Earnings Call Transcript - ITW Q3 2025

Operator, Operator

Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. Also, please be aware that today's session is being recorded. It is now my pleasure to turn the floor over to our host, Erin Linnihan, Vice President of Investor Relations. Welcome.

Erin Linnihan, Vice President of Investor Relations

Thank you, Jim. Good morning, and welcome to ITW's Third 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 third 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 O'Herlihy, President and CEO

Thank you, Erin, and good morning, everyone. As detailed in our press release this morning, the ITW team continues to perform at a high level, successfully outpacing underlying end market demand and delivering solid operational and financial execution within a stable yet still challenging demand environment. For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts. Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate. Favorable foreign currency translation contributed 2% to revenue. Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion and significantly improved our operating margin by 90 basis points to 27.4%. We maintained excellent execution in controlling the controllables as enterprise initiatives contributed 140 basis points and effective pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margins in the quarter. Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%. Additionally, year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities. We remain laser-focused on making above-market organic growth, powered by customer-backed innovation and defining ITW strength. The strategy is working, and we remain firmly on track to deliver on our 2030 performance goals, which include a customer-backed innovation yield of over 3%. As we stated before, ITW is built to outperform in challenging environments. As we look ahead to the balance of the year, we are narrowing our EPS guidance range, confident in our ability to continue leveraging the fundamental strength of the ITW business model, the inherent resilience of our diversified portfolio and the high-quality execution demonstrated every day by our colleagues worldwide. I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail. Michael?

