ITW - Illinois Tool Works Inc.

Operator: Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. [Operator Instructions] 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: Thank you, Jim. Good morning, and welcome to ITW's Third Quarter 2025 Conference Call. Today, I'm joined by our President and CEO, 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: 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 customer-backed innovation yield of 3% plus. 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: 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: Thank you, Michael. Jim, will you please open the call for Q&A? Operator: I'd be happy to. Thank you. [Operator Instructions] We'll hear first from the line of Jeff Sprague at Vertical Partners. Jeffrey Sprague: 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: Sure. Yes. So Jeff, I think the margins in construction are squarely related to 2 things. Number one, I think the quality of the construction portfolio. As we often say, we tend to operate in businesses which -- there's a cyclicality and above that long term are fundamentally very healthy. And our strategy is always to try and operate in the most attractive parts of those markets. And that's what you're seeing in construction. We're in the most attractive parts of the market. We are executing very well from a business model perspective against those particular parts of the market. And that's ultimately what drives the margins. It's ultimately also what will drive the high-quality organic growth going forward. So very confident that not only will we grow in construction when markets recover, but grow at very high quality. Jeffrey Sprague: Great. And then maybe you could elaborate a little bit on, it sounds like you've got a fair amount of visibility on Test & Measurement improving in the fourth quarter. Maybe you could speak to that, anything in particular that you're seeing orders, end markets -- I'll leave it there, let you answer. Christopher O'Herlihy: Yes. So I think it's -- Test & Measurement had a normal cyclical improvement in Q4, which we expect to achieve again this year. Q3 was a little bit mixed, obviously. We saw continued slowdown on the CapEx side. Really, we would believe on the basis of the tariff uncertainty in Q2, ultimately having a spillover effect in terms of CapEx demand into Q3. So we expect that to improve a little bit. And then the other thing we saw in Q3, which should improve is we saw a little bit of a deceleration in semi, which only represents about 15% of the segment, but where we saw some real green shoots in Q2, we saw somewhat of a deceleration, still growth, but a deceleration in Q3, and we expect that to get a little better. Operator: Our next question will come from Andy Kaplowitz at Citi. Andrew Kaplowitz: 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: Well, I think what we are -- to give you a little bit of color on Q4, and you have to factor in what we said in the prepared remarks that we are trending towards the lower end of the organic growth guidance for the full year. We typically see a sequential improvement from Q3 to Q4 in that plus a couple of points of growth, primarily driven by the Test & Measurement business as Chris just mentioned, and offset by the typical seasonal decline that we're seeing in our construction business. So Q3 to Q4 revenue is up maybe 1 point or so. On the margin side, what we also typically see from Q3 to Q4 is a modest decline sequentially of about 50 basis points or so. So still in that 27% range and with a nice improvement on a year-over-year basis. And then the kind of the key driver of Q4 is then a more normal tax rate. So that's about a $0.10 headwind relative to Q3. So Q4 looks a lot like Q3 with the normal tax rate, and that's how you get to kind of the implied midpoint of our guidance here. Maybe just a comment or 2 on Q3. I think it was a little bit of an unusual quarter in the sense that we came into Q3 after a strong June. We had a strong July, perhaps related to some of the tariff announcement and related pricing actions. And then we saw a little bit of a slowdown in August -- actually pretty pronounced in August and then a more normal September, and really a mixed bag in the quarter with a stronger automotive performance, certainly, but also some of the green shoots we talked about last quarter in the order rates in places like Test & Measurement, and semi didn't really materialize for us. So I think at the end of the day, though, we're able to offset some of this choppiness, this macro softness with strong margin performance and as we typically do, we found a way to deliver a pretty solid quarter from a margin, earnings and free cash flow standpoint. Andrew Kaplowitz: Michael, helpful color. And speaking of that, I mean, you're well up already in your range in auto in terms of margin, almost 22% in the quarter. And auto markets, as you know, overall don't feel that great yet. So can you actually -- I know you did 5% organic growth, but can you actually push to the higher end of your low to mid-20s over the next couple of years? How should we think about that given you're kind of already there? Michael Larsen: Yes. I think we're pretty confident in the margin, the target we laid out kind of low to mid-20s by next year. I think there's still a lot of opportunity here from an enterprise initiative standpoint, primarily. You also see a pretty healthy dose of product line simplification again this quarter, which that's all short-term headwind to the top line, but really positions the remainder of the portfolio for growth and higher margin performance as we exit some of the slower growth and less profitable typically product lines. So the market builds will be what they are next -- in Q4, they will be a little bit lower probably than what we saw in Q3. So we won't have the same amount of operating leverage, but we'll still outperform as we have historically in the builds. And next year, you should expect kind of our typical 2 to 3 points above build. Whatever that build number is, obviously, as we sit here today, we don't know that. So... Christopher O'Herlihy: 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: Next, we'll hear from Jamie Cook at Truist Securities. Jamie Cook: The guidance relative to earlier in the year, I think earlier in the year, you assumed FX headwind of $0.30 that went positive or neutral last quarter. What's embedded in the guide? And you also have the benefits now from the lower tax rate. So I guess, Michael, I'm just trying to understand the puts and takes because it sounds like we have at least $0.40 of tailwind. You're lowering your organic growth to the -- sorry, your sales to the lower end, but it still seems like, I don't know, the guidance should be better, I guess, than what it is just based on those tailwinds. So if you can help me understand that, I guess. Michael Larsen: Yes. I think the short answer is that just given the choppy demand environment, we're maybe taking a more measured, a more cautious approach to our guidance here as we go into Q4. We're off to a solid start in October, but things can change quickly as we saw both -- as an example, the auto builds, the swing in auto builds, semi not really panning out. So I think we're just being a little bit more measured in our guidance here with 1 quarter to go. And as always, we have a path to do a little bit better than what we're laying out for you. You cut off initially, but I think you're talking about FX, what's embedded here is the current rates. As of today, and obviously, they can change a little bit, they are a little bit of a headwind -- tailwind now relative to a headwind earlier in the year, but we're talking pennies. So I think in Q3, FX was favorable $0.04. But then other things like restructuring were unfavorable by a couple of pennies. So there's some puts and takes there. And we've also embedded, obviously, as we said in the prepared remarks, the lower full year tax rate of 23%. And we expect a more typical 24% to 25% tax rate here for the fourth quarter. So hopefully, that's helpful. Operator: [Operator Instructions] We'll hear from Tami Zakaria at JPMorgan. Tami Zakaria: 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: Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell company. And so we've already -- we're positioned to supply our auto customers anywhere in the world wherever they are based on our current manufacturing setup. And that will continue. So business coming back to the U.S. would just mean more production for our U.S. factories, but they're already here. So we don't see -- I mean, there wouldn't be a huge net benefit that we can see based on the fact that we're a producer we sell a company. Tami Zakaria: 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: Yes. So we haven't the planning process completed yet, Tami. But basically, what I would say is that for us, PLS is a bottom-up activity. It's driven by our businesses. It's very much an essential part of the ongoing kind of strategic review that we do and a critical part of 80/20 in our divisions. And obviously, deep into the company, we have this very tried and trusted methodology, requires a lot of discipline, but there's a lot of benefit that our divisions get from this. But the point is that there's -- it's bottom up. We don't have the numbers for 2026 yet. But whatever it is, it's something that makes sense in the context of -- it makes sense from a long-term growth perspective, in terms of it provides strategic clarity around where we want to focus, effective resource deployment on the back of that. And also from a margin improvement standpoint, obviously, there's some cost savings, which are a meaningful component of enterprise initiatives. A lot of these projects have a payback of less than a year. So we very much see PLS, whether it's 50 bps or 100 bps as an ongoing value-creating activity in our divisions. And like I say, we've got a lot of positive experience and expertise on this. But it's going to be a bottom-up number basically. Operator: We'll hear next from the line of Joe Ritchie at Goldman Sachs. Joseph Ritchie: I know that you'll typically like guide the trends, and -- but I guess as we're kind of thinking about 2026 and a potential initial framework with the moving pieces that you know today. Any color that you can kind of give us on how you're thinking about it, at least like this early on and what 2026 could look like? Michael Larsen: Yes. I mean I think as you say, Joe, we don't really give guidance until we've gone through our bottom-up planning process here and talk to the segments about their plans for 2026, and that doesn't happen until in November here. To give you a little bit of a way to think about this, maybe I think you should expect that per our usual process, our top line guidance will be based on run rates exiting Q4. We'd expect some continued progress on our strategic initiatives, including the contribution from customer-backed innovation. We'd expect some market share gains and the combination of those things leading to above-market organic growth again in 2026. And then the big question is really what will the market give us. On the things within our control, we'd expect to see continued margin improvement and a healthy contribution from enterprise initiatives. You should expect to see some strong incremental margins that are probably above our historical average. And I think those are kind of the big items. Then there'll be some puts and takes around price and FX and lower share count that may skew favorably. I'd expect a similar tax rate to this year. And then as usual, like I said, we'll update you in February, which -- and will include our usual kind of segment detail to help everybody kind of think through what the year might look like. Joseph Ritchie: 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: 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: Next question today comes from Stephen Volkmann. Stephen Volkmann: 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: 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 produce 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: 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: Yes. Do you want to go ahead, Chris? Christopher O'Herlihy: 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: Yes. And maybe to put some quantification around it, if I just look at kind of year-to-date in China, as Chris said, the big driver is our automotive business, up 15%. That's our largest business in China, but also Test & Measurement, Electronics up in the mid-teens, Polymers & Fluids up 10%, welding up 20% plus. I mean, I think the fueled by CBI, certainly, in most cases here, I think the team is doing a really nice job overall, up 12% in China on a year-to-date basis. And pretty confident that the things, again, that are within our own control will continue to be -- have a positive contribution to the top and bottom line in Q4 and headed into next year. Operator: Next, we'll hear from the line of Julian Mitchell at Barclays. Julian Mitchell: 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: Yes. I think, Julian, the biggest driver of margin performance for, I'm going to say, the last decade or so has been the enterprise initiatives. And we've consistently put up 100 basis points of margin improvement from our strategic sourcing efforts and from our 80/20 front-to-back efforts. And so we would expect that to continue to be the case next year. Whether that's exactly 100 basis points or not, we won't know until we've rolled out the plans, but that will far outweigh any contributions from price cost, for example. And then the other big element and which is a function of really what end market demand will do is if you look just at our performance year-to-date or in the third quarter, our incremental margins are significantly above kind of our historical 35% to 40%, including 65% in the third quarter. And you look at the margin performance this quarter in the automotive OEM business, where 5% organic growth translates into income growth of 20% plus. So it's just an illustration of we don't need a lot of growth to put up some really differentiated performance from a margin and profitability standpoint. So I can't tell you as we sit here today what the incrementals might be for next year on the organic growth. But I would tell you, I believe that they -- it will probably be above the historical range that we just referenced. Julian Mitchell: 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: Yes. I'm not sure there's a huge amount of correlation between the 2, Julian. I mean, CBI is really referencing our efforts around improving the quality of execution on innovation, whereas PLS, we typically -- and our business is typically used for kind of product line pruning. I think the only correlation between the 2 is that they're both connected to differentiation. PLS results is as a result of where we feel we're on the same level of differentiation and we're product line pruning accordingly, whereas CBI, we're leaning in to basically create and develop more differentiated products. For sure, you're going to see an improvement in CBI over time. You've already seen that. The number has actually doubled since 2018, directionally in the 1% range. It was 2% last year, trending 2.3% to 2.5% this year, well on track to get to 3-plus by 2030. PLS is a circumstantial and ongoing review of our businesses by our businesses of their product lines and they react accordingly. And as I said earlier, we see this as there's a lot of value creation comes from PLS, but in a different way. So I'm not sure there's a huge amount of correlation between the 2. I kind of think of 2 kind of differently. Julian Mitchell: But the sort of net spread of them should be increasingly positive, I suppose. Christopher O'Herlihy: It should be -- no, absolutely. Driven by improvements in CBI. Correct, that's correct. Michael Larsen: I mean PLS, as Chris said, is an outcome of a process or 80/20 front-to-back process. We've talked about kind of in the long run, maintenance PLS being in that 50 basis points range. We have a little bit more this year. We've talked about specialty and kind of strategically repositioning that segment for faster organic growth. And then as Chris said, CBI will continue to improve from here. So that spread, to your point, will widen. But my thought for putting them right next to each other on Slide 8. They're completely independent of each other. And so I just want to make sure that's clear that there's no linkage between the 2. But mathematically, the spread will grow between the 2. And net-net will be a more positive contributor to organic -- above-market organic growth as we go forward. Operator: Our next question today will come from Joe O'Dea at Wells Fargo. Joseph O'Dea: 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: Yes. I think price cost from -- in terms of kind of combined with supply chain actions, our ability to offset tariffs, I think, is not really the main event at this point. I think we've demonstrated that we know how to do that, and we've further mitigated the risk of any tariff related specifically to China. So I think that part of the equation, we feel really good about. I think the impact on demand is probably something we talked about also on the last call that it may have led to a little bit of demand -- orders being frozen back in the April kind of Q2 time frame. And there's probably a little bit of overhang still from that. I mean I think we saw what's been a pretty choppy demand environment. As I said earlier, we had some positive order activity in June, July, then it slowed. April, May, kind of pretty choppy also. So I think the impact maybe from a demand standpoint, at least initially was maybe more significant. And who knows kind of where we go from here into next year. But I think it's largely behind us at this point, certainly from a cost standpoint and maybe from a demand standpoint, this is no longer -- tariffs are no longer the kind of the main event here. Joseph O'Dea: 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: 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: 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: Absolutely, that's correct. I mean Test & Measurement is a really fertile space for us in terms of long-term growth. There's lots of new materials being developed. There's increasing stringency in innovation standards and quality standards, all of which are requiring more and more exacting -- testing equipment. And that's where we play. So again, short-term issues here around CapEx environment and so on. So a little bit of compression in Q3 relating to some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us -- will be a healthy environment for us on the basis of the quality of innovation in Test & Measurement and also the end markets they're lining up against like biomedical and so on, all of which have very strong fundamentals going forward. Operator: Next, we'll hear a question from the line of Nigel Coe at Wolfe Research. Nigel Coe: 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: Yes. So let me start with kind of the cadence as we went through the quarter. And I'm not sure we have a great answer for you, Nigel. I mean I think like we said, June and July were really some of our better months with meaningful organic growth on a year-over-year basis, then a slowdown in August and a recovery in September. And if you look at net-net for Q3, we were actually pretty close to kind of typical run rates. But -- so the point I think we're trying to make, it's just a pretty choppy environment and things can change pretty quickly, but we're not really making any long-term forecast in terms of kind of what that may mean on a go-forward basis. Some of it may be related to the tariff announcements and the associated pricing, but really hard to tell. Restructuring for us, it's a little bit of a misnomer. I mean these are funds that are expenses that are funding our 80/20 front-to-back projects. And so there's no big restructuring initiative going on inside of ITW. Our spend this year will be similar to last year, in that $40 million range. We try to kind of level load things and do a similar amount every quarter. But it's really a function of the timing of tens of projects across the company and when the divisions want to execute on those projects. So those restructuring savings are -- these are projects with paybacks of less than a year. So it happens pretty quickly, but -- and it's part of what's funding the enterprise initiative savings that we're getting next year. But these are not big kind of restructuring -- traditional restructuring projects. These are all tied to 80/20 front-to-back as per usual. So... Nigel Coe: 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: Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables? Michael Larsen: Consumables, I think, right? Is that right? Nigel Coe: Consumables and Equipment driven up nicely. Michael Larsen: Yes. Yes. I think it's a little bit of a head scratcher, to be honest with you, Equipment up 6% and Consumables down 2%. Within that, there are -- some of the Welding -- some of the filler metals are actually showing positive growth. The other thing what we're seeing is a pickup on the industrial side. So these are typically large heavy equipment manufacturers. And then the commercial side or the consumer side is a little bit slower, where it's a little bit more of an exposed to the kind of consumer discretionary spending. So it's a little bit of a mixed picture. I think the real positive in Welding is this growth is fueled by CBI. And so it's not that the markets are picking up. It's really new products, primarily on the equipment side as well as both in North America and international with some really nice growth in our European and in our China business. So that's probably the best answer I can give you. Operator: Our next question will come from Avi Jaroslawicz at UBS. Avinatan Jaroslawicz: So I appreciate that you're saying that you're trending towards the lower end on the sales guidance. Can you just talk about some of the thinking for leaving that range unchanged and just kind of wider than you typically would for this time of year? I assume you're still thinking there could be some upside to get you to the midpoint or better for the year. And would that come from any particular segments or it sounds like more from demand than pricing. So just -- is that the right way to think about it? Michael Larsen: Yes. I mean I think typically, we update guidance kind of halfway through the year. And at this point, with a quarter to go, we're well within the ranges. And so we didn't see the need to kind of update the whole thing. And the decision was to narrow the range and to explain why we're not flowing through the benefit of the lower tax rate, which is really due to the fact that we're trending towards the lower end on the revenues. So that's our way of being as transparent as we can be around the guidance. I think the -- your question kind of Q3 versus Q4, I think we've kind of covered that. Again, the segment that typically shows the biggest pickup from Q3 to Q4 is our Test & Measurement business, and then that's partially offset by the Construction being down kind of typical seasonality. And when all is said and done, revenues from Q3 to Q4 should be up by 1 point or so. Certainly, we've also factored in, I should say, the lower auto build forecast there's been -- which is done by third-party kind of industry experts. And there's been some noise around some supplier issues for some of our customers, and all of that is included in our automotive projection here for the fourth quarter based on everything that we know as we sit here today. So hopefully, that answers your question. Operator: Our next question will come from Mig Dobre at Baird. Mircea Dobre: 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: Yes. So Mig, I think there is a relationship between PLS and incrementals and so on, but it's not the only factor. I mean PLS is an element of 80/20, it's not holistic 80/20. So I think the implementation of the business model, again, the quality of the portfolio is ultimately what drives the incrementals ultimately drives the margins. In terms of your comment on -- I guess, the comment on organic growth versus margin. And so from our standpoint, I mean, organic growth and operating margin and margin expansion kind of go hand in hand. And we talk about quality of growth. And I think we've demonstrated that for instance, coming out of the pandemic, we saw very healthy growth and margin expansion while over that period, we were investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it's about the quality of the organic growth, 35% incremental historically. We're now well above that, comfortably kind of into the 40s. And that's again at a time when we are very much investing in our businesses in a very focused way around innovation and strategic marketing and so on, and so for us, the math is pretty simple with margins at 26% and with growth in incremental margins at 35% plus or even 40-plus right now, it's the operating leverage that is really driving the margins forward from here. And as we look at 2030 and our 30% goal, that's a goal that's not going to be achieved through structural cost reduction. That's going to be achieved through continuous improvement in organic growth at high quality and high incremental margins. So we see the 2 as being correlated, I would say. Mircea Dobre: Understood. But in terms of maybe the framework for '26 asking the question that somebody else asked earlier, right, if CBI is contributing 2.3% to 2.5%, maybe you can rethink product line simplification to some extent and maybe the end markets get better. Again, from my perspective, being able to get your organic growth back to that 4%, 5-plus percent range is really the thing that at this point seems to be needle moving in terms of both maybe investor sentiment as well as overall earnings growth. So I'm curious if -- I understand it's early for 2026, curious though, if you think that it's plausible that we could be looking at that kind of growth as we think about next year? Michael Larsen: It's -- I think, Mig, we're probably, as we said earlier, running a little bit higher on PLS than kind of the normal maintenance run rate. We're doing that specifically in a business like Specialty Products, where we've talked about we're strategically repositioning that segment for growth. I will tell you that in other segments and industries that I know you follow like Food equipment and Welding, that number is significantly lower, maybe even 0 in some cases. So it's not an across the board. And it's also not a number that we want to or even could manage from the corporate -- from corporate. This is such an integral part of our 80/20 front-to-back process, it's a bottom-up number. And if we were to say -- and it's tempting, I know what -- I understand how you're thinking about it, it's tempting to say, okay, no more PLS. That also would say no more 80/20 front to back. And that is certainly not in anybody's long-term interest. I can promise you that. 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.

Operator: Good morning. My name is Janine, and I will be your conference operator for today. At this time, I would like to welcome everyone to the ITW's Second Quarter Earnings Conference Call. [Operator Instructions] Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: 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: 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 at 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: 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 onetime 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 1 of our 7 segments grew revenue and expanded operating margin sequentially, with 3 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 as 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 onetime 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 7 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: Thank you, Michael. Janine, will you please open the call for questions and answers. Operator: [Operator Instructions] Your first question comes from the line of Tami Zakaria from JP Morgan. Tami Zakaria: 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: Yes, Tami, it's a pretty straightforward answer. Essentially, while our price actions to offset tariffs have been quite successful, and we are ahead on a dollar-for-dollar basis. As you know, that can be -- can mean that it is still dilutive from a margin standpoint, which is what I mentioned in the prepared remarks that price/cost was modestly margin dilutive in Q2. And so that's really what's driving it. And I think just taking a step back, if you look at the last time we were together, we said that we expected price cost to be neutral or better. And I think our teams have done a great job putting us in a position where these price actions are EPS positive, but slightly margin dilutive, which is what you're seeing in the updated margin guidance. Now that to us is just a timing issue. We will recover that margin just like we did every other cycle that we've been through. And whether that happens by the end of the year or next year, I think is a little uncertain at this point. But as we've talked about before, good companies will offset the cost impact and eventually recuperate the margin impact as well. And so that's what you're seeing in our updated margin guidance. Tami Zakaria: 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, as we think about the back half, should we expect sequential improvement versus 2Q? Michael M. Larsen: 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: 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: Our next question comes from the line of Jamie Cook from Truist Securities. Jamie Lyn Cook: I guess two questions. It sounds like on CBI, you guys think you're doing -- you're sort of gaining traction there. So can you help me understand outside of automotive where you're seeing the most success? And is the -- do we still expect CBI to contribute to 2.3% to 2.5% that you initially laid out? And then I guess my second question, just a follow-up. Michael, just what's implied in the new guide in terms of FX? I know initially, it was I think, a negative $0.30 headwind, it went neutral last quarter. Just trying to understand what's implied in the new updated guidance. Michael M. Larsen: Yes. Let me answer the FX question. So basically, what we've incorporated now are current foreign exchange rates. And so we've gone from anticipating a significant headwind going into the year, we now expect some modest favorability based on rates as we sit here today. Now I say modest because on a year-over-year basis, the contribution to EPS in Q2, for example, was about $0.03 a share. So we're not talking about huge tailwind from foreign exchange. But that's kind of the modeling assumption, current foreign exchange rates and assuming that they stay where they are, which obviously can change quickly as we've seen this year. But -- and with that, on the CBI side, Chris? Christopher A. O’Herlihy: 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: Our next question comes from the line of Andy Kaplowitz from Citigroup. Andrew Alec Kaplowitz: 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: 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: 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: Yes, Andy, and I would just add to that, that we would certainly see -- you saw a 15% growth in China, '22 in automotive. But the growth is really sustainable for a number of reasons and not just automotive. Our business in China across all segments are highly differentiated. The proof point that I would offer here is that our margins in China are at the same level as North America or Western Europe, which really speaks to the whole kind of focus on differentiation. We have very strong customer-back innovation efforts in China. China actually generates a disproportion of our patents protecting customer solutions. We have these very long and very strong, long-lasting customer partnerships in China. As an example, our auto business in China has been there of close to 30 years. A reminder, again, we produce in China for the China market. But last and I'd say by no means least, we have a very highly tenured, highly talented and experienced leadership team who are ITW business model experts and who execute for the company every day. So we really feel well positioned across all 7 segments in China. Innovation is certainly a part of it. But I think across the relationships, the quality of our team and most importantly, our focus on sustainable differentiation is really what underpins our future growth prospects in China. Operator: Our next question comes from the line of Julian Mitchell from Barclays. Julian C.H. Mitchell: 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: Yes. I think, Julian, we're still taking a fairly cautious approach here. I think as we said in Chris' opening remarks, I mean we remain in a really uncertain and a pretty volatile environment where things can change quickly, whether it be the tariff environment or foreign exchange rates. And so I think the reason why you're not seeing us take guidance up by $0.30 is exactly that, that we are maintaining an appropriately conservative approach here given the current macro conditions that we're dealing with. And I would say given, again, the conditions that we're dealing with, we feel pretty good about the type of performance that we're putting up. And the confidence that we're trying to convey in the second half, which, based on our -- everything I talked about, we're going to be putting up some reasonable organic growth implied in our guidance is kind of 2% to 3% organic growth, 100 basis points plus of margin improvement year-over-year in the back half, really strong incremental margins and also really strong free cash flows. So given the conditions we're dealing with, we feel like we're in a pretty good position here going into the back half of the year. Julian C.H. Mitchell: 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: I think, Julian, I mean, from Q3 to Q4, it's kind of our typical sequential. Typically, revenues go up a little bit from Q2 to Q3 and into Q4. The kind of the traditional run rates are not as accurate as usual because of all the price that we're getting. So if you think about these price-related -- tariff-related price increases, those are really only starting to flow through here in Q3 and Q4. And so -- that's why we're effectively guiding to something that's a little above our typical run rate. But again, we should expect, like we talked about on the last call, good sequential improvement from Q2 into Q3, Q3 into Q4. Both -- really on all the key elements here, the top line margin improvement. I think we talked about every segment improving margins and revenue in the second half relative to the first half. And that's not assuming a pickup in demand. That's basically, like I said, current run rates, it's the price current FX rates, which I think you asked about. And then an updated outlook for automotive and then a more -- about 0.5 point of easier comps in the back half of the year. So you put all that together, that's how we end up with a pretty solid second half. Just to wrap up your question around what did you see in Q2? Nothing really unusual going through the quarter other than in June, June was our strongest month, it typically is. And then some of these more positive signs that we talked about around some of the order activity and the CapEx equipment businesses became more encouraging as we went through towards the end of the quarter. Operator: Our next question comes from the line of Stephen Volkmann from Jefferies. Stephen Edward Volkmann: I guess I'm trying to say -- I know you don't like to talk in too much detail about this, but I'm assuming in your 0% to 2% organic, your volumes must be down like low to mid-single digits or something. And the reason I'm curious about that is because, obviously, you're putting up pretty good incrementals on lower volumes, I guess, so I'm trying to think about when volumes do come back, did the enterprise initiatives mean we'll have higher incremental margins? Or how should I think about that? Sorry, it's a little complicated. Michael M. Larsen: 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: And Steve, over the long term, the incremental is -- strong incremental is predominantly driven by the quality of the portfolio and continuous improvement in the quality of the portfolio and execution of the business model against that portfolio is ultimately what drives the incremental higher. Stephen Edward Volkmann: 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: 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: Yes, and all underpinned with great brands and technology, very focused on the most attractive parts of the construction market. Operator: Our next question comes from the line of Mig Dobre from Baird. Mircea Dobre: Q2 was just such a strange quarter, not so much in your reporting, but just the broader backdrop, right? I mean we started in April with Liberation Day and a lot of volatility, I guess, in the national markets, and then we exited feeling very different. And I'm kind of curious how your business experienced all of this? Have you -- at any point in time through the quarter, maybe actually felt an economic effect from this tariff uncertainty and obviously, the quarter all-in on a surface looked fine. So I'm wondering about the cadence. And the reason why I'm asking the question is because if we end up with another wave of disruption related to these tariffs, based on your learnings from Q2, how disruptive do you think that could end up being or maybe not at all to your business going forward? Christopher A. O’Herlihy: Yes. So Mig I think I would say just -- I suppose as a reminder, and you characterized Q2 very accurately in terms of how it played out. But from our standpoint, and particularly relating to the tariffs, we go back to the point that we're over 90% produced what we sell. So the direct impact of tariffs is largely mitigated. And to the extent that we need to get price, we are able to get price due to the high levels of differentiation across the business, both in 2018 and in this past round tariffs were manageable for us. And based on what we know today and even if tariffs were increased, we'd expect the tariff cost to be manageable going forward. Certainly, we would hold to our EPS neutral or better, I say no matter what happens from here on out. Mircea Dobre: 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: Yes, there was a little bit of that in one segment. We have one segment where we have some shipments to China from the U.S., particularly relating to customer requests for us to do it that way. And certainly, with the enormous China tariffs at the beginning of the quarter, there certainly was a freeze in that. That has no freed up since then. And also, we've had several -- through our we read and react capabilities in our businesses, we've been able to read and react very successfully to that. So it was to happen again, we'd have mitigation plans in place where it wouldn't be as much of an issue. Mircea Dobre: 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: Yes. So with respect to M&A, Mig, what I would say is that, first and foremost, we're very confident in our -- the ability of our current portfolio to grow at 4% plus over time. And so we are comfortable in really sticking to our disciplined portfolio management strategy around M&A. We've got a very clear and well-defined view of what we think fits our strategy. So it's just a matter of us finding the right opportunities, focused on those high-quality acquisitions that could extend our long-term growth potential to grow at a minimum at 4% plus at high quality while being able to leverage the business model to improve margins. That's typically how we think about these things. Now we do review opportunities for this on an ongoing basis, but we continue to be very selective and very selective being mindful of the fact that we've got all this organic growth potential that we're working on. We're very active in terms of reviewing M&A opportunities. And to the extent that we find the right opportunities, then we will certainly be appropriately aggressive in pursuing them, I would say. And obviously, MTS was one that we did -- we -- that's the criteria we use to evaluate and to acquire MTS, and it's proved to be a really great acquisition for us on that basis. And that's the lens by which we look at acquisitions, remaining selective, but appropriately aggressive when we see the right ones. Michael M. Larsen: And I'll just add on the other elements of our capital allocation strategy. Mig, we obviously constantly review, debate, discuss our strategy and we are still coming in conclusion that it's pretty optimal and pretty well aligned with our enterprise strategy with #1 priority being the internal investments to support all the organic growth initiatives that are going on inside the company and maintain core profitability in these highly differentiated core businesses. We have an attractive dividend. If you look at our payout ratio, we're probably and rightfully so towards the higher end of the peer group just given our margins and our best-in-class balance sheet and highest credit rating in the peer group. We'll continue to grow that dividend in line with long-term earnings. And then we allocate surplus cash to the buybacks, which is about $1.5 billion this year, about 2% of our outstanding shares. And so as we sit here today, we feel like we've optimized this. And as Chris said, we'd love to do M&A given the criteria that Chris outlined. And as you know, this is -- it's not an easy market given often the valuation are what's making this pretty challenging. Operator: Our next question comes from the line of Sabrina Abrams from Bank of America. Sabrina Lee Abrams: I think my understanding was that there would be some more restructuring in the first half. So I think there were comments about 80% of the full year, $0.15 to $0.20 headwind in the first half. So I guess just looking at the components of the margin bridge, it doesn't seem like we had -- I think restructuring year-over-year was a tailwind this quarter, and there wasn't a ton in 1Q. So just any color you could provide on restructuring this year, how it's changed? Is that still the right full year number? And how has the cadence evolved relative to your expectations? Michael M. Larsen: 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: 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: Yes. That's unchanged. We still have a fair bit of activity. And as you saw this quarter in automotive, specialty as well as construction. And so we're still at about a percentage point of headwind to the organic growth rate from strategic PLS. But obviously, a huge tailwind in terms of positioning the portfolio for future growth as well as -- if you look at the margin improvement in the segment that I just talked about, you can see kind of the benefits associated with these PLS efforts. Operator: Our next question comes from the line of Joe O'dea from Wells Fargo. Joseph John O'Dea: 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: That's exactly right. That -- Test & Measurement is the biggest step-up sequentially from the first half into the second half. I'd rather -- the segments that are above 30% already kind of in the -- we got 3 at 33%, 31%, 33%, you may not see the same type of step up in those, but other than that pretty broad-based, and we expect some sequential improvement from, like I said, from Q2 into Q3 with some -- also some improvement on a year-over-year basis. And then, frankly, a slightly bigger step-up in Q4 on the margin front on a year-over-year basis. So you take all of that. And this is implied in our guidance, so I'm not telling you something you couldn't figure out yourself is that external operating margins of about 27% in the back half of the year. And that's with some reasonable improvement year-over-year. These are improvement on already best-in-class operating margins with not a whole lot of help from macro conditions. And that's why we talk about these being such differentiated results. There are -- without dragging there are not many companies that could put up this type of margin performance given the top line and the macro that we're dealing with and just look at the incremental margins this quarter and implied for the full year. Joseph John O'Dea: 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: 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: 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: 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: Yes. I think China was up 15%, as I said in the prepared remarks. I mean, the biggest driver by far is the automotive business, but there's also some solid double-digit growth in Test & Measurement, Polymers & Fluids & Welding. And where we're seeing this are -- is in the businesses that had the highest contribution from new products. So there's a real correlation here. In terms of being able to outperform end markets is really a result of great progress on CBI. And I think maybe that explains -- there was a question earlier in terms of our performance in China and not seeing the same results in other with some of our peers and maybe that's part of the explanation. Operator: Our last question comes from the line of Steven Fisher from UBS. Steven Michael Fisher: Just to follow up on one of those last questions there. In terms of the pickup maybe at the end of the quarter in some of the capital- oriented equipment, I guess, just to achieve the 2% to 3% organic growth that you have in the second half, are you guys assuming that you -- there will be a continuation of some of that strong order levels that you saw at the end of the quarter? Or is it really just sort of -- that was kind of a onetime thing? Or I'm guessing if it's really CBI, as you said, I think it would be maybe a continuation, but just curious how you'd frame that. Michael M. Larsen: 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: 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 2 separate growth buckets? And if so, can you sort of help us differentiate between these 2 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: Yes, Steve, we bucket them differently, CBI and net market penetration. And the way we think about it is that CBI is revenue -- new product revenue in the next 3 years. After that, it's market penetration. And so the way to think about it is that the CBI revenues are today turn into the market penetration revenues in the future. It's kind of how we think about it. