market conditions. The general industrial more CapEx set aside some of the delays that Chris talked about early in the quarter when there was kind of peak tariffs angst. I think we are seeing some positive signs in general industrial in the semi space as well as in automotive. But these are short-cycle businesses. Things can change very quickly. We're dealing with a pretty challenging underlying market demand. We estimate our end markets on average are down 3 to 4. And we're holding organic flat. We improved the organic growth rate sequentially from Q1 to Q2. So that's kind of the environment that we're dealing with. And so that's why it's so important that we continue to do what we said we were going to do from an execution standpoint and continue to make progress on the enterprise initiatives and the things we can control, including CBI, price costs and so forth.

Joseph John O'Dea, Analyst

Okay. Great color there. One last quick one, just China. Really strong growth in auto. Can you just talk a little bit about other parts of China exposure?

Michael M. Larsen, Senior Vice President and CFO

Yes, I think China experienced a 15% increase, as mentioned in my prepared remarks. The automotive business is by far the biggest contributor, but we also saw solid double-digit growth in Test & Measurement, Polymers & Fluids, and Welding. The businesses that benefited most from new products are where we are seeing this growth. There’s a clear correlation here. Our ability to outperform in the end markets is largely due to the progress made on CBI. This might help explain why our performance in China was strong compared to some of our peers who did not achieve the same results.

Operator, Operator

Our last question comes from the line of Steven Fisher from UBS.

Steven Michael Fisher, Analyst

I’d like to follow up on one of the previous questions. Regarding the increase towards the end of the quarter in some capital-oriented equipment, to reach the 2% to 3% organic growth projected for the second half, are you anticipating that the strong order levels seen at the end of the quarter will continue? Or do you think that was just a one-time occurrence? If it really is due to CBI, as you mentioned, I would assume there could be a continuation, but I’m interested in how you view this situation.

Michael M. Larsen, Senior Vice President and CFO

Yes. I'd go back, Steve, to kind of our usual process for giving guidance, which is based on current levels of demand in our businesses. We have more price than usual coming through in the back half associated with these tariffs. We have some easier comps in the second half than we did in the first half by about 0.5 point. But we're not factoring in any further acceleration from kind of current levels of demand. And so if that were to happen, that would be great news. That would suggest that our guidance is conservative. If we have another round of tariffs, as somebody suggested and things slow down, then that would be bad news. But overall, I think as we sit here today, we are confidently raising our guidance, and we're well positioned for a solid second half, as I think we said earlier.

Steven Michael Fisher, Analyst

Okay. Terrific. And then just to follow up on the CB&I. I think maybe Chris mentioned 3-plus percent in the long term, 2030. Do you still think of CBI and net market penetration as two separate growth buckets? And if so, can you sort of help us differentiate between these two things? I think you had a 1% to 2% target on net market penetration and 2% to 3% on CBI and the longer-term targets?

Christopher A. O’Herlihy, President and CEO

Yes, we categorize them differently, CBI and net market penetration. We view CBI as revenue from new products over the next three years. After that, it becomes market penetration. So, you can think of the CBI revenues today transitioning into market penetration revenues in the future. That’s our perspective on it.

Operator, Operator

Thank you for participating in today's conference call. All lines may disconnect at this time.