Michael Larsen, Senior Vice President and CFO

Thank you, Chris, and good morning, everyone. Leveraging the strength of the ITW business model and high-quality business portfolio, the ITW team delivered solid operational execution and financial performance in Q3. Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of 1 percentage point from Q2. Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China. Consistent with ITW's Do What We Say execution, we continue to demonstrate strong performance on all controllable factors. Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to record operating margin of 27.4%, which expanded by 90 basis points year-over-year. Furthermore, our pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margin in Q3. Free cash flow grew 15% to more than $900 million with a conversion rate of 110%. GAAP EPS was $2.81 with an effective tax rate in the quarter of 21.8%. As detailed in the press release, the rate was driven by a benefit related to the filing of the 2024 U.S. tax return, partially offset by the settlement of a foreign tax audit. In summary, in what continues to be a pretty challenging demand environment, ITW delivered a strong combination of above-market growth with a revenue increase of 2% and solid operational execution, resulting in consistent improvement across all key performance metrics as evidenced by incremental margins of 65%, operating margins of more than 27% and GAAP EPS of $2.81, an increase of 6%, excluding a prior year divestiture gain. Turning to Slide 4 for a closer look at our sequential performance year-to-date on some key financial metrics. As you can see, ITW's organic growth rate, operating income, operating margins and GAAP EPS have all continued to improve in what has remained a mixed demand environment. Turning to our segment results and beginning with automotive OEM, which led the way on both organic growth and margin improvement this quarter. Revenue was up 7% and organic growth was up 5% with growth in all 3 key regions. Strategic PLS reduced revenue by over 1%. Regionally, North America grew 3%, Europe was up 2% and China was up 10%. The team in China continues to gain market share in the rapidly expanding EV market as customer back innovation efforts drive higher content per vehicle. In our full year guidance, we have incorporated the most recent automotive build forecasts, which are projecting a modest slowdown in the fourth quarter. For the full year, we continue to project that the automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we consistently grow our content per vehicle. On the bottom line, strong performance again this quarter with operating margin improving 240 basis points to 21.8%, and we're well positioned to achieve our goal from Investor Day of low to mid-20s operating margin by 2026. Turning to Food Equipment on Slide 5. Revenue increased 3% with 1% organic growth. While equipment sales were down 1%, our service business grew by 3%. Regionally, North America grew by 2%, driven by 1% growth in equipment and 4% growth in service. Demand remained solid on the institutional side. International, however, was down 1%. Operating margins improved 80 basis points to 29.2%. For Test & Measurement and Electronics, revenue was flat this quarter as organic revenue saw a 1% decline. The demand for capital equipment in our Test and Measurement businesses remained choppy as revenues declined 1%. In addition, Electronics declined 2% as demand slowed in semiconductor-related markets. On a positive note, operating margin improved 260 basis points sequentially from Q2 to 25.4%. Excluding 50 basis points of restructuring impact in Q3, margins were 25.9% and both operating margins and revenues are projected to improve meaningfully in the fourth quarter. Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth with a contribution of more than 3% from customer-back innovation. Equipment sales increased 6%, while consumables were down 2%. Industrial sales increased 3% in the quarter as North America was up 3% and international sales grew 4% with China up 13%. Operating margin of 32.6% was up 30 basis points as the Welding segment continued to demonstrate strong margin and profitability performance. In Polymers & Fluids, revenues declined 2%. Organic revenue declined 3%, which included a percentage point of headwind from PLS. Polymers declined 5% against a difficult comparison in the year-ago quarter of plus 10%, while Fluids was flat in the quarter. The more consumer-oriented automotive aftermarket business was down 3%. But although the top line declined, the segment expanded margin by 60 basis points to 28.5%, supported by a strong contribution from enterprise initiatives. Moving on to Construction Products on Slide 7. Revenues were down only 1% as organic revenue declined 2% in the quarter, significantly better than last quarter's 7% organic decline. Revenue was also impacted by a 1% reduction from PLS. Regionally, revenue in North America declined 1%, Europe was down 3%, and Australia and New Zealand decreased 4%. Despite market headwinds, the segment improved operating margin by 140 basis points to 31.6%. For Specialty Products, revenue increased 3% with organic revenue up 2%. Revenue included a percentage point of headwind from PLS. By region, revenue in North America declined 1% against a difficult comparison in the year-ago quarter of plus 8%, while international was up 7%, driven by consistent strength in our packaging and aerospace equipment businesses. Operating margin improved 120 basis points to 32.3%, supported by a strong contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2025 guidance. Starting with the top line, we remain well positioned to outperform our end markets in Q4, and we continue to project organic growth of 0% to 2% for the full year. Per our usual process, our guidance factors in current demand levels, the incremental pricing actions related to tariffs, the most recent auto build projections and typical seasonality. Total revenue is projected to be up 1% to 3%, reflecting current foreign exchange rates. On the bottom line, we're highly confident that the ITW team will continue to execute at a high level operationally on all the profitability drivers within our control. This includes our enterprise initiatives, which we now expect will contribute 125 basis points to full year operating margins, independent of volume. Additionally, we expect that tariff-related pricing and supply chain actions will more than offset tariff costs and favorably impact both EPS and margins. Our operating margin guidance of 26% to 27% remains unchanged. After raising GAAP EPS guidance by $0.10 last quarter, we are narrowing the range of our guidance to a new range of $10.40 to $10.50. Our EPS guidance range includes the benefit of a lower projected tax rate of approximately 23% for the full year and factors in that the top line is trending towards the lower end of our revenue guidance ranges. With those 2 elements effectively offsetting each other, we remain firmly on track to deliver on our EPS guidance, including the $10.45 midpoint, which, as a reminder, is $0.10 higher than our initial guidance midpoint in February. To wrap up, we remain highly confident that the inherent strength and resilience of the ITW business model, combined with our high-quality diversified portfolio and most importantly, our dedicated colleagues around the world, all put us in a strong position to effectively manage our way through a challenging macro environment. However, the demand picture evolves from here, we remain focused on delivering differentiated financial performance and steadfastly pursuing our long-term enterprise strategy, which is squarely centered around making above-market organic growth a defining strength for ITW. With that, Erin, I'll turn it back to you.

Erin Linnihan, Vice President of Investor Relations

Thank you, Michael. Jim, will you please open the call for Q&A?

Operator, Operator

I'd be happy to. Thank you. We'll hear first from the line of Jeff Sprague at Vertical Partners.

Jeffrey Sprague, Analyst

Maybe just 2 for me, hit 2 different businesses, if I could. First, just on construction. Clearly, you've been working the playbook. I mean one of the things that just jumps off the page to me is this is the 11th quarter in a row of organic revenue declines and the margins are still going up in the business. Maybe just anything in particular beyond kind of the normal 80/20 blocking and tackling that's behind that mix changes or other things? And just your confidence to be able to move those margins up further if and when the revenues do ever inflect positively.

Christopher O'Herlihy, President and CEO

Sure. I believe that the margins in construction are directly related to two main factors. First, the quality of the construction portfolio is significant. We tend to work in sectors that have cyclical patterns but are fundamentally healthy in the long term. Our strategy focuses on operating in the most attractive segments of these markets, which is evident in our construction efforts. We are performing well in these key areas, and this is what drives our margins. It also contributes to our ability to achieve high-quality organic growth in the future. I am very confident that as the markets recover, we will not only grow in construction but will do so with a high level of quality.