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Lacey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ITW’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] For those participating in the Q&A, you will have the opportunity to ask one question and if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: Thank you, Lacey. Good morning, and welcome to ITW’s first 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 first 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: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid start to the year as we outperformed our underlying end markets with flat organic growth on an equal days’ basis in a steady demand environment. We continue to execute well in controlling the controllables as enterprise initiatives contributed 120 basis points to operating margins of 24.8%. In addition, GAAP EPS of $2.38 came in ahead of our planned expectations. Importantly, we continue to make progress on our next phase key strategic priorities as we remain laser focused on building above market organic growth fueled by customer backed innovation into a defining ITW strength on par with our world class financial and operational capabilities. As we’ve said many times before, ITW is built to outperform in uncertain and volatile environments because of the unique advantages that we derive from our powerful ITW business model, our diversified portfolio of differentiated products and services, our decentralized close to the customer structure and our considerable financial strength. In addition, when it comes to tariffs, we believe that ITW is better positioned than most as the tariff impact is largely mitigated by our 90% plus “produce where we sell” manufacturing strategy. That said, ITW is obviously not immune to tariffs and our people are reading and reacting rapidly and decisively, working closely with our suppliers and customers to mitigate the impact of tariff increases. These strategic adjustments and ongoing pricing actions are projected to offset the cost impact of tariffs and therefore be EPS neutral or better by year-end. Looking forward and based on what we know today, we are maintaining our EPS guidance for the year without incorporating the upside from our first quarter results and more favorable foreign exchange rates. While the impact of tariffs and customer demand is obviously not known at this stage and uncertainties remain, we will continue to leverage our financial strength to remain invested in the focused execution of our long-term strategy. In concluding my remarks, I extend my sincere gratitude to our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence. Now, I’ll turn the call over to Michael, to provide more detail on the quarter as well as our guidance for 2025. Michael? Michael M. Larsen: Thank you, Chris, and good morning, everyone. In Q1, the ITW team delivered a solid start to the year, both operationally and financially. Starting with the topline, organic growth was down 1.6% as expected. On an equal days’ basis, organic revenue was flat to the prior year, which had one additional shipping day. Foreign currency translation reduced revenue by 1.8% and total revenue was down 3.4%. Product line simplification reduced revenue by 50 basis points in the quarter. Of note, we did not experience a meaningful impact from customers pulling forward orders from Q2 into Q1. On the bottom line, the ITW team continued to focus and execute well on the things that we can control, as evidenced by enterprise initiatives, which contributed 120 basis points and free cash flow of $496 million with a conversion rate of 71%. Operating margin was 24.8% as enterprise initiatives were offset by operating leverage, higher restructuring expenses related to 80/20 Front-to-Back projects and other one-time items. The margin decline year-over-year was due primarily to the non-repeat of a 300 basis points LIFO inventory accounting benefit last year. We are projecting that margins will continue to improve sequentially from here in every segment and at the enterprise level as we go through the year, which is in-line with our historical pattern and supported by meaningful contributions from enterprise initiatives that are volume independent. In summary, demand remains steady in Q1 as we continue to outperform our underlying end markets, delivering flat organic growth on an equal days’ basis, solid margins of 24.8%, free cash flow of approximately $500 million as well as GAAP EPS of $2.38 which was ahead of our planned expectations, primarily due to a lower effective tax rate in the quarter. Please turn to Slide 4, for a look at organic growth by geography. And, on a geographic basis, organic revenue declined about 3% in both North America and Europe, while Asia Pacific was up 7% with China up 12%, driven in part by continued strong performance in the automotive OEM business. As you can see, China represents about 7% of total company revenues, and China grew 9% even when excluding the 14% growth in automotive OEM. Let’s move to the segment results, starting with automotive OEM, where organic revenue declined 1% in the first quarter as product line simplification or PLS efforts reduced revenue by 1%. On a regional basis, North America was down 6% as D3 customer builds were down 10%. Europe was down 6%, while China grew 14% against a tough comparison of plus 23% last year as our local team continues to innovate and gain market share, particularly in the rapidly growing EV market. We expect this strong growth momentum to continue through the balance of 2025, partially offsetting expected weakness in North America. For the full-year and compared to industry build data, we expect that this segment will outperform relevant builds by the usual 200 basis points to 300 basis points as we continue to grow our content per vehicle. We have incorporated recently revised auto builds forecast into our guidance as worldwide auto builds are projected to be down low-single-digits with North American builds down high-single-digits, Europe down low-single-digits and partially offset by China. Overall, our relevant markets are expected to be down in the mid-single-digits in 2025, which compares to a plan of down low-single-digits going into the year. On the bottom line, the Automotive OEM segment delivered operating margin of 19.3% in Q1, which included 80 basis points of restructuring headwind. In other words, margins were 20.1% excluding restructuring. And, it is worth noting that the tariff related costs and margin impacts in this segment are relatively insignificant, primarily because of our “produce where we sell” manufacturing footprint. And, we remain confident that we will continue to expand margins as we go through the year. Turning to Slide 5. Food Equipment organic growth was up a little more than 1% and up 3% on an equal days’ basis. Equipment was flat and Service grew 3%. By region, North America grew 1% with strength in institutional end markets, which were up double-digits. Our International business was up 2%, Europe was up 2% and Asia Pacific was up 1%. In Test & Measurement and Electronics, organic revenue was down 5% due primarily to tough comparisons in the MTS business, which grew 23% in the year ago quarter and was down 19% this quarter. Excluding MTS, this segment was down 2%. Overall, Test & Measurement declined 9% with about half of that decline due to MTS. While on a positive note, Electronics was up 3% with some encouraging signs as semi-related orders were up double-digits in the quarter. Operating margin of 21.4% declined 200 basis points due primarily to negative operating leverage as well as a headwind from higher restructuring costs of 60 basis points. Moving on to Slide 6. Organic growth in Welding was essentially flat and up 2% on an equal days’ basis. Equipment increased 1%, which marked the first positive growth rate in Equipment in two years. Consumables were down 2%, while Industrial sales declined 1% and the Commercial side was down 6%. Overall, North America was down 2% offset by international, which was up 14%, driven primarily by more than 30% growth in China as a result of the success of new product introductions targeted at the energy space. Operating margin of 32.5% was essentially flat year-over-year. Polymers & Fluids organic revenue grew 2% with Polymers up 6%. Both Fluids and Automotive aftermarket were flat. On a geographic basis, North America was flat and International grew 5%. Operating margin improved 70 basis points to 26.5%. Turning to Slide 7, Construction Products. Organic growth was down 7% in tough end-markets. In The U.S, annualized new housing starts were down double-digits compared to year-end, and we estimate that international markets were down in the high-single-digits. As a result, North America was down 10% with Residential Automation down 12% while Commercial Construction was up 2%. In the first quarter, Europe was down 2% and Australia and New Zealand was down 9%. Operating margin of 29.2% was essentially flat with another significant contribution from enterprise initiatives. Specialty Products organic revenue was up 1% against the comparison of plus 6% in the year ago period, with North America up 2% and International down 1%. The reduction in revenue from Strategic PLS was 130 basis points. Of note, equipment orders were up double-digits with continued strength in the Aerospace and Packing Equipment businesses. Operating margin improved 120 basis points to 30.9% with another solid contribution from Enterprise Initiatives. With that, let’s turn to our Slide 8, for an update on our full-year 2025 guidance, which is unchanged. Looking ahead to the balance of the year, we firmly believe that we’re better positioned than most as the impact of tariffs is largely mitigated by our 90%plus “produce where we sell” manufacturing strategy, and our unmatched ability to read and react in our highly decentralized operating culture. We’re well-positioned to outperform our end markets and deliver organic growth of 0% to 2% based on our usual topline guidance process, which is based on current levels of demand adjusted for typical seasonality, the incremental pricing associated with tariffs and updated for the most recent automotive build projections that we talked about earlier. As you saw in our press release this morning, we’re maintaining our previous guidance, including GAAP EPS in the range of $10.15 to $10.55. And, given the uncertainty in the global demand environment, we decided to not incorporate the EPS upside from our above plan results in Q1 as well as approximately $0.30 of tailwind from foreign exchange at current rates. We fully expect to continue to execute at a high-level on the most important profitability drivers that are within our control, such as our ongoing pricing and supply chain actions that, as Chris said, are projected to offset tariff costs and therefore be EPS neutral or better as well as our enterprise initiatives, which we now expect will contribute 100 basis points or more of margin expansion independent of volume. So to wrap things up, we’re confident that the strength and resilience of the ITW business model, our high-quality diversified business portfolio and our people put us in a strong position to deal decisively and effectively with the effects of the announced tariffs, however, they play out from here, while remaining focused on executing our long-term enterprise strategy. So with that, Erin, I’ll turn it back to you. Erin Linnihan: Thank you, Michael. Lacey, will you please open the lines for questions? Operator: Yes, ma’am. [Operator Instructions] Okay. Your first question comes from the line of [Vlad Bostreke] (ph). You may go ahead. Unidentified Analyst : Good morning, guys. Thanks for taking my questions here. Christopher A. O’Herlihy: Good morning. Unidentified Analyst : So, I know you talked about offsetting potential tariff headwinds with pricing. I guess, can you just talk about any color on how you’re thinking about overall pricing expectations for the year now versus coming into 2025? And then just along with that, I know historically you’ve looked to offset inflationary pressures on a dollar-for-dollar basis, but you’re maintaining the margin outlook here. So, is there some different approach this time around? Christopher A. O’Herlihy: Yes. So, that I would say at a high-level the strategy is to offset tariffs with appropriate pricing. As we said on many occasions we’re able to get pricing due to high-levels of differentiation across our business. So, we expect the price cost equation to be pretty manageable based on what we know today. We expect the tariff cost impact to be EPS neutral or better. I would say that pricing in general, I mean any comments that we make on pricing should be considered in the context that we had 84 different divisions. And obviously the context is different in each one, but overall, we expect the price cost impacts with tariffs to be EPS neutral are better. We’ll do a lot better than that in some businesses. We allow our businesses who are very close to our customers to make these decisions with some overarching guidance from us, but business are close to our customers, they know their customers very well, they understand the competitive intensity and the price volume dynamics relative to their particular markets and these are decisions that are taken in our businesses on an ongoing basis not just in response to a tariff environment. So, there’s a lot of market specific expertise within our divisions as to how to get price and where to get price, but in general as I said we sell differentiated products and services, we get paid for our value and I would say so far we’re also a very good start in terms of getting price based on the tariffs that were introduced in early March. Unidentified Analyst : That’s helpful, Chris. Appreciate it. And then just stepping back, can you talk about how you’re thinking about potential contingency plans if we see the demand environment materially slow over the course of 2025? And I recall in the COVID and post-COVID era, you were very focused on winning the recovery. So, can you talk about how you’re thinking about the potential recession and recovery playbook today? Christopher A. O’Herlihy: Sure. So, I would say that in terms of contingency, obviously we are in the fortunate position that we have I would say a lot of self-help in the context of enterprise initiatives in the first instance. Divisions in the spirit of continuous improvement our divisions are always looking at supply chains, alternative suppliers as a matter of course that’s very much consistent with our continuous improvement approach. From a recession kind of posture response standpoint clearly it’s a pretty fluid environment but I would say that our overall posture in a short-term recession would be to wherever possible stay invested in our growth initiatives and these really highly profitable businesses. We’re a long-term focused company. We had the financial resources to do that. Obviously during the pandemic or when the recovery approach helped us. Number 1, take care of customers. Number 2, gain share. And so, we look at taking a somewhat similar approach. And again I come back to the point that we set up enterprise initiatives which would certainly help us protect margins in a downturn. The other point I would make that’s pretty specific to ourselves is that as we’ve often noted a fundamental element of 80/20, is that we’ve got a very flexible cost structure and we typically engage in the higher value added parts of the manufacturing process and outsource those other parts that may be lower on the value chain. So, this makes the cost structure for us very flexible and this would be a real benefit in a recessionary scenario. Unidentified Analyst : Great. Appreciate it, Chris. Thanks. Christopher A. O’Herlihy: Sure, Vlad. Operator: Thank you. Your next question comes from the line of Tami Zakaria with J.P. Morgan. You may go ahead. Tami Zakaria: Hey, good morning. Thank you so much. Christopher A. O’Herlihy: Good morning. Tami Zakaria: My question is on pricing. So, the organic growth guide 0% to 2%, I think I heard you say it includes some pricing action. So, are you assuming the pricing gain, will be offset by some volume decline and that’s why you’re leaving the full-year organic growth guide intact? Michael M. Larsen: So, Tami, this is Michael. So, the organic growth guidance of 0% to 2% is based on kind of our typical run rates or current levels of demand. We have added to that incremental pricing, which is associated with tariffs. And then, we also updated the forecast for the lower projected auto build forecasts. And I think your question around, could this incremental price be offsetting volume? I think is kind of how we think about it. While we haven’t seen a slowdown in our businesses today, certainly, the uncertainty, it’s not unreasonable to imagine that things could slow a little bit in the second half. And if that’s the case, that volumes come down, then that will be offset by the higher-level of pricing that we’re getting right now in our businesses to help offset the tariff impact. Tami Zakaria: Understood. That’s very helpful. And, so a quick follow-up on that is, have you already taken pricing in response to tariffs, or you’re waiting to take the pricing when tariffs become effective on May 2 or whatever the latest date is from the administration? Michael M. Larsen: I think as Chris said, this is 84 different discussions, but what I can tell you, every division has a slightly different time line. But I can also tell you everybody impacted by tariffs has already taken decisive action on pricing, as Chris said, based on the announcements that were made back in March. And, some of them have taken action already based on the announcements that were made early April. And so, this is kind of an ongoing process. I think what’s really encouraging, if you look back at how this played out in 2017 and 2018, how it played out in an inflationary environment coming out of COVID, I think we’ve demonstrated we have ample pricing power in these highly differentiated businesses. And so, that’s what gives us the confidence to say that our pricing actions, along with some of the other supply chain actions we talked about, will enable us to offset, the impact of tariffs and be EPS neutral or better by year-end. Tami Zakaria: That’s wonderful, here. Thank you. Michael M. Larsen: Sure. Operator: Your next question comes from the line of Julian Mitchell with Barclays. You may go ahead. Julian Mitchell: Hi, good morning. Christopher A. O’Herlihy: Good morning. Julian Mitchell: Just wanted to start off the Food Equipment business, some perhaps doesn’t get a lot of airtime, but you gave a very good update on auto and Test & Measurement. And just asking on Food Equipment because we’ve seen some fairly lackluster updates from some larger customers in that sort of quick serve channel, whether it’s Starbucks or KFC or whoever in the last 24 hours. Wondered if you’re seeing any shift in customer behavior in Food Equipment yourself and what’s your confidence in the sort of continued spending by those customers in the balance of the year? Christopher A. O’Herlihy: Yes. So Julian, overall, I think our confidence in Food Equipment is very high. This is a highly differentiated business for us. It also contains about one-third of the business is service-related and that’s very unique because we are the only major equipment manufacturer with that captive service business. And, as you’ve seen from what Michael reported earlier, the service business continues to grow nicely. On the equipment side, given the end-market split, we are about [40%-50%] (ph) of our business goes to institutional customers and that continues to be very strong for us. Food Equipment in the aggregate is an extremely fertile innovation environment. We have new product launches in all product categories this year. In Food there are some real tangible things to innovate around like energy and water savings which really matter to our customers. So, we feel very good about food equipment, it’s a very fertile innovation space because of our end market mix being more skewed towards institutional that is helping us right now and obviously we have the big service business which is a huge differentiator for us. So, we see broad-based strength in food equipment, North America, China and Latin America also expected to be strong geographically. Julian Mitchell: That’s very helpful. Thank you. And then, just to understand on the tariff points from a sort of segment standpoint and phasing through the year. Is the assumption that all segments should be sort of tariff dollar neutral for 2025 as a whole? And, is there any kind of pressure in a given quarter for ITW enterprise-wide from tariffs in terms of EBIT dollars or EBIT margin rate that you’d highlight to us? Christopher A. O’Herlihy: Well, Julian, historically, if you go back to 2017, 2018, there was a little bit of a lag between when tariffs were enacted and when pricing kicked in. I think we’ve learned some things. I think we’ve become faster in terms of reacting to these tariff increases. And so, we really don’t expect a whole lot of quarterly impact here in the short-term from a lag between price cost. I think all segments have I’d say the tariff impact is pretty broad-based, a little bit less in automotive, which is a good thing because as, it takes a little bit longer to get priced there, but everywhere else, all of our divisions, all segments are working actively on offsetting these tariff costs with supply chain and pricing actions. And ultimately, that’s what’s going to enable us to be EPS neutral or better by the time we get to year-end. But, there really shouldn’t be a lot of pressure here in the short-term. Julian Mitchell: That’s great. Thank you. Christopher A. O’Herlihy: Sure. Operator: Your next question comes from the line of Stephen Volkmann with Jefferies. You may go ahead. Stephen Volkmann: Good morning, guys. Thank you. Christopher A. O’Herlihy: Good morning. Stephen Volkmann: Julian kind of teed me up here. I was just going to ask if, Michael, if there’s anything you want to say relative to the second quarter that might be different than normal seasonality just as we model this out? Michael M. Larsen: Well, so obviously, I’ll just say this. We’re operating in a pretty uncertain environment, as you know. We had a pretty solid finish to Q1. We had a pretty good start. April is not completely done yet, but things are tracking pretty good. So, what I’ll maybe offer is that typically from Q1 to Q2, we see about a 2% topline sequential growth. We also benefit from having one more day in Q2 than we did in Q1. So, if you model that out, you’ll see that revenues are about flat from an organic growth standpoint on a year-over-year basis. Pricing may help out a little bit, but that’s kind of the base assumption that the topline is flat year-over-year. Margins, we should see a significant meaningful step up from Q1, primarily as a result of some of these one-time items not recurring and so solid margin improvement from Q1 to Q2. And then, on a year-over-year basis, margin is about flattish and EPS also about flat. So, that would put, I think last year we did $2.54. So if you believe what I just said that would put, EPS kind of in the mid, [$2.50s] (ph). You add our Q1 $2.38 on top of that. And then for the first half, you’ll get to somewhere around $4.90-ish, which would be 48% of the full-year EPS guidance, if you look at it in terms of the midpoint. And that’s pretty close to kind of our historical cadence, [$49.51] (ph). It’s a little bit lower this year as a result of slightly higher restructuring tied to our 80/20 Front-to-Back projects. But, overall, this seems like a pretty reasonable way to think about Q2 first half, second half. And again, I’ll just in case it wasn’t clear, if you go back to our last call when we gave guidance, we highlighted $0.30 of currency headwind. That’s no longer the case based on current rates. As you may recall, we don’t hedge, so these currency moves favorable in this case flow through pretty quickly given the short cycle nature of our business. So, that’s maybe a way to kind of think about Q2 and the balance of the year. Stephen Volkmann: Great. Very thorough, and I definitely do believe you. Just anything on the tax rate? I know that was a little benefit in the first quarter. Michael M. Larsen: Yes. So, I think this was a pretty standard kind of tax transaction. And so, we are modestly lowering our guidance for the full-year, for the tax rate to 24%. I think it was [24.25%] (ph) prior to that. So and that’s if you do the math, that’s about $0.05. And typically, what we would have done in a normal environment is flow through the benefit of the lower tax rate and current foreign exchange rates. And just given the environment that we’re in, we decided to not do that. And so to some extent, we’ve derisked our guidance for the full-year. Whether that will be enough or not remains to be seen. As I said earlier, things can change quickly. We’re operating in a pretty uncertain environment. And, we’ll just go back to what Chris said is that we really believe we’re better positioned than most to deal with this level of volatility and uncertainty. Stephen Volkmann: Thank you very much. Michael M. Larsen: Sure. Operator: Your next question comes from the line of Jamie Cook with Truist Security. You may go ahead. Jamie Cook: Hi, good morning. Christopher A. O’Herlihy: Good morning. Jamie Cook: Just a question on I think last quarter you had a slide in there on CBI and the contribution to revenue for 2025 supposed to contribute 2.3% to 2.5% of growth. And, I’m just wondering, did we take that slide out for a reason or it’s, in this environment, who knows? Just kind of think through that. And then just my last follow-up question, PLS, is that just still assumed one point headwind? Thank you. Christopher A. O’Herlihy: Yes. So on CBI, Jamie, we’re very encouraged by the progress that we’re making across the business, great pipeline of new products, every segment contributing. This is one of the reasons we would say we’re outperforming our end markets, right. And several product launches across the business this year, again across all segments and I would say that with respect to our target of 2.3% to 2.5%for the full-year in terms of CBI contribution, then we are well on track to do that based on our performance here in Q1. Michael M. Larsen: Yes. And I think what we’d rather not do, Jamie, and it’s a fair question, is kind of give you an update on what the CBI number is every quarter. It can be a little lumpy, but as Chris said, we are definitely tracking it. And based on what we’ve seen so far, we are on track to deliver on our full-year target. In terms of PLS, we’re still targeting 100 basis points of PLS, primarily in the Specialty Products segment, in the Automotive segment as well as on the Construction side. So, those are kind of the three larger ones. And again, this is all kind of strategic repositioning of these businesses to improve the growth rate on a go-forward basis. So, that’s all on track. Operator: Your next question comes from the line of Joe O’Dea with Wells Fargo. You may go ahead. Joe O’Dea: Hi, good morning. Christopher A. O’Herlihy: Good morning. Michael M. Larsen: Good morning. Joe O’Dea: Just looking to understand the tariff price cost dynamic a little bit more. I think, Michael, last quarter you talked about $250 million of imports roughly from China. If you just run math on that and 145% tariff and take like three quarters of the year, you’re going to need maybe 1.5 points of price to offset it and then we have some of the reciprocal tariffs as well. And so, not sure if 2% price is a reasonable kind of benchmark to be thinking about required to offset cost and be dollar neutral, but really just any color you can provide on the costs associated with the different tariffs that are in place? Michael M. Larsen: Yes. I think, Joe, the kind of the back of the envelope math you’re doing is not completely unreasonable. I mean, as you said, we talked about this on our last call in terms of the imports into the U.S. from China being about 5% of our total domestic spend. So, as you can tell from that, how small that number is, we’ve never pursued a low cost country or low cost manufacturing strategy. It’s always been kind of “produce where we sell”. As you said, that $250 million, that’s an annualized number. Once we get through inventory, we’re almost halfway through the year. So, the potential impact for the full-year 2025 is less than that. I’d say we’re, as Chris said, actively working to offset the impact with supply chain actions, pricing actions, and therefore, EPS neutral better, which is exactly what we did the last time around in 2017 and 2018 as well as post-COVID. So, we’re confident we can do that. And I’ll just say it again. I think we believe we’re better positioned here than most. And, like we said on the call last time, we think these tariffs from a cost standpoint are certainly manageable. Obviously, what’s unknown at this point is what the impact might be from a demand standpoint in the second half, but I think at this point, with the visibility we have, we feel like we’re in a really good spot. Let’s get through Q2 and then we’ll kind of update all the analytics and we’ll give you an update in terms of how we view the year on our next call. Joe O’Dea: And, then just in terms of the contingency that’s embedded within the guide, if we approach tariffs as price cost neutral. And then the FX, I think the revenue guide for the year now embeds a less bad FX environment, but that didn’t flow through, that $0.30 didn’t flow through. And so, is that kind of the contingency versus the unknown on the macro or just how you’re approaching embedding kind of contingency? Michael M. Larsen: Yes. Yes. So we updated the revenue number, but we didn’t update EPS. So, that’s a good way to look at it. It’s part of the contingency, if you want to call it that, for what might happen to volume in the back half of the year, even though we haven’t really seen it yet. And in Automotive, we have already factored that into our guidance as we sit here today based on the most recent build projections, which, by the way, is really more of a North America challenge at this point. I think we feel very good about our China business being able to sustain the type of growth rates that they’re putting up. That’s really driven mostly by the EV market and production growing at some pretty staggering numbers in China and that which is projected to continue as we go through the year. And then Europe, as we see it today, is kind of down low-single-digits, with auto builds. And all of that is, like I said, factored into the updated guidance that we’re giving you here today. Joe O’Dea: And so just big picture, when you think about kind of the elevated uncertainty we’re dealing with, which parts of the business are you watching most closely for vulnerabilities? Which parts of the business are you looking at most insulated from some of those vulnerabilities? Christopher A. O’Herlihy: Yes. So, I’d say at a high level in terms of uncertainty overall, we always say we’re built for uncertainty based on a number of attributes that we have across the company. I think the resilience provided by our diverse portfolio across the seven segments, we’re always going to have a mixture of headwinds and tailwinds but with little or no concentration risk. The fact that the portfolio is very much built around sustainable differentiation, this provides a really strong ability to recover price. I think strength of the business model to help us control the controllables and provide self-help opportunities like enterprise initiatives and then I think the very important one is the nimbleness of our decentralized close to the customer structure which really enables our ability to read and react to whatever we can’t control, so we can mitigate the impact. And I think all of these attributes position ITW to outperform particularly well in certain environments. If we’re to hit at any particular segment I think we’ve seen some challenges for a long time now in terms of the CapEx markets likely to continue obviously with the interest rate environment being kind of where it is. And, little bit of uncertainty in automotive but some of that’s already baked in. We’ve, based on the build numbers coming down, but I’d say that across the company we’re pretty well-positioned based on the overall posture and attributes that we have to really help us manage these uncertain times. Joe O’Dea: I appreciate it. Thank you. Christopher A. O’Herlihy: Sure. Operator: Our next question comes from the line of [Abi Yorosilowicz] (ph). You may go ahead. Unidentified Analyst: Hi, good morning, guys. Christopher A. O’Herlihy: Good morning. Unidentified Analyst: Just as we think about the margin progression for the rest of the year, I know you expect margins to improve as the year goes on, but when are you expecting price cost would be most favorable? Would it be like Q2 with higher pricing coming in sooner than when the cost fit, or would pricing more be in-line with cost as the year progresses? Michael M. Larsen: Yes. So Abi, you’re breaking up a little bit, but if I understood your question correctly, I’d say, we went into the year kind of assuming a normal price cost environment, which for us typically is slightly favorable to margins. We are not expecting anything unusual on a quarterly basis as we go through the year. I think there was a question earlier about the potential lag between price and cost, and we feel like we’re better positioned this time around. So, I think what always happens down the road, most good companies will recover their margin impact. Whether that happens by year-end or into next year, that remains to be seen. But, if there is some pressure, it’s short-term, and again, it’s, as we sit here today, we’d say it’s manageable, so. Unidentified Analyst: Okay. Got it. And, it’s possible you already addressed this to some extent, but just as you think about the kind of risk to potential demand weakening, would you expect that to be more from a weaker macro impacting end markets or more from higher prices and price sensitivity there? Michael M. Larsen: It would be all end-market related. I think you got to factor in that our divisions, their competitors are dealing with the same challenges that we are, and they are less favorably positioned than we are, I think, is a fair comment. So, in terms of driving above market organic growth, with the new product pipeline, with the share gain opportunities in front of us, and you are seeing that in a number of places. And so, you can look at complete segments, whether it’s Food Equipment or Welding, where there are comparables out there or even automotive, where we are outgrowing underlying markets by 200 basis points to 300 basis points. So, this is going to be all about end-market demand, and we’re confident that we’ll continue to outperform these underlying end-markets as we go through the remainder of the year. Unidentified Analyst: Okay. That makes sense. Appreciate the time. Michael M. Larsen: Sure. Operator: Your final question comes from the line of Nicole DeBlase with Deutsche Bank. You may go ahead. Nicole DeBlase: Yes, thanks. Good morning, guys. Christopher A. O’Herlihy: Good morning. Michael M. Larsen: Good morning. Nicole DeBlase: Just with respect to the mechanics of the price increases, and sorry to beat this like a dead horse, but are you guys going after this with more of like a surcharge mentality where the pricing would then come off if tariffs were to go away, or is it an actual list price increase, which is obviously more sticky? Christopher A. O’Herlihy: Yes. So, Nicole, it’s pretty much a mixture of both. And again, it comes back to the individual circumstance in each business, the relative competitive intensity I would say that the price volume dynamics that are going on in all these businesses. So, that’s a decision that we allow our businesses to make whether it’s surcharge or price increase. Obviously there’s a lot of as I said before market specific expertise in these businesses as to how to get price whether it’s surcharge or increase and where to get it, but in general I think the level of differentiation that we have really enables us to do it. But, these are decisions that are taken at the division level, like I say, and it’s a mixture of both surcharge and price increase. Nicole DeBlase: Okay. Understood. And then, with respect to the restructuring actions that you guys are taking this year, has there been any shift in the total amount of restructuring, especially considering a weaker volume environment? And do you still expect to incur 80% of those charges in the first half? Michael M. Larsen: Yes. Nicole, that’s still the case. I think these are the restructuring projects that are being done are all tied to our 80/20 Front-to-Back process and are identified kind of going into the year as part of the planned process. And obviously, we’ll see kind of how things play out from here, but it’s still the same assumption for the full-year and still assuming that about 80% of the total spend this year will happen in Q1 and Q2. Nicole DeBlase: Got it. Thank you. Michael M. Larsen: All right. Thank you. Operator: Thank you for participating in today’s conference call. All lines may disconnect at this time.

Operator: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. For those participating in the Q&A, you will have the opportunity to ask one question and if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: Thank you, Tamika. Good morning, and welcome to Illinois Tool Works Inc.'s fourth quarter 2024 conference call. I'm joined by our President and CEO, Chris O'Hearlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss Illinois Tool Works Inc.'s fourth quarter and full year 2024 financial results and provide guidance for full year 2025. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Harelahe. Chris? Chris O'Hearlihy: Thank you, Erin. Good morning, everyone. You saw in our press release this morning, in Q4, Illinois Tool Works Inc. delivered a solid finish to the year. We outperformed our underlying end markets with organic growth turning positive excluding pipeline simplification, and we continue to execute well controlling the controllables to expand operating margins and free cash flow to record levels. GAAP EPS improved 7% to $2.54. In end markets that we believe were down in the low to mid-single digits, fourth quarter organic revenue declined half a point, which is a point better than the 1.4% decline in Q3. Excluding the impact of product line simplification, primarily due to strategically positioning for growth, in our Specialty Products segment, organic revenue growth was positive 0.4%. Overall demand was steady in Q4, with some improvement relative to demand levels going into the quarter. Revenue came in approximately two percentage points or $70 million above what they would have been had demand held at the levels we were seeing exiting the third quarter. In addition to outperforming our end markets, the Illinois Tool Works Inc. team did a solid job executing operationally, resulting in operating income of $1.03 billion, an increase of 4% despite total revenues that were down more than 1%. Record operating margin of 26.2% was an increase of 140 basis points with a 120 basis point contribution from enterprise initiatives. As a result of strong working capital management, primarily around inventory, free cash flow increased 10%, with a conversion to net income of 133%. Looking back in 2024, the Illinois Tool Works Inc. team delivered another year of solid operational and financial performance, achieving record financial results, including EPS, margins, and returns as we consistently outperformed underlying end markets, particularly evident in segments such as automotive OEM and construction products. We made continued progress on our next phase key strategic priorities. In 2025, we will build on this momentum and remain laser-focused on building above-market organic growth fueled by customer-back innovation into a defining Illinois Tool Works Inc. strength, on par with our world-class financial and operational capabilities, and deliver differentiated performance in whatever environment we face. We still have some work ahead of us as we position the company to deliver 3% plus CPI yield by 2030, but we are pleased with achieving 2% in 2024, more than double our historical pre-COVID levels. Furthermore, I'm particularly encouraged by the progress we're making on a key leading indicator of CBI yield, patent filings, which increased 18% in 2024. Turning to our guidance, we are very well positioned to continue to execute at a very high level again in 2025, on both the top and bottom line. Our usual revenue guidance approach, our organic growth projection of 1% to 3% excluding TLS reflects current levels of demand adjusted for seasonality. Although there are certainly some positive signals in our businesses, the current reality is that we are not yet seeing these reflected in orders. Having said that, we are very well positioned to capitalize on an improving demand environment if it should materialize. Our EPS guidance midpoint of $10.35 reflects the fact that we are faced with non-operational headwinds including a foreign currency translation impact of $0.30. Our expected operating margin improvement of 100 basis points is powered by another solid contribution from enterprise initiatives independent of volume. In concluding my remarks this morning, I again want to extend my sincere gratitude to our global colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence. Now I'll turn the call over to Michael to provide more detail on the quarter and full year performance as well as our guidance for 2025. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. In Q4, the Illinois Tool Works Inc. team delivered a solid finish operationally and financially to a record year. Starting with the top line, organic growth was down 0.5%, which included a 0.9% revenue reduction from strategic product line simplification. Foreign currency translation reduced revenue by 1%, and two acquisitions earlier in the year added 0.2%. Total revenues were down 1.3%. Sequentially, revenue growth of plus 3.7% from Q3 to Q4 compared favorably to our historical sequential growth of plus 1.5%. On a geographic basis, organic revenue declined about 1.5% in North America, was down 3%, and Asia Pacific was up 5% with China up 9%. On the bottom line, the Illinois Tool Works Inc. team continued to focus and execute well on the things within our control, as evidenced by an operating margin of 26.2%, an increase of 140 basis points year over year driven by enterprise initiatives, which contributed 120 basis points. Six of our seven segments expanded operating margin, driven primarily by strong execution of enterprise initiatives that contributed between 70 and 190 basis points to each segment. In summary, for Q4, we outperformed our underlying end markets with positive organic growth, achieved record margin performance with a strong contribution from enterprise initiatives, and generated record free cash flow and record GAAP EPS of $2.54. Please start with slide four. Operating cash flow was $1.1 billion, and free cash flow increased 10%, a quarterly record of $1 billion, with a conversion to net income of 133%. Strong working capital management, including inventory, was a meaningful driver of the strong cash in Q4, with further targeted reductions this year. We project free cash flow conversion of greater than 100% for 2025. Now let's move to the segment results starting with automotive OEM, where organic revenue declined 2% in the fourth quarter against the tough comparison of plus 8% in Q4 2023. On a regional basis, North America was down 5%, while Europe was down 10% against a tough comparison of plus 11%. China grew 8% despite a comparison of plus 31% as our China team continues to drive customer-back innovation and gain market share, including in the rapidly growing EV market. For the full year, compared to industry bill data, the segment outperformed relevant bills by our typical 200 to 300 basis points, and we expect similar outperformance in 2025 as we project that automotive OEM will grow 0% to 2%, 1% to 3% excluding PLS, with auto bills in relevant markets that are projected to be down in the low single digits. On the bottom line for the full year, automotive OEM improved margins by 230 basis points to 19.6%, and the segment remains firmly on track to achieve its goal of low to mid-twenties operating margin over the next couple of years. Turn to slide five. Food equipment delivered organic growth of almost 3.5%. Equipment grew 3% and service grew 5%, as the growth investments made in the first half of 2024 to expand capacity and support long-term above-market growth in this very attractive service business are paying off. By region, North America grew 2%, with institutional end markets up in the high single digits, and restaurants essentially flat. The international business was strong with growth of 5%, with Europe up 4%, and Asia Pacific was up 11% due to strong equipment sales. Test and measurement and electronics, organic revenue turned positive for the first time in five quarters, up 2%, with test and measurement essentially flat as electronics grew 6%, the highest growth rate since the fourth quarter of 2022, as semiconductor electronics activity started to pick up. As we've talked about before, because of our focused growth investments, including customer-back innovation, through the cycle, we remain very well positioned to capitalize on a long list of attractive growth opportunities as the semi-electronics recovery begins to take shape. Operating margins expanded by 170 basis points in the quarter to 27%. Moving on to slide six. Organic growth in welding improved as organic revenue was essentially flat after five subsequent quarters of year-over-year declines. Equipment was flat and consumables were down 1%. While North America was down 2%, international grew 9%, with strong growth in China as a result of some very targeted customer-back innovation efforts. Throughout 2024, the welding team continued to benefit from a strong pipeline of new products, contributing more than 3% to growth. In our view, this is a great example of our strategic CBI efforts and the adoption of our next phase CBI framework gives our divisions the ability to gain share and outgrow end markets on a consistent basis. Operating margin of 31.2% was a 160 basis point improvement over the prior year. Polymers and Fluids, organic revenue grew 1% with Polymers up 5%, and Fluids up 1%. Automotive aftermarket, which tends to be more correlated to consumer discretionary spending, was down 1%, which is about two points ahead of end market growth with relevant point of sale data indicating a market that was down 3%. On a geographic basis, North America declined 4%, and international grew 8% with Europe again showing solid demand. Turning to slide seven. Our most interest rate-sensitive segment, construction products, organic growth was down 4% in a tough market as new housing starts were down about 7% globally in Q4. In North America, construction products was down 4%, approximately three points ahead of a market that was down about 7%, with residential renovation down 3% and commercial construction down 9%. Europe was down 3% and Australia and New Zealand were down 8%. The 2025 outlook for the construction market globally remains uncertain with new housing starts in the US expected to be down in the low to mid-single digits. With that as a backdrop, we expect construction products to be about flat in 2025 as we're well positioned to outperform end markets with the launch of new products and market share gains. Operating margin of 28% improved 110 basis points with another significant contribution from strong execution on enterprise initiatives. In expected, specialty products organic revenue was down 4% with a planned 5% reduction in revenue from strategic PLS as the team continues to take the necessary actions to strategically reposition the segment for consistent above-market growth. While the work is not complete, the progress so far has been encouraging. 2024 organic growth of more than 3%, margin improvement of 380 basis points, gives you a sense of the strategic and financial value we derive from PLS. Operating margin was a record 28.4% for the quarter. Moving to slide eight and full year 2024 results. As you've seen from Illinois Tool Works Inc. all year, our colleagues around the world continue to execute at a high level for our customers and for the enterprise. As a result of their efforts, Illinois Tool Works Inc. consistently outperformed end markets and delivered record results on key performance metrics such as earnings, operating margin, and after-tax return on capital. Throughout 2024, we remained focused on maximizing our growth and performance over the long term as we invested in projects that accelerate above-market organic growth and sustained productivity in our highly profitable core businesses. We raised our dividend for the sixty-first consecutive year by 7% and returned more than $3.2 billion to shareholders in the form of dividends and share repurchases. Moving to slide nine for an update on one of our key strategic priorities. As we've talked about before, customer-back innovation is the most impactful driver of our ability to consistently grow revenue above market. The CBI revenue of today fuels our ability to drive market penetration and share gains in the future. Over the past few years, we've expanded our CBI revenue yield from less than a percent pre-COVID to 2% in 2024. We're well positioned for further improvement in 2025 based on the recent launch of our next phase CBI framework. We can feel the energy and excitement from our divisional teams as they implement the framework in their divisions. And as Chris said, we're particularly pleased with the 18% increase in patent filings in 2024. Because every one of those patents is tied to a known customer pain point, and represents a high-quality growth opportunity for Illinois Tool Works Inc. In 2025, we will continue to work on fully adopting our new CBI framework in each one of our divisions consistent with the pace required to deliver CBI yield of 3% plus by 2030. Let's move to slide ten and our guidance for full year 2025. As you can see, Illinois Tool Works Inc. is once again well positioned to execute at a high level and outperform our end markets in any scenario. We aim to improve margins by approximately 100 basis points with another strong contribution from enterprise initiatives. Per our usual process, our organic growth projection of 0% to 2% or 1% to 3% excluding strategic PLS of a percentage point is based on current levels of demand adjusted for typical seasonality. Foreign currency translation at current rates represents a 3% top-line headwind. In terms of profitability, operating margin is expected to improve by about 100 basis points to a range of 26.5% to 27.5%, which includes approximately a 100 basis point contribution from projects related to enterprise initiatives that are independent of volume, ranging from 60 to 170 basis points in each segment. We are projecting GAAP EPS in the range of $10.15 to $10.55, which includes a longer list than usual of non-operational headwinds, including $0.30 of unfavorable foreign currency translation impact and $0.15 to $0.20 from increased restructuring expenses tied to ongoing 80/20 front-to-back projects, and higher income tax expense with an expected tax rate in the range of 24% to 24.5%. Excluding the $0.30 of non-operational headwind from foreign currency, EPS would be $10.65 at the midpoint, an increase of 5% versus last year. In terms of cadence for the year, we expect a first half, second half EPS split of about 47% and 53% as compared to our usual 49% and 51%, which is due to increased restructuring expenses in the first half of the year. Combined with the typical sequential step down in revenues from Q4 to Q1, we therefore expect Q1 EPS to contribute about 22% of the year's EPS, slightly below our typical 23% to 24%. As I mentioned, we expect strong free cash flows with conversion greater than net income, and per our disciplined capital allocation framework, surplus capital is allocated to an active share repurchase program as we plan to buy back $1.5 billion of our own shares in 2025. Our guidance does not account for any pricing adjustments made in response to the implementation of tariffs. Illinois Tool Works Inc.'s produce-what-we-sell strategy largely mitigates potential tariff impact, and we're comfortable that once again we're in a position to read and react as necessary by adjusting price in response to higher costs as a result of tariffs. Based on our past experience, most recently in 2017 and 2018, and our strong operational capabilities, we believe that the price-cost equation is manageable for Illinois Tool Works Inc. across a wide range of scenarios. Turning to our last slide, slide eleven, for our 2025 organic growth projections by segment. As you can see, six of our seven segments are projecting positive organic growth, based on current run rates adjusted for typical seasonality. Every segment is well positioned to outperform their end markets again in 2025, and consistent with our continuous improvement, never-satisfied mindset, every segment is also projecting margin improvement with another solid contribution from enterprise initiatives. In summary, our segments are heading into 2025 well positioned to execute again as they continue to outperform their underlying end markets and improve margins and profitability. With that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Tamika, please open the line for questions. Operator: At this time, if you would like to ask a question, press star one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Steven Bockman with Jefferies. Steven Bockman: Great. Good morning, everybody. Thanks for taking the question. Morning. Couple of things here, Michael. I think you gave a range of enterprise initiative benefits on the various segments, but I was too slow to write it down. But can you just maybe call out where this top and bottom kind of impact would be from enterprise initiatives on the appointment level? Michael Larsen: Yeah. The largest impact, as you might expect, is I said 190 basis points would be in our automotive OEM segment. You know, we've talked about the margin improvement plan there going back to Investor Day in 2023. And so that's where the largest opportunity probably resides. And then at the lower end, you would expect segments that are already operating margins in the kind of low thirties, maybe something like welding, would be in that maybe 60 basis points plus range. So that's kinda the I think the important point is that every one of our segments has opportunity for further improvement in margins, driven by enterprise initiatives, which, as you know, are independent of volume, which is a great place to be going into a pretty uncertain 2025. Steven Bockman: Okay. Great. And then maybe just bigger picture. Thank for the slide on CBI. But that's the one I think it's toughest for us to kind of explain. Wondering if there is a segment or maybe just even a couple of very specific projects that you could call out that kinda illustrate the power of WebCVI. Michael Larsen: Yeah. So, Steve, I would say that CBI is well represented across all seven segments. Every division is working on this in a very intentional way. And we have a great pipeline of new products right across the company. But it's called a one where we're seeing some steady impact in 2024. Welding, obviously, we've called on a few on a few different calls here as having made great progress in what has been a very difficult market in welding, we certainly mitigated that market admission by basically coming to us to 3% innovation contribution from welding in 2024, more to come in 2025. But nice increase across the portfolio. The increase you see going into 2025 is broad-based and will impact every segment. But a carload welding specifically in 2024. Operator: Your next question comes from the line of Scott Davis from Melis Research. Scott Davis: Hey. Good morning, guys. Michael Larsen: Hey. Good morning, Scott. Scott Davis: I'm just kind of amazed that you can increase margins in a down volume environment. I mean, it just doesn't happen very often in our world. Unless you're coming off, like, a really big restructuring or something, which is not really the case, but you guys help us understand. Let's just take auto as an example. When you look at your performance in auto, it's you know, can you kinda parse it down to, you know, mixed benefit, new product benefit, you're getting better price and margin with new products, are you more efficient with your labor or your fixed assets? I mean, if there's any way to kinda break down how this kinda special sauce is working, I think it would be it'd be helpful. Michael Larsen: Yeah. So, Scott, I would say in auto specific we kinda call this out somewhat at Investor Day in terms of, you know, the main drivers of margin improvement in auto were gonna be, you know, volume recovery. Obviously, we're not getting a whole lot of that at the moment, but the other main components were enterprise initiatives and then higher margin on CBI. And that's really what's driving, you know, the margins in auto. Enterprise initiative is just kind of how we think about those, and obviously, we've been delivering on those across the an appraisal for a while. But really and it continue to be an important contributor results. Really, these initiatives, which as we called out, are independent of volume, are really an outcome of what we consider to be just this very, very strong continuous improvement mindset that's very much part of Illinois Tool Works Inc.'s DNA and really drives the visual quality of practice in areas like 80/20 front to back and strategic sourcing. These are very much bottom-up initiatives driven by our talented people in our divisions at a very granular level. Most of these projects are less than a half million dollars individually, when you have 84 divisions, they add up to a real meaningful number here. So have a lot of visibility, ownership, and accountability in our divisions around these initiatives. And as a track record, as indicated here, with respect to enterprise initiatives over the last eleven years, our divisions have very much done what they said they would do. So we believe these are all sustainable. On the back of this ownership and accountability, that's fundamental to our culture, strong continuous improvement mindset that we would say is now hardwired into our divisions. And in the case of 80/20 front to back, as you've heard us say on many occasions, this is something that we've never done with. It's the gift that keeps on giving. So with that, we see this contribution continuing. Obviously, Michael's called out called it out again at a hundred basis points in 2025. It's ultimately that that's what makes it sustainable is your continuous improvement mindset that exists across all of our businesses. Not just in auto. In auto, we also have, as we do elsewhere, you know, the whole impact higher margin impact of CBI. And the other aspect that's fundamental to enterprise initiatives is PLS. Which we called out, you know, a number of times in this call. As being fundamentally valuable to us, not just from a growth standpoint in terms of you know, clarifying where to grow, simplifying our portfolio, and simplifying the allocation of resources. But also in terms of the margin pop that we get, from enterprise initiatives around PLS. And a lot of those projects have a payback of a year or less. Scott Davis: Okay. That's helpful. And guys, you didn't mention M&A in your prepared remarks, and I know this stuff can be a little lumpy, but I happen to have a view that you guys can be arguably the quote best owner for lots of different stuff because you've been successful in the past and running lots of different widget businesses and that skill seems to be transferable, I would think. But maybe I'm overstating that. There's just a little color on what's holding you back on M&A? Is it price? Is it the opportunity set? Is it you know, I would think you'd have a fair amount of confidence in your organization that you could integrate and win with a pretty wide set, I guess, is kinda my point. Michael Larsen: Yeah. I think if we've outlined, you know, basically, we remain pretty disciplined in terms of M&A, in terms of our portfolio management strategy. You know, we certainly have a clear we would say a clear and well-defined view of what fits our strategy in our financial criteria. So it really is a question of us finding the right opportunities. You know, we're focused on high-quality acquisitions that would extend our long-term growth potential minimum 4% plus, a growth of high quality, and then being able to leverage the business model to improve margins. So I would say we review opportunities on an ongoing basis. We are very selective, you know, given all the organic growth potential we have in our core businesses. But we are pretty active in terms of reviewing opportunities. And to the extent that we find the right opportunities, we'll be appropriately aggressive in pursuing them. And I would say, you know, going back to the MTS example of an opportunity that really ticked all the boxes for us and know, although, you know, in two years in here, we are this is turning into a home run for us. And then that was largely on the basis that you know, it really met all the characteristics that we look at. But rest assured, we're pretty active. We just need to find the right opportunities. Operator: Your next question is from the line of Andrew Kaplowitz with Citigroup. Andrew Kaplowitz: Hey, guys. Close enough. How are you doing? So Chris or Michael, I know you're forecasting your segments based on current run rates for 2025 and Chris mentioned that orders haven't picked up yet. But I was intrigued by your commentary that your sequential growth from Q3 to Q4 was 3.7%, you know, greater than 1.5% in store growth. So but you see through the end of the year better yet through January, any pickup in sales momentum that's worth calling out. You did call out semi recovery. Beginning with the intestine measurement. Do you forecast that to continue? Is there anything else you're seeing? Michael Larsen: I think it's a little too early. Probably, I need to call a recovery here for sure. We are seeing some positive signs. We called out semi electronics. You know, going through the fourth quarter, we