Jeffrey Sprague, Analyst

Great. Could you elaborate on the visibility you have regarding the improvement in Test & Measurement for the fourth quarter? Are there any specific details about orders or end markets that you could share?

Christopher O'Herlihy, President and CEO

Yes. I believe Test & Measurement experienced a typical cyclical improvement in the fourth quarter, which we anticipate will happen again this year. The third quarter was somewhat mixed, as we noticed an ongoing slowdown in capital expenditures. This slowdown seems to be a consequence of the tariff uncertainty in the second quarter, which had a continued negative impact on capital expenditure demand into the third quarter. We expect to see some improvement in that area. Additionally, in the third quarter, we noticed a slight slowdown in the semiconductor space, which accounts for about 15% of the segment. While there were indications of growth in the second quarter, the growth slowed down in the third quarter. However, we expect it to improve a bit moving forward.

Operator, Operator

Our next question will come from Andy Kaplowitz at Citi.

Andrew Kaplowitz, Analyst

Chris or Michael, you obviously didn't change your organic revenue growth guide for the year. I think last quarter, you talked about embedded in it was 2% to 3% organic growth for the second half, which means you still need a big uptick in Q4. I don't think comps get a lot easier for you in Q4 versus Q3. So it's just more pricing that's laddering in Q4? Because I think you just said, right, you're run rating as usual. Any other businesses get better in Q4 versus Q3?

Michael Larsen, Senior Vice President and CFO

I’d like to provide some insight on our fourth quarter. It's important to note that we're trending towards the lower end of our organic growth guidance for the full year. Historically, we see an improvement from the third quarter to the fourth quarter, typically around a couple of points of growth, mainly due to the Test & Measurement business, as Chris highlighted, though this is countered by a seasonal decline in our construction business. So, we expect revenue growth from Q3 to Q4 to be about 1 point. Regarding margins, we usually experience a slight sequential decline of approximately 50 basis points from Q3 to Q4, keeping us within that 27% range, which marks a nice year-over-year improvement. The main factor for Q4 will be a more standard tax rate, presenting a headwind of around $0.10 compared to Q3. Overall, Q4 should resemble Q3, adjusted for the normal tax rate, and this informs the implied midpoint of our guidance. As for Q3, it was somewhat atypical. We entered Q3 on the heels of a robust June and had a strong July, likely influenced by tariff announcements and associated pricing actions. However, we encountered a notable slowdown in August, followed by a return to normal in September. The quarter was mixed, with strong automotive performance but the anticipated improvements in order rates for areas like Test & Measurement and semiconductors did not fully materialize. Nevertheless, we managed to counteract some of this volatility and macro softness with solid margin performance, ultimately delivering a strong quarter in terms of margin, earnings, and free cash flow.

Andrew Kaplowitz, Analyst

Michael, thank you for the information. You have already achieved a margin of almost 22% in the automotive sector this quarter, despite the overall market conditions still being challenging. You mentioned a 5% organic growth, but do you think it's possible to reach the higher end of your low to mid-20s margin over the next couple of years? How should we approach this, considering you are already performing at that level?

Michael Larsen, Senior Vice President and CFO

Yes, we're quite confident in the margin target we set for next year, which is in the low to mid-20s range. There's still significant opportunity from an enterprise initiative perspective. This quarter, we continued to simplify our product lines, which may create short-term headwinds for revenue but ultimately positions the rest of our portfolio for growth and higher margins as we phase out some slower-growing and less profitable products. The market builds in Q4 will likely be a bit lower than what we experienced in Q3, meaning we won't have the same level of operating leverage. However, we still expect to outperform as we historically have. Next year, you can anticipate our usual performance, typically 2 to 3 points above the build numbers, although we don't currently know what those numbers will be.

Christopher O'Herlihy, President and CEO

And Andy, just to add to that, the other big driver of margin improvement in auto is customer-backed innovation. We're getting a real nice healthy contribution from that this year. We expect that to continue and indeed accelerate over the next couple of years. And ITW innovation always comes at higher margin.

Operator, Operator

Next, we'll hear from Jamie Cook at Truist Securities.

Jamie Cook, Analyst

The guidance compared to earlier in the year shows that you initially expected a foreign exchange headwind of $0.30, which has since turned positive or neutral last quarter. What is included in the current guidance? Additionally, you are now benefiting from the lower tax rate. I'm trying to understand the factors at play because it appears we have at least a $0.40 tailwind. You are lowering your organic growth and sales to the lower end, but it seems like the guidance should be more favorable based on those tailwinds. Could you help clarify this?