saw a pretty solid December. What we usually do. And so I think we don't wanna get too far ahead of ourselves here at this point. So we've modeled as we always do based on run rate. And if certainly, if market conditions improve, if demand picks up in the second half. And there are, I should say, certainly some external indicators that would suggest that that is a possibility. You know, we're really well positioned to take advantage of those growth opportunities. And if that turns out to be the case, you know, 1% to 3% organic XPELS you know, would be on the conservative side. But, you know, we don't wanna get too far ahead of ourselves. We're focused on the things that know, we can control. We just talked about the margin improvement from enterprise initiatives. And know, when the inevitable recovery happens, we're gonna be in a great position to continue to outgrow the underlying markets. So that's kinda how we've positioned this. Andrew Kaplowitz: Helpful, Michael. And could you give us more color into your ability to continue outperform in China? I mean, it's been very impressive. Obviously, it's focused on China automotive. So maybe just talk about that. I think you already said that you expect similar level levels of outperformance in 2025 or is it 2024 in China Automotive? Automotive in general? But maybe talk about what you're doing there. Is it really CVI that's helping you or something else? Michael Larsen: Yeah. So, Andy, the performance in China relative to automotive has been going on for quite a while now. And it really speaks to the quality, you know, of the team that we've built in China, the investments we've made in China, over many years. And you're right. CVI is a large part of this, particularly you know, our growth in EV in China has been significant. You saw it again this year where we outperformed builds in China by about 800 basis points. We expect similar outperformance in China next year in automotive really on the back of, you know, the resource base the investments that we've made, the really best in class innovation and business model application that we see in China that's put us in a position not just to outperform on revenues, but even from a margin standpoint, you know, our margin in China are pretty much similar to what they are elsewhere in the world. So you know, it's really a factor of the organization and organizational capabilities we built across the business model innovation, and growth in China. Andrew Kaplowitz: Appreciate the color, guys. Michael Larsen: Thanks, Andy. Operator: Next question is from a line of Jeff Sprague with Vertical Research. Jeff Sprague: Hey. Thank you. Good morning, everyone. Hey. I just wanted to think about the in a relationship with PLS and CBI. Right? Regardless of how good your margins are, right, there's always gonna be a twenty in your construct. So should we think of you know, CBI also just kinda constantly reloading the PLS opportunity set. And if that's the case, should we just kinda be thinking about it I don't know. Secular 1% headwind on PLS indefinitely as the as the CBI benefits kinda build on the other side of that equation? Michael Larsen: Yeah. So maybe just refresh, I think, in terms of, you know, our philosophy and how we think about product identification and, you know, the value that accrues for us. So I would say, Jeff, you know, PLS for us is very much an essential part of the ongoing strategic review and portfolio pruning. That goes on really as a critical part of the implementation of 80/20 front to back in all of our divisions. And, you know, we got pretty much a trade and trusted methodology around this that's deeply embedded and very well understood. It certainly requires discipline, but there is a lot of benefits that our divisions get from proper PLS implementation. And even though there's a short-term kind of revenue impact, here, this has always been positive for us in the long term from a growth standpoint. And that PLS provides strategic clarity, which ultimately will help CBI for sure. But not just clarity, but also execution on our division's most critical customers and products. And effective resource deployment around that, again, which all indirectly helps CBI. Then from a margin improvement standpoint, of course, you know, we get the cost savings from PLS, which ultimately are a meaningful component of the enterprise initiatives. And so I would say with PLS, you know, there's no doubt that the specific way that we execute PLS. It's very much an ongoing kind of value-creating activity for us in our divisions. And like I say, we have a lot of positive experience and expertise on this. So we saw this, you know, very much so, and especially this year, but on our overall business on an ongoing basis. But the clarity that comes out of PLS ultimately will be an enabler around CBI. And Jeff, if I may just add, you know, PLS was a little higher in 2024 than kind of our normal maintenance run rate of about half a point, which was entirely driven by the work that was done in specialty products. And I talked a little about the outcomes and the momentum going into 2025 in that segment. You know, we're a little bit higher this year. As well at a point, primarily in automotive, construction, and then more work to do in specialty products. I think it's too early to tell whether this is kind of a new I think you call it a secular kinda work. Now the runway is about a point. I think it's a little too early to say. Let's get through this year, and then we'll kinda see what it rolls up to next year. But the important thing is as Chris said, this is an outcome of how we run these businesses. We're not trying to manage the PLS number because we know the strategic and financial value that we derive from doing PLS in our businesses. Jeff Sprague: Great. Thanks for that perspective. And then maybe just a little tactical one on auto, right, in region four region, but you know, even in region. Right? US, Canada, Mexico, Mexico, could be a lot of scrambling going on in the supply chain, maybe a reprieve here this week. But you know, are you seeing any, like, unusual change in order patterns? People trying to, you know, get in front of maybe just the expiration of this thirty-day cooling-off period. You know, just any other kind of tariff-related noise that you might be seeing would be interesting. Michael Larsen: Yeah. Jeff, to be honest, I would say it's too early to tell. I mean, obviously, it's been a pretty choppy week on the tariff front. But look, all I would say is that we're really well positioned here to read and react. To whatever comes along, and we're confident that this is not really a state EPS for us. This year. Right. And we, you know, we have assets in all these geographies where uniquely positioned to take care of customers and that's gonna be our priority as we manage through this. Operator: Your next question is from the line of Jamie Cook with Truist Securities. Jamie Cook: Good morning. I guess just two questions. You know, one, just back on auto again. Another question just obviously, auto has been a great content story for you. If we shift back more to ICE versus EV, just wondering what the potential headwind could be for the auto business given just been such a great growth driver. And then my second question, Chris, to you. Obviously, you know, under you, CBI seems to be I don't wanna say more important, but it's definitely getting more press or you're talking about it more, I would say, relative to your predecessors. But just trying to think about the 30% plus margin target. We do get some, you know, criticism that that might be too high or maybe it gets pushed out as we're focused on CBI. So just anything you can say about your confidence level there is it just a function of volumes or anything you wanna say on that target? Thank you. Chris O'Hearlihy: Yes. So let me start with the CBI and margin impact. First, Jamie, if I could. You know, we would say that actually seeing CBI is likely to be an on margins because ordinarily, when we invent differentiated new products, margins tend to be higher. And with respect to the whole organic growth versus margin question, which I think you're posing, you know, from our perspective, organic growth and margin go hand in hand. And I would even say that historically, our fastest-growing business have often been our highest margin businesses. And I think we also demonstrated, you know, coming out of the pandemic where we had both healthy growth and margin expansion. Right? Over that period, we are investing, you know, in a very focused way in resources like innovation and strategic marketing to position us to grow at 4% plus. Percent in the long term. So for us, I mean, you know, it really comes down to as we often talk about in Illinois Tool Works Inc., the quality of organic growth. You know, the fact that we can deliver organic growth at these high incrementals, which is really a natural outcome of applying our business model to this high-quality portfolio of businesses. Yeah. So the math is pretty simple. You know, given our margin is 26% with growth at 35% plus incrementals, then, you know, we expand margin. And in fact, the path of 30%, as we have pointed out, is much more paved with operating leverage than structural cost reduction. And then this is why effectively. It's a that our primary road to 30% in 2030. You know, given the high levels of differentiation in our portfolio, you know, we have very healthy gross margins. This provides more than enough investment firepower to appropriately invest in our business to help drive CBI and growth while still delivering very healthy incremental margins. And on the back of that, of course, continued expansion in operating margins. And then I think, Jamie, you asked about kind of the transition the pace of the transition from ICE to EV and you know, I think for us, at this point, our content per vehicle, ICE versus EV is about the same. Our margin profile is about the same. And so we are fairly agnostic to any mix in ICE versus EV at this point. Obviously, we've been as we've talked about many times on this call, really well positioned, particularly in China where the growth has been and the content, the vehicle growth has been really terrific. So at this point, we don't see this as a major issue for the company. Operator: Thank you. Your next question is from the line of Joe Ritchie with Goldman Sachs. Joe Ritchie: Hey, guys. Good morning. Michael Larsen: Hey. Joe Ritchie: So just talking about PLS and because back innovation. I guess on the PLS side, yeah, how much is PLS how much has that been contributing to the margin expansion? Like, much they contribute in 2024 and the expectation from 2025? And then your commentary on CVI is very, very interesting. I'm just curious, like, which segments are furthest maybe, behind or in the earlier stages of implementing it. Michael Larsen: Yes. So the generic ask answer to your question in terms of the contribution margin contribution with PLS in the overall context of enterprise initiatives, it varies from year to year, Joe, but I'd say, you know, directionally, it's in the 50/50 range, I would say. On CBI, like I said, you know, we have, you know, broad-based kind of improvement on CBI across the portfolio. All seven segments are working on this and making improvements. If I was to call out ones that are probably further ahead, I referenced welding already. You know, automotive, you know, obviously, necessarily so given the level of disruption that we see in automotive markets right now. Food equipment, obviously, a very fertile space for innovation on the back of energy and water savings. And then test measurement electronics, another area where you know, significant change in those end markets around increasing stringency in innovation standards, in quality control standards. Obviously, new materials being developed require new test methods. That's another area where we've had a lot of early success, I would say. But rest assured, all seven segments, you know, we'll see an improvement in innovation contribution as we go forward. Joe Ritchie: That's helpful, Chris. And if I could maybe just follow-up with one more. I recognize you're planning to do, you know, the billion and a half in buyback this year. You take a look at your balance sheet right now. It's in a good position. If you wanted to lever up another turn, would be pretty easy for you to do a more aggressive buyback. I'm just curious, like, under what scenario would you maybe consider doing maybe a little bit more and be a little bit more aggressive buying back your shares? Michael Larsen: Yeah, Joe. So the $1.5 billion that we've penciled in for this year is our best estimate of what the surplus capital is gonna be for the company this year. So, you know, once we've fully funded our internal investments for growth and productivity, once we've paid the dividend any acquisitions, and then what's left is allocated to share repurchases. And obviously, to the extent that the performance of the company exceeds kind of the guidance we gave you today, whether it's top line or margins or we still have opportunity on working capital, as I said in my remarks, and that $1.5 billion goes higher than typically, what we would do is allocate that excess surplus capital also to the share buyback program. So maybe one way to think about the $1.5 billion is it's at least $1.5 billion. And to the extent the company performs, you know, better than what we laid out for you today, the number could be higher than that. I think in terms of capital structure, if I may, without getting too technical here, I think we've made some really good adjustments over the last few years in response to a higher interest rate environment. And I'll just point to our interest rate. Our interest expense in the fourth quarter being down year over year, our projection for 2025 is flat to maybe even down slightly. Despite the fact that interest rates are significantly higher. I think if you just look at kinda what other peers are talking about, I think that would compare pretty favorably. And so in terms of capital structure, we would say we're in a pretty optimal place at this point in time. And do not foresee any major changes in terms of capital structure or capital allocation for that matter as we enter into 2025. Operator: Your next question is from the line of Tami Zakaria with JPMorgan. Tami Zakaria: Hi. Good morning. Thank you so much. Hi. Starting back on the tariff topic, I appreciate that it's too early to tell. But can you remind us of your exposure to direct imports from countries like Mexico and also the EU and Canada? The reason I asked last time in 2018, you did provide some numbers around imports from China and how that would impact the P&L. Which was very helpful. So anything you're able to or willing to share now? Michael Larsen: Yeah. I think with all the usual caveats, I'll just I'll give you kinda a way to think about this, Tami. The combined imports from China, Canada, and Mexico account for less than 10% of our domestic spend here in the US. So China, it's kind of in the mid-single digit 5%. Five, six percent range. Canada, 2%, Mexico, 2%. So and then, obviously, you know, Europe, slightly different equation there. But that's for those three. So you add that up, and do kinda know, back at the let's just pick China for a moment. Okay? So roughly $250 million of imports from China 10% increase is $25 million. Which means we have to go get price of at least $25 million. And probably a little bit more than that to recover the margin impact as well. So you know, I think the and this is a $16 billion company. So I think that's kinda why combined with our produce where we sell strategy, you know, our ability to read and react at the divisional level, you know, we feel like as we sit here today, this is a manageable equation. We've got a game plan in place that will cover tariff-related material cost inflation with price actions based on, you know, some pretty positive experience doing the same thing coming out of 2017, 2018, and by the way, a very inflationary period coming out of COVID, given the differentiated nature of our businesses, our ability to execute and take care of customers, we feel very good about our ability to offset, you know, those tariff-related cost increases. So pretty much in any scenario that we can think of as we sit here today, we feel like we're in a good spot. Tami Zakaria: Got it. So a quick follow-up. Minus any tariff-related noise, what is the expectation for price cost for this year that's embedded in the guide? Michael Larsen: Yeah. I think Tami, we're kinda back in kind of a normal price cost environment. Historically, we have offset cost increases with price on a dollar basis and also it's been slightly favorable from a margin standpoint as well. So, you know, keep in mind that you know, given the performance and the value of the product and services that we offer. You know, we're in a good position here to get price to offset any potential cost increases. Operator: Your next question is from the line of Julian Mitchell with Barclays. Julian Mitchell: Hey, Julian. Hi. Good afternoon. Michael Larsen: Hey. Good morning. Julian Mitchell: Maybe just the first question around the top line sort of cadence. You know, understood, Michael, what you said about Q1. Yeah. The first half share of earnings. Anything you'd call out on the sort of top line movement through the year and anything on sort of any segments we should bear in mind when looking at the slide eleven weightings. Michael Larsen: Yeah. I think, Julian, typically, I'll refer to kind of the typical seasonality. And so what usually happens from Q4 to Q1 revenues sequentially declined by kinda 3% ish with a little bit more than that last year. In 2024 and in 2023. If that happens, that's about a little over $100 million. That's organic growth that's down about one. And then foreign currency with rates as we sit here today adds another three points of pressure. So now you got revenues kinda down in that three to five range. Margins typically start out at the lower end in Q1 and kind of progress from there as we go through the year. Just like top line, by the way, goes up Q1 to Q2. Q2 Q3 is about flat, and then there's another pickup again from Q3 to Q4. And then we have these non-operational headwinds beyond currency, including, you know, somewhat higher restructuring in the first half of 2025. All related to 80/20 front to back project, the TADA. These are projects less than a year payback that are feeding the enterprise savings to margin improvement that we are putting up every quarter, that will be more weighted towards the first and the second quarter, and we have a little bit of headwind on the tax rate as well in the first half. So you add all that up, know, just relative to Q4, EPS $2.54. Revenue's probably ten cents of EPS headwind. Going into Q1 and then maybe another ten cents of headwind from the combination of higher restructuring expense and a higher tax rate. So that's that 22% of the full year number that we gave you for the first quarter. So hopefully, that's helpful. Julian Mitchell: Okay. That's great. Thank you, Michael. And maybe just wanted to focus perhaps on specialty products for a second. You know, that was one segment that definitely caught the eye the first quarter, few quarters of last year, seems to be, you know, normalizing somewhat on sales in the fourth quarter. So how are we thinking about margins in specialty for the year ahead? There's a lot going on there with PLS and restructuring or reorganization there, it looks like. Maybe just kinda flesh out what the plan is in specialty and any more details on the year ahead there, please. Michael Larsen: Yeah. So as you pointed out, Julian, very solid year in specialty in 2024. You know, some strength in areas like aerospace and then strong demand in areas like food and beverage packaging equipment and so on. And then as we called out, you know, all through the year, this has all been done at a time when we were doing some strategic portfolio repositioning for long-term growth. And that's certainly, you know, with a significant impact in Q4 as you saw both hundred basis points. There's some carryover on this in 2025. But we expect growth in specialty in 2025 despite the PLS. We also expect margin improvement in specialty in 2025. And the objective here is to make this segment a 4% grower in the long term. And based on 2022 to 2024 performance, we're certainly well on our way to doing that. Julian Mitchell: Great. Thank you. Michael Larsen: Sure. Sure. Operator: Your next question is from the line of Nigel Cole with Research? Nigel Cole: Oh, good morning. Thanks for the question. Just wanted to talk about the 90 bps of margin expansion at the midpoint, x items. In general sense on where you see. Know you don't provide margin guidance by segment, but if you could just make any comments the best opportunities for, Omex and we're perhaps you know, those below the bar. And in particular, I just wanted to try and dig into the auto margins just given, you know, first half relatively depressed. And that the extra rate close to 20%. So just wondering you're seeing in auto specifically. Michael Larsen: Yeah. So Nigel, you're right. We don't really give margin guidance by segment, but what I can tell you is that we expect based on kind of the bottom-up projection that we received, from our segments at Plantheim, we expect every one of our segments to improve margins in 2025. And that's based on what they told us, not what Chris and I would like to see. You know? And so I think, obviously, the businesses that are the segment that are a little further along in terms of the journey towards 30%. So if you think about welding, I think those you know, it can be a little bit more challenging. You know, if you without getting too detailed, just look at the growth at five, forty percent incrementals, you get less of margin improvement in welding than you do, for example, in automotive. Now in automotive, you're right. We're not counting on a lot of lift here from in fact, we're counting on a market that's down in the low single digits. And the big driver here in 2025 is the enterprise initiatives. And so that's really that's what's fueling the margin improvement in that you know, call it a hundred basis points of margin improvement in automotive in 2025. So we still you know, we've got a lot of things that are still within our control from a margin improvement standpoint. Independent of volume, that's a great place to be. We'd love to see some operating leverage. And if you just look at it as an example. If you we try to call it specialty products, you know, a little you know, 3% growth and suddenly margins are up, you know, more than 300 basis points. And that's so they're the incrementals when this growth starts to come through. At least in the near term, I'm gonna be you know, quite a bit higher than our kinda historical 35% to 40% incremental margins. And that's really from there, that's where the margin improvement really accelerates. So hopefully, that's helpful, Nigel. Nigel Cole: It is, Michael. Yeah. Thanks. And just I just wanna double click into that one key restructuring. This is fifteen cents. I think it's fifty-five, sixty million dollars of pretax investments. Just given that you don't disclose restructuring by setting and any help in terms of where you see the heaviest impacts across portfolio? Michael Larsen: I'd rather not get into that level of detail now. So we'll call it out when we report. Q1. You'll be able to see kind of we've got that schedule in the back of the press release that laid out the restructuring. Suffice it to say that, you know, there's opportunity for, you know, further margin improvement in every one of these segments. And know, I'd rather not get into the specifics in terms of by segment for the first half. Now just to be clear, the EPS headwind on a year-over-year basis that we called out from restructuring and the tax rate was fifteen to twenty cents. Per share. About half of that is tax and the other half is restructuring. And eighty percent of that restructuring is gonna is planned for the first half of 2025. So it'll be a little bit of a challenging start to the year in terms of the headline numbers. And, you know, we'll help with calling out kind of those non-operational headwinds as we go through the year. But just from a modeling standpoint, we wanna make sure everybody was kinda clear on how the year might unfold. Operator: Your next question is from the line of Joe O'Dea with Wells Fargo. Joe O'Dea: Hi. Good morning. Michael, your comment about, you know, your position to take advantage of an inevitable recovery is encouraging. You know, just curious as you look at the end markets and I think about kind of volumes and cycles, know, what you're looking at, whether it's kinda re or whether it's end market and segment, but, you know, where you think you're gonna see things get better earliest and any perspective from a volume standpoint in terms of, you know, how depressed some of these markets are? Michael Larsen: Yeah. Joe, I wish I could help you there. I mean, I think my crystal ball is not any better than yours. You know, I think the reference to, you know, taking advantage of the recovery was specific to what we're seeing in semi and electronics. I think if you look at some of you know, so that's one cycle that certainly, you know, for two years has been pretty challenged. I think the same could be said for some of our capex driven businesses. Test and measurement, you know, the Instron business, positive growth in Q4, but not the typical kinda five, six, seven organic that you would expect in that business over the long run. You know, welding certainly encouraged that the business is now, you know, flat. Ish in Q4 and down low single digits for the full year. That's a cycle know, typically, those cycles last six to eight quarters, and that's kinda where we're at right now. So the only thing I can just give these are just kinda anecdotal thoughts on where things go from here. But things change quickly. This is you know, we're operating in a pretty fluid and pretty dynamic demand environment with you know, things change pretty quickly here. We, as you know, are more short cycle oriented. So our focus is really on how do we make sure we position ourselves for long-term above-market organic growth in these businesses, continue to invest through these cycles, leveraging our financial position to do so, and then when these recoveries come, we're gonna be in a great spot to compete and gain share and grow with new product. So really the focus that we're talking about. Joe O'Dea: No. I appreciate the call appreciate that color. And then on tariffs and pricing and how you manage the uncertainty, the question is just how quickly you can implement pricing through the system and I'm sure that's not a one size fits all kind of answer, but, you know, living in an environment where you can have such headline whiplash, kind of how you approach that and how long it takes to get pricing in response to, you know, what you would anticipate tariffs could be. Michael Larsen: Yeah. So, Joe, you're correct. It's not really a one size fits all answer because we have, obviously, 84 divisions and 84 different kind of circumstances and opportunity profiles around pricing. But what I can assure you is that, you know, given the decentralized nature of the company, given the fact that decisions are made very close to our customers, then, you know, our nimbleness means that we are quicker to read and react more than most. So there's not a huge lag with us for that reason. Not a whole lot of approvals that are needed to implement pricing. It's done on the ground in the division, close to the customer, relative to the circumstantial opportunity profile that the division sees. Operator: Your next question is from the line of Andrew Obin with Bank of America. Andrew Obin: Yes. Good morning. Good morning. Just to follow-up on short cycle industrial names. So just TMM and E and welding. So just to confirm, we're not modeling any ramp of organic growth this year. And more structurally, once again, just to confirm, if PMI is sustainably over fifty, how fast can these businesses grow, and should we think sort of high single digits as possible in a robust cyclical recovery? Michael Larsen: I think, Andrew, that's that it's impossible to answer that question. I mean, I think we have models based on current levels of demand. We are not modeling a recovery in any of these end markets, including welding and test and measurement. If that indeed happens, you know, we will take full advantage of the growth opportunities. You know, historically, coming out of cycles like this, it's not uncommon to see quarterly growth rates in kind of the mid and maybe even high single digits, but every recovery, as you know, is different. And you know, as we'd like to say, we're not economists here. You know, we are so there's no incentive for us to try to forecast where things go just given the short cycle nature of our businesses. So I'm sorry I can't help you. Andrew Obin: No. No. That's a great answer. Thank you. And just on food equipment, you know, solid growth in fourth quarter. Right? 3% plus versus the kind of third quarter. Guidance for 1% to 3% organic growth. So why would things decelerate from the fourth quarter? Are you seeing pressure anywhere? Michael Larsen: No. We're not seeing pressure. It's basically again based on, you know, sequential run rates over time, not just the fourth quarter. We are very encouraged about food generally. I would say, you know, we've seen this continued recovery in service. Still not quite back at pre-pandemic levels here. We hope just to refresh we are the only major manufacturer in captive service business and this it's a real differentiator for us. Because it used to be a very first iteration environment in food equipment, as I said earlier around things like water and energy savings. We see continued end market strength in areas like institutions. And then, geographically, I think China and Latin America are expected to be solid geographically. But that's the kind of the view on food equipment. We expect a solid 2025 on the back of a solid 2024. So, Andrew, I'd say we share your optimism, and we'll pass that on to the team that runs the business. Okay. And we'll see how they do this year. But, you know, 1% to 3% further margin improvement, service business is really performing at a good level now given the investments that we talked about. And so we're really feeling good about how we're positioned going into 2025 in food equipment. Operator: Great. And thank you everyone for your time today. This concludes today's call. Thank you for joining. You may now disconnect your line.

Operator: Good morning. My name is Kathleen and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Thank you. Erin Linnihan, Vice President of Investor Relations. You may begin your conference. Erin Linnihan: Thank you, Kathleen. Good morning and welcome to ITW's third quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris O'Hairlehy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Hairlehy. Chris? Chris O'Hairlehy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, during the third quarter, the market demand environment continued to moderate across our portfolio with further softness in the Automotive and Construction markets. Overall, third quarter revenues came in approximately half a percentage point, or $25 million below what they would have been had demand held at the level we were seeing exiting the second quarter. That said, the slowdown in Q3 was less than in Q2, where revenue came in approximately one percentage point, or $50 million below run rate. As a result, third quarter organic revenue declined 1%, with five segments down year-over-year, partially offset by growth in two segments. This 1% revenue decline compares to our end markets, which we believe were down in the low to mid-single digits. As we have all year, the ITW team continued to successfully navigate and overcome these market challenges with strong operational execution. Those efforts resulted in operating income of $1.05 billion with operating margin of 26.5%, which included a 130 basis point contribution from enterprise initiatives. With little operating leverage, six of seven segments still increased operating margin, resulting in segment operating margin expansion of a 110 basis points. EPS grew 4% to $2.65, excluding the gains from the divestiture that Michael will review in more detail. The continued contribution from enterprise initiatives, regardless of volume, speaks to the power and resilience of our business model. And it is notable that for the first time, three of our segments delivered operating margin above 30% in the quarter. And we are well on our way to achieve our goal of 30% operating margin for the company by 2030. Our continued focused execution and typical operational excellence have enabled ITW to effectively counter persistent market headwinds and achieve increased profitability, where we continue to invest to maximize growth and performance over the long term. Consistent with our long-term commitment to return surplus capital to shareholders by an attractive and growing dividend, on August 2nd, we announced our 61st consecutive dividend increase, raising our dividend by 7%. And year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Today, we are raising our full-year GAAP EPS guidance by a $1.33, from a range of $10.30 to $10.40, to a new range of $11.63 to $11.73, to incorporate the impact of the divestiture gain and a lower projected tax rate for the full year. Based on current levels of demand exiting Q3, we are maintaining our previous operational guidance for revenue and organic growth to be approximately flat for the year and our operating margin to be between 26.5% and 27%. While the ITW team is in a commendable job managing the short-term challenges this year, perhaps more importantly, we continue to deliver solid progress on our next phase enterprise strategy priorities. As we outlined to you a year ago, the central focus of the next phase of our enterprise strategy is to elevate high-quality organic growth and customer-backed innovation as key ITW differentiators, on par with our best-in-class operational capabilities and financial performance. This quarter, we made further progress in our journey to achieve this strategic goal. We believe that customer-backed innovation, or CBI as we call it, is the most impactful driver of our ability to consistently grow revenue above market. In essence, the customer-backed innovation revenue of today fuels the ability to drive market penetration and share gain in the future. Over the past few years, we've made progress on expanding our revenue from CBI from less than a percent in 2017 to approximately 2% today. And at our September Leadership conference, we launched the next phase CBI framework for our 84 divisions around the world. Just as we successfully focused the entire organization on 80-20 front-to-back over a decade ago, we are now doubling down on customer-backed innovation. And I, for one, can feel the energy, excitement, and momentum from our team as they implement this strategy at each division. With our continued laser focus on our typical do-what-we-say execution, it is with strong conviction that I know we will build above-market organic growth fueled by customer-backed innovation into a defining ITW strength. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and dedication in serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I now turn the call over to Michael to discuss our Q3 performance and full year guidance in more detail. Michael. Michael Larsen: Thank you, Chris. And good morning, everyone. Starting on Slide 3, and as expected, the third quarter ended up looking a lot like the second quarter with continued strong operational execution in a moderating demand environment. Total revenue declined 1.6%, with organic revenue down 1.4%. Foreign currency translation reduced revenue by 0.4%, and acquisitions increased revenue by 0.2%. On a geographic basis, organic revenue declined about 3% in North America. Europe was down 0.5% and Asia Pacific was down 1% with China, essentially flat. In this environment, the ITW team continued to focus and execute well on the things that we can control as evidenced by six of our seven segments, expanding operating margin, driven primarily by enterprise initiatives that contributed between 70 and a 180 basis points to each segment and a 130 basis points at the enterprise level. Third quarter operating margin was 26.5%, up 30 basis points sequentially from the second quarter and flat with the prior year due to a tough comparison. As you may recall, last year's Q3 margin of 26.5% expanded 200 basis points compared to 2022 due in part to the favorable impact of a few corporate items that we discussed on the call last year, including a one-time insurance recovery. Excluding those one-time items last year and looking just at segment operating margin, which is included in the press release tables, our segment operating margin increased by a 110 basis points compared to the prior year, which is more in line with our typical margin expansion on a quarterly basis. GAAP EPS of $3.91 was up 53% and included a $1.26 gain from the divestiture of our non-controlling equity interest in Wilsonart. Excluding this gain, EPS of $2.65 was an increase of 4% year-over-year. I want to spend a minute on a previously announced Wilsonart divestiture. The proceeds from the transaction, net of transaction costs were approximately $395 million, which we reduced to reduce our commercial paper balance. The transaction resulted in a pre-tax gain of $363 million and income taxes on the gain were more than offset by a discrete tax benefit of a $107 million related to the utilization of capital loss carry forwards, which resulted in the favorable GAAP EPS impact of a $1.26. Free cash flow was $783 million, which was 102% conversion of adjusted net income. And as Chris mentioned in the third quarter, we raised our dividend by 7% to an annualized payout of $6 per share, which marks our 61st consecutive year of increases. And as planned, we repurchased $375 million of our own shares during the quarter. The effective tax rate in the quarter of 14.9% was below our typical tax rate in the 24% to 25% range. As you can see from the reconciliation, the press release, the tax rate was favorably impacted by several discrete items in the quarter, including the Wilsonart transaction. Excluding these discrete items, our core tax rate was 23.7%. So in summary, the third quarter looked a lot like the second quarter with moderating, but also stable demand and solid operating margin and profitability performance as we continue to focus and execute well on the things that we can control. Please turn to Slide 4, for a look at our year-to-date segment margin performance. And as you can see from the table on the left side, six of our seven segments have expanded their already best-in-class margins year-to-date and three segments by more than a 100 basis points. Food Equipment is a bit of an outlier due to the growth investments in our service business and specifically the near-term inefficiencies associated with on-boarding of new service technicians to support accelerated organic growth in this business. This margin headwind is now largely behind the Food Equipment segment as evidenced by a 110 basis points of margin improvement in the third quarter. Total company margin is up a 180 basis points, which in fairness includes a 100 basis points from the one-time LIFO adjustment in the first quarter, but still solid performance in the current environment. Moving to the segments and starting with Automotive OEM, organic revenue declined 3% in the third quarter as industry build rates continue to come down. North America was down 6% as the D3 customer bills were down 9%. Europe was down 5% and China was down 2%. Compared to the automobile industry build data, the segment has outperformed bills by about 200 basis points year-to-date and we expect similar outperformance in the fourth quarter. The segment also delivered solid operating margin performance of 19.4% and 50 basis points increase despite lower volume and we expect more progress in the fourth quarter and next year as we continue to work towards our long-term goal of achieving operating margins in the low to mid 20s by 2026 in this segment. Turn to Slide 5, organic revenue in Food Equipment was about flat against a tough comp of plus 6% last year as equipment was down 4% and offset by service, which grew 7%. Regionally, North America was down 2% after being up 10% last year with institutional sales about flat as healthcare was up mid single digits and restaurants were down about 10%. International was solid up 3% with the service business up 8% and Europe up 4%. Operating margin improved a 110 basis points due to the service margin normalizing and a solid contribution from enterprise initiatives. As we mentioned last quarter, we expect margin to continue to improve as we go through the year. Test & Measurement and Electronics, organic revenue was down only 1% after being down 3% last quarter with stable demand in Semiconductor Electronics and CapEx sensitive end markets. While Test & Measurement was down 3%, Electronics was up 1% in the quarter after being down 3% last quarter. And this marked the first quarter of positive growth in Electronics since the end of 2022. And we're beginning to see increased Semiconductor customer activity suggesting that perhaps we are near a bottom for this market. As we've discussed before, we remain very well positioned to capitalize on the growth opportunities in this space when the inevitable recovery does happen. Operating margin expanded by 190 basis points in the quarter to 25.7%. Moving on to Slide 6, Welding's organic revenue declined 1%, a meaningful improvement from being down 5% in the second quarter as both Equipment and Consumables revenue declined 1%. Both America revenue was down 2% but International was up 6% with solid growth in Europe and China. As we talked about at the beginning of the year, the Welding team was planning on a solid contribution to the top line from the launch of new products, which in the third quarter resulted in a 3% plus contribution to growth. And this is just one of many examples inside the company that illustrates how continued progress on CBI as Chris was talking about, gives our segments the ability to gain share and outgrow their end markets. Operating margin of 32.3% was a third quarter record for the Welding segment. Polymers & Fluids, organic revenue grew 1% with Polymers up 10% due to international strength and Fluids was up 3%. Automotive aftermarket, which as you know, is tied closely to consumer discretionary spending was down 3% in the quarter. On a geographic basis, North America declined 5% and International grew 11% with Europe again showing solid demand. Turn to Slide 7, organic revenue in Construction products was down 9% as Construction end markets took a sizable step back from the second quarter with new housing starts down 10% on an annualized basis as compared to down 6% in the second quarter. As a result, North America declined 10% with residential down 12% and commercial construction down 7%. Europe was down 4% and Australia and New Zealand was down 11%. Despite the lower volume, operating margin of 30.2% was a record for the segment with another significant contribution from enterprise initiatives. Finally, specialty products had a solid quarter with organic revenue growth of 6% with strength across the portfolio as both Equipment and Consumables were up 6%. North America was up 8% and International grew 2%. The 6% growth rate for the segment included about 200 basis points of PLS or product line simplification in the quarter. As we continue to make progress on repositioning some of our specialty products divisions for consistent above market organic growth. We expect about 300 basis points of PLS in the fourth quarter and that the segment will be flat to up low single digits for the full year. Operating margin expanded 330 basis points to 31.1%, a third quarter record for the segment with strong contributions from operating leverage and enterprise initiatives. Moving to Slide 8 and our updated full year 2024 guidance. As you've seen all year, the ITW team continues to execute at a very high level and find a way to leverage our business model and high quality diversified business portfolio to deliver solid operational and financial results in a challenging demand environment. Looking ahead at the fourth quarter, we do not expect the near-term demand environment to improve, and as usual, our guidance is based on current levels of demand, seasonally adjusted, and foreign currency exchange rates. As a result, we're maintaining our previous projection for revenue and organic growth to be approximately flat for the year. We're also maintaining our full year operating margin guidance, which is projected to be between 26.5% and 27%, an improvement of a 165 basis points at the midpoint, with enterprise initiatives contributing more than a 100 basis points. As you saw in the press release, we incorporated the impact of the Wilsonart divestiture gain and a lower projected effective tax rate of 21.5% for the full year into our EPS guidance, as we raised GAAP EPS guidance from a range of $10.30 to $10.40 per share by $1.33 to a new range of $11.63 to $11.73 per share. Excluding the Wilsonart gain, EPS range is $10.37 to $10.47 per share, or $10.42 at the midpoint. So, in summary, while the overall demand environment remains pretty uncertain and challenging in the near term, we remain laser-focused on leveraging ITW's unique strengths and capabilities to optimize our ability to deliver differentiated performance over the long term. And with that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Kathleen, will you please open the queue for questions? Operator: [Operator Instructions]. And your first question comes from the line of Jeff Sprague of Vertical Research Partners. Your line is now open. Jeff Sprague : Hello. Good morning, everyone. Chris O'Hairlehy: Good morning, Jeff. Jeff Sprague : Good morning. Hey, I just wanted to sort of pick up sort of where you left off there, Michael, with kind of the trends into the fourth quarter. I don't know, unless my math is wrong, I think kind of sequentially you're looking at revenues of maybe 4% or 5%, when normally they declined slightly. So, was your exit rate in September or your early read in October kind of better than what we saw in the quarter in aggregate? Or maybe you could just clarify if I'm missing anything there. Michael Larsen: Yeah, sure, Jeff. So, let me start by saying, as you know, we don't give quarterly guidance. And as you were trying to do based on our year-to-date performance and our full year guidance, you can get pretty close in terms of figuring out Q4. But maybe let me try to help out a little bit. So, I'd say at a high level, Q4 looks a lot like Q3. Typically what we see from a seasonality standpoint is a sequential improvement in revenues from Q3 to Q4, about a point to a point and a half. And that's going all the way back to 2017. So, at current run rates, typically we're up a point to a point and a half. We do have easier comparisons in the fourth quarter. And for what it's worth, there's also an extra shipping day in the quarter. So, you add all that up, we get to about flat revenues on a year-over-year basis. We expect, again, our typical margin improvement of about 100 basis points on a year-over-year basis. So, that is a slight decline from Q3 to Q4, which is kind of the typical seasonality. And the main driver here remains another strong contribution from the enterprise initiatives. And then factoring in a more kind of normal tax rate for us in that 24%, 25% range. And you get to EPS at the midpoint. And I'm just doing the math. I'm not giving guidance that's in that 2.51 range for the fourth quarter. So, I'll just add, while we're talking about the fourth quarter, we do expect a strong quarter, again, from a free cash flow standpoint. And we're projecting some meaningful improvement on our inventory levels in the fourth quarter, which is not easy in the current demand environment. So, hopefully that's helpful, Jeff. Jeff Sprague : Yes. No, it's very helpful. Thanks for that color. And then just kind of secondarily, your business in China is not huge. It's very important for Auto, though. And it was just kind of interesting that China Welding was solid. A lot of cross-currents there. Like, we had some pretty ugly China numbers out of Trane and Otis today. Those are different businesses, obviously. But maybe this is for Chris. Can you just maybe give us your bigger picture view on what's going on there? And also just kind of given the importance of Auto, anything in this kind of China-Europe tariff spat around Automotive influence your view or outlook at all? Chris O'Hairlehy: Yeah. So, I think from the Auto China standpoint, Jeff, I mean, China builds this year in Auto are expected to be up 1%. We expect to be up 8%. So, our businesses continue to penetrate very successfully in China. And EV obviously is a large part of the story, given the fact that China is producing about 60% of the world's EVs. But we're making very strong penetration gains in EV in China, as evidenced by the market growth. In Auto in general, we expect to be up a couple of percent against flat builds this year. Sorry, flat versus negative down 2% -- up 2%, I would say as we have been kind of historically would expect to be on into the future. And that that strength has been pretty much across all three geographies, Europe, North America, but especially in China. Michael Larsen: So, let me just add a little bit of color. So, I think if you look at the third quarter, about flat with Auto, as we said down 2. And certainly some challenges also in Test & Measurement down single-digit, low single-digits, same in Food Equipment. So, strength in Welding which is tied to oil and gas, LNG, transportation, and also some strength in our specialty products, appliance business. So, you all add up, you get to about flat for the quarter, up 6% year-to-date. We think in the fourth quarter, as Chris said, we'll see a pickup on the Automotive side, continued strength in Welding. And so, Q4 should be kind of flat, maybe up a low single-digit and the full year up in that 5% range. So, as we sit here today, I think we feel pretty good about China. I know there's a lot of talk about stimulus and so forth. We haven't seen a lot of that yet. So, if that's still to come, that would certainly be helpful. But as we sit here today, we feel pretty good about China. Chris O'Hairlehy: Okay. Thank you for the color. Michael Larsen: Sure. Operator: Your next question comes from the line of Jamie Cook of Truist Securities. Please go ahead. Jamie Cook : Hi, good morning. Michael Larsen: Morning. Jamie Cook : I have two questions. One, I was impressed with the specialty growth in the quarter despite headwinds from PLS and I know Specialty is special, because there's a lot of different businesses in there. Can you just sort of break down what you're seeing within that business? What segments drove sort of the organic growth? That would be my first question. And then I'll give you my follow-up after that. Chris O'Hairlehy: Yeah. So, Jamie, I think a good part of the Specialty story is strengthened Aerospace. We have one particular business that's focused on Aerospace. And again, we saw about 30% growth in that business this quarter. We saw, I'd say, pockets of strong demand I think throughout the segment, areas like consumer packaging. Consumer packaging equipment were also pretty strong. And we did have some favorable comms in Specialty versus last year. But even with all that, we expect Specialty to be up kind of low single-digits for the full year. And it's really strengthening our conviction that on the basis of the strategic portfolio positioning we've been doing in that segment, which involves some, as we said before, some product line pruning throughout the segment which is certainly choppy, and it's creating a bit of a drag, as Michael just indicated a couple of 100 basis points this year. But what it does, what this is all doing is really strengthening our conviction that the objective to make Specialty a 4% grower in the long term is well on track here. And everything we've seen this year gives us a strong belief that we can do that. Michael Larsen: And I think the only thing I'd add is just, Jamie, if you look at the margin performance, you can see what happens at ITW, and this is not unique to Specialty when you get a little bit of operating leverage, suddenly you're in that 31% plus range, which is certainly very encouraging and gives us, as we said earlier, a lot of conviction and ability to get to that 30% target at the enterprise level with three segments this quarter above 30%, which is, that's the first time that's happened. And again, that's with very little operating leverage. So that's certainly really, really gives -- pretty encouraging as we look also into next year in terms of the momentum around the margin performance of the company continues. Jamie Cook : And that's helpful, because I think some of the bears think the 30% plus is challenging for you guys to do. So it's nice to see that. I guess one more follow up. Chris, you talked about market outgrowth in Auto. You talked about Welding from the new product introductions, and even on Food, the increased service effort. As you go through CBI, and you're now, you've been with ITW forever, but CEO for a longer period of time. Are there any businesses that you're considering are more challenged, like over the longer term that you think is going to be tough to get to the organic growth targets that you have? You don't have to say which ones, but just understanding if there's any difference in how you're thinking about the portfolio relative to when you first took over. Thanks. Chris O'Hairlehy: Not at all, Jamie. I think if we go back to Investor Day last year, we were very overt in our comments that we felt that all seven of our segments have the capability to grow 4% plus. And we certainly believe that today, and even more so. With respect to CBI, the CBI opportunity, I think is very relevant across all seven segments. And we're at different points in terms of the development around that. But I think, everything we've seen would indicate that all these segments have a pretty fertile innovation environment, have critical customer pain points that are there to be solved. We're certainly mobilizing the company around that in very similar way to where