Michael Larsen, Senior Vice President and CFO

Yes. In short, given the fluctuating demand environment, we are taking a more cautious approach to our guidance as we enter Q4. We're seeing a solid start in October, but things can change quickly, as evidenced by the variations in auto builds, which have not materialized as expected. Therefore, we're adopting a more conservative stance with one quarter remaining. We always have the potential to outperform our guidance. As for foreign exchange, the current rates are slightly more favorable now compared to earlier in the year, though the impact is minimal. In Q3, foreign exchange provided a benefit of $0.04, but other factors like restructuring had a slight negative effect. Additionally, we've included a lower full-year tax rate of 23% in our projections, with an expectation of a more typical tax rate of 24% to 25% for the fourth quarter. I hope this clarifies things.

Operator, Operator

We'll hear from Tami Zakaria at JPMorgan.

Tami Zakaria, Analyst

A medium- to long-term question for you. Given all the policy changes to incentivize bringing auto production back into the U.S., do you perceive this to be an opportunity down the line given your market share with the big 3? Or would onshoring not be a net gain because you already supply parts to manufacturing overseas? So how to think about that onshoring opportunity in auto?

Christopher O'Herlihy, President and CEO

Yes. Tami, I would say that we are primarily a producer where we sell our products. We are already positioned to supply our auto customers globally based on our current manufacturing setup, and that will continue. If production moves back to the U.S., it would simply mean increased output for our U.S. factories, which are already in place. Therefore, we don't anticipate a significant net benefit from onshoring since we already supply parts to overseas manufacturing.

Tami Zakaria, Analyst

Understood. And one question on PLS. I think it's about a 1% impact. Should we expect this to continue at that 1% range for the next few years? Or is this year more of a heavy lifting, so it might fade as we go into next year and beyond?

Christopher O'Herlihy, President and CEO

We haven't completed the planning process yet, Tami. However, I can say that for us, PLS is driven from the ground up by our businesses. It is a crucial part of our ongoing strategic review and aligns with the 80/20 principles in our divisions. We have a well-established methodology that requires discipline but provides significant benefits to our divisions. The important takeaway is that it is a bottom-up process. We do not have the numbers for 2026 at this moment, but whatever they may be, they will support our long-term growth objectives, help clarify our strategic focus, and enhance effective resource allocation. From a margin improvement perspective, there are cost savings that play a significant role in our enterprise initiatives, with many projects yielding paybacks in under a year. We see PLS, whether it's a 50 basis point or 100 basis point impact, as a continuous value-creating effort in our divisions. We have a wealth of positive experience and expertise in this area, but it will fundamentally be a bottom-up figure.

Operator, Operator

We'll hear next from the line of Joe Ritchie at Goldman Sachs.

Joseph Ritchie, Analyst

I know you'll usually guide the trends, but as we consider 2026 and a possible initial framework with the moving pieces we know today, could you provide any insights on how you're viewing it this early on and what 2026 might look like?

Michael Larsen, Senior Vice President and CFO

Yes, we don't provide guidance until we've completed our bottom-up planning process, which involves discussions with the segments about their 2026 plans in November. To give you some perspective, you can expect that our top line guidance will be based on the run rates as we exit Q4. We anticipate continued progress on our strategic initiatives, including insights from customer-backed innovation. We expect to gain some market share, and these factors combined should result in above-market organic growth in 2026. The key question will be what the market conditions provide. In terms of what we can control, we expect ongoing margin improvement and a positive contribution from our enterprise initiatives, leading to stronger incremental margins likely above our historical average. These are the main points to consider. There will also be some factors related to pricing, foreign exchange, and a lower share count that may have a favorable impact. I expect a tax rate similar to this year. As always, we'll provide an update in February, including our customary segment details to help everyone understand what the year might entail.

Joseph Ritchie, Analyst

Okay. Great. That's helpful, Michael. And then I guess just on capital deployment. I know you guys are doing the $1.5 billion buyback. It seems like you've got probably some room on your balance sheet if you wanted to lever up a little further and still stay investment grade. Like how are you guys thinking about the right leverage for you going forward? And put that in the context of potential M&A opportunities and what you guys are looking at across your different businesses?

Michael Larsen, Senior Vice President and CFO

Yes. I mean I think we're sitting here at about 2x EBITDA leverage, which is right in line with what our long-term target has been. The buyback specifically is really the allocation of the surplus capital that we generate, which is a big number for ITW, about $1.5 billion, and that's what is being allocated to the share buyback program and leads to a reduction in the overall share count of about 2%. But all of that only happens after we have invested in these highly profitable core businesses for both organic growth and productivity. We're fortunate that only consumes 20% to 25% of our operating cash flow. The second priority here is an attractive dividend that grows in line with earnings over time. Chris talked about this being our 62nd year of consecutive dividend increases of 7%. And then when all said and done, we still have a lot of capacity on the balance sheet for any type of M&A opportunities. As you may know, we have the highest credit rating in the industrial space. We have arguably the strongest balance sheet. And so there's a lot of room here if the right opportunities were to present themselves.

Operator, Operator

Next question today comes from Stephen Volkmann.

Stephen Volkmann, Analyst

So I'm curious whatever commentary you might wish to provide around what you're seeing on sort of price cost and obviously, it didn't impact you in the quarter. But are you seeing suppliers raising prices and you're kind of able to offset that however you choose? Or do you think maybe they're holding back and that's still to come? And then in that vein, just how do you ascertain that you will cover whatever costs? Will it be dollar for dollar or also on margin?

Michael Larsen, Senior Vice President and CFO

Yes. I think, Stephen, the biggest driver of cost increases this year has been the tariff-related cost increases. And I think we've responded with both pricing actions that we've talked about and also supply chain actions. As you know, we are largely a producer where we sell company. I think the 93% or so of the company is produced where we sell. We had a little bit of exposure that we talked about earlier in the year. We've worked hard to mitigate that and put ourselves in a really good position. We've been able to, through those actions, offset the impact from tariffs this year. And in Q3, as we said in our prepared remarks, price/cost was positive both from a dollar-for-dollar earnings standpoint and also from a margin standpoint. So I feel like at this point, we're kind of back to a more normal environment. At this point, from a price/cost standpoint, we are not completely caught up yet, but we've got a quarter to go. And then for next year, who knows what the tariff environment might be for next year. But I think we feel very confident given our track record here in terms of being able to manage whatever those cost increases, whether they are typical inflationary increases or tariff increases might be as we head into next year.

Stephen Volkmann, Analyst

Super. Okay. And then just pivoting, China was obviously really good for you guys this quarter. I'm wondering if you might be able to drill in there a little bit and give us a sense of what's driving that? And I don't know, maybe some of the CBI initiatives or something.

Michael Larsen, Senior Vice President and CFO

Yes. Do you want to go ahead, Chris?

Christopher O'Herlihy, President and CEO

Yes. So basically, Stephen, what's driving China right now is auto in China, in particular, I think our penetration on EV in China, particularly with Chinese OEMs. We continue to make great progress on CBI and market penetration in China, particularly with Chinese OEMs. We continue to grow content per vehicle. As you know, China represents mid-60s in terms of percentage of worldwide EV builds. And we're growing nicely there, particularly with a strong position with Chinese OEMs. In addition, you mentioned CBI, I would say that China, even though it represents about 8% of our revenues, we certainly get a disproportionate amount of our patent activity from China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive is what's driving our progress there. And we're basically penetrating at a level well above the market.

Michael Larsen, Senior Vice President and CFO

Yes. To provide some quantification, looking at year-to-date results in China, our automotive business is the main driver, showing a 15% increase. This is our largest segment in China, but we also see growth in Test & Measurement and Electronics, which are up in the mid-teens, Polymers & Fluids up 10%, and welding up more than 20%. Overall, the team has done a great job, resulting in a 12% year-to-date growth in China. I am confident that the factors we can control will continue to positively impact both the top and bottom lines in Q4 and into next year.

Operator, Operator

Next, we'll hear from the line of Julian Mitchell at Barclays.

Julian Mitchell, Analyst

Maybe just wanted to start with the operating margins. So I think you mentioned, Michael, that next year, you should be above the historical incremental. And I guess you have that sort of placeholder of 35% to 40% dating back to the Investor Day. So it's presumably in reference to that. But just wanted to understand as you look at next year on the margin side of things, is there a big kind of payback from the restructuring efforts that happened this year coming in? Price/cost maybe for this year as a whole is margin neutral and then that flips positive next year, maybe just any sort of fleshing out of the thoughts on some of those margin moving parts, please?