we mobilized the company around front to back 10, 12 years ago. With the same kind of capability build and investment in resources, a much higher level of leadership kind of time and focus around CBI, we have lots of great innovation practice across the company. And we've now codified that into a very effective innovation framework. And this is the exact same approach that we took on 80-20 front to back, which as we know was very successful. And we've seen this. I mean, this is not something that's starting today. We've been working on this for a couple of years now in terms of focused investment in resources and CBI. And we've seen that in terms of the improvement in yield that we've seen from CBI. So there is a lot of conviction here that the yield improvement from one to somewhere over two today will be north of three in due course. And we have a very clear path to doing that. And like I said, that's going to result in improvements in every one of our segments on the ultimate journey to having every one of these segments growing at 4 plus. Jamie Cook : Thank you. Operator: Your next question comes from the line of Andy Kaplowitz of Citi Group. Please go ahead. Andy Kaplowitz : Hey, good morning, everyone. Michael Larsen: Morning, Andy. Andy Kaplowitz : Chris and Michael, I know you've been hopeful about a turn in Test & Measurement for much of this year. And you did mention maybe more positive discussions with Semiconductor customers and you did see Electronics turn positive. So maybe you can give us some more color on the conversations you're having. The outlook obviously, you're always going to predict run rates, but as you go into ‘25, do you see a better outlook for the segment? Chris O'Hairlehy: Yeah, I think based on the customer conversations that we are having, we're starting to see a bottoming, particularly in Semi. Just to characterize, Semi is about 15% of Test & Measurement. It represents a couple of percent of ITW's revenues. So just to put it in context, but there's no doubt that we saw a bottoming and slight improvement in this, I think, in the third quarter. Electronics, similarly, had been down for quite a while, significantly down earlier this year. It's starting to bottom there as well. And then I think an important kind of bellwether for us, the Instron business, which is a critical business within Test & Measurement, had very solid growth during the quarter. And that's certainly encouraging as we look here for the balance of the year and on into next year. Andy Kaplowitz : It's helpful, Chris. And then, Michael, I think you mentioned, I think, what you call the solid step back in Construction markets in Q3. Do you see any hint of stabilization as you go toward the end of the year in those markets? I mean, obviously, we started a U.S. rate cutting cycle. Maybe what changed in Q3 versus Q2 in your businesses that led to this step down? Michael Larsen: Well, I think, Andy, we're talking about our most interest rate-sensitive segment. So, I think what we're seeing here is a market that's down in the low teens. I pointed in the script to kind of the housing start numbers being down 10% on an annualized basis, which kind of mirrors our business in North America. Maybe we're a little bit better than that. And then we're seeing similar type of softness in Australia, New Zealand, which is a meaningful part of our business. So, I think at this point, it's really too early to point to any signs or indicators that things are getting better here. Over the long term, certainly the fact that interest rates appear to be coming down has been a leading indicator, but we've not seen anything to suggest that things are picking up in Construction at this point. So, and I'll just say in that context, I think it's even more remarkable that we -- the team put up margins of 30% plus here in the third quarter in an environment that's certainly pretty challenging. So, and about as challenging as we see across the company at this point in the cycle. Andy Kaplowitz : Appreciate it, guys. Michael Larsen: Sure. See you, Andy. Operator: Your next question comes from the line of Tami Zakaria of J.P. Morgan. Your line is now open. Tami Zakaria : Hi, good morning, Team ITW. Hope you're doing well. Chris O'Hairlehy: Good morning, team Tami. Tami Zakaria : Thank you. So, my first question is on margins. Very nice margin performance in the quarter. I'm curious, what was price cost in the quarter? And more broadly, how are you thinking about Enterprise initiative and related margin improvement potential in 2025? It seems like almost like an endless well at this point, and I mean it positively. So, any forward-looking comments about Enterprise initiatives and what you're expecting for next year would be helpful. Michael Larsen: Yeah, let me do price cost and then, Chris, if you can add some commentary on Enterprise initiatives. But I think at this point Tami, as we said before, price cost has kind of normalized. This is no longer a distraction as it was back in ‘21, ‘22, and ‘23. At this point, price dollars are ahead of costs on a dollar basis and modestly positive from a margin standpoint. Now, that, just to be clear, doesn't mean that costs are coming down, particularly Electronics, Energy in certain geographies, components that have labor content. We're also seeing it in our employee costs, health and welfare, and other pockets, overhead costs such as just to point out, rental expense, leases, software licenses. So, we have to continue to be very diligent in this area and make sure that we get price to offset all of these pressures. But overall, nothing significant to point to on the price cost equation. And then maybe on the Enterprise initiatives, Chris. Chris O'Hairlehy: Sure. So Tami as we said, Enterprise initiatives continue to be an important contributor to results. And how we think about these initiatives is that these initiatives, they are independent of volume and they're really an outcome of the continuous improvement mindset that's very much part of ITW's DNA, I would say. And this is what really drives this divisional kind of quality of practice and 80-20 front to back in sourcing. And typically very bottom-up initiatives driven by our talented people in our divisions at a very granular level. Most of these initiatives are in the couple of hundred thousand dollar range and in terms of individually. But when you have 84 divisions, these add up to a very meaningful number. So, the divisions have a lot of visibility, ownership, and accountability on these. And the track record has indicated over the last 11 years, our divisions are going to do what they say when they forecast these. So, our confidence on enterprise initiatives going forward, that this will continue really is an outcome of this strong ownership and accountability that resides in our divisions and the strong continuous improvement mindset that I refer to that's really hardwired into our divisions at this point. And the case of 80-20, as we know, this is the gift that keeps on giving. So, with that we certainly see an ongoing contribution from Enterprise initiatives going forward, including in 2025. And this is a fundamental part of how we drive differentiated execution in any environment. Tami Zakaria : Got it. That is very helpful. Thank you. And my second question is more strategic. So, there's a lot of optimism around data centers, AI, power generation, power demand, so on and so forth. How do you assess these opportunities internally? Do you see an opportunity for ITW to increase this exposure to some of these trends, maybe organically or through acquisitions? So, how do you evaluate some of these scenes? Chris O'Hairlehy: So, I think as it relates to data centers specifically, we have standard characteristics of businesses that we would pursue for acquisition based on sustainable differentiation. So, if an opportunity came along that was data center related and met our normal criteria, then we'd be all in based on the characteristics of having a business that could grow above market, that we could leverage our business model, and we could acquire at the right valuation. And that applies to everything, not just data centers. So, we don't have a specific focus on data centers. We kind of look at all these things on an equal basis in terms of their long-term attractiveness for us. Tami Zakaria : Got it. Thank you. Operator: Your next question comes from the line of Joe O’Dea from Wells Fargo. Please go ahead. Joe O’Dea : Hi. Good morning. First, just wanted to ask on, and kind of specific to North America, but interested in kind of CapEx versus OpEx trends, and I think appreciating a pretty quick book and ship model. I'm not sure how much you would see this, but we do hear about inquiry activity being better than order activity out there. And so, curious the degree to which you see some of that or hear some of that from your salesforce and customer tone. As I think about rates starting to come down, I think some folks waiting for getting post-election, and just the idea that you're getting a sense that there is some pent up demand that hasn't moved forward with some uncertainty overhang, and thoughts on that potentially moving forward nearer term. Chris O'Hairlehy: Well, I think, Joe, I'd start by saying we're not economists and we're not trying to predict the impossible here, which is where the economy is going. We are, as you said much more short cycle. Our divisions do a great job kind of reading and reacting to what's going on in their respective end markets. I would just make a broader comment based on what we saw in the third quarter, which is some stability in the more CapEx sensitive businesses. So, I'll point to Welding, as I mentioned. I'll point to Test & Measurement, including our Instron business, which was up in a meaningful way on a year-to-year basis and improved kind of quoting and order activity. So, maybe that squares with what you were talking about. And then the softness in Q3 was really much more tied to Construction and Automotive production, specifically with our customers, with the T3 customers. But certainly some stability in CapEx, and we'll see where it goes from here. We're modeling based on current run rates. So, based on what we're seeing in our businesses today, and we'll see how it all plays out as we go into 2025. And interest rates maybe -- would be a little helpful if they came lower for sure. So… Joe O’Dea : Nope, I appreciate that color. And then just wanted to ask on CBI, as we think about it becoming sort of a growing initiative. Just what it means on the R&D side and the degree to which you can keep R&D relative to sales at sort of similar levels or what you're doing there, as we would think, to drive more innovation you might need to allocate a little bit more there. Chris O'Hairlehy: Yeah, so for us spend in R&D or innovation is largely an outcome of basically request more divisions. Basically, we fund all the good projects. We've been making over the last three or four years, making very focused investments in areas like innovation and strategic marketing. We expect that to continue. But if that number was to go up, that's not a problem for us. It's really an outcome of funding all these good projects. And our teams are really focused on their 80 opportunities in their markets with their key customers. And whatever we spend in R&D typically is an outcome of that. And we're very happy to spend it because it's typically money well spent on the degree of focus that our businesses have. Michael Larsen: Yeah. And just from a numerical standpoint, I'd say, R&D spend the way we've defined it here over the years is about 1.8% of sales. So as sales grow, so will the R&D dollar spend. And we don't foresee any significant change in that as we go forward. As Chris said, we really fund every project that our divisions put forward and that's important to them. And so that's how we approach it here. Really in terms of it's an outcome of this process that Chris described. Joe O’Dea : Appreciate it. Thank you. Chris O'Hairlehy: Sure. Operator: Your next question comes from the line of Sabrina Abrams of Bank of America. Please go ahead. Sabrina Abrams : Hi, good morning. As a follow up to some of the CBI commentary and questions, I think back at your investor day, the framework for CBI for segment was about 2% to 3% contribution and its most meaningful driver to reach long term targets. Are you on track for that this year? And I understand it's relevant to all seven segments. But maybe if you could provide any color on which segments you think are more mature in this journey. Chris O'Hairlehy: Yeah, so we're very much on track to do 3% plus inline with our target by 2030, if not indeed before that, based on the progress that we are making. We're at varying levels of accomplishment currently across our seven segments. I would point to Welding as an example. This year, as we've highlighted, Michael highlighted his commentary, our Welding business is suffering some significant end market challenges, but we're getting north of 3% contribution CBI in Welding. As we forecasted at the beginning of the year, several new product launches. So Welding will be one, Test & Measurement, Electronics, obviously an area of significant attractiveness around innovation in the context of what's going on in those markets. New materials being developed, all of which require to be tested, increasing stringency in areas like R&D and in quality control, all of which requires more and more sophisticated testing equipment which really speaks to our competitive advantages. And then the other one I'd highlight is Food Equipment. Food Equipment, sustainability in areas of energy savings, water savings is a very fertile innovation environment, and we've managed to leverage that for several years. And the other one, of course, I point to is Auto. Auto, given the disruptive nature of Auto right now, particularly with the increased penetration of electric vehicles, provides enormous opportunity for innovation. And we're capitalizing on that as evidenced by the fact that our electric vehicle penetration into electric vehicles is higher than the market average. So, I feel pretty good about all seven segments, but those are the four that I'd highlight right now. Sabrina Abrams : Thank you. And it seems some of the above average PLS in Specialty products is behind us and that business is growing nicely. You guys got rid of Wilsonart. Moving past some of this portfolio rationalization, is there more appetite to do M&A, given some of these divestitures are behind us? Chris O'Hairlehy: Yes, I would say our posture on M&A hasn't changed. And since we outlined this at the leadership conference. And we've got a pretty disciplined portfolio strategy. We believe clear and well-defined view of what fits our strategy. And so it's a case of us finding the right opportunities. And for us, we're focused on high quality acquisitions that extend our ability to grow at a minimum 4% over the long term. That's the first criteria. The second criteria we look at is that we're able to leverage the business model to improve margins and then obviously acquiring the business at the right valuation to provide a decent long term return for our shareholders. We review opportunities on an ongoing basis, but we're very selective on the basis of these criteria. And if I could point to MTS as an example, MTS was an example of an acquisition we did 2.5 years ago, which fulfilled all of our criteria. And thanks to a very strong execution. That's now turning out to be a home run on the basis of being pretty selectable, the criteria going in, strong execution when we acquire it. And now we've got a business that in the long term will be a superb ITW business. Sabrina Abrams : Thank you. Operator: Your next question comes from the line of Julian Mitchell of Barclays. Please go ahead. Julian Mitchell: Hi, good morning. I was hoping this might be one call I could escape AI data centers, but I think they got dragged in minutes ago. Chris O'Hairlehy: We didn't bring it up, just for the record. Julian Mitchell: No, totally fair, totally fair. If we think just for a second, Michael or Chris about sort of inventories, just curious about your own levels and those of your customers or distributor partners, I think your own inventories dollar wise are pretty steady sequentially this year, but still running a little bit high as a share of revenue versus pre-COVID, maybe 11% versus something like 8% five years ago, six years ago. Is 11 sort of a good run rate from here? Or no, it should come down over time, but gradually just as the revenue picks up? And then how do you assess the sort of state of play of inventories that your distributors and customers, so they kind of generally right size now after two years of being leaned out? Michael Larsen: Yeah, I think that's right, Julian. Let's start there. The channel, I think those inventory levels have normalized. Our channel doesn't carry a lot of inventory because they're used to our place in order today, we ship you tomorrow. So with that level of customer service, there's no incentive for them to carry a lot of inventory. And then I would kind of pivoting to our own inventory levels. I'd say just more broadly on free cash flow, it was good to be above 100% again here in the third quarter, which is more aligned with the typical levels that you expect from us. And we expect to continue to make meaningful progress again in Q4 on the inventory and free cash flow. So we've talked about our focus on reducing our months on hand, getting back to kind of pre-COVID levels of about 2.5 months on hand, we're about 3. The difference here is in that $300 million to $400 million range of additional inventory that we'll expect to come out Q4 and then into next year. So we view that, I think the same way you do as a big opportunity to drive above average free cash flow for the company here in the near term. I think we've made some progress down, I think it's 6% year-over-year. Last year, inventories came down 17%, but we can certainly, we agree that there's some opportunity here and we want to do that, reduce inventory levels while maintaining those customer service levels, which is where I started because we believe they're a real competitive advantage for us. And the last thing I'll say is all of this, the fact that maybe we're a little bit lower this year free cash flow than in prior years, doesn't impact our capital allocation plans. We're investing in our businesses for growth and productivity, all new products are funded. We raised the dividend 7% in August and we're buying back 1.5 billion of our shares this year as planned. But I agree with you that there's definitely an opportunity here and we're going after it in every one of our 84 divisions in a meaningful way here. Julian Mitchell: That's a very good answer. Thank you. And then just my follow-up, sort of thinking again about that question of customer-backed innovation and driving up organic growth and market share. I think as you said, sort of R&D to sales is pretty steady. So maybe flattish dollars year-to-date versus last year. CapEx was sort of flattish year-to-date, down somewhat in the third quarter year-on-year. So when we're thinking about kind of the levers of getting that market share up, and it's in the context of a sort of decentralized operating structure where you're sort of letting the businesses ask you for R&D dollars. Maybe give us one or two examples of how you're driving up that share? How does that interplay work between trying to get more dollars of spend into different businesses with a high return versus that kind of decentralized nature? Any sort of examples around that might be helpful for me, at least. Chris O'Hairlehy: Yes. I would say Julian, that our spend in innovation has been rising over the last two or three years. I mean, we've seen double-digit increases in spend on the basis of pretty focused investments in strategic marketing and innovation across the portfolio. But a lot of this goes beyond spend. It really comes down to a much higher level of, I think, leadership time and focus. As I said, we're already doubling down on this in the same way we doubled down on 80-20 front-to-back last time. And we've been investing in building capability really for the last few years here. And I think you can see that in the increased yield that we've had since, like ‘17 ‘18, where it was about 1%, to now where it's about 2%. So we're already seeing the investments. And this capability build is both in our divisions, but also at our segment level to really enable our businesses to be able to achieve this. A lot of this comes down to the quality of the framework. We have a lot of great innovation practice across the company. We've codified that, and now we want to make sure that it resides everywhere in every division in ITW. And this is the exact same approach that we took on 80-20 front-to-back that was very successful in the last phase of our strategy. So we're on a great path here. We've already seen the outcomes. We expect to see a continuous improvement in CBI contribution every year from here on out, starting in 2025. Julian Mitchell: That's great. Thanks, Chris. Chris O'Hairlehy: Sure. Thank you. Operator: Your next question comes from the line of Nathan Jones at Stifel. Please go ahead. Adam Farley : Hey, good morning. This is Adam Farley on for Nathan. I wanted to follow up on Welding. What impact do you believe the upcoming election is having on the sentiment in the underlying industrial market? Do we potentially see an improvement in ‘25, maybe post-election? Michael Larsen: Maybe I'll... Do you want to jump in? Chris O'Hairlehy: Yes. So at a high level, Nathan, I would say, look we're a short-sighted company. So we're kind of reading and reacting to what's in front of us. There's nothing overt or specific that we're hearing from our customers related to the election, I would say. Michael Larsen: Yeah, I would agree with that. I think there's some, other than anecdotes, there's really nothing specific that we can point to. And I think that we'll kind of leave it at that. Adam Farley : Okay. Fair enough. I know it wasn't called out in the press release, but was there any hurricane impact at your sites or maybe at your customer sites? Michael Larsen: No, not at our sites. I can't speak for all of our, thousands of customers in those affected regions, but there was no impact on our facilities or, and thank God, on our people in those areas. Adam Farley : Okay. Thank you for taking my question. Michael Larsen: All right. Thanks, Adam. Erin Linnihan: And Kathleen, I think that ends the call for us today. Operator: Yes. There are no further questions at this time. Thank you, everyone, for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. Erin Linnihan, Vice President of Investor Relations. You may begin your conference. Erin Linnihan: Thank you, Audra. Good morning, and welcome to ITW's second quarter 2024 conference call. Today, I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris? Christopher O'Herlihy: Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, during the second quarter, the short cycle demand environment continued to moderate across our portfolio. At the total company level, second quarter revenues came in approximately 1 percentage point, or $50 million below what they would have been had demand held at the level we were seeing exiting the first quarter. Second quarter organic revenue was down in three segments with declines year-over-year in CapEx-related products such as welding, test and measurement and construction. These declines were offset by revenue growth in four segments resulting in overall flat organic growth year-over-year at the total company level as compared to our end markets which we believe were down in the low single digits. As usual, as the quarter progressed, the ITW team executed well on all the elements within our control. As evidenced by record second quarter operating margin, which improved by 140 basis points, 26.2%, supported by 140 basis points of benefit from enterprise initiatives. Operating income grew 4.5% to a second quarter record of $1.05 billion and GAAP EPS came in at $2.54, up from $2.48 last year. As per our normal practice, we are adjusting our full year guidance in line with demand levels in our businesses as they exist today. Current run rates exiting Q2 projected through the remainder of the year results in about flat organic revenue for the full year. The moderating demand is partially offset by stronger margin performance and we are raising our margin guidance to 26.5% to 27%. Factoring in both of these elements, lower market demand and stronger margin performance, we are lowering the midpoint of our EPS guidance by 1% as we narrow the range to $10.30 to $10.40. While the combination of moderating manufacturing CapEx demand and lower automotive bill forecasts for the second half has us operating in a challenging near-term environment, we will continue to drive our usual high-quality execution on all the elements within our control, while remaining focused on managing and investing to maximize the company's growth and performance over the long-term, as we build above market organic growth fueled by customer-backed innovation into a core ITW strength. In this regard, we are very encouraged by the progress we are making on customer-backed innovation in each of our divisions. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our second quarter performance in more detail, as well as our updated full year guidance. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. In Q2, revenue declined 1% with organic revenue down 0.1%, essentially flat year-over-year, and a slight improvement from being down 0.6% in Q1. As Chris said, demand moderated sequentially as total company revenues grew 2% from the first quarter to the second quarter, a point below our historical run rate growth of 3%. Faced with moderating demand, the ITW team, as usual, did a great job in terms of reading and reacting to the environment and delivered record margin and profitability performance in the second quarter, as evidenced by 4.5% operating income growth and operating margins of 26.2%, an improvement of 140 basis points as enterprise initiatives were once again the largest margin and profitability driver contributing 140 basis points this quarter with more to come in the second half. GAAP EPS of $2.54 increased 2% or 5% excluding a 2023 one-time tax item. Our free cash flow was $571 million which was a 75% conversion of net income, slightly below our historical conversion in the 80% range, as we continue to focus on reducing our inventory months on hand to pre-pandemic levels without impacting customer service levels. We repurchased $375 million of our own shares during the quarter as planned, and the effective tax rate was 24.4% compared to 21.4% in the prior year, which lowered EPS by $0.10. In addition, foreign currency translation was approximately a $0.05 headwind year-over-year. In summary, strong execution and Q2 results as the impact of a moderating short cycle demand environment was offset by strong margin and profitability performance. Please turn to Slide 4 for a look at organic growth by geography. The 2% decline in North America was an improvement over the first quarter's 3% decline. Europe grew 1% and Asia Pacific grew 3%, with China up 5%. Moving on to segment results, the Automotive OEM segment delivered flat organic growth in the second quarter against a tough comparison of plus 16% in the year-ago quarter. North America was down 4%, Europe was down 2%, and China was up 7%. In the first half, Automotive Builds were flat, and our Automotive OEM segment grew 2% above market. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China. In our guidance, we have now factored in the most recent automotive build projections, which have declined to negative 2% for the full year. As you may recall, when we issued our initial guidance in February, Automotive Builds were expected to be flat for the year. On a positive note, the segment delivered strong operating margin performance of 19.4%, a 260 basis points improvement, as we continue to work towards our goal of achieving operating margins in the low to mid-20s by 2026. Turn to Slide 5, Food Equipment organic revenue grew 2.5% against a comparison of plus 7% in the second quarter of last year. Equipment grew 1% and service grew 5% against a comparison of plus 16% last year. By region, North America increased 2% with service up 3%. Organic growth in the institutional market was up mid single digits, and the retail market was up high single digits. International revenue was up 3.5% led by Europe. As we talked about last quarter, the current margin performance reflects the fact that we're making focused capacity investments in the first half of 2024 to support and accelerate continued above-market organic growth in our very attractive service business. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to Test & Measurement and Electronics, organic revenue was down 3% with continued softness in semiconductor, electronics, and CapEx-sensitive end markets. Both Test & Measurement and Electronics were down 3% in the quarter. Moving on to Slide 6, Welding was down 5% in Q2, as Equipment declined 5% and consumables were down 3%. By region, North America declined 6% with industrial sales down 7% and the commercial side down 6%. International grew 3% with some strength in Europe. Operating margin was 32.9% with a solid contribution from enterprise initiatives. Organic revenue in Polymers & Fluids increased 3%, led by Polymers up 10%, and Fluids was up 4%. Automotive aftermarket was down 2% in the quarter. On a geographic basis, North America declined 4% and international grew 13%. Operating margin of 28.2% improved more than 200 basis points. Turn to Slide 7. Demand trends in construction products continue to be challenging on a global basis as organic revenue declined 4% in Q2 in a market that we believe is down in the mid to high single digits. North America was down 2% as the residential and renovation business was down 2% and commercial was down 9%. International markets remain soft as Europe was down 7% and Australia and New Zealand was down 4%. Finally, specialty products had a strong quarter with organic revenue growth of 7% due to significant strength in our aerospace equipment division as well as pockets of increased demand across our portfolio. As a result, international was up 10% and North America was up 5%. As previously discussed, results can be a bit choppy as we continue to work to reposition the Specialty segment for consistent above-market organic growth, including strategic portfolio work and more significant product line simplification, which included 230 basis points in Q2. Operating margin improved 590 basis points to 31.9% with strong contributions from enterprise initiatives and operating leverage. With that, let's move to Slide 8 for an update on our full year 2024 guidance. Despite a challenging first half macro demand environment, the ITW team found a way to deliver solid operational and financial results. And excluding one-time items, we grew operating income 4% in the first half as margins improved by 130 basis points to 25.8% with 140 basis points from enterprise initiatives. GAAP EPS was up 10% -- up 5% excluding one-time items. Looking ahead to the second half in our updated guidance, we do not expect the short cycle demand environment to improve. Per usual process, we are adjusting our full year guidance in line with conditions on the ground as they exist today. Current run rates exiting Q2 adjusted for typical seasonality and the most recent automotive build forecast projected through the remainder of the year would result in approximately flat organic growth for the year in markets that we believe are down in the low single digits. This compares to a prior organic growth guidance of 1% to 3% and impacts EPS by approximately $0.25. The lower top line guidance is partially offset by stronger margin and profitability performance, which is expected to continue into the second half, including a significant contribution of more than 100 basis points from enterprise initiatives. As a result, we raised margin guidance to 26.5% to 27% as we continue to make solid progress towards our goal of 30% operating margin by 2030. The higher margins impact EPS favorably by about $0.10. The net of these two factors, as you saw this morning, is that we lowered the top end of the range of our full-year GAAP EPS guidance to a new range of $10.30 to $10.40, which is a reduction of $0.15 or 1% at the midpoint from $10.50 to $10.35 with 6 months to go in the year. To wrap things up, we delivered a solid Q2 and first half in a challenging demand environment, and we've updated our full year guidance per usual process to reflect current levels of demand. Given the strength of our competitive advantages, the resilience of the ITW business model, and our diversified high-quality portfolio, we're well-positioned for whatever economic conditions emerged through the second half of the year. With that, Erin, I'll turn it back to you. Erin Linnihan: Thank you. Audra, will you please open the line for questions? Operator: [Operator Instructions] We'll go first to Andy Kaplowitz at Citigroup. Andy Kaplowitz: Hey, good morning, everyone. Christopher O'Herlihy: Good morning. Michael Larsen: Good morning, Andy. Andy Kaplowitz: Good morning. Chris and Michael, you continue to have unusually strong results in specialty products in Q2 after I think you said in Q1 that it was a bit unusual and Q2 would normalize. I know you mentioned aerospace. I don't think I've heard that particular business mentioned before. So could you give us more color on what's going on there and what is the probability that segment could continue to outperform? Michael Larsen: Yes. So, Andy, we've had a -- as you've outlined, a very solid half one here in specialty. There's a few different things going on. I think strength in aerospace has been a feature throughout the first half. There's some other pockets of strong demand elsewhere. Obviously, we had favorable comps in specialty and we've also benefited from the timing of some orders, particularly in Q1 for some of our European equipment businesses. This is a segment that we've got some strategic portfolio repositioning going on. A bit more than the normal kind of PLS that you'd see, more than maintenance, much more strategic, it's going to be a bit of a drag on revenue for the full year, we would say. We probably expect specialty to be up just above flat, maybe flat to low single digits for the full year. But the important thing here is that the strong work that we are doing to really make this segment a 4% grower in the long-term. And based on the progress that we've seen this year, we certainly believe we can do that. Andy Kaplowitz: Very helpful. And then Chris and Michael, you mentioned that demand continues to moderate in Q2, but could you give us a little more color regarding the cadence of the demand you saw? Has demand stabilized at lower levels across your short cycle businesses, or would you say it's still getting worse? And then with the understanding that you're forecasting the exit rate of Q2, you do have much easier comps in the second half. So just at the enterprise level, are you digging in any conservatism or is it really just on run rates? Michael Larsen: Well, so I think in terms of the cadence, I think we saw as we were going through the quarter is the demand continued to moderate as the quarter by -- as the quarter progressed. And by segment, definitely auto, as auto builds came down, the CapEx businesses that Chris mentioned, Test & Measurement and Welding, were maybe a little bit more impacted than some of the other businesses. I think on a positive note, I just might add that June also had really strong margin performance. So I think we got some good margin momentum heading into the second half. In terms of the back half of the year, as we said, per our typical process, this is based on current levels of demand that we're seeing in these businesses adjusted for seasonality. We do have, as you recall, some more favorable comparisons here in the second half of the year. If you look at last year, we were up 4% in the first half of '23, and we're flat in the second half of '23. So, the comparisons definitely get easier. We also have the benefit of two additional shipping days in the back half, one in Q3 and one in Q4. And then the last thing I would add is we've updated the automotive build forecast, as we saw a decline there from previously about flat for the year to down 2%. And we expect to outgrow that per typical 2% to 3% and we continue to outgrow by a little bit more than that in China as we've talked about previously. So those are all the elements that kind of went into the top line guidance. I might just add, if you look at the reduction, 1 to 3 organic now to about flat, and you look at kind of the flow-through on that, that's about a 20% decremental, just given how strong the margin performance is and how flexible our cost structure is so that we can continue to kind of read and react to whatever demand environment we're dealing with in the second half. Andy Kaplowitz: Appreciate all the color. Michael Larsen: Sure. Operator: We'll move next to Scott Davis at Melius Research. Scott Davis: Hey, good morning, guys. Michael Larsen: Good morning. Christopher O'Herlihy: Good morning. Scott Davis: I know I probably asked this in prior quarters, but M&A is, I assume, no change in strategy there, more bolt-ons? Or we have heard of some larger assets that are going to become available, would you guys be comfortable casting a wider net there? Christopher O'Herlihy: Yes. So, Scott, I think our posture on M&A hasn't changed much. I mean, as we shared at our Investor Day, we have a pretty disciplined portfolio management strategy and we're certainly staying consistent to that. From our standpoint, we have a pretty clear and well-defined view of what fits our strategy and our financial criteria. So, for us, it's a case of just finding the right opportunities. Very much focused on high-quality acquisitions that can extend our long-term growth potential, growing at a minimum of 4% plus at high-quality. We've been able to leverage the business model to improve margins. So we review opportunities certainly on an ongoing basis, pretty selective given what we believe to be pretty compelling organic growth potential that we have in our core businesses. And if I go back to the MTS acquisition from a couple of years ago, that was certainly an acquisition that ticked all the boxes and only a couple of years in here and already turning out to be a great ITW business. So to the extent that we can find acquisitions like that, then we'll certainly be very active. Scott Davis: Okay. Fair enough, Chris. And then I was just looking back at your investor deck and your growth, your long-term growth targets, 4 to 7, 2 to 3 points of that were coming from customer-backed innovation, and you did mention that in your prepared remarks. But are you still confident that you can drive that kind of growth from customer-backed innovation? It seems like a lot to me, but you guys would have a better feel for that. Christopher O'Herlihy: Yes, I was going to say, Scott, that we're even more confident now than we were at Investor Day. Our confidence has certainly continued to grow. We're very encouraged by what we're seeing in our businesses. It's one of the reasons that we believe that we're outperforming our end markets right now. And our view on customer-backed innovation is that we're going to lean into customer-backed innovation in the same way with a similar approach that we utilized in really reinvigorating front to back 80-20 in the last phase of our enterprise strategy in terms of our intention around it, in terms of the rigor and capability build that's going on all over this company right now. And in doing so, increase our contribution from what was approximately 1% in 2019 to north of 2% today, and what will be north of 3% in the not too distant future. So everything we see on customer back and the work we're doing in our divisions gives us an even stronger sense of confidence that this is going to be really impactful in terms of our ability to grow 4% plus in the long-term. Scott Davis: Okay, thank you, Chris. I'll pass it on, appreciate it. Christopher O'Herlihy: Sure, Scott. Thank you. Operator: Next, we'll go to Tami Zakaria at JPMorgan. Tami Zakaria: Hi, good morning. Thank you so much. Christopher O'Herlihy: Good morning. Michael Larsen: Good morning. Tami Zakaria: So my first question is -- morning. So, my first question is North America saw negative, I think you said 2% organic growth while other regions are positive. Are you still seeing destocking headwinds in North America or any other region? Or is the market softening now more a function of just demand rather than destocking? Michael Larsen: Yes, I think it's more the latter, Tami, that demand is a function of where we are in the economic cycle. And so destocking, which was a headwind all of last year, is no longer a significant factor at this point. I think if you look at just North America, down 2% was really driven by Welding, down 6%. And then Auto, Polymers & Fluids down 4%. And then some positive momentum in Food Equipment up 2% and Specialty up 5%. But again, that's really more reflection of kind of where we're at in the cycle versus anything going on from a destocking standpoint. Tami Zakaria: Got it. That's helpful. And then just a bit clarity on the new operating margin guide. So operating margin expected up about 165 basis points on flattish organic growth. Can you help me understand that 165 basis points, how much of that is enterprise initiatives versus the 140 you saw in the first half? And then is there any price cost or volume or anything else that's adding to that 165 basis points year-over-year? Michael Larsen: Yes, I think not a lot of volume leverage, obviously, as we're guiding to about flat growth for the year. The biggest driver continues to be the enterprise initiatives. As you said, we got 140 basis points in the first half. The roll-up for the second half looks really good. As we said today, more than 100 basis points. And so somewhere I would say between 100 and 140 is maybe a reasonable estimate. And then price-cost, a modest contribution. We're kind of back to a normal price-cost environment. And so that's not a significant driver. Really the big driver here, as I think you pointed out, are the enterprise initiatives that independent of volume, continue to contribute in a meaningful way, which is a great position to be in -- in a -- given where we are in the cycle, in a pretty challenging and uncertain environment. And without giving too much away, as we kind of look into the future beyond this year, we'd expect another solid contribution in 2025 and beyond. Tami Zakaria: Understood. Thank you. Michael Larsen: Sure. Operator: We'll go next to Joe Ritchie at Goldman Sachs. Joe Ritchie: Hey, good morning, everybody. Christopher O'Herlihy: Good morning, Joe. Michael Larsen: Good morning. Joe Ritchie: Can we go back to Specialty for a second? You guys talked about the strategic positioning efforts there and when I think about that business, it's a hodgepodge of a bunch of different businesses that seemingly don't have a lot to do with each other. And so I'm just trying to understand like what's the kind of like overall strategy with the businesses within Specialty. And then what are you guys really doing to kind of drive this margin expansion sustainably higher over the long-term? Christopher O'Herlihy: Yes, so Joseph, specialty is indeed, as you said, a collection of high-quality, high-margin businesses. There is a concentration around consumer packaging, both on the equipment side, on the consumable side. There's also a bit of a concentration around appliance components. And then there's a collection of smaller businesses, one of which is primarily lined up alongside aerospace, that are very attractive and certainly capable of growth. So we're going through a strategic repositioning of some of those businesses in terms of heavier leaning on PLS. We haven't seen much growth in Specialty over the last few years, as you know, so that's what caused us to really look at the portfolio. But we feel very good about the progress we're making in terms of there's a lot of high differentiated product lanes in that segment. And this repositioning will put us in a position where we accentuate the growth of those, we resource those, and we maybe de-resource some other ones that are not in a position to grow. But overall, I would say it's a nice portfolio of businesses with a strong differentiation lineage running through it. And as I say, we are well-positioned to grow to some 4% plus in the long-term. Joe Ritchie: Okay, great, Chris. And then maybe just to follow-up to that is, sometimes companies will go through this, addition by subtraction exercise, and it sounds like you guys are in the process of improving the margins. The margins are already good. But it also kind of seems like there's an opportunity then for you guys to potentially divest some of those assets going forward, whether it's in the specialty business or beyond in the rest of your portfolio, how are you guys thinking about that equation in the divestiture side? Christopher O'Herlihy: Yes. So, we look at our portfolio on an ongoing basis. We believe we've got a very high-quality portfolio and if the opportunity comes to divest, we would certainly do that. I would say that as we think about portfolio management today, it's more likely to be in the realm of product-lane pruning as opposed to divestiture. Now, that could change, but as we look at it today, it's much more along the lanes of pruning within businesses as opposed to divestiture of businesses, I would say. Joe Ritchie: Okay. Thank you. Operator: We'll move next to Julian Mitchell at Barclays. Julian Mitchell: Hi, good morning. Christopher O'Herlihy: Good morning. Julian Mitchell: Maybe just a question around the free cash flow conversions, because I think it's sort of 67% in the first half, the year's guided a 100 plus. Doesn't seem like there should be a lot of working cap liquidation in the second half because the quarterly revenue run rate is kind of stable at $4 billion. So maybe just to flesh out the confidence in the cash conversion step up, please. Christopher O'Herlihy: Yes, sure, Julian. I mean, I think you're right. We are slightly below our typical conversion range here for the first half. And I think on the last call, we talked about our focus at the divisional level on reducing our inventory months on hand from we're right around 3.1 right now as compared to pre-COVID, 2.5 or even a little bit lower than that in some of our segments. So, we've made some progress. Inventory is down a double-digit on a year-over-year basis. But I would agree with you that we can definitely do better. We fully expect to take advantage of this opportunity in the second half to reduce inventory levels and generate above average free cash flow while, as I said, maintaining our typical ITW [indiscernible] customer service level. So big focus on this in the second half. And just given our track record around, kind of do what we say, execution, we feel like we're really well-positioned to generate above average free cash flow in the second half. Julian Mitchell: That's helpful. Thank you. And then just my second question would be around the sort of, it looks like the second half run rate on the total company sales and margins, very similar to Q2, as you normally guide, with sort of 26% margin, $4 billion revenue a quarter. You mentioned, Michael, the day sales effect in Q3, Q4, but just wondered, anything else in terms of seasonality for total company you'd remind us of for the third versus the fourth quarter? Any big moving parts on the segment margin as we step into the back half? I think Specialty, you've talked about Polymer & Fluid, I'm also curious about the margin outlook there, please. Michael Larsen: Yes. Yes, I think all good questions, Julian. I mean, Q3 looks a lot like Q2, I would say. We typically see a modest increase in revenues from Q3 to Q4, with emphasis on modest. And we also see typically a modest improvement in operating margins as we go through the year -- from Q2 to Q3 and then into Q4. And so there's really nothing unusual going on there. We do, as you pointed out, we do benefit from having a couple of extra days here in the second half and then, like I said, more favorable comparisons. The other thing that would not be in the run rates is what Chris talked about earlier, which is this increased contribution from new products coming in at higher margins. But we feel like we've really maybe taken not just an approach that's consistent with kind of how we've done it historically in terms of guidance, but a fairly conservative approach going into the second half. Certainly things can change quickly. Things kind of improve, but they can also deteriorate and hopefully, kind of parsing out for you the impact here in Q2 in terms of what a point of revenue growth sequentially means or decline means, the $50 million at the decremental that we talked about, I think gives you a way to kind of further risk adjust your numbers, or if you are more optimistic, you can certainly make those adjustments as well. But that's kind of how we think about the guidance here for the second half. Julian Mitchell: Great. Thank you. Michael Larsen: You're welcome. Operator: And we'll take our final question from Walt Liptak at Seaport Research. Walt Liptak: Good morning. Thanks, Chris and Mike. I wanted to ask a follow-up on the guidance and just a comment that you made on the first question about -- it sounds like June might have gotten a little bit better for some of the capital goods businesses like welding or maybe some others. I wonder if you can talk about that, that some of that macro industrial weakness start to get better. Christopher O'Herlihy: Well, yes, I think, Walt, June was -- things continued to moderate, particularly Auto Builds were softer in June. And then on the CapEx side, Welding, I think consistent with commentary you may have heard from some of our peers in the welding space. And then Test & Measurement, I think while we have not seen a pickup in semiconductor or electronics or CapEx, I would say semi also has not gotten worse. So it's kind of bumping along. And I would just add that we remain like really well-positioned for the inevitable recovery down the road. And I think if you look at, some of the segments with positive organic growth here in Q2, so you look at Specialty, you look at Polymers & Fluids, the operating leverage that we generate of fairly modest organic growth is pretty remarkable. So we're really well-positioned for that. We continue to invest, a lot of focus on new products, but we've not seen a pickup in those markets yet. But again, really well-positioned for the inevitable recovery down the road here, whenever that may happen. Walt Liptak: Okay. Yes, totally agree with that. On one of the segments it's doing -- that's growing, Food Equipment, you guys sounded kind of upbeat about kind of the retail chain, despite some of the bankruptcies that have been going on. I wonder if you can talk about, maybe in a little bit more detail, how that retail part of the business is moving? Christopher O'Herlihy: Yes, I mean, I think the retail growth similar to in the first quarter, I think up 9% here in the second quarter, and it's all driven by new products. So this is all way and wrap equipment and new product rollouts. And I'd say our customer base is not part of the population that you may be alluding to that's having trouble financially. I mean, these are all the big grocery store, retailers, chains that you would expect. And so we're not seeing any impact there from them being in trouble financially. Quite on -- quite the contrary. Walt Liptak: Okay, great. Okay, congratulations for that. Thanks. Christopher O'Herlihy: All right, thank you. Operator: That concludes the question-and-answer session. Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's First Quarter Earnings Conference Call. [Operator Instructions] Erin Linnihan, Vice President of Investor Relations, you may begin your conference. Erin Linnihan: Thank you, Krista. Good morning, and welcome to ITW's First Quarter 2024 Conference Call. Today, I'm joined by our President and CEO, Chris O’Herlihy; Senior Vice President and CFO, Michael Larsen; and Vice President of Investor Relations, Karen Fletcher. During today's call, we will discuss ITW's first quarter financial results and provide an update on our outlook for full year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2023 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O’Herlihy. Christopher O'Herlihy: Thank you, Erin, and good morning everyone. While the near-term demand environment across the majority of our segments was certainly challenging as we anticipated, the ITW team delivered a solid start to the year as our first quarter results came in as expected. And we remain solidly on track to deliver on our 2024 performance targets. Starting with the top line. Organic growth was down 0.6% as 5 of 7 segments declined in the face of a tough demand environment and versus some difficult comparisons year-over-year. Those comparisons are more favorable for the balance of the year, and based on current levels of demand, we are confident that we will deliver on our full year performance targets, including organic growth of 1% to 3%. The ITW team continued to execute at a very high level and delivered strong margin and profitability performance in the first quarter. Excluding a onetime inventory accounting item, quarterly operating income grew 4%, as operating margin expanded 120 basis points to 25.4%, with a strong contribution from enterprise initiatives of 140 basis points, as we continue to make solid progress towards our goal of 30% operating margin by 2030. GAAP EPS of $2.73 increased 17%, and excluding the onetime item, we grew EPS 5% to $2.44. The free cash flow conversion rate of 68% was in line with normal Q1 levels. Looking ahead, where we did raise our GAAP EPS and margin guidance for the year to account for the onetime item, our operational guidance remains unchanged. We continue to expect that current levels of demand across the majority of our end markets and favorable year-over-year comparisons will translate to positive organic growth through the balance of the year. Combined with our continued strong margin and profitability performance, we are confident that ITW is firmly on track and well-positioned to deliver on our 2024 guidance. In concluding my remarks, I want to thank all of our ITW colleagues around the world for their exceptional efforts and for their dedication to serving our customers with excellence, and driving continuous progress on our path to ITW's full potential. I will now turn the call over to Michael to discuss our first quarter performance in more detail, as well as our updated full year guidance. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. In Q1, we delivered a solid start to the year with some high-quality execution in a pretty challenging demand environment as expected. Despite an organic revenue decline of 0.6%, operating income grew 4% and operating margin improved 120 basis points to 25.4% as enterprise initiative contributed 140 basis points. EPS increased 5% to $2.44, excluding a onetime item. Our free cash flow was $494 million, and we repurchased $375 million of our own shares during the quarter as planned. EPS increased 17% to $2.73, and operating margin expanded 420 basis points to 28.4%. As you saw this morning, our GAAP results include a onetime LIFO inventory accounting change that resulted in a favorable pretax impact of $117 million to cost of revenue equal to $0.29 a share. In Q1, we made the decision to transition from the LIFO to FIFO inventory accounting method for all of our U.S. businesses, because it is a more consistent and simpler method for valuing inventory across our operations. In summary, Q1 results were as expected in the current environment, and growth rates are projected to improve as we go through the balance of the year. Our margin and profitability performance continues to be strong, and we're solidly on track to deliver on our guidance, which I will discuss in a few slides. Please turn to Slide 4 for a look at organic growth by geography. As you can see, the 4% decline in North America was partially offset by positive growth internationally, as Europe grew 1% and Asia Pacific grew 6%, led by China up 15%. Excluding the 23% growth rate in our Chinese automotive OEM business, organic growth in China was still up 7%. For the full year and for our usual process, which is based on current levels of demand, we expect organic growth of 1% to 3% in both North America and Europe, with Asia Pacific up in the mid-single digits, led by China. Moving on to segment results and starting with the Automotive OEM segment, which delivered solid organic growth of 3% despite North America being down 6% as Europe grew 2% and China grew 23%, driven by continued strong penetration and market share gains. For the full year, we continue to expect solid above-market growth with our typical penetration gains of 2% to 3% and continued outgrowth in China. Margin and profitability performance was strong as margins improved by 370 basis points to 19.8%, and enterprise initiatives contributed more than 200 basis points. We continue to make solid progress on the margin enhancement plan in this segment, and we are firmly on track to deliver margins in the low to mid-20s by 2026, which you will recall is what we said we would do at our Investor Day last year. Turning to Slide 5. Food Equipment organic revenue declined 1% as expected against a tough comparison of plus 16% in the first quarter last year. Equipment was down 4%, and service grew 3%. And by region, North America declined 2% due to a particularly difficult comparison of plus 21%. On a positive note, the retail business was up 10%, fueled by new product launches and overall North America order activity in Q1 was pretty encouraging across the board. International revenue was flat with Europe down 1% and Asia Pacific up 6%. While 5 of our 7 segments improved their margins in Q1, Food Equipment margins declined modestly to 26% as a result of focused capacity investments to support and accelerate continued above-market organic growth in our very attractive service business. Looking forward, we expect margins to continue to improve sequentially as we go through the year. Turning to Test & Measurement and Electronics. Organic revenue was down modestly as Test & Measurement grew 2% despite a tough comparison of plus 12%. Electronics was down 8% due to challenging near-term demand trends in electronic assembly. The recent MTS acquisition continues to perform well and grew more than 20%. With margins that are improving, but still in the mid-teens, this created a mix headwind for this segment and diluted segment margins by about 250 basis points. Looking ahead, we expect Test & Measurement and Electronics margins to improve from here as we go through the balance of the year. Moving on to Slide 6. And as expected, Welding faced a tough demand environment and year-over-year comparison of plus 10%, which resulted in a decline of 3% in Q1. Equipment declined 2% and consumables were down 6%. Industrial sales declined 1% versus an 18% comparison, and the commercial side was down 6%. By region, North America declined 3% against the comparison of plus 10% and international declined 8%. On a positive note, operating margin improved 80 basis points to 32.7% with a solid contribution from enterprise initiatives. Organic revenue in Polymers & Fluids declined modestly as Automotive Aftermarket was down 2%, and both Fluids and Polymers were essentially flat in the quarter. On a geographic basis, North America declined 5% and international grew 5%, led by China. Operating margins improved 104 basis points to 25.8%. Turning to Slide 7. Near-term demand trends in Construction Products continued to be challenging on a global basis as organic revenue declined 7% in Q1. North America was down 3% as the residential and renovation business was down 1%. And international markets remained soft as Europe was down 11% and Australia and New Zealand was down 12%. On a positive note, operating margin improved 190 basis points to 29.4%, driven primarily by another solid contribution from enterprise initiatives. Finally, Specialty Products. Organic revenue growth was up 6%, due primarily to the timing of large equipment orders in 2 European businesses. As a result, international was up 19% and North America was down 1%. As we have talked about before, we're working to reposition the Specialty segment for consistent above-market organic growth, which involves some strategic portfolio work and more significant product line simplification as we go forward. Operating margin improved 410 basis points to 29.7%, driven by operating leverage and a solid contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2024 guidance. With Q1 results that were right in line with our expectations, we're solidly on track to deliver on our 2024 performance targets and guidance. Looking ahead and starting with the top line, we do see some positives in terms of stable demand, more favorable comparisons year-over-year as we move forward, a normalized pricing and inflationary environment, new product launches, and no meaningful headwind from inventory destocking. Per our usual process, our organic growth guidance of 1% to 3% is based on current run rates adjusted for typical seasonality. Operating margin is expected to improve by 140 basis points at the midpoint to a range of 26% to 27%, which includes more than 100 basis points contribution from enterprise initiatives and 50 basis points from the onetime item in Q1. As I mentioned on our last call, every segment is projecting to improve their operating margin performance, again, in 2024, with another solid contribution from enterprise initiatives across the board. After-tax return on capital is expected to remain firmly above 30%, and we expect strong free cash flows, again, with conversion greater than net income. As you saw this morning, we raised our full year GAAP EPS guidance to a new range of $10.30 to $10.70, which now includes $0.30 of EPS from the Q1 inventory accounting change. Setting that item aside, our operational guidance remains essentially unchanged as we expect a combined headwind of about $0.30 from higher interest expense, currency and income taxes, with an expected tax rate in the range of 24% to 24.5%. In terms of cadence for the year, we expect our first half, second half EPS split to be about 50-50 this year, as we factor in the onetime item in the first quarter, which compares to our typical split of 49-51, so slightly less back-end loaded than usual. To wrap things up, as expected, the ITW team continues to execute at a very high level in a challenging near-term demand environment, which we anticipate will improve as we go through the balance of the year based on current levels of demand and more favorable comparison. In addition, our first quarter results came in as expected, and we are solidly on track to deliver on our 2024 guidance. On a separate note, today is Karen Fletcher's last ITW earnings call. Over the last 6 years, Karen has been instrumental in articulating ITW's unique and differentiated competitive advantages and our plan to leverage them to their full potential to you, the investment community, in a clear and compelling manner. In doing so, she has helped us position ITW as one of the world's highest quality, best performing, and most respected industrial companies. Please join Chris and me in thanking Karen, for her many contributions to ITW and wishing her all the best in retirement. Karen Fletcher: Thank you, Michael. That means a lot, and it's been a privilege to do that. Michael Larsen: Thank you, Karen. And with that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Krista, will you please open the line for questions? Operator: [Operator Instructions] Your first question comes from Jamie Cook from Truist Securities. Jamie Cook: Congrats Karen, and thanks for all your help over the past 6 years. Karen Fletcher: Thank you, Jamie. Jamie Cook: My first question on the Food Equipment side, I think, Michael, you noted some positive order activity in North America. If you could just speak to what you're seeing there? And then how much of a margin headwind was the capacity investments that you spoke about? And then my follow-up question, just on Specialty. I know you spoke to taking portfolio actions in PLS. If you could just give a little more color there, where are you taking actions? And how much is PLS, I guess, a headwind to organic growth within Specialty for the year? Michael Larsen: I think that was 4 questions in one, Jamie. Well, I'm going to try... Jamie Cook: I know, but that's every quarter, so I get... Michael Larsen: I'm going to try my best here. So the comment on Food Equipment. I think for many of our segments, if you take a step back, these growth rates are a little unusual for us, which is really driven, as we said, by these really significant challenging comparisons that we're dealing with, including in Food Equipment. So the additional color, even though we're not necessarily a backlog-driven company, was directed around the order activity in North America, which grew double digit in the first quarter here, and which I think gives some additional credibility. What we're saying is that we are expecting a return to more typical growth rates here, including in Food Equipment as we go forward. The margin pressure, the margin impact is about 100 basis points in Food Equipment here in Q1 and Q2. And it's really as a result of taking advantage of a huge growth opportunity that's sitting right in front of us in our service business. So what we're talking about is adding a significant number of service technicians to help us meet the demand in one of the most attractive parts of our Food Equipment business. And as you know, we're the only captive OEM with the service business, which is a huge competitive advantage for us in this segment. So I think those were the 2 questions around food equipment. I don't know if you want to add anything to that, Chris? Christopher O'Herlihy: No. I would just, I guess, accentuate the point of differentiation aspect of the service business within food with unique captive manufacturer. And this is a necessary investment at this point to capitalize on what is an undoubtedly stellar growth opportunity on the service side for us. Michael Larsen: And then on Specialty, the organic growth rate here was really driven by large equipment orders and the timing around those in 2 of our businesses in Europe. What we're trying to articulate on a go-forward basis is that we still expect meaningful PLS, product line simplification, as we move forward and strategically reposition this business for 4% plus growth on a consistent basis. And so we still expect a meaningful impact from that as we move forward. And I think kind of what we're saying is don't count on 6% organic growth as we move forward. We had guided to this segment at our last call to be down 1% to 3%. And so please keep that in mind. And the same is true for the margins. I mean, I think what you're seeing here on the margins is what happens when we get some growth in these businesses and the operating leverage here contributing in a meaningful way to 29.7% operating margins in the Specialty segment. I think that is not -- on a go-forward basis, that's Q1, both growth rate and margins are a little bit of an anomaly, and I think we expect to return to more -- still very profitable margins kind of in the high 20s, but maybe not something that starts with a 29. Jamie Cook: Congrats again, Karen. Karen Fletcher: Thanks, Jamie. Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Tami Zakaria: First off to Karen, I'll definitely miss you, but I wish you all the best of luck. And welcome aboard, Erin. Looking forward to working with you. Karen Fletcher: Thanks, Tami. Tami Zakaria: Of course. So my first question is, just wanted to get a little color here. I think you expect organic growth to be positive throughout the balance of the year. Does that mean you expect 2Q organic growth to be within that full year range of 1% to 3% growth? Michael Larsen: So Tami, as you know, we don't give quarterly guidance. What I will tell you to try and help you out here a little bit is that if you model kind of current levels of demand or run rate, as we call them, into Q2, what we're typically seeing is a step-up in revenues in the low single digits from Q1 to Q2. And in Automotive OEM, actually a meaningful improvement in the builds from Q1 to Q2, an increase in the low to mid-single digits there as well. So you will see slightly higher revenues in Q2. And given that the comparison gets easier on a year-over-year basis, we were up 5% in Q1 last year, up 3% in Q2, it is certainly possible that we'll see slightly positive organic growth here in Q2. But the more meaningful step-up really starts in the second half of the year, which is kind of what's implied in our guidance here. So think about it maybe as kind of flattish in the first half, maybe slightly positive in Q2, and then an improvement in the second half of the year, as the comparisons year-over-year improve by 4 points relative to the first half of the year. So in the second half last year, revenues were essentially flat, and at current run rates, you'd expect to see positive organic growth rates in the low single digits in the second half. And I might just add for those keeping track that there are 2 extra shipping days in the second half this year compared to the second half last year, which at least mathematically should provide some additional revenue growth for us. Tami Zakaria: Got it. That's very helpful. My second question is similar to the first one, but on the margin side. I think that in the first quarter, you had $117 million tailwind. That's about 70 basis points tailwind for the full year, but you raised the full year guide by about only $50 million. And the first quarter margin also came in a little better than what most people on the Street were modeling. Just trying to understand, as we think about the next 3 quarters, is there any incremental cost pressures or maybe price cost headwind than originally thought? Or is it just your conservatism that you raised the full year guide by only 50 basis points? Michael Larsen: Well, what I would say, Tami, is that we're really pleased with our first quarter operational performance here, as you saw in the margin rates. And if you exclude the onetime item, 140 basis points from initiatives, 120 basis points of overall margin expansion, and margins at 25.4% is a pretty significant accomplishment here for the first quarter. And we do expect, as we typically do going through the year, that margins improved sequentially from here on out. So you should see a modest improvement sequentially from Q1 to Q2, and then again into Q3 and Q4. The only thing I would highlight as you think about the second quarter is, similar to last year, we do expect some higher restructuring expense in the second quarter, and these are all projects that are tied to a typical 80/20 front-to-back projects. These are not tied to any concerns around volume growth whatsoever. I don't want you to think that this is pure planned restructuring for the second quarter. And as I said, just real quick on Q1, again, 5 of 7 segments improved margins in the current environment, including with revenues down in 5 of 7 segments. And we expect, consistent with our bottom-up planning process here for the full year, that every segment will improve margins as we go through the year and on a year-over-year basis. Operator: Your next question comes from Steve Volkmann with Jefferies. Stephen Volkmann: Great. Karen, I can add my congratulations, and we will miss you. And Erin, welcome. And I'm impressed that you already have Karen's cadence down so well. So... Karen Fletcher: Thank you. Stephen Volkmann: Can I ask a little bit about China? That seemed to be a bit of an outlier there. I guess, quite a bit of that automotive, but even without that, things seem to be relatively good. Any color you can give us on that? Michael Larsen: Yes. I think as you pointed out, Steve, the big driver is obviously our Automotive OEM business, up 23%. And the team there is doing a great job growing content on new vehicles, including on the EV side, and gaining market share. Even excluding those, as I said, China was still up 7% year-over-year. Strong contribution from Polymers & Fluids. Some of that is tied also to market share gains on the EV side of things and the bonding of some of these batteries in the assembly process, where we have a really unique and differentiated product. Specialty products also contributed. Test & Measurement grew and Food Equipment. So across the board, really solid performance in China. And moving forward, we'd say that looks pretty sustainable as we go into Q2, and then the second half, the comps get a little bit more difficult. But as I said, for the full year, China should be up in the mid- to high-single digits here, which is certainly encouraging. And again, I think it speaks to kind of the benefit of being as diversified from a geography standpoint as we are. And so certainly, some challenges in the first quarter in North America, but offset in Europe and in China, which is really a big benefit for us. Stephen Volkmann: Super. And then a follow-up is on Automotive margins. Obviously, going well there, and I think you said 200 basis points or better than 200 basis points of enterprise there. And I'm just trying to get a sense of how we should think of the cadence in auto margins as the year progresses. And I don't know, maybe the exit rate or the total year enterprise something? Michael Larsen: Yes. I mean, I think, I wouldn't expect a lot of regression from where we are. These are absolutely sustainable here in the 19%-plus range. And I think that's probably where we'll end up for the year, maybe a little bit better in the back half. Some of that depends on the build assumptions. There might be a little bit of restructuring here in the second quarter. But big picture, I'd say, Automotive, really solid progress here on a year-over-year basis. We expect full year margins in the 19%, almost 20% range, an improvement of 240 basis points on a year-over-year basis, and lots of room to go as we work through our margin enhancement plan. Christopher O'Herlihy: Yes. And Steve, I suppose just to support that, I mean, this is very much an improvement plan that's on track to get back to the low to mid-20s margins by 2026, as we outlined at our Investor Day, largely through a combination of, over that time, volume recovery, enterprise initiatives, and higher-margin innovation. So both in '23 and again in '24, we're very much tracking on that cadence with respect to what we outlined at our Investor Day last year. Michael Larsen: Yes. So nothing unusual in terms of the margins in Q1, and sustainable, but lots of room for improvement from here. Operator: Your next question comes from Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Karen, congratulations. We'll miss you. Karen Fletcher: Thanks, Andy. Andrew Kaplowitz: So Michael, probably, I'm guessing you don't want to reset your organic growth guides for your segments every quarter, but just higher level, you had Construction, Specialty forecast to be down, I think 1 of 3, while the other segments were projected to be up between 2 and 4 and 3 and 5. Specialty was actually much better. Has that changed the segment's outlook at all? I know you talked about a little bit of a pull forward in some equipment orders. And were any of the other segments like weaker than you thought, to start? Michael Larsen: I think, Andy, you're right. We don't want to update our guidance for the segments every quarter. And what I will tell you is, given our portfolio, there's always going to be some puts and takes. And I think that's, again, I just talked about the competitive advantage with being as diversified as we are geographically. And the same is true when you look at this portfolio of businesses. You're always going to have some things that maybe are a little more pressured from a market standpoint in the short term. And those are typically offset by segments that are performing a little bit better. And it all kind of evens out to that 1% to 3% organic growth guidance. So I'm not really going to go through segment by segment here, but I'd say there's definitely some puts and takes, but overall, not too far off from what we talked about on the last call. And certainly, our full year guidance, we're firmly on track to deliver on that. Andrew Kaplowitz: Michael, that's helpful. And then just in Welding, maybe give us a little more color to what you see going on there. There was some destocking end of last year, maybe a little bit still early this year. Are you getting past that, and differences between industrial and commercial markets, sort of what do you see going forward there? Michael Larsen: Yes. I think the big driver here is really the comparisons year-over-year. That's driving the growth rates as we go forward. And so just like I said, for the total company, for Welding, it's also true that as we go through the year, these comparisons get easier. 10% growth in Welding in the first quarter last year is obviously not a sustainable growth rate. And so it wasn't really a big surprise that organic revenue was down 3%. I'd say on a positive note, and this is true not just in Welding, but across the board, last year, we dealt with some meaningful headwind from excess inventory at our customers and in the channel. And to the point of magnitude, a percentage point of drag on the organic growth rate last year, that is essentially behind us at this point. So that's kind of the positive news across the board, including in Welding. And then we're back to a normal pricing environment. We've got an exciting lineup in terms of new products that are being launched here in the near term. And so you put all of that together, and we feel really good about the outlook here in Welding. Top line, obviously, but maybe I will just highlight the margin performance again. The fact that with revenues down, margins at 32% plus, operating margins is really strong and speaks to the focus that we have on really quality of growth over quantity of growth. And the team is executing well on that plan. Andrew Kaplowitz: Agreed on the margin performance. Operator: Your next question comes from Andrew Obin with Bank of America. Sabrina Abrams: You have Sabrina Abrams on for Andrew Obin. Congratulations, Karen. Karen Fletcher: Thanks, Sabrina. Sabrina Abrams: On the margin side, are there any changes to how you're thinking about volume leverage, price cost, maybe like the reinvestment in enterprise initiatives, as we move through the year? Maybe we could like walk through the different buckets and how they relate to the full year guide? Michael Larsen: Yes. I think there's not a lot of change from what we talked about on the last call. We are maintaining our operational guidance here kind of big picture at 1% to 3% organic growth. There is some positive operating leverage. We expect slightly more than 100 basis points of enterprise initiatives, which is based on the strong performance here in Q1 at 140 basis points. Price/cost has essentially normalized at this point. So there is some modest favorability from price/cost as we go through the year. Maybe a little bit more in Q1 versus the back end of the year. And then we have done a good job, as we talked about on the last call, managing some of the cost pressures from an inflationary standpoint around employee-related cost benefits. That used to be a headwind. Order of magnitude, we used to talk about 150, 200 basis points, and that's right around 100 basis points of margin headwind now. And then the last thing that I would add is just the accounting change. So factoring in the LIFO accounting change in Q1, that's how you get to that 140 basis points of margin improvement for the full year and the new range of 26% to 27%. Sabrina Abrams: And then what are you guys seeing in terms of electronics demand? And what are you hearing from your customers? Because this market has been pressured for 5 or 6 quarters now, but clearly, the comps are getting easier. Has this started to bottom out yet? Michael Larsen: Well, so I think it's a little bit of a mixed picture there. I think last year, we talked a lot about the challenges in the semi-related businesses. Last year, those were down order of magnitude 20% to 25%. Now -- we're talking about just to kind of size things. These businesses represent about 15% of the Test & Measurement and Electronics segment, 3% of total ITW revenues. So just to kind of put things in context. The positive news is that the semi markets appear to have bottomed out. So this is no longer a drag on the overall growth rate of the segment. They were actually maybe slightly positive here in Q1, but the inevitable recovery has been deferred. And so when exactly that will come, whether that's in the second half or next year, is hard to tell. It's not factored into our guidance, as we told you today. And then we're seeing a little bit of what I said in the script, a little bit of pressure in the electronic assembly side of things. So this is maybe more tied to consumer electronics, and that's what drove electronics being down 8% here in the first quarter. Operator: Your next question comes from Mig Dobre with Baird. Mircea Dobre: And I'll join the chorus here. Karen, all the best in retirement and really appreciate all the help over these years. Karen Fletcher: Thanks, Mig. Mircea Dobre: One question I had was about EMEA, which frankly came in a little bit better than I would have guessed. I guess one of the themes during this earnings season has been that Europe, frankly, has not been that great. So I'm kind of curious what you're seeing there? Is it just a function of the Specialty kind of onetime items that might have helped Europe in the quarter? Or is there kind of more green shoots to talk about in Europe? Michael Larsen: I mean the big driver in Europe here from a dollar standpoint was the Specialty Products, these 2 equipment businesses here, and the timing around some of those orders, as Specialty was up 20% here in the first quarter. But overall, I'd say pretty stable. Automotive was up 2%, Test & Measurement and Electronics up 5%, Food Equipment about flat. That's a little bit of an anomaly that will return to more positive growth as we go through the year. And then smaller businesses. Welding down a little bit and Polymers & Fluids down a little bit. But overall -- and then Construction obviously remains a drag internationally as it has been for well over a year at this point. So Construction was still down double digit here in the first quarter. But overall, 1% positive organic growth in the first quarter in Europe. Mircea Dobre: Understood. And since you mentioned Construction, that was going to be my follow-up there. How do you sort of think about the way this segment can progress through the year here? Is there some sort of a stocking effect that we need to be aware of? And can you also clarify a little bit what you're seeing in North America. You talked about resi. I'm curious what you're seeing on the nonresi side of things? Michael Larsen: Yes. I think overall, actually, if you think about Construction, the performance in North America I think is a good example of illustration of how the business is outperforming in a very challenging down market. Only to be down 3% in a market that, if you look at all the key metrics, is certainly down a lot more than that is pretty impressive. Residential/remodel, we said down 1%. I mean the home centers are actually down a little bit more than that. And on the commercial side, to your question, that continues to be soft. The commercial side is down. I mean, it's a fairly small part of the overall business, about 20% of the global business, maybe even a little bit less than that. That business was down in the low teens here in the first quarter. But overall, pretty resilient performance in a challenging market, and we expect that frankly to remain that way as we go through the balance of the year. If you look at our guidance last time we were together, we said we expected Construction to be down 1% to 3% and I'd certainly put them in that category. And then what's really helping drive some of the performance here is the margin performance. Again, for our Construction business to be delivering 29% plus margins is pretty remarkable without any volume leverage. Erin Linnihan: And I think we'll take one more question, please. Operator: Your next question comes from Julian Mitchell with Barclays. Matthew Pan: This is Matthew Pan from Julian Mitchell's team at Barclays. Just one, if you could dial in on the TME margins, they were down year-over-year. Can they expand in 2024 overall? Michael Larsen: The short answer is yes. And I think one of the reasons, as I said in the prepared remarks that Test & Measurement margins were down in the first quarter is really the strong performance of the MTS business, which grew at 20% plus organic, which is certainly great performance. But due to the fact that we're only 2 years in, in terms of implementing the ITW business model, margins are in the mid-teens in that business. And so there's a negative mix effect that diluted the margins in Test & Measurement by about 250 basis points. Now as we go forward, starting Q2 and then through the balance of the year, we do expect that margins will improve from here in the Test & Measurement and Electronics segment. If you just look at kind of where we were historically, we're going to be back to kind of the mid-20s here for the full year is the current expectation. So like in every segment, including in Test & Measurement and Electronics, we expect to improve margins on a year-over-year basis. So... Christopher O'Herlihy: Yes. In Test & Measurement and Electronics, I would just add that there's an extremely fertile environment for innovation, which will underpin margin progression going forward in that segment. Michael Larsen: Yes. Matthew Pan: Got it. And just a quick follow-up. The free cash flow was down year-over-year in Q1. Is that just a working capital build? And then what are your thoughts on Q2? Is that up year-over-year? Michael Larsen: Yes. I think if you look at the free cash flow conversion, it's actually pretty close to kind of normal seasonality. Working capital, if you look at the inventory, it's certainly a decline on a year-over-year basis. It looks like an increase from year-end in Q1. You have to factor out this LIFO inventory accounting change, which added $117 million of inventory in the first quarter. If you do that, you'll see that inventory was actually flat in the quarter relative to year-end, when typically we see a 5% increase or about $85 million of inventory increase in the first quarter, which the team was able to offset. Now that said, our months on hand are still elevated relative to pre-COVID levels. And so pre-COVID, we were in the low 2s months on hand. We're right around 3. Certainly, some improvement, but we believe that there is a lot more opportunity here to drive those inventory levels back to kind of pre-COVID levels given that supply chain has normalized. And so as a result of that, you should expect continued strong free cash flow performance as we go through the year. And that's consistent with the guidance we gave today, which is a conversion of 100% plus for the full year. So I think overall kind of typical performance in Q1, and more to come as we go through the balance of the year in terms of reducing our inventory levels, which will result in strong free cash flow, as you've come to expect from ITW. Operator: That concludes our question-and-answer session. And with that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Operator: Good morning. My name is Eric, and I'll be your conference operator today. At this time, I would like to welcome everyone to the ITW Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations. You may begin your conference. Karen Fletcher: Thank you, Eric. Good morning, and welcome to ITW's fourth quarter 2023 conference call. I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. Also with us today is Erin Linnihan who joined our Investor Relations team last month as Vice President. Erin, welcome to ITW. During today's call, we'll discuss ITW's fourth quarter and full-year 2023 financial results and provide guidance for full-year 2024. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the Company's 2022 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. Christopher O'Herlihy: Thank you, Karen, and good morning, everyone. In Q4, we delivered a solid finish to a year of high quality execution and face some pretty unique challenges, including slowing demand for CapEx, headwinds from customer and channel inventory reductions and an automotive industry strike. As a result, organic growth was essentially flat in the fourth quarter. Operating margin came in at 24.8% with 150 basis point contribution from enterprise initiatives and free cash flow grew almost 40%. GAAP EPS of $2.38 included $0.04 of unfavorable impact from the devaluation of the Argentine currency. Throughout 2023, the ITW team continued to leverage the strength and resilience of the business model and our high quality diversified business portfolio to deliver a year of strong operational and financial performance, including solid organic growth of 2% on top of 12% growth in both 2021 and 2022. Operating margin of 25.1% and an improvement year-over-year of 130 basis points. Income growth of 7% to a record $4 billion, after-tax ROIC of more than 30%, 50% plus free cash flow growth and GAAP EPS of $9.74. We delivered these results while investing almost $800 million to sustain productivity and accelerate our organic growth initiatives in our highly profitable core businesses. As we outlined at our Investor Day, our key strategic priority as we enter this next phase of our enterprise strategy in 2024 is to build above market organic growth fueled by customer-back innovation into defining ITW strength on par with our world class financial and operational capabilities. Turning now to our 2024 guidance. We are encouraged by what we are seeing in terms of demand across the majority of our portfolio, along with some meaningful improvements in both customer and channel partner inventory levels and input cost inflation, as well as continued progress on customer-back innovation. For our usual process, our organic growth projection for 2024 of 1% to 3%, and our EPS guidance of $10.20 at the midpoint, reflect current levels of demand adjusted for seasonality. Operating margin is projected to improve by about a 100 basis points at the midpoint to a range of 25.5% to 26.5%. This includes another solid contribution of approximately a 100 basis points from enterprise initiatives. Before I turn the call over to Michael to provide more detail on the quarter and full-year performance as well as our guidance for 2024, I want to thank my ITW colleagues around the world. Their extraordinary dedication and commitment to serving our customers and executing our strategy with excellence and for their incredible support as I transition into the CEO role. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid finish operationally and financially to a strong year for the company. Starting with the topline, the soft market demand for CapEx that we talked about on our Q3 earnings call continued into the fourth quarter. In addition, customer and channel inventory reductions and the automotive industry strike reduced our organic growth rate by approximately 1.5%, resulting in essentially Fed revenue and organic growth on a year-over-year basis. That said, we finished the year with stable to slightly improving demand on a sales per day basis, as evidenced by sequential revenue growth of plus 2.5% from Q3 into Q4 compared to our historical sequential growth of plus 1.5%. Foreign currency translation added 1.2% to revenue and divestitures reduced revenue by 0.4%. GAAP EPS was $2.38 and included $0.04 impact from the devaluation of the Argentine currency. On the bottom line, operating income was a Q4 record of $988 million and operating margin was flat year-over-year as enterprise initiatives of 150 basis points and 60 basis points of price, cost, margin benefit, net of year-over-year inventory revaluations were offset by a combination of growth investments including headcount ads, higher employee-related costs, such as wages and benefits, as well as increased restructuring expenses year-over-year. Free cash flow grew 39% to a fourth quarter record of 908 million with a conversion to net income of 127%. Overall for Q4, solid operational execution and financial performance in a pretty challenging environment. Please turn to Slide 4, starting with one of the highlights for Q4 and the year. Our free cash flow performance on the left side of the page. And as you can see, our full-year free cash flow was up more than a $1 billion to a record $3.1 billion as our inventory months on hand metric continued its slide path to pre-COVID levels. Now let's move to the segment results starting with automotive OEM, which led the way with organic growth of 8%, despite North America being down 9% due to the impact of the automotive strike. Meanwhile, Europe's organic growth rate was plus 11%, and China was up 31% driven by strong market share and penetration gains in the rapidly growing EV market. Operating margin was 19.2% excluding 160 basis points of headwind from higher 80/20 front-to-back restructuring expenses as the automotive OEM team continues to work toward its margin goal in the low to mid-20s over the next two to three years as outlined at our Investor Day. Looking forward, we expect automotive OEM to grow 3% to 5% in 2024, based on an assumption of essentially flat global auto bills year-over-year, plus our typical penetration gains of 2% to 3% and continued above market organic growth in China. Turn to Slide 5. Food equipment delivered organic growth of 3% against a tough comparison of plus 17% in Q4 last year. Equipment grew 1% and service was very strong, up 7% for the quarter. By region, North America grew 4% with institutional end markets up in the mid-teens, retail up mid-single digits and restaurants down in the high-single digits. Europe and Asia Pacific both grew 1%. Test and measurement and electronics, organic revenue was down 1% due to continued softness in semiconductor-related end markets. While test and measurement grew 5%, electronics declined 14%. Moving on to Slide 6. Slower demand in welding resulted in an organic revenue decline of 7%. Equipment was down 8% and consumables were down 6%. Industrial sales declined 11% versus a tough comparison of plus 23%. Commercial was down 2% and oil and gas was down 3%. Overall, North America was down 7% and international was down 6%. Polymers & Fluids, organic revenue declined 2% with our automotive aftermarket down 3%, Polymers grew 6% and Fluids was down 7%. Operating margin expanded 270 basis points to an all-time high of 28.5% for the segment. Turning to Slide 7. In a tough housing market, construction products, organic revenue declined 4% as North America was essentially flat with residential renovation flat and commercial construction up 3%. International markets have been soft all year and in the fourth quarter, Europe was down 9% and Australia, New Zealand was down 5%. Specialty products, organic revenue was down 5% as North America was down 6% and international declined 5%. Consumables were down 10% and equipment revenue grew 8%. Moving to Slide 8 and full-year 2023 results. And as Chris said, throughout the year, our colleagues around the world did an exceptional job of delivering for our customers and responding decisively to a challenging and volatile market demand environment. As a result of their efforts, ITW delivered record financial performance in 2023 with solid organic growth of 2% on top of 12% growth in both 2021 and 2022. Best-in-class margins of more than 25% and after-tax return on invested capital of more than 30%. And we delivered these results while continuing to fully fund projects to accelerate above market organic growth and sustain productivity in our highly profitable core businesses. We raised our dividend 7% and return more than $3 billion of shareholders in the form of dividends and share repurchases. Let's move to Slide 9 and our guidance for full-year 2024. And looking ahead, we definitely see some positives in terms of moderating headwinds in the external environment from supply chain, input cost inflation, and customer channel partner inventory reductions. But there are certainly some challenges, including lower automotive bills that I talked about earlier for example. For our usual process, our topline guidance of revenue growth of 2% to 4%, an organic growth of 1% to 3% is based on current levels of demand adjusted for typical seasonality and incorporate current foreign exchange rates. Operating margin is expected to improve by about a 100 basis points to a range of 25.5% to 26.5%, which includes a 100 basis points contribution from our enterprise initiatives. After-tax return on invested capital is expected to remain firmly at 30% plus, and we expect strong free cash flows again with conversion greater than net income. For 2024, we are projecting GAAP EPS in the range of $10 to $10.40, which includes headwinds of about $0.10 of higher interest expense and $0.20 of higher income tax expense with an expected tax rate in the range of 24% to 24.5%. In terms of cadence for the year, we expect our typical first half, second half EPS split of 49% and 51%. Our capital allocation plans for 2024 are consistent with our longstanding disciplined capital allocation framework that we discussed at last year's Investor Day. Our top priority remains internal investments to support the organic growth initiatives associated with the next phase of the enterprise strategy and sustained productivity in our highly profitable core businesses. Second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of ITW's total shareholder return model. Third, selective high quality acquisitions that enhance ITW's long-term profitable growth potential, have significant margin improvement opportunity from the application of our proprietary and powerful 80/20 front to back methodology and can generate acceptable risk adjusted returns on our shareholders' capital. And finally, ITW's surplus capital is allocated to an active share repurchase program as we plan to buy back $1.5 billion of our own shares in 2024. Turn to our last slide, Slide 10 for our 2024 organic growth projections by segment. And as you can see, five of seven segments combined are projecting organic growth of approximately 4% at the midpoint, partially offset by some unique challenges in construction and specialty products. These segment projections are the outcome of the bottom up planning process that we completed in January, and a combination of several factors including current levels of demand, deep underground market and customer insights from our divisions, market share gain expectations, and the growing contribution from our customer-back innovation efforts and the associated new product launches in every one of our divisions. Consistent with ITWs continuous improvement, never satisfied mindset, every segment is projecting to improve their operating margin performance again in 2024 with another solid contribution from enterprise initiatives across the Board. So overall, we are heading into the first year of our next phase enterprise strategy, well positioned to continue to outperform in whatever economic conditions emerge as we move through 2024. With that, Karen, I'll turn it back to you. Karen Fletcher: Okay. Thank you, Michael. Eric, can you please open up the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of Tami Zakaria with JPMorgan. Your line is open. Tami Zakaria: Hello. Good morning. Thank you so much. So my first question is, when we look at the annual guide, organic growth guide for 2024 for each segment, how should we think about these segment growth rates for the first quarter? Should it be similar to the annual guide, or do you expect any deviation from that in the first quarter and then maybe improvement throughout the year? Michael Larsen: Well, I think, you'll see improvement in the year-over-year organic growth rates as the comparisons get easier as we move through the year. But by and large, the projections here track kind of typical seasonality from Q4 into Q1 and so forth. So there's really nothing unusual there. The other thing to keep in mind is while the guidance at the enterprise level is essentially based on current run rates as we talked about. It's a much more granular projection at the segment level, which includes also significant contribution again from new products as well as our normal pricing less drag from the inventory reduction that we've been talking about really all year. And so really give a better kind of number as we look at the segments. So that's how I would think about it. Tami Zakaria: Got it. That's very helpful. And then it seems like the inside incremental margin for the year is in the 60% to 70% range, probably in the high 60 if my math is right versus normally 35% to 40%. So what's really driving this? Any specific segment you want to call up that may drive this overall high incremental for the year? Michael Larsen: Yes. I think Tami, we've got fairly modest kind of revenue growth that we're calling for here, 1% to 3%. And our incremental margins embedded in the guidance are higher than our typical long-term 35% to 40%, which is what I would still use in terms of long-term modeling. The reason why is a 100 basis points contribution from enterprise initiatives that give us a higher incremental margin in 2024. As part of our planning process that I just described, we've now had a chance to go through all the projects and activities that contribute to a 100 basis points of enterprise initiatives, again in 2024. And I might add, these are largely independent of volume. So regardless of what volume does, we're seeing another significant contribution here, which is certainly a nice thing to have in your hip pocket in what we would describe still as a fairly uncertain and volatile environment. Tami Zakaria: Got it. Thank you so much. Michael Larsen: Sure. Operator: Your next question comes from the line of Steve Volkmann with Jefferies. Your line is open. Stephen Volkmann: Great. Good morning, everybody. I actually wanted to ask – excuse me – I wanted to ask the margin question a little bit differently, Michael, because if you have a 100 basis points from enterprise, and that's kind of the total that we're looking for, I suppose there must be some offsets in maybe some other costs or something because we're not really getting underlying incrementals. We're sort of getting it all from the enterprise initiatives, if you follow me. So just any detail on that would be great. Michael Larsen: Yes. So I think the math is actually pretty simple for 2024. So we've got some volume leverage at that 2% to 4% revenue growth, maybe just round numbers, maybe that's about 50 basis points. The enterprise initiatives add about a 100 basis points. We're entering into what we would describe as a normal price cost environment at this point. And so there's like a modest positive contribution from our price cost efforts. And then the offset is really our continued investments in growth, including some headcount, some employee-related cost, wages and benefits, even though those costs are moderating in 2023 that's still is approximately a 100 basis points of headwind, which then gets us to that midpoint of 26% in 2024. And I might add, well, on our way to our 30% target here by 2030 that we talked about at Investor Day. Stephen Volkmann: Super. Okay. Thanks for filling that in. And then maybe if I could just follow-up, the food guide, the bottoms up food sort of outlook of 3% to 5% seems like a bit of an acceleration from sort of recent trends, and we don't have super easy comps, I don't think. So what are you seeing in that end market? Christopher O'Herlihy: Yes. Sure, Steve. So on Food Equipment, projecting 3% to 5% growth next year, really on the back of a few different aspects. Firstly, as always, with Food Equipment, it's a very fertile environment for innovation. So we see several new product launches across all product categories. We would expect less channel destocking Food Equipment in 2024. And also I would say we have a continued recovery in service. As I think, service is about one-third of our revenues in food. We're the only major manufacturer with that captive service business and service is a business that's still in recovery pretty much from COVID, equipment has recovered, but we will see probably the final year of recovery in service in 2024, and all that is adding up to a 3% to 5% growth rate in food next year. Stephen Volkmann: Understood. Thank you. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Andrew Kaplowitz: Good morning, everyone. Christopher O'Herlihy: Good morning. Andrew Kaplowitz: Michael, when we look at your 1% to 3% organic growth forecast for 2024, you have a nice acceleration dialed into for your CapEx businesses such as welding and T&M. You're saying you're basing your guidance and current run rates. So you obviously did mention some improvement in sequential demand in Q4. Could you give us more color on what you're seeing in these CapEx businesses that's allowing you to forecast what you're forecasting? I would imagine you're dialing an improvements in semicon and electronics, for instance, in T&M, but that goes into now what you usually do. I'm just curious as to what's flushing out. Michael Larsen: Well, I think, like we've said, really most of the year we've seen some slowing in demand for CapEx and certainly in Q3 and Q4. I think as we go into 2024, as Chris just said, we've got less headwind from these customer and channel partner inventory reductions that were drag of about 1% in 2023. We have a meaningful contribution and increased contribution from new products, given all the efforts around customer-back innovation that we're driving. And then we have normal pricing, and you put all of that together and just based on, I think as you point out, it was encouraging that we saw a pickup in the sequential revenue per day from Q3 to Q4, that I think tells you that there's certainly some stability here and some of the headwinds I just described are maybe mostly behind us. We expect still a little bit of headwind from these inventory reductions as we go through the first half of the year. I think of it – we're working through our own inventory levels here and we expect to reduce our inventories in the first half. We think our customers and channel partners maybe doing some of the same, but it'll be less of a headwind here in 2024. So you put all of that together, I think you're an environment where things are pretty stable. Test and measurement you mentioned semi, it's less than 3% of our revenues. There is an expectation of a modest market pickup here in the second half. We expect to gain share and launch new products in this space. So we'll grow a little bit faster than market there. But overall, we're not expecting a big recovery in demand or the economy to pick up in the second half. This is basically based on kind of current run rates. The one outlier I'll just reiterate is automotive, we're going from a build environment in 2023, that was up in the high-single digits. We expect that to be about flat. And so the growth in automotive is all from penetration gains and continued market share and innovation in China which has been an incredible contributor to our overall growth rate and will remain so for the foreseeable future. Andrew Kaplowitz: Very helpful color, Michael. And then Chris or Michael, you mentioned unique challenges in specialty equipment and construction products. Maybe you could elaborate on what you're seeing in these segments. Doing more PLS in specialty, for example, what's the outlook or frame the outlook for 2024? Christopher O'Herlihy: Yes. That's correct, Andy. In terms of specialty particularly, we're doing some strategic portfolio work there heavier, I would say amount of product line pruning than we normally expect in a normal maintenance environment. We're doing quite a bit more on specialty really to position that segment for long-term growth of 4% plus. So that's what's going on there, and we're pretty pleased with the progress around that. On construction, it is very much a market story. I mean, obviously, all three main markets for us, North America, Western Europe, and Australia and New Zealand are all forecasting significantly declines in housing bills next year, that will be 11% in North America, mid-single digits in Europe and high-single digits in A and Z. So that's really what's impacting the construction business. Andrew Kaplowitz: Helpful, guys. Thank you. Christopher O'Herlihy: Thank you. Operator: Your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open. Joseph O'Dea: Hi. Good morning. Thanks for taking my question. Christopher O'Herlihy: Good morning. Yes. Joseph O'Dea: So I mean, you talked about the daily sales rate from Q3 to Q4. It sounds like overall customer tone is perhaps getting a little bit better. You're talking about adding some headcount. Can you just expand a little bit on customer conversations over the last several months to understand a little bit better sort of the verticals where you see some of that uptick happening, and then where you are adding headcount within the business? Michael Larsen: Yes. I mean, I think the tone from customers has been pretty cautious all year, particularly on the CapEx side of things as we talked about. If you go back to our Investor Day last year, we talked a lot about accelerating our efforts to drive high quality above market organic growth primarily fueled by, as Chris said earlier, our customer-back innovation efforts. And so those are the areas, all growth related headcount ads that we're making to make sure that we have all the capability we need in terms of innovation, commercial, sales and marketing resources to drive continued progress and deliver on our above market organic growth commitments. Joseph O'Dea: Got it. And then on the channel inventory side of things, can you just talk about the visibility that you have and any context on how maybe elevated those inventory levels got during supply chain constraints? Where you think they are now relative to normal? It sounds like you think first half of this year you could still see customers doing a little bit of work to trim inventories. Michael Larsen: Yes. I think by and large, if you go back historically, we haven't had great visibility to the levels of inventory in the channel and with our customers. I think we have much better visibility today, given that we've been talking about it all year. Overall, it's been a drag of a percentage point on our growth rate for the year. It was 1.5% in Q3, 1% in Q4, and I think several of our segments, we are back to kind of normal inventory levels and this is largely behind us. And then there's maybe a few other areas where there might be some continued, but certainly less headwind as we go into Q1 and Q2. And then I think at that point, we'll give you an update. I think we'll be able to say this is now completely behind us. Joseph O'Dea: And so with respect to the growth outlook that there's no real inventory – notable inventory headwind within that growth range? Michael Larsen: Well, there's a little bit. I mean, obviously if you look at our run rates, it is included in our run rates at a higher level than what we might reasonably expect. So if that plays out the way we expect, that would be certainly favorable to the run rate and to the guidance that we just gave you. Joseph O'Dea: Understood. Thank you. Operator: Your next question comes from the line of Andrew Obin with Bank of America. Your line is open. Sabrina: Hey, good morning. You have Sabrina Abrams on for Andrew Obin. Michael Larsen: Hey, Sabrina. Sabrina: As we think about pricing into 2024, are there any segments or any particular businesses where on the margin you're seeing more competition and pricing competition as cost moderate? Michael Larsen: Well, I think, Sabrina, we've talked about this before, we want to maintain our price premium based on the quality and the customer service, the lead times that ITW is uniquely positioned to provide, but we also want to compete and we want to gain market share. That's kind of central to our overall enterprise strategy and the focus I just talked about around organic growth. So that's said, I think we expect a normal contribution from price here in 2024. These inflation-driven price increases are now behind us. Input cost inflation, that big wave we've been dealing with, as we sit here today, we'd say is largely behind us. And so we're entering into a normal pricing environment across the portfolio. I think that is a fair statement. If you just look at, we've now essentially recovered the margin impact from that price costs, the price cost dynamics, and we're entering into a normal environment in 2024. Sabrina: Thanks. And then as a follow-up on welding, what is driving the reacceleration in growth there from down 6% in 4Q? And how are you thinking about margins in the segment in 2024 given where you're exiting the year and the sort of margins you reported in 2023 here? Christopher O'Herlihy: Well, I think welding, so we're not counting on a market acceleration, just to be clear. This is if you look at in a normal market environment, just assume for a minute, let's assume the market is flat. The contribution from new products and normal price very quickly gets you to something in the low-single digits. So I just want to be clear around that. The other thing I'd say, just on the margins. We talked a little about the year-over-year inventory revaluations. That's what caused the margins to drop in the fourth quarter, below 30%. And we expect that to be back above 30% here in the first quarter as that one-time kind of year-over-year inventory impact is behind us. So we would expect margins to kind of remain in that 30% plus as we go through 2024. And as I said earlier, that's not unusual. Every one of our segments told us as part of this bottom up planning process that they are on target to improve their operating margin performance in 2024. Sabrina: Thanks. I'll pass it on. Christopher O'Herlihy: Yes. Thank you. Operator: Your next question comes from the line of Steven Fisher with UBS. Your line is open. Steven Fisher: Well, thanks. Good morning. Christopher O'Herlihy: Good morning. Steven Fisher: This has been asked in a few ways about the segments, but really just trying to think about the 1% to 3% organic growth in the context of your sort of 4% to 7% CAGR through 2030. I guess what's the buildup of market growth and price versus market penetration and customer-back innovation? I know again, there's lots of different segment dynamics here, but when you roll it all up, are you basically assuming that it is kind of like flat markets and a couple of points of penetration and innovation. Is that the way to think about it? Christopher O'Herlihy: Yes. I think it is. I mean, as we say, in our four to seven calculus that we outlined at our Investor Day, you have a contribution from market – contribution from market penetration, and the largest contribution is actually from customer-back innovation. And that's what we're seeing here in 2024 really across most of our businesses. As we used to think about growth, 2% growth last year on top of 2021 – or 12% growth in 2021 and 2022 and targeting 1% to 3% here on the path to four plus, is kind of how are outlining this. And I would say that it's a target and a goal that we're very confident on the basis that it's where the bulk of our divisions are spending their time. We're making progress, certainly more to do, but given the portfolio, given the fact that we've got plenty of room to grow in each segment, given the investments that Michael has been talking about that we've been making now for quite a few years in strategic marketing and innovation. We're really putting ourselves and building the muscle here to get into a position where we will grow 4% plus over the entirety of this next phase. And I think in terms of just capability build, if you think about this in the way that – the way we leaned into front to back 80/20 in the last phase of our strategy, that's the way we're leaning into innovation in the next phase of our strategy. The same level of rigor, scope, and capability building that we applied to front to back 80/20 in the first phase. We are now applying to customer-back innovation here in this next phase. And I would say we're very encouraged by the progress that we've seen on innovation over the last couple of years. It was a 1% contributor five years ago. It's now a 2% contributor on its way to 3% and beyond. And again, very encouraged by the progress that we're seeing across many of our divisions in terms of the qualitative work they're doing on innovation, but also in terms of the quality of the innovation pipeline across all seven segments. Steven Fisher: That's really helpful. And just to follow-up, sort of the macro level of the pace of economic growth seems to be diverging between Europe and North America increasingly. So can you just give us a sense of what you've factored in on the European economy and how you're thinking about that? I know you talked about the construction side, and I guess similarly on China, how are you thinking about China in 2024 sort of a net positive for you, I think in 2023, maybe different for some other companies. So how are you thinking about that in 2024? Christopher O'Herlihy: Yes. I think in our overall guidance here of 1% to 3% organic, that's where you'll find all the major geographies. So North America, in that low single-digit, 1% to 3% range. And Europe kind of similar to North America, definitely we've seen some challenges on the construction side as you pointed out, but kind of you put it all together, it's in that one to three range. And then the China is more positive, but that's really driven by the automotive business, which is more than half of our revenues in China. So we expect another double-digit type growth for the auto business in China. And that takes China to kind of the mid single-digit range in 2024. Steven Fisher: Really helpful. Thank you so much. Christopher O'Herlihy: Sure. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Your line is open. Julian Mitchell: Thanks very much and good morning. Christopher O'Herlihy: Good morning. Julian Mitchell: Maybe – and apologies if I'm somewhat retreading some worn ground already, but just trying to understand on the revenue outlook again, because it sounds like you had suffered from some destocking in 2023. You're assuming that destocking continues Q1 and Q2 or you're seeing that destocking continue as we speak. But you sound confident on the sort of sell-through, I suppose and so the guidance embeds your selling recouples upwards to sell through in the second half. So I just wanted to make sure, is that the right way of thinking about it? And when you're thinking about sell-through right now, is your sense from your salespeople and the bottom up work that you mentioned that the sell-through in most of your markets is sort of better now than a few months ago. Just trying to understand that, please? Michael Larsen: I'd say it's about the same, Julian. I mean, I think we – as Chris said, we just delivered 2% organic growth in 2023 in a pretty challenging environment as we talked about. And that included a point of inventory reduction impact. And I might add a point of drag from semi since it came up earlier. So if those two don't repeat, which is what we're saying, then you go from 2% to 4% pretty quickly. And we're not saying that destocking continues at the same level in the first half, which I think is what you said. We do expect it to be less of a drag in the first half. We also said the comps year-over-year are certainly more challenging in the first half than they are in the second half. So I think we're confident because when we look at everything going on inside the company and this focus on driving above market organic growth, a big focus on customer-back innovation, we look at the pipeline and new products that are being launched in every one of our divisions across the company. We look at a kind of a normal pricing environment. We feel pretty confident based on what we're seeing, as we sit here today. Now, we also said this is a pretty uncertain and volatile environment, things can change quickly. And so the thing that we have a lot of confidence is our ability to continue to read and react to whatever conditions our divisions are dealing with on the ground and deliver strong performance as we go through 2024. So we're not economists. We're not trying to forecast where the global economy is going. We're kind of basing our guidance on all the things we just talked about. And that's how we end up in that 1% to 3% range for 2024, which to us doesn't seem like a moonshot based on everything we just talked about. Julian Mitchell: That's helpful. Thank you. And then maybe switching away from the topline. On the margin front, I think in an earlier question reply, you mentioned sort of higher investments offsetting enterprise initiatives. So there's a couple of things on margin. One was, are we seeing a big increase in R&D and/or CapEx this year and any color on those as a sort of external benchmark for that reinvestment rate? And then price cost, I think a big first half tailwind for you maybe on margins this year. Just wanted to sort of any sense of scale for that. Michael Larsen: Yes. Price cost, I think we're kind of in a normal environment for 2024. It's not going to be a material driver of our performance. It'll be a modest contribution to margins and EPS in 2024 based on everything that we know today from a pricing and inflation standpoint. In terms of the investments, I think, our investments grow in line with our sales over time, and that's true both for customer-back innovation, it's also true for our capacity CapEx improvements that – that are all of these investments, about $800 million in 2024 are geared and centered around driving above market organic growth in every one of our divisions. And the biggest headwind, I think to margins this year was not so much the investments necessarily not just in growth, but we saw inflation in our employee-related costs just like everybody else including wages and benefits. And we expect that part of the equation to moderate here in 2024 based on some of the actions we're taking to manage those costs in 2024. So that's not going to be an increased headwind as we go forward. Julian Mitchell: Thanks very much. Michael Larsen: Sure. Operator: Your next question comes from the line of Mig Dobre with Baird. Your line is open. Mircea Dobre: Thank you for taking our question. Good morning. Christopher O'Herlihy: Good morning, Mig. Mircea Dobre: On the topic of outgrowth, it sounds like you're seeing about 2% this year. You're aiming for maybe 3 percentage points. I guess what I'm curious, when you're looking at your portfolio, presumably we don't have this outgrowth notion being sort of evenly distributed, what portions of your portfolio are generating outgrowth at the pace that you need it to be? And where else do we need to see further investment or further adjustments needed to be made? Christopher O'Herlihy: Yes. So Mig, I would say that, we're probably seeing our growth across most of our portfolio. I would use, auto as an example, think about flat bills in 2024. We're talking about 3% to 5% on auto as an example. We've historically outgrown in food equipment. As I think, if you look at some of the comparisons and so on. Also with welding and with construction, large down market here in 2023 which we outgrew, so we have the capacity to outgrow across much of our segment. And with respect to investments, I think we've been making these focused targeted investments for some time now. This is not new news. This is something we've been doing for a few years to really position ourselves to grow at 4% plus across the enterprise over this next phase. And I think the big driver of that, as we said a few times is customer-back innovation, is leaning on customer-back innovation that we've been working on for a couple of years, and we'll accelerate over this next phase. And that's really what will drive the outgrowth going forward. And that customer-back innovation opportunity resides in every segment on the basis of the level of differentiation in every segment, the share runway opportunity we have in every segment. So we would expect every segment in time to meaningfully contribute to that 4% plus organic growth. Michael Larsen: I would just add to that, Mig. We've talked a lot about the individual segments today. I think you got to look at ITW as the beneficiary of a highly diversified, high quality portfolio. All of our segments with margins in the high-20s, we're working through automotive, and so you're always going to have some puts and takes, which is what we're talking about. But this portfolio really gives us a level of resilience and a real competitive advantage relative to others, and puts us in a great position to perform, continue to perform at a high level in any type of demand environment over the long-term. Now, we never said that we were going to be the fastest grower. There's always going to be certain end market trends, whether it be aerospace or electrification or whatever it maybe. But you put this portfolio together in its totality. We have all the firepower that we need to deliver a 4% plus average annual organic growth as we go forward. And by the way, five of our segments are doing that, as we said earlier in 2024. So I wouldn't lose sight of the fact that, we're a business model centric company and a huge beneficiary of this high quality diversified portfolio. Mircea Dobre: Understood. Then my follow-up, maybe a question on M&A, Chris, love to get your thoughts on this and maybe how you think about using M&A as a potential tool to generate this outgrowth that you're talking about? Thank you. Christopher O'Herlihy: Yes. Sure, Mig. So effectively, we are very much sticking to our disciplined portfolio management strategy, which is very consistent in terms of – we are certainly interested in high quality acquisitions where we can find them that extend our long-term growth potential to grow at a minimum 4% plus at high quality. That's the primary kind of lens, we look at acquisitions. We've been able to leverage the business model to improve margins. And so we certainly review opportunities on an ongoing basis, but we're pretty selective here about acquisitions, given the fact that we believe we've got a lot of organic growth potential that we're going to execute on here over the next few years. If I think about MTS as an example of the typical – attractive candidate, we look at and ticked all the boxes in terms of strategic attraction, in terms of differentiation, solving customer pain points, opportunity to leverage the business model to improve margins. And having owned that business now for just over two years because we stuck to the characteristics that we believe in with respect to acquisitions. This is an acquisition that's turning on to be a home run and will be a great ITW business in the long-term. So it's a real blueprint for how we think about acquisitions and how we'd be thinking about acquisitions going forward. Mircea Dobre: Appreciate it. Thank you. Christopher O'Herlihy: Sure. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the ITW Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations. You may begin. Karen Fletcher: Okay. Thanks, Krista. Good morning, and welcome to ITW's third quarter 2023 conference call. I'm joined by our Chairman and CEO, Scott Santi; Vice Chairman, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today’s call, we’ll discuss ITW’s third quarter financial results and provide an update on our full year 2023 outlook. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company’s 2022 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 Chairman and CEO, Scott Santi. Scott Santi: Thank you, Karen, and good morning, everyone. As you are all aware, on September 7, we announced our CEO succession plan, wherein I will be turning over the CEO role to my colleague, Chris O'Herlihy at year-end. Chris is an exceptional leader with deep expertise in ITW's highly differentiated business model, our focused strategy to leverage it to full potential and the company's unique one-of-a-kind culture. He has been an invaluable partner and collaborator with me over the past 11 years. We have worked closely together to prepare for this transition. He is more than ready and he will do an exceptional job as ITW's next CEO. If you allow me a brief bit of reflection in the last 11 years, I will simply say that everything we did was driven by our fundamental belief in the performance power of the differentiated set of strategic and operational capabilities and practices that we refer to as the ITW business model. In this past phase, we focused on getting the company properly positioned to be able to leverage them to their full potential over the long term. With this as our foundation, ITW enters our next phase in a position of great strength and resilience with these unique skills and capabilities sharply honed. I wholeheartedly believe that there will be an even bigger source of competitive advantage and differentiated performance in the company's next phase than they were in the last one, especially if you believe as I do that the level of volatility and unpredictability of the world will only increase from here forward. I have absolutely no doubt that Chris and the incredibly talented ITW leadership team behind him will utilize all of the differentiated tools at ITW's disposal to read and react to whatever comes our way and lead the company to even greater heights in our next phase. Let me close by saying that it has been both a privilege and an honor to lead this great company for the last 11 years. And I offer my deepest gratitude to all of my ITW colleagues past and present for all of their support and for their unwavering commitment to working every day to be the best ITW that we can be. With that, it is now my pleasure to turn the call and in a few months, the company over to Chris O'Herlihy. Chris, over to you. Christopher O'Herlihy: Thank you, Scott, and good morning, everyone. First, I want to thank Scott and our Board of Directors for their trust and confidence in electing me as ITW's next CEO. I'm incredibly humbled by the opportunity to lead this great company, our exceptionally talented leadership team and our 46,000 dedicated colleagues around the world. As Scott said, as a result of the work done over the last 11 years in executing our enterprise strategy to leverage the ITW business model to its full potential, our company has never performed better or been better positioned for the future. The central focus of the next phase of our enterprise strategy is to elevate high quality organic growth and customer back innovation as key ITW differentiators on par with our best-in-class operational capabilities and financial performance. Our leadership team and I are deeply committed to doing just that in delivering on ITW's 2030 Enterprise Performance Goals. Now, let's turn to our Q3 performance. The strength and resilience of ITW's proprietary business model and high-quality diversified portfolio once again drove strong operational execution and financial performance this quarter. Starting with the top line, organic growth was 2% on an equal days basis, as demand for CapEx slowed down in test and measurement and electronics and welding. Our margin and income performance continues to be very robust. Operating margin improved 200 basis points year-over-year to 26.5% as enterprise initiatives contributed 140 basis points. Quarterly operating income grew 9% to $1.1 billion. GAAP EPS grew 9% to $2.55 and free cash flow was up 40%. With three quarters behind us, we are narrowing our EPS guidance to a range of $9.65 to $9.85, which now incorporates a $0.12 adjustment to the impact of the auto strike in Q4. Looking ahead at the balance of the year, the company remains well positioned to deliver another year of differentiated performance. I'll now turn the call over to Michael to discuss our Q3 performance and full year guidance in more detail. Michael. Michael Larsen: Thank you, Chris, and good morning, everyone. Organic growth in the third quarter was essentially flat and plus 2% on an equal days basis as Q3 this year had one less shipping day compared to Q3 last year. Foreign currency translation impact was favorable by 1.5% and divestitures reduced revenue by 1.2%. The net result was revenue growth of 0.5%. Third quarter operating margin was 26.5%, an increase of 200 basis points year-over-year as enterprise initiatives contributed 140 basis points and price cost margin impact was positive 210 basis points. GAAP EPS of $2.55 was up 9% and included $0.07 net of favorable corporate items on a year-over-year basis starting with unallocated expense, which improved by $43 million due to lower employee related expenses, including health and welfare and a one-time insurance recovery. This favorable item was partially offset by $16 million of lower other income, primarily due to lower investment income. As I said, the net effect of these two items was favorable $0.07 net per share. Free cash flow grew 40% to $856 million, with a conversion to net income of 111% as we continue to make solid progress on returning to our normal historical inventory levels. We repurchased $375 million of our shares this quarter and raised our dividend by 7% to an annualized payout of $5.60 per share, which marks our 60th year of raising the dividend. In summary, Q3 was another quarter of strong operational execution and financial performance. Turning to Slide 4, organic revenue growth by geography. As you can see, North America was down 2%, Europe was about flat, and Asia Pacific was up 6%, with China up 8%, driven by the Automotive OEM segment. Excluding auto, China was down 1%. Moving to the segments and starting with our Automotive OEM, organic growth was 4%. North America was down 5%, Europe was up 5% and China was up 18%. There was essentially no impact on Automotive OEM segment revenues from the auto strike in Q3. But as Chris noted, that will not be the case in Q4. As a reminder, our North American Automotive OEM business represents approximately 40% of total segment revenues. And within that 40%, approximately two-thirds of our annual sales are tied to D3 automotive customers. Included in our updated earnings guidance today is our estimate that the impact of the auto strike will reduce our Q4 earnings by $0.12 per share, which is essentially based on October D3 domestic production levels continuing through the remainder of the quarter. Turning to Slide 5. Food Equipment delivered solid organic growth of 6% as Equipment was up 5% and Service grew 9%. North America grew 10%, with institutional sales up in the mid-teens, restaurants up high single digits and retail up in the high teens on the back of new product rollouts. Europe, however, was flat and Asia Pacific was up 6%. In Test & Measurement and Electronics, organic revenue was down 4%, weighed down six percentage points by semiconductor-related demand, which represents about 15% of segments and for context, only 3% of ITW revenues. Overall, Test & Measurement grew 2% and as demand for CapEx slowed in the quarter and Electronics declined 13%. Moving on to Slide 6. Welding's organic revenue declined 2%, as Equipment revenue was down 3% on the back of softer demand for CapEx. Consumables were down 1% as industrial sales declined 9% versus a tough comparison of plus 30% last year. Commercial, however, was up 6% against an easier year-over-year comparison of down 10%. Overall, though North America revenue was down 3% and international was essentially flat. Polymers & Fluids, organic revenue grew 3% as automotive aftermarket grew 10% due to the launch of new products. Polymers was down 1% and Fluids was down 4%. Margins were solid as operating margin improved 280 basis points to 28.1%. Turning to Slide 7, organic revenue in Construction was down 2%, as North America grew 2%, with residential up 2% with some strength on the residential renovation side, which was up 7%. Commercial construction was down 2%. International markets were soft, with Europe down 8%; and Australia and New Zealand down 4%. Margins were solid as operating margin improved 420 basis points to 29.9% with strong contributions from enterprise initiatives and price cost. Finally, Specialty Products, organic revenue was down 6%. North America was down 9% and international grew 1%. Consumables were down 9% and Equipment revenue, which represents about 20% of the segment, was up 9%. Moving to Slide 8 and our updated full year 2023 guidance, as you saw this morning, we are narrowing the range of our GAAP EPS guidance to a new range of $9.65 to $9.85 which, as I mentioned earlier, includes a $0.12 adjustment for the estimated auto strike impact in Q4. Based on current levels of demand exiting Q3, including the estimated impact of the auto strike, we're projecting organic growth of 2% to 3% for the full year. We are raising our full year operating margin guidance to 25% to 25.5%, to reflect our stronger margin performance exiting the third quarter, and we expect that margins for the full year will improve by 150 basis points at the midpoint, including a contribution of more than 100 basis points from enterprise initiatives. We are projecting free cash flow conversion of more than 100% of net income for the year. So while the overall demand environment clearly has some uncertainties in the near-term, inventory normalization, elevated interest rates, increasing CapEx caution and the auto strike just to mention a few. The entire team at ITW remains focused on leveraging ITW's unique strengths and capabilities to optimize our ability to continue to deliver differentiated long-term performance. With that, Karen, I'll turn it back to you. Karen Fletcher: Thank you, Michael. Krista, please open the lines up for questions. Operator: [Operator Instructions] Your first question comes from the line of Scott Davis from Melius Research. Please go ahead. Your line is open. Scott Davis: Good morning Scott and Chris and Michael and Karen. Michael Larsen: Good morning. Scott Santi: Good morning. Scott Davis: I was -- the price/cost positive 200 basis -- 210, was better. I think we were thinking just some simple math kind of more like 100, 150. What -- were you able to get more, price in the quarter? Or was it lower cost or a little bit of both? Or just a little color there would be helpful. Thanks. Michael Larsen: Yes. So let me give you a little bit of context here. So we are definitely on track to recover the margin impact now from more than two years of unprecedented inflation, which now appears to have stabilized. There's definitely still some pressure on the cost side, on the labor side, components as well as energy. That said we've made some good progress. Price/cost was positive 190 basis points in Q1, 216 in Q2, which was the peak and then 210 here in the third quarter. And we're now looking at somewhere around 150 basis points in Q4, and that would put us around 200 basis points recovery for the full year. Price is holding, and we're seeing a little bit of deflation on the -- more on the commodity side. So these would be the metals, in particular, which drove the stronger performance here on price/cost in the third quarter. Scott Davis: That's helpful. Chris, I know it's early. You've got another couple of months, but is there kind of a plan for the first 90 days? Or where do you see the -- I guess the focus shifting, is there a little bit more emphasis on portfolio or -- I know you mentioned kind of driving higher growth rates, but they're just -- given the diversity of end markets you sell into, there's just so much you can do on that front. But maybe just a little color on where you planning on spending your first kind of three to six months and focusing? Christopher O'Herlihy: Yes. So Scott, I would say, in general, our plan is very much in line with what we outlined at our Investor Day in terms of really ensuring that we continue to strengthen our foundation, which is our business model and obviously then building organic growth as a core strength on par with our operational capabilities and financial performance over time. I think the first 90 days I'm just learning the job, just go out and pretty good understanding of our businesses already, but obviously, working with our businesses to make sure that our strategy is well part of dominant businesses, which, of course, it is, that's really the plan for the first 90 days, I would say. But it's really in the context of being very committed to this -- the strategy for the next phase, which is to sustain the strong foundation we have around our business model, we're really leaning in and continuing to build our organic growth capabilities to be on par with our operational capabilities and our financial performance. Scott Davis: Okay. Best of luck. Thanks all. And congrats, Scott, a fantastic run, really exceptional. So thank you all. Best of luck. Scott Santi: Thank you. Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Please go ahead. Your line is open. Tami Zakaria: Hi. Good morning. Thank you so much. So my first question is, I wanted to understand the operating margin expansion a bit better, 200 basis points, enterprise initiative 140, price/cost 210. So what was the drag to get to the 200 basis points expansion. I remember you were investing in labor and compensation this year. Is that still there? And when do you expect that to taper off, especially as you look into 2024? Michael Larsen: Yes. Good morning, Tami. So you're right. If you look at the margin improvement year-over-year, another really strong contribution from Enterprise Industries. I think the best performance in 2.5 years, which is really remarkable given where we're at in the enterprise strategy. Price/cost, we talked about 210, and then 160 basis points of, I don't want to call it headwind necessarily because these are investments that we're making in our long-term organic growth initiatives, including new hires as well as then, obviously, the regular wage and benefit inflation that everybody else is seeing. That all adds up to about 160 basis points. And that's how you get to -- even with all of those investments, that we continue to make, you're getting 200 basis points of margin improvement on a year-over-year basis to 26.5%, which I believe was a new record for the third quarter. Tami Zakaria: Does that 150 basis points headwind continue in the fourth quarter and maybe in the next several quarters, how should we think about that headwind? Michael Larsen: Yes, I think the normal run rate is somewhere -- we've been running higher than that this year. The normal run rate and we'll see how the plans roll up for next year. I don't want to get too far ahead of myself. But if you look at historically, that's about 100 to 150 basis points of headwind. Tami Zakaria: Got it. Can I ask one more quick one? The $0.12 headwind from the auto strike you're calling out for the fourth quarter. Does that assume the strike continues through the end of the quarter? And what does that mean in terms of organic growth headwind for the fourth quarter? Michael Larsen: Yes. So Tami, let me just broaden the lens maybe a little bit here. I think given the uncertainty around auto and the fact that the strike is now in the sixth week here, we decided that we take a more prudent approach, which is basically based on what we're seeing in our businesses right now, maybe with room for things deteriorating a little bit further from where they are today. And if you take that quarter-to-date impact and extrapolate through year-end, that's how you get the $0.12 of EPS adjustment that's now embedded in our guidance. So assuming -- to answer your question, it continues through year-end. If the strike ends before year-end, obviously, we'll do better than that. If it gets worse, our businesses will do a great job in terms of reading and reacting to the conditions on the ground. The optimist might say that some of those -- that production will get deferred into next year. But obviously, a lot of uncertainty, and given that we don't really want to pin down a revenue number, we're just going to give you here the $0.12 of adjustment that I just laid out for you. Tami Zakaria: Great. Thank you, so much. Michael Larsen: Sure. Operator: Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead. Your line is open. Andrew Obin: Yes, good morning. Michael Larsen: Good morning. Andrew Obin: So question, I think before you were talking about sort of 25% of the portfolio slowing structure over the past couple of quarters. Have any of those markets bottom like electronics? And have any new markets started to slow? Or is it the same 25%? Just how do you look at the world? Michael Larsen: Hi Andrew, so there's definitely some puts and takes. I think, for example, if you had asked me that question last quarter, I would have said automotive OEM -- automotive aftermarket would be in that category. They were up 10%. So just an example of things moving in and out. So I'm not sure it's really that relevant to look at. But if you just look at what we would say now is kind of slowing to 25% on a combined basis, those businesses were down year-over-year, 3% in the third quarter. However, sequentially, they did improve from the second quarter by a percentage point, which I would say fairly stable. Talking about electronics and semi specifically, I think consumer electronics remains fairly weak. On the semiconductor side, you will recall that we've talked about an expectation from industry experts, I'll call them as well as our customers that there would be a reacceleration of demand here in the second half of this year. And that now looks like it's been deferred probably until sometime next year. Now obviously, we remain, as we now do on an ongoing basis, committed to those businesses. We continue to invest and really position ourselves for the inevitable recovery down the road, which hopefully comes next year in 2024 and making sure that we're well positioned to take full advantage of the long-term growth opportunities that we believe are right in front of us in that part of our businesses, so. Andrew Obin: Got you. And then maybe you've answered this question as you talked about the business overall, but in Construction Products and Polymers & Fluids, the changes in variable margin cost was a material benefit to margin year-over-year and has been year-to-date. Anything specific that you're doing in these businesses and how much more runway is there? Michael Larsen: Well, there's a lot of work that's going on in those businesses to deliver these results. Obviously, I'd say the categories you're familiar with, the first one is the ongoing contribution from the enterprise initiatives. And so both the segments that you mentioned had a significant contribution from enterprise initiatives as well as favorable price/cost impact. So those are really the two big drivers in those businesses. And I think it is pretty remarkable that they're putting up record quarterly margin performance given, frankly, not a lot of volume growth, not a lot of volume leverage. So you can imagine once we get the volume leverage going again, as Chris was talking about at incrementals kind of in that 35 to 40 range, there's even more runway for margin improvement. Andrew Obin: Thank you so much. Michael Larsen: Sure. Operator: Your next question comes from the line of Steven Fisher from UBS. Please go ahead. Your line is open. Steven Fisher: Thanks. Good morning, and congratulations, Scott. Within the Welding segment, it seemed like the year-over-year was a little weaker on the industrial side relative to last quarter and maybe a little better on the commercial. Is that something that you're projecting at least in the near term? And to what extent is there a margin mix difference between those two subsegments that you could be aware of? Michael Larsen: So there's not a lot of difference in terms of the margin performance. But I think this is -- these are some great data points that illustrate kind of the dynamic nature of the environment that we're operating in. And really, what I tried to lay out in the commentary was what's driving this on a year-over-year basis are just a comparison. So it's really hard to draw any conclusions from the year-over-year comparisons. What I think we can say broadly in Welding, as we said upfront, is that the overall demand for equipment appears to be slowing down a little bit in the near term, whether that will remain at those levels on a go-forward basis is difficult to say at this point. Backlogs have normalized. We're not really a backlog-driven company. We're now back to two to three weeks of backlog at the enterprise level. And then the last point I'll make is we're still seeing meaningful impact from our customers and channel partners reducing their levels of inventory. So if you think about at the enterprise level, that was a point to 1.5 points of organic growth drag. So just to maybe normalize the Q3 results a little bit on the top line. So 2% on an equal days basis, and then you factor in the inventory adjustments, you're back at 3, 3.5 just to kind of put things in context a little bit. But there's no question that the activity slowed down a little bit on the welding side here in the third quarter. Steven Fisher: Okay, that's helpful. And then when would you get an idea of how your price versus cost is going to shape up for 2024? I'm getting the sense broadly in industrial it is going to be pretty tight. Would you agree with that? And is that something you can sort of 80/20 to kind of tilted in your favor? Michael Larsen: Well, so we haven't even rolled up our plans yet for next year. That really happens at the end of this month, and then we'll have some good discussions with our segments and we'll get a much better handle on what the price/cost equation might look like. I do think if you just look at the margin recovery trajectory that we're on. We haven't fully recovered the margin impact. And so I think it's not unreasonable to assume that there will be some carryover into maybe the first half of next year. And then you add on top of that maybe our normal pricing. But again, I don't want to get too far ahead of ourselves. We'll give you a lot more detail when we give you guidance for the full year, which will be early next year. But certainly, if you're -- price is holding at current levels and the raw material cost -- direct material cost equation, those has stabilized. We're not seeing significant deflation at this point, but we're also not seeing anything close to the inflation that we've seen over the last two years. So, that's kind of the good news here. Steven Fisher: Thanks. I appreciate the thoughts. Thank you. Operator: Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead. Your line is open. Julian Mitchell: Thank you. Good morning. Maybe one area was interested in was Test & Measurement and Electronics. Also, in light of sort of progress on the integration of the acquisition, how that's gone as it's been in the portfolio several quarters now? And also just on the base business, very mixed to reads some of various peers in that market. Any color you could give us or kind of expectations for Q4 on Electronics versus, say, Test & Measurement within that, please? Michael Larsen: Yes. So, Julian, we don't give quarterly guidance. But I think if you look at historical information, you'll see that there's typically a ramp-up in Test & Measurement and Electronics in Q4 relative to Q3. And so we do expect some of that. I think overall, on the Electronics side, like I said, the consumer electronics end market remains soft. Just semi in isolation is down 20%, 25% on a year-over-year basis. And that's -- last year, that was about a $500 million segment. So, we're definitely seeing -- that's what's driving these results. If you take out the semi impact in Test & Measurement and Electronics we're actually up 2% on a year-over-year basis. But we expect this pressure to continue. We're not counting on a recovery here in the fourth quarter. It's based on run rate and typical seasonality I'd say on MTS overall, maybe, Chris, do you want to make some comments? You were just up there. So, maybe you want to-- ChristopherO'Herlihy: Yes. So, I would say, Julian, that certainly the assumptions we made when we acquired the MTS business in terms of strategic fit and financial rationale have been very much validated by our two years of owning the business. The business has performed very well. We are currently in the process of implementing our business model. We're already starting to see some real nice results accruing from that. But we strongly feel this is going to be a very, very successful ITW acquisition. In fact, we are taking our Board of Directors up to MTS later this week for them to witness firsthand the level of progress that we've made on the integration in terms of implementing our business model. But like I say, two years in, so far so good. Great people, great brands, great technology, great opportunity to improve the business model, and like I said, this is going to be a great ITW business in the long term. Michael Larsen: Yes. And I would just add maybe to quantify what Chris is talking about in the short term. This business grew double-digit top line in the third quarter. And you'll recall maybe margins coming in were somewhere around 7%. And through the implementation of the business model, at this point, we are -- the outlook for the full year is in the mid-teens. So right on track in terms of the potential that we thought we had when we acquired the business. So good progress. Julian Mitchell: That's helpful. Thank you. And good to hear on MTS. Maybe just a broader question, perhaps amidst the sort of the CEO transition that was announced and congratulations to both Scott and Chris. But maybe on the sort of thinking about the top line a little bit and it looks like maybe some of the share gains that ITW had enjoyed just after COVID maybe have eased to-date or eased in the last 12 months or so. I realize there's some destocking noise in various channels and so looking at market share in that context may not be that helpful. But just wanted sort of perspectives on market share across the larger ITW businesses and whether there's perhaps a need to redeploy a greater share of enterprise initiatives or price/cost savings into sort of organic reinvestment in the base business? Michael Larsen: Yes. Maybe I'll start and then, Chris, you can jump in. I think I'll start by saying we completely disagree with the premise that we are not gaining market share. Recognizing that it may be difficult for you looking in from the outside to decipher those market share gains on an annual basis, but if you go to every one of our divisions, they will have a very clear picture, all 84 of them in terms of what market growth is and what their growth rate is and what their competitors are growing at. And in all cases, we would say that given our competitive advantages that we derive from the business model in terms of our customer-facing metrics, in terms of our -- the value add that our customers are getting from buying our products, we're continuing to gain share in the markets that we're focused on. And in some cases, you're able to look at public company peers you can peel back the onion a little bit. And if you do that work -- if you were to do that work, Julian you'll see that we are gaining market share in the areas that we are focused on. And I might just add, not only are we gaining market share, but I'll just note the margin performance of our businesses relative to our competitors which typically we are running at two, three times, our competitors, and you can look at Food Equipment and Lincoln and the Welding side, for example, and you'll see that, that is the case. But maybe, Chris, if you want to comment a little bit? Christopher O'Herlihy: Yes, I would echo everything Michael just said in terms of the quality of our portfolio, in terms of the amount of room we have to grow in each segment customer-facing performance and so on and the focused investments that we've made in areas like sales and innovation, coupled with the fact that we've seen a nicely improving yield on customer-back innovation. All this gives the credence to what we're hearing from our businesses that we are getting share in most of our key markets in relation to our competition. Julian Mitchell: That's great. Thank you. Operator: [Operator Instructions] Your next question comes from the line of Mig Dobre from Baird. Please go ahead. Your line is open. Mig Dobre: Yes. Thank you. Good morning and congrats to Scott and Chris. Just a quick question on construction. In your comments, you mentioned that the resi renovation channel has done doing quite well. Maybe a little more color there. Is that a function of new products or anything going on in the channel? I just found that to be a little bit surprising given where productivity and interest rates and all of that seems to be? Michael Larsen: Yes. So again, Mig, you're right. This is on the residential renovation remodel side of things. So these are typically sales through big box retailers, names that you'd be familiar with. And I think if you look at I think somebody asked earlier about market share, this is a great example of really strong market share gains in this particular end market, because I agree with you, if you just look at the underlying data, you might be a little surprised that, that part of the business is up 7% year-over-year in the current interest rate environment. And like I said, this is essentially all volume and share gain through the big box retailers. Mig Dobre: And presumably, that has some staying power beyond this quarter? Michael Larsen: Well, I think that overall construction in North America actually remains fairly stable. I'd say maybe a little bit more concern on the international side, which has been weak. The market demand has been a lot softer on the international side. But North America – keep in mind that in the fourth quarter, typically, we talked about seasonality by segment, I said Test & Measurement usually does better. Construction is one where, for obvious reasons, the fourth quarter is typically a little bit lower than the third quarter. But in terms of the share gains and our – the strength in this particular part of the business, that absolutely has staying power. Mig Dobre: Great. Then my follow-up, maybe on Food Equipment. I'm curious as to how the supply chain has sort of evolved for you here and where your lead times are? I know you've got a number of verticals within this segment, but some context there would be helpful. And also, where are you from a backlog perspective? Are you seeing any sort of noise in the channel around destocking? Or is the segment perhaps less impacted than others? Thanks. Michael Larsen: So Mig, just from a lead time perspective, I would say that a natural outcome of our business model is best-in-class lead times and customer-facing performance. And we are very much back to where we were pre-pandemic in terms of our ability to supply our customers. In terms of the channel, yes, I think it's an area where there is a little bit of inventory in the channel. We're seeing that coming down. It's probably still out there. It's one of the segments that has been impacted, I think, by channel inventory likely to come down over the next couple of quarters here, but it's fair for sure. Christopher O'Herlihy: Yes. And then just on the backlog, we're back to normal levels which, in our case, given our customer delivery performance is two to three weeks. So we're back to kind of normal levels here. Mig Dobre: All right. Appreciate it. Thank you. Michael Larsen: Right. Thank you. Operator: Your next question comes from the line of Joe O'Dea from Wells Fargo. Please go ahead. Your line is open. Joe O'Dea: Hi. Good morning. Thanks for taking my questions and congrats to both Scott and Chris. I guess, I wanted to stay on that topic in terms of the channel inventory normalization it is something you talked about last quarter. I think size is pretty similarly last quarter. And so the question is just any changes that you've seen from kind of June, July into where we are now in terms of the trends on some of that inventory rationalization, whether regions, end-markets, pace of it or if it's all kind of trending in line with expectations as of a couple of months ago? Michael Larsen: I'd say this is trending right in line with expectations that we kind of laid out on the last call. Like I said, the drag on the organic growth rate of 1% to 1.5% was pretty broad-based, every segment had some impact, very similar Q3 as Q2, and we think this will probably be with us for a few more quarters. And I'd just say, if you just look at our own inventory levels, we are currently running slightly above three months on hand, where typically we're running at low-twos. And we estimate that in our case, it will take us probably until kind of early mid next year to get back to normal inventory levels as we work through the exact same things that our customers and channel partners are working through. And I might just add here that that's obviously going to continue to drive some really strong free cash flow performance for ITW as inventory levels, working capital continues to normalize, as a result of supply chain having stabilized. Joe O'Dea: And then, how does that kind of compare, relate to some of what you're seeing from your customers right now, I think, in the prepared remarks, you talked about maybe a little bit of slower kind of CapEx demand trends out of your customers. What you're seeing in sort of test and measurement or welding and the degree to what you're hearing from customers is this is more inventory related or if it's something that's a little bit of a pause that's more maybe macro uncertainty related? Michael Larsen: I think it's really hard to tell. I mean, I think overall, the demand environment, as we said there's, clearly some uncertainties here in the near-term. Inventory as part of that, the interest rate environment, everybody being maybe a little bit more cautious on the CapEx side and then in of our segments, particularly, the auto strike. So there's, a lot of things going on here. It is a pretty dynamic environment, it can change pretty quickly. The only thing we know for sure is that, the ITW team will continue to read and react to whatever conditions are on the ground. And I think if you just look at our track record, we'll continue to deliver differentiated long-term performance. And so that's really our focus is on continuing to do just that. Joe O'Dea: Understood. Thank you. Michael Larsen: Thank you. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time. Have a wonderful day.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thanks, Rob. Good morning, and welcome to ITW’s second quarter 2023 conference call. I’m joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we’ll discuss ITW’s second quarter financial results and provide an update on our full year 2023 outlook. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2022 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 Chairman and CEO, Scott Santi. Scott Santi: Thanks, Karen, and good morning, everyone. As you saw from our earnings release this morning, the ITW team delivered another quarter of strong operational execution and financial performance. Quarterly operating income grew 9% and exceeded $1 billion for the first time in ITW’s history. Operating margin expanded 170 basis points year-on-year to 24.8%, a second quarter record with a 130 basis point contribution from enterprise initiatives. Operating margins for the company are now solidly above 2019 levels. And with a normalizing price/cost environment, we are back to making progress toward our 2030 goal of 30%. With regard to revenues, organic growth was 3% as stable underlying demand in many of ITW’s industrial end markets was partially offset by inventory reductions at our end customers and channel partners in response to stabilizing supply chain performance. We estimate that this impacted organic growth by 1 point to 1.5 points in the quarter. GAAP EPS of $2.48 was also a Q2 record for the company and excluding one-off tax items in both years, grew – EPS grew 9%. Looking ahead, while customer and channel inventory normalization will continue to be a factor for the next several quarters at least, we expect stable underlying demand and continued strong margin and profitability performance through the balance of the year. As a result, we are raising our full year 2023 EPS guidance by $0.10 at the midpoint. I’ll now turn the call over to Michael to discuss our Q2 performance and full year guidance in more detail. Michael? Michael Larsen: Thanks, Scott, and good morning, everyone. Q2 revenue grew by 2% with organic growth of 3%, and divestitures reduced revenue by 1%. Foreign currency translation impact was neutral and not a headwind for the first time since the third quarter of 2021. Underlying demand remains stable across the majority of our end markets with some softness in about 25% of our portfolio. As Scott mentioned, our businesses estimate that inventory reduction efforts by our end customers and channel partners reduced organic growth by 1% to 1.5% at the enterprise level. By geography, North America was flat, Europe grew 5%, Asia Pacific grew 11%, with China up 22%. On the bottom line, operating income grew 9%, exceeding $1 billion for the first time ever. Operating margins were a real highlight this quarter as they improved to a new Q2 record of 24.8% with Enterprise Initiatives contributing 130 basis points. Price/cost margin impact contributed 260 basis points in Q2, while higher wages and benefit costs lowered margins by around 100 basis points. In addition, we continue to fund our growth investments, including headcount additions to support our organic growth strategies and initiatives. All in, we delivered 170 basis points of margin improvement in the quarter, with margin expansion in six of our seven segments, three of them, welding, food equipment and construction products, recorded all-time highs. GAAP EPS was $2.48, an increase of 5%, and excluding one-time tax items in both years, EPS grew 9%. Our cash performance was strong as free cash flow grew 68% to $705 million, a new Q2 record. Free cash flow was 94% of net income, about 10 percentage points above our historical Q2 average, helped by an inventory reduction of 6% since year-end. Like our end customers and channel partners, our divisions are also beginning to reduce inventory levels as supply chains normalize. That being said, we added almost $1 billion of inventory over the last two years to mitigate supply chain challenges and it would likely take us until the first half of next year to get our inventory levels from currently 3.2 months on hand back to our normal months on hand levels of about two. We expect that it will be much the same for many of our channel partners and customers. Overall, for Q2, excellent operational execution and financial performance across the board, including record operating income, operating margin and GAAP EPS. Turning to Slide 4. We wanted to spend a minute on ITW’s operating margin performance in Q2. Like I said, one of the highlights of the quarter. Not only did margins significantly expand year-over-year and quarter-over-quarter, but at 24.8% margins and are now also solidly above pre-pandemic levels, and we are back on track in terms of making progress towards our goal of 30% in 2030. Let’s move to the segment results, starting with automotive OEM, which led the segments with strong organic growth of 16% and positive growth in all regions. North America was up 3% and Europe grew 18%. China grew 51%. Operating margin expanded 250 basis points to 16.8%, and price/cost margin impact turned positive for the first time in more than three years as this segment continues on the margin recovery and improvement path that we laid out at our 2023 Investor Day. As a reminder, we’re executing a plan to get auto OEM margins solidly back into the 20s over the next three years. Organic growth in this segment in the second half reflects some tougher comparisons, and we expect continued meaningful sequential improvement in operating margins in Q3 and Q4. Turning to Slide 5. Food equipment also delivered strong organic growth of 7% with North America up 8%. Institutional end markets were up 13%, with continued strength across the board. International revenue grew 5%, with Europe up 5% and Asia Pacific up 2%. A real highlight was service revenue, which grew 16%, the ninth quarter in a row with double-digit growth as we continue to support existing customers, new product installations and gain market share. Operating margin expanded 310 basis points to 27.8%, an all-time record for the food equipment segment. Test and measurement and electronics delivered positive organic growth of 1%. The slowdown in semiconductor-related revenues, which represent about 20% of the segment, reduced the segment growth rate by 6 percentage points. Test and measurement grew 10% with continued strong demand for capital equipment as evidenced, for example, by Instron, which grew 30%. Electronics declined 13% on semiconductor softness, which is, however, beginning to show some signs of bottoming out. Moving on to Slide 6. Welding delivered 1% organic growth against a tough comparison of plus 22% in the prior year. Equipment revenue was essentially flat and consumables were up 2%. Industrial sales were really solid with organic growth of plus 5% on top of 27% in the prior year, while the commercial side was down 9%, about as expected against the comparison of 19% last year. North America revenue was flat and international grew 5%. This quarter’s highlight was definitely operating margin expansion of 460 basis points to 33.9%, a new record for the segment and for the company. And the fact that our highest margin segment continues to improve margins and not just by a little bit, is a good example of the never satisfied continuous improvement mindset and is so core to the ITW culture and mindset across the company. Polymers and fluids organic revenue was down 1% against a difficult comparison of plus 10% last year. Divestitures impacted revenue by 6%. Automotive aftermarket was up 1%, polymers down 2% and fluids down 1%. On a geographic basis, North America grew 1% and international declined 3%. Turning to Slide 7. Organic revenue in construction was down 6% against a comparison of plus 15% last year. North America was down 3% with U.S. residential construction down 2% and commercial construction, which represents about 15% of the region, down 5%. Europe was down 14%, and Australia and New Zealand was down 4%. Despite some challenging end market conditions, operating margin expanded 170 basis points to 29.3%, an all-time record for the Construction Products segment. Finally, Specialty organic revenue was down 4%, which included 1 point of headwind from product line simplification and an estimated 3 percentage points from end customer and channel inventory reduction efforts. North America was down 7% and international grew 4%. Equipment revenue, which represents about 20% of the segment, was up 23%, and consumables were down 9%. With that, let’s move to Slide 8 for an update on our full year 2023 guidance. As you saw this morning, we raised our GAAP EPS guidance by $0.10 with a new midpoint of $9.75 based on our strong first half performance with record first half GAAP EPS of $4.81 and the expectation for stable underlying demand and continued strong margin and profitability performance through the balance of the year. Our organic growth guidance of 3% to 5% includes our expectation that end customer and channel inventory normalization activities will continue to modestly impact overall demand through at least the balance of the year. Operating margin is projected to expand by more than 100 basis points at the midpoint of our range of 24.5% to 25.5%, which includes a contribution of more than 100 basis points from enterprise initiatives. We’re also projecting strong free cash flow performance with a conversion of over 100% of net income. Finally, on the tax rate, our first half rate was 22%, and we expect our typical 24% in the second half for an expected full year rate of around 23%. In summary, a strong first half, both operationally and financially. And as we head into the second half, we are in a strong position to continue to deliver differentiated performance through the balance of the year. With that, Karen, I will turn it back to you. Karen Fletcher: All right. Thank you, Michael. Rob, can you please open up the lines for questions? Operator: [Operator Instructions] And our first question comes from the line of Jeffrey Sprague from Vertical Research. Your line is open. Jeffrey Sprague: Thank you. Hello everyone. Scott Santi: Hello Jeff. Jeffrey Sprague: Yes hi, thank you. I wonder if we could address Michael, just kind of the price-cost algorithm for the remainder of the year now. You are up 260 bps in the Q2. I know you still got some more work to do there, particularly in Automotive. So maybe you could address that on a total ITW basis? And how do you see Automotive margins progressing into the back half of the year towards that two handle on margins there? Michael Larsen: Yes, sure, Jeff. So I think overall, on price-cost, we’d say we’re on track to recover the margin impact from a period over the last two years of unprecedented inflation, which has now stabilized. So, in the first quarter, price-cost was positive 190 basis points, Q2 260 basis points and for the balance of the year, we’re looking at a more normalized 130 to 150 basis points range. And for the full year, we should recover somewhere around 150 to 200 basis points at the enterprise level. I think what was encouraging is every segment is now margin positive, including Automotive OEM and we expect that for [indiscernible] your question specifically to remain the case for the back half of the year. And combined with enterprise initiatives, we expect sequential improvement in Q3 and Q4 in the Automotive segment, and we should end up somewhere in the high teens as we exit 2023. We’re still a long way to go over the next two to three years to get back to kind of the low to mid-20s, which is the path that we laid out at Investor Day. Jeffrey Sprague: Great. And your comments about the supply chain normalization and everything were pretty clear, but I just wonder if you could give us some perspective on your backlogs, right? Typically, you don’t have big backlogs, but you got to kind of 2x normal in a number of your businesses. Where are we at the ITW level and kind of getting things back to the normal run rate? Michael Larsen: Yes, I think, similar to what we talked about on the last call, supply chain performance continues to improve. And as that happened, our backlogs are also starting to come down. And at this point, we’re still above our normal levels. If you look at the businesses where we do carry some backlog Food Equipment, for example, we’re running at 2x normal levels, and the same is true in Welding. But as I said, those backlogs are coming down pretty quickly as supply chain performance improves. Jeffrey Sprague: Thank you very much. Michael Larsen: Sure. Operator: Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open. Jamie Cook : Hi, good morning. Two questions. A follow-up on the inventory reductions from your customers and channel partners. Exactly what’s embedded in the back half of the year, is it another visit 1 to 1.5 points and in the guide in the back half of the year? And then as a follow-up to that, you are maintaining your revenue guide despite this, so what’s doing better than expectations? And sort of my last question is Construction margins were very impressive considering the sales decline. So any color on that? Thank you. Michael Larsen: Yes. I think the inventory reduction impact that we saw here in Q2 is now embedded in our run rates, and therefore, embedded in our guidance for the balance of the year. Actually, if you look at our Q2, it came in right in line with run rate except for these – the inventory impact that we estimate at 1 point to 1.5 points. And underlying demand, as we said, is really stable, if not strong in places like Auto and Food Equipment. So we feel really good about our assumptions here going into the back half of the year. Your question specifically on Construction, I agree with you, that’s some pretty impressive performance given the challenging end markets, particularly if you look at Europe. The big drivers here continue to be enterprise initiatives, which has been called the gift that keeps on giving. Scott Santi: By you. Michael Larsen: By me. Scott Santi: Yes. Michael Larsen: Yes, if I may say so. And I think total company, the Enterprise initiative impact ranged from 70 to 200 basis points by segment with Construction at the very high end of that at about 200 basis points impact. And then certainly, there’s still some catch-up on price/cost. Construction was a segment that was hit harder than the average in 2021 and 2022. And so price/cost did contribute in a meaningful way. We do expect that, just like we do for the rest of the Enterprise to begin to normalize here in the back half, like I said in response to Jeff’s question, but we’re still going to see positive price/cost impact, including Construction in the second half. Jamie Cook : Thank you. Michael Larsen: Sure. Operator: Your next question comes from the line of Joe O’Dea from Wells Fargo. Your line is open. Joe O’Dea : Hi, good morning. Scott Santi: Good morning. Joe O’Dea : I guess I wanted to sort of extend that a little bit in terms of the comment around underlying demand being sort of stable to strong and sort of calling out Auto and Food Equipment. But anything from sort of a regional or end market perspective that you’re watching most closely on end market demand and sort of considerations on kind of prospects for slowing anymore? Scott Santi: I think overall, it’s been remarkably stable. If anything, we saw some firming up in the second quarter based on some trends in the first quarter that we talked about relative to 25% of our portfolio. I think the one place we saw things continue to weaken was in Europe on Construction between Q1 and Q2, but for the rest of the portfolio, I think, at this point, the best description is pretty firm. Joe O’Dea: Got it. And then also just the margin strength in the quarter and thinking about the back half of this year, I think, the midpoint for the full year would suggest something like a 25.5% margin in the back half. I think you’ve talked about sort of continued progress on Auto. Just anything else that you think to be the more notable contributors to that sequential improvement? Michael Larsen: Yes, I mean the big driver continues to be the Enterprise initiatives. The work around eighty-twenty front-to-back and strategic sourcing efforts, we expect at least 100 basis points of contribution there in the second half. And then price-cost, we still expect a meaningful contribution as we talked about a few minutes ago. So, all of that means that as we look at kind of the second half, we expect margins to continue to improve sequentially from Q2 to Q3 and from Q3 to Q4, maybe somewhere around 50 to 60 basis points each quarter of sequential improvement. I think we talked in the past about 100 basis points of improvement year-over-year. That’s still looking very good. So, like I said in the prepared remarks, we’re really well positioned here in terms of our margin and profitability performance through the balance of the year and frankly into next year. So, I’ll leave it at that. Joe O’Dea: Thank you. Operator: And your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open. Tami Zakaria: Hi, good morning. Scott Santi: Good morning. Tami Zakaria: Thank you so much for taking my questions. So, my first question is on Food Equipment. I think I saw on your slide, it grew 3%, while services were up 15%. So for the Equipment portion, is that entirely pricing-driven? Was there any volume growth in the quarter on the Equipment side? Michael Larsen: So, I think you know this, Tami, we don’t break out price and volume. And I’d say both elements contributed and it’s a little different equipment versus service, but certainly some really strong activity. North America, I think, we said up 8%, that has Equipment up 5%, services up 15%, by end market institutions up 13%, health care up 18%, restaurants, still really strong performance there. Retail a little softer. That can be a little lumpy, international side, up 5%. So, I think really strong quarter by Food Equipment and actually looking really good for Q3. I think that they should be putting up another really strong quarter. There might be a little bit of – if you go back and look, the comparisons are a little bit challenging on a year-over-year basis. But overall, the underlying demand in food equipment remains really healthy and really well positioned again for the second half. Tami Zakaria: Got it. That’s very helpful color. And if I can ask a follow-up about your Welding segment, I thought the results there were very interesting. Operating margin was up 460 basis points even though organic growth was about 1%. So, what’s driving this very strong operating margin leverage? Is it purely price/cost, or is there something else going on in there? Michael Larsen: There is something else going on in there, Tami. So, it’s a similar answer to what I said for Construction. I mean I think there is a healthy dose of enterprise initiatives. And then we’re still recovering the margin impact on price/cost. So, those are the main drivers here. And like I said, I mean, price/cost, we expect that to normalize in the second half, but the Enterprise initiatives and we expect that to continue into the – through the balance of the year and into next year. Tami Zakaria: Perfect, thank you. Operator: Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open. Andy Kaplowitz: Hey, good morning everyone. Michael Larsen: Good morning. Andy Kaplowitz: So you mentioned you thought electronics-related markets look like they may be bottoming out. Could you give us more color into what you’re seeing here prompted you to say that? And then stepping back and focusing on the 25% of the business, including Electronics, that has been weak, would you say that like Electronics, you are seeing the bottoming in many of these markets, maybe outside of European Construction, which you already mentioned? Or was that [indiscernible] just focused on Electronics? Michael Larsen: So let me do the semi portion first. I mean, I think, there has been this view that the second half would be a step-up from the first half. Really, we talked about this going into the year. Scott Santi: Mostly from what we’re hearing from our customers. Michael Larsen: And I was going to say, the customer feedback has now become even more supportive of that view along the lines of get ready for orders to come back here in the second half and make sure you have the capacity to support us, which, of course, we do. So, that’s kind of the color commentary around semi. And similar to what you’re hearing from other... Scott Santi: We’re not baking any of that into our back half… Michael Larsen: That’s a good point. None of that is baked in. So I think that’s... Scott Santi: We’ll take them when we see it. Michael Larsen: Exactly like we normally do; none of that would be in our run rates, obviously. And so we’d be happy to see that here late Q3, Q4, if we get those – if that really comes to fruition. On the 25% of the portfolio, I think maybe to give you a little bit more detail, I think what was really encouraging this quarter is if you look at the performance of those businesses, and there are some puts and takes. There are some businesses that are no longer slowing, that have moved out and others, I think Construction Europe was an example that maybe have moved in, but it’s still about 25% of the company. Those businesses were down 7% year-over-year in the first quarter, and they were only down 3% in the second quarter. And actually, if you look at it sequentially, the businesses as a group improved 2% sequentially. And that includes in that 25% is also at least a portion of our semi revenues. So I think that’s certainly encouraging as we look to the back half of the year. Andrew Kaplowitz: Michael, that’s really helpful. And then I just want to go back to your commentary on regional demand. You mentioned China was up 22% in the quarter, which I think you expect did. And obviously several of your peers have talked about seeing some incremental weakness in China moving forward. Do you still feel well positioned there, maybe given your China auto exposure, you still expecting kind of Food Equipment markets to improve? Any color would be helpful. Michael Larsen: Yes. I think, Andy, the big driver for us in China is auto, and that’s our largest businesses. We talked about this on the last call, we expected a strong Q2 in China. Based on some of the COVID-related slowing in the first quarter, we bounced back in the second quarter with auto up more than 50% in Q2 and all of China up 22%. I think a better way to look at China is maybe if you look at the first half, our China business was up 7% on a year-over-year basis, and that’s maybe a more accurate representation of kind of the underlying levels of demand. And so for the second half, we’d expect something kind of in the mid-single digits out of that region. But again, it’s all driven by the auto business that’s doing a phenomenal job frankly, gaining share and launching new products particularly on the EV side with domestic local Chinese OEMs that are winning big time, as we talked about at Investor Day. So really well positioned, not just for the second half but for many, many years to come here in our China business and in auto particularly. Andrew Kaplowitz: Appreciate all the color. Michael Larsen: Sure. Operator: Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open. Joe Ritchie: Hey guys. Good morning. Scott Santi: Good morning. Joe Ritchie: Can we maybe just double-click a little bit on the longer-term service opportunity in Food Equipment? Clearly, 16% growth in that business is very robust, and I’m sure it carries a pretty good margin for you guys as well. Can you just maybe kind of talk a little bit about how you’re increasing the growth rate today and then what the expectations are going forward? Michael Larsen: Yes. I mean I think the service business we’ve talked about this for a long-time now in terms of long-term organic growth potential. It is a huge differentiator with us – for us in the market. We are the only OEM that has service capabilities, and it gives us all kinds of advantages in terms of our ability to install, service, maintain and then capture replacement down the line. So we think there’s a lot more to come on the service side. We’re obviously still, to some extent recovering from COVID. If you actually look at the Equipment side has now fully recovered to 2019 levels. The Service side is still catching up, and so we expect that there’s still a lot of runway particularly with our installed base. Scott Santi: I was going to say that I’m not current on the exact – what our businesses estimate is our share of our installed base, but last time I had the conversation I think it was sort of well into the low-20s at best maybe and don’t sort of take that as possible, but at the point is that we have a lot of room to grow within – with just doing – giving more penetration with our current installed base globally. Joe Ritchie: Got it. That’s helpful. Maybe, I don’t know if there’s an opportunity to elaborate on that point, Scott. I think you guys called out the service business being roughly, what 30% of the Food Equipment segment. So are you – do you have to invest more in your service capabilities or getting feed on the street to improve the penetration there? Scott Santi: Yes. And that’s been an active strategy for the last – really coming – really from before COVID. So some of it is coverage, some of it is programming. When you actually service the equipment you sell, we have lots of opportunity to integrate service offerings at the point we sell the equipment, which is part of the – why we think this is a big competitive advantage for us. So it’s essentially all of the above, but there’s no way to do service remotely. So we got to have service techs on the street. We’ve got, I think, north of 1,500 in North America and the same in Europe. And given the profitability of the business and how much runway we have we’ll certainly continue to invest. That’s part of what Michael talked about; continue to invest in our organic growth strategies that’s certainly a good example. Joe Ritchie: Yes. Okay. Great. And then maybe one last question just on M&A. Just any comments around the pipeline today, what you’re seeing and whether there’s been any movement since you last updated at Investor Day? Scott Santi: Yes, I’d say that there’s been no change. We continue to get sort of apple flow in terms of people wanting us to take a look at things. And as we’ve talked about for a long time and certainly updated at our Investor Day, the aperture through which we will strike on those opportunities is pretty narrow given all the potential in our core business, but we’ve done MTS recently, and we will continue to opportunistically be aggressive. But from the standpoint of overall flow, is it up or down, I’d say it’s been pretty stable. Joe Ritchie: Okay. Great. Thank you. Operator: And your final question comes from the line of Julian Mitchell from Barclays. Your line is open. Julian Mitchell: Thanks. Good morning. Maybe a question first off, just around the cadence of sort of Q3 versus Q4; anything to call out there when you’re thinking about margins or the top line, particularly in the context of that destocking that you mentioned? Thank you. Michael Larsen: Yes. I think, Julian, I think I said this earlier, we do expect as we typically do, if you look at our historical sequential lift from Q2 to Q3 of about 1%. The thing to keep in mind is that Q3 has one less shipping day relative to prior year and relative to Q2, so that is going to have a little bit of an impact. So don’t expect a big jump here in Q3. But certainly based on current run rates, some progress on the top line, progress on the bottom line with margin expansion. I think we talked about that somewhere along the lines of 50 plus basis points from Q2 to Q3. And I might just add that in terms of our typical cadence kind of first half, second half, if you look at our full year EPS, we’re typically 49% to 51%, and we are – as we see today, right in line with that, based on our – if you look at our $4.81 GAAP EPS for the first half the midpoint of our guidance of $9.75, you can calculate what’s left to go, and you’ll see it’s a lift from the first half to the second half. That’s right in line with our historical averages, which gives us a lot of confidence as we head into the second half here. Julian Mitchell: Thanks very much, Michael. And maybe just my second question or follow-up would just be around when you’re thinking about the sort of market share gain efforts across the company. Volume growth year-to-date very muted or negative; do you still think you’re getting some share? Or was the sort of the share gain maximized really two, three years ago when competitors were supply constrained and now we’re in a normal supply chain environment, the sort of share gains have dried up largely? Thank you. Michael Larsen: Well, so Julian, I wouldn’t agree with how you characterize this in terms of no volume gains year-to-date. I think we have a lot of confidence that we continue to take market share not just as we talked about through the pandemic. But on an ongoing basis, I mean, I think if you look at our organic growth rates relative to peers in these – in some of these segments, you’ve got some good comps. You can certainly take a look at that. And I think we’re continuing to invest here in all of our organic growth strategies and efforts, including headcount to continue to take market share. So we have a high degree of confidence that we continue to take share. Scott Santi: And it’s not something you measure in a quarter or two. Julian Mitchell: No, I think these... Scott Santi: I think the long view, we’ve committed to organic growth in our organic growth goals in our – in the Investor Day we just did, and those are organic growth goals that are going to be well above underlying market growth at 4 to 5 and in that case by definition we will continue to take share. Michael Larsen: Yes. And I think the other thing, I mean, the biggest driver as we talked about at Investor Day, Julian, I think you were there is going to be our customer-back innovation efforts. We’re signing a bright light on our CBI efforts, and we’re – the whole company is focused on continuing to drive up the contribution to organic growth from our innovation efforts. And so you put all of that together we’re highly confident we can deliver our long-term kind of 4% plus organic, which is given our high levels of profitability, that’s all we need to grow, EPS kind of high-single digit, low-double digit. You add an attractive dividend yield on top of that, and you’re getting that 11 to 13 TSR over the long-term, not every year, this year, yes, but not every year. That’s what you should expect from ITW. And it’s much more about that than it is a quarterly market share number, which is, I think, what you’re asking about. Julian Mitchell: That’s very helpful. Thank you. Michael Larsen: Sure. You’re welcome. Operator: And thank you for participating in today’s conference call. All lines may now disconnect at this time.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW First Quarter Earnings Conference Call. [Operator Instructions]. Thank you. Karen Fletcher, Vice President of Investor Relations. You may begin your conference. Karen Fletcher: Okay, thank you, Rob. Good morning, and welcome to ITW's first quarter 2023 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's first quarter financial results and provide an update on our outlook for the full year 2023. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2022 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 Chairman and CEO, Scott Santi. Scott Santi: Thank you, Karen. And good morning everyone. As you saw from our earnings release this morning, we delivered a solid start to the year, with results coming in largely in line with our expectations heading into the quarter. Starting with the top line, organic growth was 5% with four of seven segments delivering positive organic growth, led by Food equipment up 16%, Welding up 10%, Automotive OEM up 8% and Test & Measurement and Electronics up 6%. Polymers & Fluids was flat, Construction was down 1% and Specialty was down 5%. Operating margin expanded 150 basis points to 24.2% with 100 basis point contribution from enterprise initiatives. GAAP earnings per share increased 10% to $2.33, which was a new Q1 record for the company. Our free cash flow conversion rate was 86% of net income which was in line to modestly above normal Q1 levels. Looking ahead at the balance of the year. While there is of course some uncertainty with regard to the macro environment, I have no doubt that my ITW colleagues around the world will continue to read react and execute at a high level to whatever comes our way. I will now turn the call over to Michael to discuss our Q1 performance in more detail and our updated full year guidance, Michael? Michael Larsen: Thank you Scott. And good morning everyone. ITW delivered another solid quarter operationally and financially, starting with organic growth of more than 5%. Foreign currency translation headwind and divestitures reduced revenue by 2%, and 1%, respectively. On the bottom line, our operating income grew 9% with incremental margins of 98%. Operating margin improved 150 basis points to 24.2% with enterprise initiatives and price costs contributing 100 basis points, and 190 basis points respectively. In addition to higher wages and benefit costs year-over-year, were funding our growth investments including headcount in the areas that support our organic growth strategies and initiatives. And we still delivered 150 basis points of margin improvement in the quarter. GAAP EPS grew 10% to $2.33, which included foreign currency translation a headwind of $0.06, and our Q1 tax rate was 22.6%. And as Scott said, it was encouraging to see our free cash flow performance return to normal levels. Overall for Q1, excellent operational execution across the Board and strong financial performance including record EPS. Please turn to Slide four, starting with positive organic growth in all of our major geographies. Including North America, which represents about 55% of total revenues, and grew 5%, and Europe is up 6%. Asia Pacific grew 2%, despite a 6% decline in China due to COVID related headwinds in Q1. Moving on to segment results, starting with Automotive OEM and solid organic growth of 8%. North America was up 3% and Europe grew 16%. China was down 5% due to COVID related headwinds in Q1. And we're seeing the expected bounce back here at Q2. In terms of automotive OEM margins, we are beginning to recover the price cost margin impact that has diluted margins in this segment by about 450 basis points over the last two years. As a result, we expect price cost margin impact to turn positive starting in Q2, which, combined with positive volume leverage and contributions from enterprise initiatives, will lead to higher margins sequentially and year-over-year starting in Q2 and for the balance of the year. Turning to Slide 5. Food Equipment delivered another strong quarter with organic growth of 16% as North America led the way with organic growth of 21%. Institutional end markets were up more than 50% with particular strength in education and lodging. In addition, restaurants were up more than 30%. International revenue grew 9%, with Europe up 11% and Asia Pacific was down 6% due to China. Strong progress on margins with Q1 operating margin of 26.7%, an increase of more than 400 basis points year-over-year. Test & Measurement and Electronics delivered organic growth of 6% despite a double-digit slowdown in semiconductor-related revenues, which represent about 20% of segment revenue. On the other hand, demand for our capital equipment remains strong as evidenced by Instron, for example, which was up 22%. Overall, Test & Measurement grew 12% organically and electronics was down 4%. Moving on to Slide 6. Welding delivered double-digit organic growth of 10% in Q1 on top of 13% in Q1 last year as equipment grew 10% and consumables were up 11%. Industrial sales remained strong with organic growth of 17%, while the commercial side was down 2%. North America grew 10%, and international grew 12%, driven by strength in the oil and gas business, which was up 15%. Operating margin expanded 110 basis points to 31.9% a new record for the segment and the company. Organic growth in Polymers and Fluids was about flat against a difficult comparison of plus 13% last year. Automotive aftermarket was down 1%, Polymers grew 1% and Fluids was also up 1%. On a geographic basis, North America grew 1% and international declined 2%. Turn to Slide 7. Organic revenue and construction was down 1% against a tough comparison of plus 21% last year. Residential construction was down 1% and commercial construction, which represents a little less than 20% of the business in North America was up 5%. Europe was down 9%, and Australia, New Zealand was up 3%. Finally, Specialty organic revenue was down 5%, which included 3 percentage points of headwind from product line simplification. On a geographic basis, North America was down 4% and international was down 6%. Okay, let's move to Slide eight, for an update on our full year 2023 guidance. As you saw this morning, we raised GAAP EPS guidance by $0.05 to a new range of $9.45 to $9.85, which considers the lower projected tax rate for the full year in the range of 23.5% to 24%. Given the level of macroeconomic uncertainty going forward, we're essentially holding our operational guidance and adjusting EPS to reflect the lower projected tax rate. Our organic growth projection of 3% to 5% reflects current levels of demand with some risk adjustment for further slowing in certain end markets. Combined, foreign currency translation impact at current rates and divestitures are projected to reduce revenue by 1%. Operating margin is projected to expand by more than 100 basis points at the midpoint of our range, which includes approximately 100 basis points from Enterprise Initiatives and positive price/cost margin impact. Like I said, we're off to a solid start to the year with some positive momentum heading into Q2, and we remain well positioned to continue to outperform in whatever economic conditions emerge through the balance of 2023. With that, Karen, I'll turn it back to you. Karen Fletcher: Okay. Thank you, Michael. Rob, let's open up the line for questions, please. Operator: [Operator Instructions] And your first question comes from the line of Andy Kaplowitz from Citigroup. Your line is open. Andrew Kaplowitz: Hey, good morning, everyone. Michael, can you give us a little more color on to how you're thinking about the company's margins for the year? I know you didn't change your forecast, but as you said, was up 150 basis points in Q1. I think you guided us to 100 basis points, and you said price versus cost in Q1, I think you said it was 190 points. I know you're thinking about 100 basis points for the year. So are you thinking that should be materially higher now especially given your comps return in automotive so what held you back from not increasing your margin forecast for the year? Michael Larsen: Well, I think Q1, Andy came in right along with our plan, really across the entire income statement and also on free cash flow. So Q1 margins expanded 150 basis points. That's typically the low point for the year. And so if you go back and look historically, you'd expect margins to improve from here in Q2 again in Q3 and Q4. And based on our current planning, we expect about 100 basis points of margin improvement year-over-year in each one of the remaining quarters. And actually, across our segments, we're seeing similar trends in terms of margins improving from here. We are -- if you look at kind of the bridge and we talk about this last quarter, as well we're certainly seeing some positive operating leverage from our organic growth this year. We're seeing at about 100 basis points of contribution from enterprise initiatives that's well within our own control based on projects and activities that are going on inside the company. We are starting to see price cost margin impact being positive. That really started in Q4. And as you said, another step forward here in Q1, we expect that to remain positive for the remainder of the year. As you know, we've diluted margins about 250 basis points at the enterprise level over the last two years and maybe we'll recover about half of that this year, so maybe a little bit more than 100 basis points from price cost. And then the delta is what we talked about in terms of the investments that we're making to support our organic growth and including in our people. And so we are certainly seeing some increases there in terms of wages and benefit increases that everybody else is seeing. So that's kind of the margin picture for the year-end. I hope that answers your question. Andrew Kaplowitz: Yes, Michael, that's helpful. And then last quarter, you said that 25% of your ITW businesses were slowing. Is that still the case? And those businesses end up slowing at the run rate you projected a maybe better or worse than you projected. And then Q1 is a bit higher than you predicted in terms of seasonality. Are you still thinking sort of that 49%, 51% in terms of EPS breakdown for the year? Michael Larsen: Yes. I think we're -- if you look at the -- what we talked about last quarter was about 25% of the company's revenues slowing down. And so just to maybe remind everybody, we're talking about residential construction. We're talking about commercial welding and the automotive aftermarket being down here in Q1 and kind of into in the low single digits. Our appliance components business and Specialty Products being down in the high single digits. And then semiconductor, we talked about orders coming down. We're now seeing that translate into revenues coming down in that 10% to 15% range, primarily in the Test & Measurement segment. So Q1 was actually in line with plan in terms of what we expected. We do expect some further slowing primarily in these -- this handful of businesses that I mentioned. And what I would just say... Scott Santi: And that's not new. That's in our plan. Michael Larsen: Yes, that was in our plan, and that's included in our guidance and our plan for the rest of the year. I would just say there's a lot of strength in other parts of the company, obviously. The vast majority of our businesses are still seeing solid demand. We're always going to have some headwind and tailwind and it kind of all nets out to some pretty solid performance, as you saw in Q1, and we'd expect the same for the remainder of the year. I'll just say this, I mean, the environment, obviously, this is pretty uncertain at this point, things can change pretty quickly. But based on what we know today, we remain really well positioned to deliver solid performance here in Q2 and for the balance of the year. Andrew Kaplowitz: Michael, are you still thinking that 49-51 split? Michael Larsen: Yes. From a planning standpoint, I think that's still a good assumption and in line with really what we have done historically. Andrew Kaplowitz: Thank you. Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open. Tami Zakaria: Hi, good morning. Thank you so much for taking my questions. So you mentioned sequentially, you expect Automotive margins to get better from here on. How about sales? Should we also expect the first quarter sales to be the lowest of the year and then build from here? Or is there some seasonality that we should be modeling? Michael Larsen: I mean there is very little improvement from here on out. I mean, I think there -- it's really the growth rates year-over-year are more driven by the comparisons. So if you look at Q2 last year was there was a meaningful decline in -- or a lower number in auto builds that's going to be higher this year. So we will see some good growth in Q2 on a year-over-year basis. But sequentially, you're not going to see significant and certainly not an assumption baked in here in terms of significant revenue growth sequentially. Tami Zakaria: Got it. Thank you so much. I’ll pass it on to next person. Operator: Your next question comes from the line of Jeff Sprague from Vertical Research Partners. Your line is open. Jeff Sprague: Thank you. Good morning, everyone. Maybe two separate topics for me. If you think about the parts of the portfolio that are still resilient and you have visibility, I think one of the uncharacteristic things maybe you saw in the last year or so is backlog build where you wouldn't typically get backlog build. I just wonder if you could speak to that kind of your forward visibility on some of the things that are a bit later, longer cycle, are the backlogs holding, you're starting to burn into them? Any color on orders there would be interesting? Michael Larsen: Yes. I mean I think as you point out, Jeff, we are not necessarily a backlog-driven company. And while backlogs have come down a little bit, they're still significantly higher today than kind of pre-COVID levels. So maybe not running at 2x, 3x, but at least 50% higher in businesses like Welding and Food Equipment where we're still seeing a fair bit of backlog. The other thing we talked about, Jeff, you know this as supply chain continues to moderate here in terms of the challenges we're going to see backlogs come down, and that's exactly what we're seeing across the company. Jeff Sprague: And I wonder if you could speak longer term to auto margins. I think you said kind of 450 basis point hit from just the price cost, arithmetic and the game had catch up there. Margins are down only about 300 basis points, right over the last year or so. Are you actually pointing us to kind of higher structural margins in auto on the other side of this? I know we don't get it all in 2023, but are we had to do a higher place than we were a year or two ago in auto margins? Scott Santi: Yes. I'm not sure, Jeff, the exact comp that you're referring to, but I think it's safe to say that auto margins, we see a low to mid-20s business over the next two or three years. And it's a combination of great growth prospects there. The fact that all the new programs that we add are margin positive and in fact, just to put in a plug for our Investor Day in a couple of weeks, we're going to spend some time detailing out sort of the margin path in auto in more substance. Operator: Your next question comes from the line of Scott Davis from Melius. Your line is open. Scott Davis: Hey, good morning. Scott, Michael and Karen, I was wondering if you guys could give us a little bit of a window into what's going on in China. I think the April PMI came in a little lighter than what folks were expecting back down a contraction level, but they should be reopening. And I think January was probably the toughest month you had in the quarter. But you've had a chance, I'm guessing by now to see at least an early look at April. What are you seeing there kind of just from a macro perspective and perhaps into each of the businesses if that makes sense? Michael Larsen: Yes. I mean I think we -- to answer your question, we're seeing a bounce back here in April, which supports a double-digit growth rate on a year-over-year basis in China here in the second quarter. We did see here in the first quarter, as you pointed out, particularly in January, several of our customers, the automotive OEMs as well as our restaurant food equipment businesses were slower to open up. So we were definitely down in automotive OEM. I think we said 5%. We were down in Food Equipment. Polymers & Fluids was also down kind of in that 15% to 20% range. And those businesses are all coming back pretty strong here in the second quarter. You'll see some big build numbers in automotive OEM in China. That business could be up significantly will be up significantly on a year-over-year basis. Also, the comps are easier here. So we're looking at a 40% to 50% growth rate in the automotive China business. Food Equipment is coming back, Polymers & Fluids, the Welding business. So it all adds up to something Q2 year-over-year up somewhere around 20%, which obviously includes the bounce back from January, and they're maybe a little bit slower than expected to be opening here in the first quarter. Scott Davis: All right. That's helpful. And I want to go back to Jeff's question, and I don't want to blow up your Investor Day, but feel free to point. But is the era of price de-escalators or price downs and the auto contracts, is that era over with and we're at least over the next 5 years, you envision more of a flattish price environment? Or has nothing really changed. And at the end of the day, we're going to be back into that kind of usual down 1%, 2% price dynamic? Michael Larsen: Yes. I think it's more of the latter, to be honest here. I think the industry has not really changed in terms of how these contracts are structured where you get a lot of price upfront. And so the key there is to continue to innovate and solve problems for customers in ways that nobody else can. And so as you win new programs and get new content on vehicles, that has to come in at a higher price. But in terms of the structure price tons every year that has not changed at this point. Scott Davis: Okay. Thank you for the integrity of answer. Operator: Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open. Joe Ritchie: Thanks. Good morning, guys. Can we talk about your position in the Chinese like auto OEM market, there seems to be a real change that's happening there? And I'm just curious, how do you think your position is today? Do you need to do anything to kind of help scale the business? Just any thoughts around that would be helpful. Michael Larsen: Well, I think as you'll see, again, at Investor Day, there's been a pretty dramatic shift in that in what's been a very successful automotive business in China. The fastest-growing OEMs are our local to local Chinese OEMs and particularly on the EV side. And so will detail also at the Investor Day, some of the investments that we're making to support that growth and make sure that we have enough capacity and resources in terms of our innovation efforts to continue to win in the Chinese automotive business. So it is a very different business from 5, 10 years ago, but still very successful. And frankly, the organic growth prospects there in terms of above-market organic growth are really some of the best inside the company. So Joe, that's -- again, we'll spend a little more time on this at Investor Day, but we're certainly very optimistic on that business. Joe Ritchie: That's great to hear. I'm looking forward to learning more about it. I guess the follow-on question, and I know we've talked a little bit about the margin recovery in autos and we'll get more at Investor Day. I'm just curious, though, can you help maybe quantify how much of an impact price/cost was to the margins this quarter on a year-over-year basis. And I know that you're now forecasting for sequential improvement and year-over-year improvement as the year progresses. But how much of a benefit is it expected to be as we progress through the quarters? Michael Larsen: Yes. So I think it was a slightly negative price cost margin automotive in Q1 and like I said we’re expecting this to begin to turn positive here in the second quarter. We are seeing overall deflation on more of the commodities, including resins, nylon and acetyl those more basic commodities, those prices are coming down. And so that's part of what's helping us along with, like we said, new content coming in at higher margins. And so those combined will lead to the beginning of cost recovery, price cost margin recovery this year. But as Scott said, this could take two to three years. This takes a little bit longer in automotive OEM than in other parts of the company. Scott Santi: And I'd just point out, following up on Michael's comments that our auto business still outperforms the peer benchmarks by a margin factor of 2.5x the returns on capital we generate are absolutely terrific and right in line with what we do also in the company. So from a long-term standpoint, these are short-term issues that we'll deal with, but it's not terrible by any stress. The business still performs really well. Michael Larsen: That's true. Joe Ritchie: Great. Thanks, guys. Operator: Your next question comes from the line of Steve Volkmann from Jefferies. Your line is open. Steve Volkmann: Good morning, everybody. Michael, you sort of answered a small part of my question, but I'll ask the broader one. I'm curious what you're seeing across the company in terms of the cost side specifically? I think you mentioned a few of these commodities down maybe for automotive. Are there any other areas where you're seeing deflation on the cost side? And then the follow-on is any risk? Or how do you plan that going forward relative to your price? Is there any risk that kind of price follows that back down as that goes down? Thanks. Michael Larsen: Well, so I think, Steve, we're seeing -- I wouldn't say we're seeing significant deflation at this point. It's just costs are not going up anymore. There's maybe a little bit of deflation, like I said, in kind of the basic commodities that we mentioned. On components, so assembled parts, machine parts that have labor content, I think the costs are going to be a little stickier there, again, because of the labor component. In terms of our planning, consistent with how we always do this, our planning assumptions are based on all known cost increases and decreases as well as the price that we have either implemented or announced, I think we are kind of lapping these more inflation-driven price increases, and we're kind of back to normal price increases. In terms of will those price increases stick as material costs potentially come down. I think we have only 5% of our revenues roughly is tied to an index. So the vast majority we would expect to certainly be able to maintain our historical price premium and at the same time, we want to compete and we want to gain market share, which is really the -- one of the big priorities, if not the number 1 priority of our enterprise strategy, which is strategic share gains to consistently grow organic growth above market. So that's how I would -- I think we'd frame that. Steve Volkmann: Great. Okay. Thank you. And then just a quick follow-up on the construction products. Market were quite a bit higher than I think some of us were looking for. Anything to call out there that was kind of margin goodness and how that sort of goes going forward? Michael Larsen: Yes. I mean when you see something really unusual, the answer is usually price cost. So that's another segment that's been hit really hard over the last two years, actually, a little bit more than the automotive segment from a margin standpoint. And here, what you're seeing is we are beginning to recover the margin impact, which is what we talked about is about to start happening in the automotive business. So that combined to positive price cost combined with a significant contribution from enterprise initiatives actually above the average of the company. I think they were the highest inside the company at 170-odd basis points of contribution of enterprise initiatives. So those were the two big drivers in the