Michael Larsen, Senior Vice President and CFO

I believe the main factor driving margin performance over the past decade has been our enterprise initiatives. We have consistently achieved a 100 basis points improvement in margins from our strategic sourcing and 80/20 front-to-back efforts. We expect this trend to continue into next year. While we won't know the exact figures until we implement our plans, this improvement will significantly surpass any contributions from price costs. Additionally, evaluating our year-to-date performance or what we saw in the third quarter, our incremental margins are considerably higher than the historical range of 35% to 40%, with 65% in the third quarter alone. In the automotive OEM business, for example, a 5% organic growth resulted in over 20% growth in income. This demonstrates that we don't need substantial growth to achieve exceptional margins and profitability. While I can't specify the incremental margins for next year regarding organic growth at this moment, I do believe they will likely exceed our historical average.

Julian Mitchell, Analyst

That's helpful. And then just maybe one for Chris. Looking at Slide 8 and that CBI contribution of sort of over 2 points to sales and the sort of partial offset from PLS headwinds that you discussed earlier on this call somewhat. And I realize this isn't how you look at it, and it's sort of really bottom-up driven. But if we're thinking about that spread of, say, CBI versus PLS enterprise-wide, is the assumption that, that should be more and more of a net positive as those CBI efforts that you talked about at the Investor Day a couple of years ago increasingly get traction? Just trying to understand how to think about the delta between those 2, understanding that they are independent bottom-up process.

Christopher O'Herlihy, President and CEO

I'm not sure there's a significant connection between the two, Julian. CBI relates to our focus on enhancing the quality of innovation execution, while PLS is usually focused on pruning product lines. The only link between them is that both are associated with differentiation. PLS results reflect our position on differentiation, leading us to adjust our product lines accordingly, while CBI is about creating and developing more unique products. You can expect to see improvements in CBI over time; in fact, it's already doubled since 2018, moving directionally in the 1% range. It was 2% last year and is trending towards 2.3% to 2.5% this year, on track to exceed 3% by 2030. PLS involves an ongoing review of our businesses and their product lines, leading to appropriate adjustments. As I mentioned earlier, PLS generates a lot of value, but in a different manner. Therefore, I don't see a strong correlation between the two; I view them quite differently.

Michael Larsen, Senior Vice President and CFO

PLS, as Chris mentioned, is the result of an 80/20 front-to-back process. We've indicated that in the long run, maintenance PLS is expected to be in the 50 basis points range, and this year we anticipate slightly higher. We have also discussed specialty and the strategic repositioning of that segment for quicker organic growth. Additionally, as Chris pointed out, CBI will continue to enhance from this point onward. Therefore, the spread between them is expected to widen. My intention in placing them next to each other on Slide 8 was to clarify that they are completely independent. I want to emphasize that there is no connection between the two, although mathematically, the spread will increase. Overall, this will be a more favorable contribution to above-market organic growth as we progress.

Operator, Operator

We'll hear next from the line of Joe O'Dea at Wells Fargo.

Joseph O'Dea, Analyst

Can you talk about the tariff impact a little bit? There were periods of time earlier this year where the math would have suggested something up to 2% kind of price requirement to offset. And it seems like we're in an environment now where the pricing required is probably less than 1%. But anyway, any thoughts around that? And then stepping back, it would seem like that's not necessarily a big hit to demand. And so the tariff kind of overhang would be more uncertainty related than magnitude of pricing required at this point related, but your thoughts on that?

Michael Larsen, Senior Vice President and CFO

Yes. I believe that our ability to manage tariffs and combined supply chain actions is not the primary focus right now. We have shown that we can effectively handle these challenges, and we have reduced the risks associated with tariffs, particularly those relating to China. We feel confident about this aspect. Regarding demand, we mentioned in our last call that there may have been a slight decrease in orders back in April during the second quarter, which has likely left some lingering effects. We've experienced a rather volatile demand environment. As previously noted, we saw some positive order activity in June and July, but then it slowed again. April and May were also quite unpredictable. Initially, the impact on demand may have been more pronounced, and it's uncertain what the future holds as we move into next year. However, I believe that the challenges we faced are mostly behind us at this point, certainly from a cost perspective, and potentially from a demand viewpoint as well. Tariffs are no longer the central issue here.

Joseph O'Dea, Analyst

And so like what do you think the main event is in terms of seeing kind of an unlock of better demand, right? Because you're outgrowing markets, but that market growth rate, not kind of all that inspiring at this point. And so in sort of this protracted kind of challenged demand environment, if tariffs are kind of easing as a headwind, what do you think is the key to the unlock?

Christopher O'Herlihy, President and CEO

Yes. So I think, Joe, we think we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously going through a period right now where there's quite a bit of contraction and uncertainty and so on and so forth in areas like construction. But our fundamental thesis is that we're in markets which we believe for the long term are attractive. We want to make sure we're in the best parts of those markets, and we believe that we are. We believe we can see quite clearly in areas like automotive and construction and historically in Welding and Food Equipment that we're outgrowing the markets at the point at which the cycle turns, we'll be really well positioned. And to Michael's earlier point, not just for growth, but for even higher quality of growth on the basis that our incrementals have strengthened from historical levels on the basis of portfolio pruning around sustainable differentiation, coupled with very high-quality execution on the business model. So we feel pretty good about the long term where we're just going through a period where we see some short-term demand issues. But we feel we've got a really good portfolio for long-term growth.

Joseph O'Dea, Analyst

Maybe just tying that into Test & Measurement and what you're seeing there. It seemed like in an environment, you're investing in CBI, like we hear a number of companies talking about innovation. It would seem like they need your equipment. Are you seeing this kind of build up in terms of what would have kept them on the sidelines, but if they want to invest in innovation, it would seem like they're going to need your help.

Christopher O'Herlihy, President and CEO

Absolutely, that's correct. Test & Measurement is a very promising area for us regarding long-term growth. Numerous new materials are being developed, and there is a growing demand for innovation and quality standards, which requires increasingly precise testing equipment. That’s our focus. There are some short-term challenges related to the capital expenditure environment, leading to a slight compression in Q3 due to some capital expenditure freezes in Q2. However, in the long term, this is a very robust environment for us, supported by the quality of innovation in Test & Measurement and the strong fundamentals of end markets like biomedical and others that we are aligned with moving forward.

Operator, Operator

Next, we'll hear a question from the line of Nigel Coe at Wolfe Research.

Nigel Coe, Analyst

We covered a lot of ground here. Just want to go back to the comments around strong start to the quarter and then it sort of pared out. Do you think there's any unusual behavior with distributors around price increases or tariffs. Obviously, we had the big tariff event middle of the quarter. Anything you'd call out there, number one? And then number two, restructuring actions in the first half of the year, did we see the full benefit in 3Q? Or was there still some benefits to come through in 4Q?

Michael Larsen, Senior Vice President and CFO

Yes. Let me begin by discussing how the quarter unfolded. I'm not sure we have a clear answer for you, Nigel. As we mentioned, June and July were strong months for us, showing significant organic growth year-over-year, followed by a slowdown in August and a recovery in September. Overall, for Q3, our performance was close to our typical run rates. The key point is that the environment has been quite volatile, and conditions can shift rapidly. However, we are not making any long-term predictions regarding future impacts. Some of this volatility may be linked to tariff announcements and pricing changes, but it's difficult to determine the exact effects. Regarding restructuring, it's somewhat misleading to use that term. The funds we are discussing are expenses allocated to our 80/20 front-to-back projects, and there isn’t a major restructuring initiative taking place at ITW. Our spending this year is expected to be similar to last year, approximately in the $40 million range. We aim to distribute our spending evenly across quarters, but this ultimately depends on the timing of various projects and when the divisions choose to implement them. The savings from these initiatives are associated with projects that have payback periods of less than a year, meaning they materialize quickly. This is also part of the funding for the enterprise initiative savings we anticipate next year. However, these shouldn’t be considered traditional restructuring projects; they are all related to the 80/20 front-to-back approach as usual.

Nigel Coe, Analyst

Yes. Okay. That's helpful. A quick one on Welding. We've seen, I think, now 2 quarters of nice inflection in growth on Equipment, but Consumables remains sort of step down in that low single-digit decline territory. Is that primarily a price differential between Equipment and Consumables or anything else you'd call out?

Christopher O'Herlihy, President and CEO

Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables?

Michael Larsen, Senior Vice President and CFO

Consumables, I think, right? Is that right?

Nigel Coe, Analyst

Consumables and Equipment driven up nicely.

Michael Larsen, Senior Vice President and CFO

I find it a bit puzzling, to be honest. Equipment sales are up 6% while Consumables are down 2%. Within Consumables, some of the welding filler metals are actually experiencing growth. We're also seeing an increase on the industrial side, which typically involves large heavy equipment manufacturers. However, the commercial or consumer side is progressing more slowly, as it relies more on discretionary spending from consumers. Overall, it's a mixed picture. The positive aspect in welding is that this growth is supported by CBI. It's not that the markets are improving; rather, it's driven by new products, mainly in equipment, with strong growth in both North America and internationally, particularly in Europe and China. That’s probably the best explanation I can provide.

Operator, Operator

Our next question will come from Avi Jaroslawicz at UBS.

Avinatan Jaroslawicz, Analyst

I appreciate your mention of trending towards the lower end of the sales guidance. Could you explain the rationale behind leaving that range unchanged and wider than usual for this period? I assume there's still potential to reach the midpoint or better for the year. Would that improvement come from specific segments, or is it more driven by demand rather than pricing? Is that the correct way to interpret it?

Michael Larsen, Senior Vice President and CFO

Typically, we update our guidance about halfway through the year. With a quarter remaining, we're still within our projected ranges, so we didn't find it necessary to make a complete update. Instead, we chose to narrow the range and clarify why we're not benefiting from the lower tax rate, which is primarily because our revenues are trending towards the lower end. This approach reflects our commitment to transparency regarding the guidance. In terms of your question about Q3 versus Q4, we’ve already addressed that. Generally, the segment that tends to show the most growth from Q3 to Q4 is our Test & Measurement business, although this is somewhat balanced out by a seasonal decline in Construction. Overall, we expect revenues to rise by about one percentage point from Q3 to Q4. We have also taken into account the lower auto build forecasts provided by third-party industry experts, as well as some supplier issues affecting our customers. All of this information has been integrated into our automotive projections for the fourth quarter based on our current knowledge. Hopefully, this clarifies your question.

Operator, Operator

Our next question will come from Mig Dobre at Baird.

Mircea Dobre, Analyst

I also kind of want to go back to the PLS discussion. And I guess my question is this, when you sort of look at your comments for delivering above normal incremental margins, how reliant are you on PLS in order to be able to do that? How important is PLS in that algorithm? And I guess, given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty much outperforming anyone else out there that I'm looking at. Is there a point in time here where it's rational to sort of say, hey, look, maybe we can throttle back on PLS because we can actually deliver more earnings growth and more return for shareholders by just trying to accelerate organic growth rather than pruning the portfolio?

Christopher O'Herlihy, President and CEO

Yes, I believe there is a connection between PLS and incremental growth, but it is not the sole factor. PLS is part of the 80/20 principle, but it doesn't represent the entire picture. The effectiveness of our business model and the quality of our portfolio ultimately drive incremental growth and margins. Regarding your point about organic growth versus margin, from our perspective, organic growth, operating margin, and margin expansion are closely linked. We emphasize the quality of growth, and we've shown this, especially as we emerged from the pandemic, where we experienced strong growth and margin expansion while strategically investing in innovation and marketing. Currently, our organic growth is significantly above the historic 35% incremental level, comfortably into the 40s, as we continue to focus on investment in innovation and strategic marketing. The relationship is straightforward; with margins at 26% and incremental growth exceeding 35%, our operating leverage is driving margin improvement. Looking ahead to 2030, achieving our 30% margin goal will not come from reducing structural costs, but rather through ongoing enhancements in organic growth with high quality and high incremental margins. Thus, I see the two as interconnected.

Mircea Dobre, Analyst

Understood. In relation to the framework for 2026 and addressing an earlier question, if CBI is contributing 2.3% to 2.5%, perhaps there is an opportunity to simplify product lines somewhat, and maybe the end markets will improve. From my perspective, restoring your organic growth to the 4% to over 5% range seems crucial for influencing both investor sentiment and overall earnings growth. I'm interested to know if you believe it’s feasible to expect that level of growth as we consider the upcoming year, even though I realize it's still early for 2026.

Michael Larsen, Senior Vice President and CFO

I think we are currently operating slightly above the usual maintenance rate for PLS, particularly in our Specialty Products segment, where we are strategically repositioning for growth. In other segments, such as Food Equipment and Welding, the PLS numbers are significantly lower, possibly zero in some instances. It's not a uniform situation across the board, and it’s not something we can manage from the corporate level. This is a critical aspect of our 80/20 front-to-back process, and the numbers come from the ground up. While it might be tempting to consider eliminating PLS, doing so would also eliminate the 80/20 process, which wouldn't serve anyone's long-term interests.

Operator, Operator

Ladies and gentlemen, that was the final question in our queue for today. We'd like to thank you all for your participation in today's session, and you may now disconnect your lines. Please have a good day.