construction business. And what's really encouraging is as we look kind of forward, this is not a onetime kind of Q1 impact, we expect to -- based on what the team is telling us to sustain those margins in the high 20s, which is pretty remarkable when you think about where we started pre-enterprise strategy somewhere around 12%. So we expect to sustain those high-20 margins certainly in the near term and medium term. Steve Volkmann: I appreciate. Thanks. Operator: Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open. Chigusa Katoku: This is Chigusa Katoku on for Jamie. Thanks for taking my question. So on organic growth, you maintain the 3% to 5% guide. But I was just wondering if the outlook by segment just at around at all? Michael Larsen: And actually -- so of course, we looked at this. I mean, I think we're very close to what we told you on our last call when we gave guidance for the full year. We are seeing a lot of strength in automotive, food equipment, test and measurement, welding, construction, maybe a little bit better than what we had planned. But overall, kind of grand scheme of things, we are right in line with the assumptions that we gave you at the enterprise level when was that, 3 months ago, yes, last quarter. Chigusa Katoku: Okay. Great. And then on price/cost. So you mentioned that it was 190 basis points positive this quarter. And you remember, you expect it to be positive for the remainder of the year. But I was wondering how we should think about cadence just because I thought there would probably be some puts and takes with auto just beginning to recover onward? Michael Larsen: Yes. I think 90 basis points from price cost and is not -- that's not your normal contribution. So I think we'll have -- based on what we know today, another similar contribution in the second quarter and then it will come down in the second half of the year just as we run into some of the comparisons around price. But like I said, net-net, we -- you would expect somewhere around 100 to 150 basis points for the full year in terms of price-cost margin, in fact, based on what we know today, which obviously, there's a fair bit of uncertainty in the environment. But based on what we know today, that would be the expectation. Operator: Your next question comes from the line of Andrew Obin from Bank of America. Sabrina Abrams: You have Sabrina Abrams on for Andrew Obin. Thanks for taking my questions. I think you guys were talking about seeing further slowing through the rest of the year is embedded in the guidance, particularly in the 25% of businesses that you've already pointed to slowing. Are there other areas of the business that you would flag as maybe the next year to drop maybe based on current order activity? Michael Larsen: I'm not sure I understood the first -- you said CA slowing? Sabrina Abrams: Just like the 25% of the businesses that you've pointed to slowing and I think you said those would be the -- where you see particularly further slowdown in the rest of the year. I'm just wondering if there's any incremental signs of softness you're seeing in other parts of the portfolio? Scott Santi: I think that's a simple answer. The other 75% demand rates continue to be very strong. Michael Larsen: Yes. I think and Sabrina, the way maybe to think about it is there's a lot of strength in the more capital equipment businesses, food equipment, test and measurement, welding, there's a lot of strength in the automotive business on the top line, which is kind of on its own cycle. And then the more consumer-oriented, more interest rate sensitive and then semi is where there is some softness. And we've been calling out that softness really if you go back and look. I mean, since last summer, we started to see a slowdown in in construction, and it's played out in Q1, at least exactly like we thought it would. And so far, Q2 is off to a pretty good start. Sabrina Abrams: Got you. And then you talked about reinvesting in the business. Can you talk about where adding headcount has been more of a focus? Michael Larsen: Well, I think it's really across the enterprise. So it's -- we're not favoring one segment over another. Every business, every operating unit inside the company has significant organic growth opportunities in front of them, and they make the decisions in terms of where to allocate headcount and or to add headcount to support in support of their organic growth strategies. So there's not really one or two segments that are favored over another one. It's -- every 1 of our 84 divisions like I said, have significant organic growth opportunities in front of them and they're going after those by investing in innovation, commercial resources and capacity to support those customers. Scott Santi: And I'll just add that I can reiterate something you said before, which is in all cases, those investments are self-funded, i.e., margins in every segment will continue to go up. Michael Larsen: Yes. I mean, this is all part of our -- you look at our long-term incremental margins in that 35% to 40% range, that’s after making all the investments necessary to take full advantage of the organic growth opportunities that are in front of us. Operator: Your next question comes from the line of Joe O'Dea from Wells Fargo. Your line is open. Joe O'Dea: Hi, good morning. Thanks for taking my questions. I wanted to start just on consumables trends and what you're seeing. I think if we look at sort of polymers and specialty products and construction products, those tend to have some of the relatively higher consumables exposure across the businesses. Those are where we've seen some of the softer year-over-year organic trends. And so is that really just a function of consumer exposure? Or also, any signs of seeing some destocking maybe tied to some of these consumables? And if that is the case, any visibility on what inning we might be in terms of sort of inventory correction? Michael Larsen: Yes. I mean there's certainly some inventory correction going on this quarter or last quarter, we saw that -- and again, it's not like we're selling directly to the consumer. These are all B2B businesses, but the end market, the end consumer or the end customer is a consumer. And those are the ones where we're seeing a little bit more softness, as you said. So I don't know if I have a whole lot more I can add to that. Joe O'Dea: Okay. And then also just wanted to circle back on the earnings cadence over the year and talking about the 49-51 split, I mean, it seems like it would actually imply maybe a little bit lower than normal weighting in the second quarter. Maybe the answer is you're talking about 100 bps, and it's overly nitpicking, but I just want to make sure it's not -- it doesn't sound like you're seeing sort of slowing relative to what you thought earlier in the year, such that we wouldn't see kind of a normal-ish second quarter? Michael Larsen: No. I think last quarter, we -- on this call, we talked about 49 51. I think it's still kind of in our planning assumption, 49%, 51%. And again, I'll just reiterate, that's based on what we're seeing today. I think there's a fair bit of uncertainty that everybody is dealing with right now. But that's kind of our -- that's our base planning assumption. And like I said, so far, Q2 is off to a good start. Operator: Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open. Nigel Coe: Thanks, good morning. Couple of ground, but I just want to dig into food equipment because that continues to suggest to really outperform quite nicely. So just curious where we are on the post reopening refresh cycle upgrade cycle? Any thoughts there on sort of the in-store base and share gains, et cetera? Michael Larsen: Well, I think we've gained a lot of share in this business based on our ability to service and supply our customers with lead times when others maybe struggled. I think there's really nothing unusual going on in terms of the recovery, the equipment side, we'd say we have largely recovered at this point. And then on the service side, we're still picking up momentum, maybe an area where we're a little constrained in terms of our ability to take care of everybody on the service side. But overall, we are continuing to see some really strong demand trends in this business. This is an area we're talking about backlog earlier where the backlog is 2x normal levels, which gives us a little bit more visibility than what we're normally we were used to. In terms of the end markets, as you know, our business is more focused on the institutional side, and we're seeing a lot of strength there, whether it's health care or education or lodging but also restaurants up 30% plus. I think we said this in the prepared remarks. So overall, really a lot of solid momentum here. China was a little softer in Q1 as we talked about, I think that business was down about 20%, and so that's going to come back here in Q2 and for the remainder of the year. But certainly a business that's performing at a very high level, including on the margin side, it's really encouraging to see the margins back in in the high 20s again. So overall, I think a solid quarter and really well positioned for the remainder of the year. Scott Santi: Just to take another plug for it -- sorry, Nigel. I was just going to. Nigel Coe: Go ahead. Scott Santi: That we will be featuring food equipment as one of the segments at our Investor Day in a couple of weeks, just to make another plug for that event. Nigel Coe: That would be great. And then just my follow-on is just going back to order margins. You've talked about price cost, I understand that. North America was 3% growth, Europe is 17%. Just wondering if there's a mix issue as well that maybe just essentially to that margin to the downside. And when you talk about sequential improvement in order margins in Q2, do you think that continues into the back half of the year, so we have a nice cadence Q-over-Q from here? Michael Larsen: The latter, the answer is yes, that's the current planning assumption that margins continue to improve from here on out in automotive. I think North America, you can't read too much into the quarterly build numbers. But if you look at overall builds were up, I think, about 10% in North America in Q1. But as you know, we are more concentrated with the D3 auto OEMs. So those -- they were up I think, about 2% in the quarter. So I don't think that has a significant margin impact necessarily. As I think we've talked about before, our margins are pretty comparable across customers as well as by geography. So not a huge mix issue, if you want. Operator: And our last question comes from the line of Julian Mitchell from Barclays. Your line is open. Julian Mitchell: Good morning. And thanks for squeezing me in. I just wanted to circle back to the organic sales guide for the year. Because in Q1, I think you did 5% the year sort of guided at 4 at the midpoint, the price/cost tailwind shrinks through the year, and I'm assuming therefore that the price revenue tailwind does as well. So you're essentially assuming sort of flat volume growth or sort of steady volume growth Q2 to Q4 with Q1 or even an acceleration perhaps. But you've talked about 1/4 of the business seeing a slowdown. So maybe help us understand what's the sort of the quarter of the business that's accelerating volume-wise from Q1 to offset the 25% that's slowing more. Michael Larsen: Yes. I think what we talked about during on the last call was our guide of 3% to 5% organic, we expect that being organic growth in the first half of the year being closer to 5% and the second half closer to 3%, and that's really more of a comp year-over-year phenomenon than anything else. There's no assumption here built in, in terms of things accelerating in the back half. Our typical seasonality is Q1 is kind of the low point from a revenue standpoint. Q2, we see a step up and then again in Q3. And then Q4 is kind of similar to Q3. So that's -- again, those are the planning assumptions based on what we're able to kind of extrapolate as we sit here today. I would just add to I'd just add, they haven't changed. I mean I think Q1 came in right along with our expectations. And so we're kind of still right in line with that full year plan. Julian Mitchell: And is it fair to assume sort of firm why that price tailwind does taper through the year just as the sort of the price cost margin tailwind tapers? Michael Larsen: Yes. Maybe with the exception of the one business we talked a lot about today, which is the automotive OEM business, that's just beginning to recover we do expect that one to pick up here starting in the second quarter and then again in the second half of the year. Julian Mitchell: That's helpful. And then just my follow-up would be on the Test & Measurement business, where I don't think there's been many questions, but some of the peers like say, Tektronix, Fortive or something. They were growing 20% plus in Q1. They're guiding to exit the year at flat. Just wondered on the sort of the core test and measurement piece aside electronics, how you're thinking about the balance of the year in terms of that rate of slowdown? Michael Larsen: Well, general and industrial demand for Test & Measurement equipment remains really strong. I think I mentioned Instron up 22%, another plug for our Investor Day, MTS, which will give you kind of a progress report was up 14% year-over-year in Q1. So those businesses are even more in line with some of the numbers that you were quoting. And really, the only challenges here are on the semi side, which is only about 20% of the segment. And like we said those semi revenues are now down in that 10% to 15% range in Q1. We expect some further softness here in Q2 in that part of the business. But overall, I mean, I think organic growth of 6% and our margins kind of in the mid-20s after digesting a lower-margin acquisition and some really good progress in this segment. Julian Mitchell: That’s great. Thank you. Karen Fletcher: So that wraps things up. I want to thank everybody for joining us this morning. And just a reminder, we look forward to seeing you at our Investor Day in Boston on May 18. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Fourth Quarter Earnings Conference Call. [Operator Instructions] Karen Fletcher, Vice President of Investor Relations. You may begin your conference. Karen Fletcher: Thank you, Cheryl. Good morning, and welcome to ITW's Fourth Quarter 2022 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's fourth quarter and full year 2022 financial results and provide guidance for full year 2023. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2021 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 Chairman and CEO, Scott Santi. Scott Santi: Thanks, Karen, and good morning, everyone. As you saw from our release this morning, in Q4, we delivered a strong finish to a year of high-quality execution in the face of some pretty unique challenges in the operating environment. Starting with the top line organic growth, was 12% as all segments delivered positive organic growth, and five of our seven segments grew double digits, led by Auto OEM, up 20%, Food Equipment, up 17%, Welding, up 15%, Polymers & Fluids, up 11% and Test & Measurement and Electronics, up 10%. Construction Products was up 4%, and Specialty Products was up 3%. Operating margin expanded 210 basis points to 24.8%, with 110 basis point contribution from enterprise initiatives and favorable price/cost margin impact of 70 basis points, which was for the first time in nine quarters -- which was favorable for the first time in nine quarters. Incremental margin was 52%, and operating income grew 18%. GAAP earnings per share increased 53% to a record $2.95, including $0.61 of gains from divestitures and $0.12 of negative currency -- excluding $0.61, sorry, of divestiture gains and $0.12 of negative currency EPS growth was 27%. For all of 2022, the company delivered organic growth of 12% for the second year in a row, best-in-class operating margin of 24.4% in our base business, after-tax return on invested capital of 29.1% and record GAAP EPS of $9.77, an increase of 15% versus the prior year. There's no question that our decision to stay invested in our enterprise strategy and then our people throughout the pandemic and the quality of our team's execution of our when the recovery focus coming out of it are powering the strong growth and financial performance, ITW is currently delivering. As a result, we are very pleased with our momentum and positioning heading into 2023. Turning to our 2023 guidance. Demand remained solid across the majority of our portfolio, and we are seeing meaningful improvements in supply chain performance and moderating input cost inflation. At the same time, there's no question that the economic outlook, let's call it, remains certainly dynamic. As a result, our organic growth projection for 2023 of 3% to 5% and our EPS guidance of $9.60 at the midpoint reflect current levels of demand and a risk adjustment for further slowing in certain end markets. And Michael will provide more detail on that in just a minute. Before I turn it over to Michael, I want to again thank my ITW colleagues around the world for their extraordinary dedication and commitment to serving our customers and executing our strategy with excellence. Michael, over to you. Michael Larsen: Thank you, Scott, and good morning, everyone. The demand growth that we've experienced all year continued into the fourth quarter as revenue grew 8% with organic growth of 12%. On an equal day’s basis, organic growth was 14% as the fourth quarter this year had one less shipping day compared to prior year. We finished the year with strong growth momentum as evidenced by our sequential organic revenue growth of plus 4% from Q3 into Q4 on a sales per day basis as compared to our historical sequential of plus 2%. By geography, every major region grew double digit, with North America up 13%, Europe up 11% and China up 10%. Foreign currency translation headwind reduced revenue by 5%, and the net impact from acquisitions and divestitures was plus 1%. GAAP EPS grew 53% to $2.95 and included a $0.61 gain from two divestitures, which I'll provide more detail on in a moment. Excluding those gains, EPS increased 21% to $2.34, which included $0.12 of EPS headwind from foreign currency translation. So, on an apples-to-apples basis, eliminating both divestiture gains and currency headwind, EPS increased 27%. On the bottom line, operating income grew 18%, with strong incremental margin performance of 52% and operating margin improved 210 basis points to 24.8%. Operating margin in our base businesses, excluding MTS, was 25.2%. In the fourth quarter, we achieved favorable price/cost margin impact of 70 basis points. And as Scott said, this was the first quarter with favorable margin impact from price/cost since the third quarter of 2020. Enterprise Initiatives contributed 110 basis points. As you saw in the press release, we completed two divestitures in the fourth quarter, resulting in a combined pretax gain on sale of $197 million recorded in nonoperating income and an EPS impact of $0.61. By utilizing capital loss carryforwards to offset taxes on the divestiture gains, the overall tax rate for the company was 19.1%. So overall, for Q4, excellent operational execution across the board, strong financial performance and what remains a pretty uncertain and volatile environment. Okay. Please turn to Slide 4, starting with our progress on organic growth. And as you know, we've been aggressively executing a very focused growth strategy to build consistent above-market organic growth into a core ITW strength on par with our operational 80/20 front-to-back capabilities. As you can see from the data on the left side of the slide, ITW's 12% organic growth rate for each of the last two years compares favorably to our proxy peers at about 9% both years, suggesting that while we're not there yet in terms of realizing ITW's full potential organic growth performance, we're making some very solid progress. Moving on to the segment results, starting with Automotive OEM, which led the way with organic growth of 20%. Year-on-year revenue growth was, of course, helped by supply chain challenges in the industry last year. North America was up 15% and Europe grew 23%. China was up 17% with particularly strong growth in electric vehicles. On a full year basis, ITW Automotive OEM revenues were up 12% versus 6% growth in car builds. Looking forward, we expect Automotive OEM to grow 5% to 7% in 2023 based on a risk-adjusted auto build assumption in the low single digits plus our typical penetration gains of 2% to 3%. Turning to Slide 5. Food Equipment delivered another very strong quarter with organic growth of 17%. North America grew 25% with double-digit growth in all major categories and end markets. Institutional was up more than 40% with strength across the board, restaurants were up 30% and retail grew 20%. International revenue grew 7%, with Europe up 9% and Asia Pacific was flat with some near-term softness in China. The Food Equipment team also delivered excellent progress on margins, with Q4 operating margin of 27.6%, an increase of almost 500 basis points year-over-year. So obviously, strong momentum in this segment, and we expect Food Equipment to grow 8% to 10% in 2023. Test & Measurement and Electronics revenue grew 15%, with organic growth of 10%. Test & Measurement grew 12% organic, excluding the acquisition of MTS, with continued strong demand for capital equipment as evidenced by Instron, which grew 24%. Electronics was up 7%. While our semi-related businesses, which represent combined annual revenues of about $550 million or approximately 20% of the segment, grew 17% in the quarter. We are beginning to see a slowdown in demand after three years of very strong growth. So, embedded in our 2023 organic growth projection of 2% to 4% for this segment is anticipated further slowing in semi-related end markets. Moving on to Slide 6. Welding delivered strong organic growth of 15% in Q4, with equipment up 17% and consumables up 13%. Industrial sales remained very strong with organic growth of 25%. On the commercial side, which is more consumer-oriented, demand continued to slow and organic growth was down 1%. On a geographic basis, North America grew 15%, and international grew 17%, driven by strength in the oil and gas business, up 19%. Operating margin was up 160 basis points to 31.6%, a new record for the segment and for the company. Looking forward, we expect revenue to grow 5% to 7% in 2023, which includes some anticipated further slowing on the commercial Welding side. Polymers & Fluids delivered organic growth of 11%, with the automotive aftermarket business up 13% with some seasonal strength in wiper blades. Polymers grew 11% with continued strength in industrial applications, and Fluids was up 5%. North America grew 11% and international was up 10%. Looking forward, we expect Polymers & Fluids to grow 3% to 5% in 2023, which is based on current levels of demand and anticipated further slowing in the more consumer-oriented automotive aftermarket business. Turning to Slide 7. Overall demand in Construction slowed to an organic growth rate of plus 4%. North America was still up 9%, with residential up 11% and commercial construction was down 6% due to a tough comparison of plus 21% last year. Europe was up 3% and Australia and New Zealand was down 4%. As you know, Construction is our most interest rate sensitive segment, and we are projecting further slowing in 2023 and a negative organic growth rate of minus 5% to minus 3%. Specialty organic growth was 3% as supply chain shortages eased up in Q4, and the equipment businesses had a strong finish to the year with organic growth of 8%. Consumables were up 2%. And on a geographic basis, North America grew 1% and international grew 7%. Looking forward, we expect Specialty organic revenue of negative 1% to plus 1% in 2023, which is based on current levels of demand and anticipated further slowing in the appliance components business. So, let's turn to Slide 8 for a recap of a very strong 2022. As throughout the year, our teams around the world did an exceptional job of delivering for our customers, while responding quickly and decisively to rapidly rising input costs, navigating supply chain disruptions and aggressively executing our Win the Recovery strategy. As a result, for the full year, ITW grew organic revenue by 12% with double-digit growth in five of seven segments. And despite significant price/cost margin pressures and thanks in part to 90 basis points contribution from our enterprise initiatives, our base businesses expanded operating margin by 30 basis points to 24.4%. GAAP EPS of $9.77 was a record for ITW with EPS growth of 15% on top of 28% EPS growth in 2021. Excluding divestiture gains and negative currency translation impact, EPS grew 12% in 2022 on an apples-to-apples basis. In 2022, we also invested more than $700 million to accelerate organic growth and to sustain productivity in our highly profitable core businesses. Raised our dividend 7%, marking the 59th year of consecutive increases. Returned $3.3 billion to shareholders in the form of dividends and share repurchases and made solid progress on the integration of a very high-quality acquisition in the MTS Test and Simulation business. And most importantly, we delivered these results while continuing to make meaningful progress on our path to ITW's full potential through the execution of our long-term enterprise strategy. So, let's move to Slide 9 for an update on our full year 2023 guidance. And while we certainly see some positives in terms of supply chain easing and moderating input cost inflation, there's also no doubt that the economic outlook and demand picture is becoming increasingly uncertain. On our last Q3 earnings call, we pointed to pockets of slowing demand at approximately 20% of our business portfolio. And today, we would add semiconductor-related end markets to the mix bringing the total to about 25% of ITW's portfolio. In our view, it therefore made sense to take a more cautious approach to our top line guidance this year by basing it not just on current levels of demand, adjusted for seasonality as we typically do, but rather anticipating further slowing in end markets related to construction, commercial welding, auto aftermarket, appliances and semiconductor. As a result, our organic growth rate projection for 2023 of 3% to 5% is lower than our typical run rate approach. Operating margin is expected to improve by 100 basis points or more to a range of 24.5% to 25.5%. This includes approximately 100 basis points contribution from enterprise initiatives and positive price/cost margin impact based on all known and implemented price and cost actions. After tax return on invested capital should improve to 30% plus, and we expect strong free cash flow with conversion greater than net income. For 2023, we expect GAAP EPS in the range of $9.40 to $9.80, which also includes $0.15 to $0.20 of higher interest expense on our short-term debt and $0.25 of increased income tax expense as our tax rate will revert to our normal, approximately 24% versus 22% in 2022, excluding the tax impacts from our divestitures. In terms of cadence for the year, we're now back to our typical first half, second half EPS split of 49% and 51%. Our capital allocation plans for 2023 are consistent with our long-standing disciplined capital allocation framework. Our top priority remains internal investments to support our organic growth initiatives and sustain our highly profitable core businesses. The second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of ITW's total shareholder return model. Third, selective high-quality acquisitions, such as MTS, that enhance ITW's long-term profitable growth potential and have significant margin improvement potential from the implication of our proprietary 80/20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' capital. And finally, surplus capital will be allocated to an active share repurchase program, and we expect to buy back approximately $1.5 billion of our own shares in 2023. Turning to our last slide, Slide 10, for our 2023 organic growth projections by segment. And you can see that we're expecting solid to mid -- solid mid- to high single-digit organic growth in four of our seven segments, offsetting some lower growth rates in Test & Measurement and Electronics, which is due to semiconductor demand, as well as in Construction and Specialty resulting in an overall organic growth rate at the enterprise level of 3% to 5%, which is on top of 12% organic growth in each of the last two years. Overall, we're heading into 2023 with strong momentum, and we're very well positioned to continue to outperform in whatever economic conditions emerge as we move through 2023. And so, with that, Karen, I'll turn it back to you. Karen Fletcher: Okay. Thank you, Michael. Cheryl, please open up the lines for questions. Operator: [Operator Instructions] Your first question is from Jamie Cook of Credit Suisse. Your line is open. Jamie Cook: Hi, good morning. Congrats on a nice quarter. I guess, my first question, you talked about the 25% of your portfolio where you're starting to see weakness. Can you talk -- I know semis be incremental. Can you just give a little more color on what you're seeing in semi? And then on the 75% rest of your portfolio are trends in line with your expectations, a little more positive or negative versus last quarter? And then I guess, just my follow-up question to that price/cost in the quarter, I think it was 70 bps positive. I think that's a little better than what you expected. Was that driven more by price or raw going down? And then what are your assumptions on the ability to hold price in 2023? Thank you. Michael Larsen: Okay. That was a lot there, Jamie. I'll do my best, okay? So, I think the color on semi is really the -- we're coming off a three year very strong growth cycle with growth in the high teens or better than that over those three years. And we are starting to see a slowdown in the order intake really in Q4. So, it hasn't really showed up in our numbers in a meaningful way yet, but we do expect that to continue into 2023. We think it's more of a near-term slowdown. And like you said, that is the addition to the portfolio we've said before, 20% is slowing. Demand is slowing now. It's 25%, and semi is really the incremental 5% this quarter. But it's important to keep in mind that the balance, the other 75% of the portfolio, continues to perform at a really high level. And I'll just point to the 12% organic we put up in Q4 and for the full year. And then if you look at our guidance on Slide 10, by segment, you can see mid- to high single-digit growth in Automotive OEM, Food Equipment, Welding, mid-single digit in Polymers & Fluids and then a little bit lower in Test & Measurement. And then of course, Construction is the one that's a little bit projected to be down year-over-year and Specialty about flat. I'll also say, if you just look at from Q3 to Q4, we -- typically, our sales per day go up 2%, we actually went up 4%. So, we're more than offsetting some of the slowing that we're seeing in 25% of the portfolio. So good momentum, really well positioned going into next year. I think on the price/cost side, we were really encouraged. We talked about this on the last call and an expectation of being positive -- slightly positive on margins on price/cost in Q4. This was a little bit better, driven by both sides of the equation really price and cost, but it was certainly great to see that turn positive for the first time since I think I said the third quarter 2020. So, first time in eight quarters, so really encouraging heading into 2023. Operator: Your next question comes from the line of Scott Davis of Melius Research. Your line is open. Scott Davis: Hey, good morning. Congrats on another strong year in '22. Scott Santi: Thank you. Michael Larsen: Thank you. Scott Davis: A little bit of a nit, but on the 3% to 5%, 23 top line for growth forecast. Is there any real price in that? Or you anniversary the big price increases that you had in Welding and now you're kind of more in the kind of neutral-ish to maybe slightly positive versus a bigger number? Michael Larsen: Well, I think we are certainly lapping some bigger price numbers. There's no doubt about that. And I think, as you know, we don't break out price and volume separately for all the reasons we've talked about in the past. But there's both price and volume in the numbers that we've laid out for 2023. And the 3% to 5% organic, I'll just say it's a risk-adjusted number. If you do a pure run rate, you end up at a higher number. We just thought given the -- everything we talked about, it was probably reasonable to take a more cautious approach given the environment. Scott Davis: Yes. No, it totally makes sense. What about the inflation assumptions in general when you guys think about the '23 outlook as far as kind of breaking out materials versus labor? And is it fair to assume that labor inflation remains reasonably high, but material inflation is more moderated? Is that a fair assumption in your guide? Michael Larsen : Yes. I think that's reasonable. I think certainly materials and components in that order, we are seeing -- I wouldn't say price are coming -- costs are coming down in a significant way, and they're remaining at a fairly elevated level. And then I think on -- our labor costs, certainly we're experiencing the same labor cost inflation as others. But -- and so maybe a little bit higher than typical, but nothing really that significant. We're still expanding margins by 100 basis points or better here in 2023. So hopefully, that answers your question. Scott Davis : Yes, it does. Thank you. And best of luck this year. Michael Larsen : Sure. Thank you, Scott. Operator: Your next question comes from the line of Tami Zakaria of JPMorgan. Your line is open. Tami Zakaria : Good morning. Congrats on the great results. So I have a couple of quick ones. The first one is how should we think about your EBIT margin progression throughout the year? Is the 25.5% to -- 24.5% to 25.5% range going to be fairly consistent in all the quarters? Michael Larsen : So Tami, like I said, we're kind of back to our typical cadence here. I think we said first half, 49% of our EPS for the full year; second half, 51%. We really -- if you go back unlike time, we've been remarkably consistent. Embedded in that is also the fact that Q1 is typically our lowest quarter in terms of revenue, and we're expecting somewhere in the mid-single-digit type growth. Margins will probably start out a little bit lower, but still 100 basis points of margin improvement on a year-over-year basis. And maybe just to give an additional data point, if you run the same data on Q1 contribution to EPS overall, it's somewhere around 23% of the full year, and that's a pretty -- the company has become remarkably predictable over the years. And so I think that's probably a pretty good estimate for how the first quarter might play out. Tami Zakaria : Got it. That's fantastic color. Thank you. And I'm just going to ask the question and I hope I get lucky and get a number. But can you share what organic growth is trending quarter-to-date? Any segments trending negative right now? Michael Larsen : So we just saw the January numbers and everything looks fine. Everything is tracking and really nothing different from what we talked about in the script here. So we're off to the start that we thought we would have. Tami Zakaria: Okay, awesome. Thank you. Operator: Your next question comes from the line of Andy Kaplowitz of Citigroup. Your line is open. Andy Kaplowitz : Good morning, everyone. Michael, when we think about margin expectations for '23 across your segments, does the lag in price versus cost flipped the most in Auto OEMs, so you could see a nice jump in margin in that segment? Or should we generally think that your segment margin will trend with who has the highest growth forecast versus the weakest growth forecast in '23? Michael Larsen : I think, Andy, we expect -- all of our planning here at ITW has done bottoms up, as I think you know. And every one of our segments, including the higher-margin ones, such as Welding as well as Automotive, which is really dealing with some near-term pressures primarily related to price cost as well as just volume leverage. Every one of our 7 segments told us that they expect to improve margins year-over-year in 2023. But obviously, the ones that have the higher growth rates are going to have more volume leverage and therefore, probably a more significant improvement in operating margin. But everybody will get better. I would just say on Automotive, it's going to take some time to recover the price/cost margin impact, which has been significantly higher in Automotive than in other segments for all the reasons we've talked about in the past. It takes a little bit longer to recover price. So I think our current view is it will take us maybe two to three years to get back to automotive margins in the low to mid-20s. And so that's maybe how I would -- we would characterize it. Andy Kaplowitz : Very helpful, Michael. And then can you give us an update on the longevity of enterprise initiatives? ITW continues to I think we might begin to get a little spoiled here that it could last indefinitely. So how are you thinking about enterprise strategy? Do you still see a long runway of initiatives across your segments? And where will the focus of enterprise strategy be across your segments in '23? Michael Larsen : Well... Scott Santi : Yes, go ahead, you start. Michael Larsen : Okay. Well, I think we're in the tenth year now. I think if you add up the combined savings, it's approaching $1.5 billion of structural cost out from 80/20 and from strategic sourcing. And when we rolled up the plans here in November and check back in, in January and had a chance to review all the projects and activities that go into delivering these 100 basis points, we were really encouraged by what we saw. And so I know that for a couple of years, we've been saying -- I've been saying this is not going to go on forever, and I... Scott Santi : We were wrong. Michael Larsen : And I was wrong, which happens a lot. But I think, ultimately, look, I think if you model ITW long term, I'd go back to the TSR model we've given you, which is 4% plus organic growth, incremental margins in that 35% to 40% range. Then operating income grew $7 million. You add acquisitions and buybacks on top of that. And so EPS grows 9% to 10%, and you add an attractive dividend in that 2% to 3% range. 2% to 3% range on top of it, you get 11% to 13% over the long term, that's what you should expect us to deliver. And so I think I have to say, to give you a definite and on enterprise initiatives because, as Scott reminded me, I've been wrong for many years. But that's probably how I would think about it, Andy. Scott Santi : I would just add in terms of perspective that I think one of the real strengths of our operating methodology and our business model is it's there's no one definition of perfection. There is always room to get better. We use the business model as the core tool that our 84 divisions used to identify and prioritize opportunities to get better. And I don't see that stopping for quite a while. Michael Larsen : Right. I think we've said this before. I mean, this proprietary ITW business model is more powerful than it's ever been as we sit here today. It's much different from 10 years ago, 3 years ago. And we are applying it. Our people, we've all gotten better at applying these methodologies, and we're applying it to a much more differentiated portfolio. And so as long as we continue down that path, I think it is -- I agree with Scott. I don't think it's going to end any time soon. So that's probably how we've set it up. Andy Kaplowitz: Appreciate all the color, guys. Operator: The next question comes from the line of Andrew Obin of Bank of America. Your line is open. Unidentified Analyst : You have Sabrina Abrams [ph] on for Andrew Obin. So first on the margin guide, the 70 bps to 170 bps of year-over-year expansion includes the 100 bps of enterprise initiatives. And then, I guess, the remainder is 20 bps of price/cost at the midpoint. I'm just trying to think, is this a conservative approach? Should you had 70 bps of benefit in 4Q? Is there potential upside here? Michael Larsen : Well, I think maybe what would be helpful, Sabrina, is just -- let me just give you some of the elements here that go into the margin improvement on a year-over-year basis. And I'm going to use round numbers here, okay? So if we just ended 2022 at operating margins of about 24%, you should expect volume leverage somewhere in the 50 to 100 basis points of positive contribution to margins year-over-year, the enterprise initiatives, which is sized at about 100. We're certainly going to make some good progress on price/cost as 70 basis points was encouraging in Q4. I think the -- if that's the run rate going into 2023, maybe a little bit better than that. Let's just say price/cost adds approximately 100 basis points based on what we know today. And then the offset to some of this is our typical kind of -- we talked about this a little bit, wages and inflation on wages. We are bringing in some new hires to support our organic growth efforts. We are investing in driving organic growth, including capacity. And so that's typically a headwind of less than 100 basis points. That's running a little bit higher, just given the underlying inflation that's in the system that's probably running at 150 to 200. And so you add all that up, you get 100 basis points plus of margin improvement on a year-over-year basis. And I think that's a pretty good number, Sabrina. Unidentified Company Speaker : Got it. That's helpful. And so China, I guess, was strong in Auto OEM in 4Q. Just trying to think what's incorporated in your guide for China reopening next year? Michael Larsen : Well, I think, as we look at kind of on a geographic basis, including China, most of our regions are kind of in that mid-single digits for the year. And China is maybe a little bit higher than that. A big driver, as you pointed out, in China is really the Automotive business, where we continue to make a lot of progress in terms of market share and penetration gains. So that's certainly our largest business and also the biggest driver of our growth in China next year. And so if the total company is 3% to 5% organic, China is certainly a little bit higher than that in our current projections as we sit here today. So... Unidentified Company Speaker: Great. Thank you so much. I’ll pass it on. Operator: Your next question comes from the line of Jeff Sprague of Vertical Research. Please go ahead, your line is open. Jeff Sprague: Thank you. Good morning, everyone. Solid results. Just back to enterprise, I've often kind of thought of it maybe incorrectly as reflecting a little bit of a trade-off between margin and growth. And maybe originally, it was more cost oriented, but the organic growth here recently would suggest you're not trading growth for margin. And I wonder if you could just kind of comment on that. Obviously, the growth has enjoyed a cyclical lift the last couple of years. So I don't want to overstate the point, but it does seem that the system has thrown up at organic growth than it had historically? And just any context on that, I think, would be interesting. Scott Santi : Yes. First of all, Jeff, thank you for noticing. The -- what I would say in terms of just the arc of the last decade, we've been on this is that clearly, for the first five to seven years, we had a lot more work to do inside the businesses to get ourselves in position to grow. And what we're delivering now is much more about businesses that are from an operational standpoint, a lot closer to 80% or 90% of their potential. And so a lot of -- which allows a lot of our effort and attention and just to be reallocated to commercial opportunities to grow. And that's ultimately what is showing up now. We have a lot more sort of energy collectively being devoted to growth opportunities because we've gotten the internal -- the operational position of these businesses firing in sort of in a really strong position. And so it's -- you can't be great at everything all at once. It's part of, I think, what we would reflect that over the last decade and one of the real secrets to the outcomes we've delivered in my view is that we've been focused on the right things at the right time and have not tried to do too much at any stage. But we're clearly now at a stage where organic growth is the 80 of what we've got opportunities to do and what we've got to deliver on going forward. And I think that's reflected in the numbers that we're currently throwing off. Jeff Sprague : And would -- Michael gave that piece of the bridge, wage and growth investment. Is that number other than kind of the inflationary pressures that you mentioned? Is that structurally moving higher? Or can that sort of be funded within the normal incremental margin construct and other levers that you're attempted for? Scott Santi : That's exactly the way we do it. We are self-funding our growth investments through our incremental margin contribution. So at the 35 historical and targeted run rate, that is -- that includes -- that's after those incremental investments in growth. We're investing in capacity now in a really significant way in headcount in the areas that help us grow and supporting innovation. And we're still going to deliver of 100 bps of margin improvement next year. So that just illustrates the point of these businesses are so profitable that every incremental dollar of revenue that we generate organically drives a lot of incremental cash flow and certainly to support that we're going to invest some of that, but it doesn't impair our belief that we're in a good chunk of it to the bottom line. Jeff Sprague: Great. Thanks for that context. Operator: Your next question is from Stephen Volkmann of Jefferies. Your line is open. Stephen Volkmann : Good morning, guys. Most of my questions have been answered. A couple of quick follow-ups. Is there a portion of your portfolio where you would expect to give back price once the sort of lower energy and transportation and raw material costs kind of work their way through? Michael Larsen : We have a very small portion of our overall portfolio where the pricing is indexed to raw materials. If you add it all up, it's somewhere around 5% of our total revenue, so really an immaterial number, where it's an automatic giveback on price. I think on everything else, we historically command a premium given our -- the differentiated nature of our products and services and the quality of our delivery, and we expect to maintain that premium as we compete and focus on gaining market share. So that's how I'd answer your question, Steve. Stephen Volkmann : Great. I appreciate it. Pretty minimal then. And then just sort of maybe the obligatory question on capital deployment relative to your thinking on any sort of further divestiture opportunities or M&A pipeline, anything to kind of call out there? Michael Larsen : Yes. So I think you saw the two divestitures here in the fourth quarter. That's part of -- I think we called out a handful of business units about a year ago. So the first two are done. We've got a smaller 1 that's kind of in the works. And then we've got a more meaningful one that is performing at a really high level right now. And I think we're going to kind of assess the capital markets and conditions and whether it's the right time to launch sometime this summer and that would kind of round out what we talked about a year ago. So that's kind of where we're at. Stephen Volkmann : Great. And M&A pipeline, sorry. Michael Larsen : Well, yes, I mean, we get this question every time, we answer it the same way. I mean, I think organic growth is priority number one for all the reasons that Scott just talked about. I think -- we'd certainly be interested in high-quality acquisitions that accelerate the long-term growth potential of the company, where we can improve margins through the implementation of the business model and we can earn a reasonable rate of return on our shareholders' capital. And so MTS is a good example of an acquisition that checks all the boxes. That was a pretty big one that we did a year ago. And to the extent that other opportunities like that present themselves that check the boxes, we're definitely going to lean in, in a big way. So that's -- but... Scott Santi : Yes, maybe just a little color on top of that, that's more sort of topical near term. What I would say generally is that we are not looking to acquire broken businesses, we're looking to acquire good businesses and help them be great businesses. And in environments where the sort of economic -- the macro is uncertain, those good businesses, it's really not a good time to sell. So if anything, I'd say the environment until the macro trajectory gets a little bit more clear, I would expect that the opportunities might be a little less than normal this year, at least through the first half, but we'll see. Stephen Volkmann: Appreciate the color. Thank you. Operator: Your next question comes from the line of Dan Donner of BMO Capital Markets. Dan Donner : Excellent. Thank you. So the Food Equipment business, as you have highlighted, has definitely been a standout for you. And after attending the NAFEM Equipment Show yesterday, there's a noticeable difference in how the business seems to be presenting itself more cohesively than before. So will you comment on this aspect and also on some of the things that you're doing there with regard to consolidating sales reps and allocating more investments toward maybe the cooking side, specifically products like combi ovens and priors, which are certainly areas that have well-known large competitors? Michael Larsen : Well, I'll take a stab. I think we're not really doing anything different than we have over the last five years in the Food Equipment business. We've continued to invest in differentiated products, including the categories that you mentioned. And we've been putting up -- the team has been putting up some really great numbers as a result of executing on their strategy. And so if you add up the organic growth rate here, over 17% coming out of the pandemic 23% last year, this year, high single digit, double digit, and that's really as a result of us innovating and growing all product categories. Scott Santi : And I add to that near term, our supply capabilities winning these businesses. Michael Larsen : Yes, definitely, I think this has been an area where kind of back to our win the Recovery positioning and the decision to carry enough inventory to service our customers with the same level of excellence in difficult supply chain on the different supply chain conditions has paid off in a big way. And so I think if you get the sense that the Food Equipment team is in a good mood. I think that's because they're gaining share and putting up some really strong numbers, including on the margin side, if you look at that almost 400 -- almost 500 basis points of improvement on a year-over-year basis. So that business, like we said, has got a ton of momentum going into 2023, and we're very bullish on the future here. Dan Donner : Okay. Thank you. Yes, they were definitely in a good mood. Operator: Your next question comes from the line of Joe O'Dea of Wells Fargo. Your line is open. Joe O'Dea : Good morning. Thanks for taking my question. I wanted to start the Slide 4, where you show the 300 bps of outgrowth versus the proxy group over the last couple of years. Can you talk to attribution of that? And I think, obviously, a pricing environment where you've seen different trends across different companies, I'm not sure the degree to which maybe pricing is outpacing. But the degree to which it's volume is primarily share gain and just your confidence in the stickiness of those share gains as supply chain corrects? Scott Santi : Yes. I guess I'll -- my response would be that there's no way that we can break this apart into various pieces. What I can say is that the proof is in the pudding. Ultimately, it's in the performance and our ability to consistently outperform. We're not claiming victory here. We're not -- we've got a lot of room to go across the company in terms of our ability to consistently deliver the kind of organic growth that we're capable of. But what we are saying is that we put a couple of years on the board, where we are growing our peers in the aggregate. Now what percent of that is our market exposures versus theirs or different approaches to pricing or supply capability? I'd say all of the above. In the end, it doesn't matter as long as we're able to consistently outgrow our peers and outgrow our markets and that's really the goal. Joe O'Dea : And I guess related to that, as you're seeing maybe supply chain ease, and I don't know if competitors are in the market in a little bit more competitive way. But any challenges now that you didn't see maybe 6 or 12 months ago? Michael Larsen : Yes, I think, Joe, from the beginning, the Win the Recovery positioning was all about strategic share gains focused primarily on our existing customers. And we were not interested in opportunistic onetime orders. And so we're pretty confident with that direction. These share gains are going to stick. I think the pandemic and the supply chain kind of disruptions were a great opportunity for ITW to demonstrate how differentiated our supply chain capabilities are for those customers that didn't know. And so I think that's been really -- that's what's contributing also to the outgrowth relative to peers. I mean that's one more element of the equation as you talked about with Scott. Joe O'Dea : And then I just wanted to clarify on the average daily sales plus 2% versus seasonal -- or plus 4% versus seasonal plus 2, the degree to which that's underlying demand accelerating versus maybe backlog burn. I think it's hard to parse given broadly inflated backlogs out there what underlying demand trends look like. But any comments on what you're seeing sort of underlying accelerate versus decel? Michael Larsen : Well, I think we're not a backlog-driven company. As you know, we don't carry a lot of backlog. And as you also say, it's hard to parse out what was backlog versus new orders. So I'm not sure I can give you a great answer. What I can tell you is that, typically, our sales per day go up by 2%. If you go back and look in time, and they went up by 4%. And so things are definitely not slowing. And we've got some great momentum going into Q1 and 2023. Joe O'Dea: Great. I appreciate the color. Operator: Your next question comes from the line of Julian Mitchell of Barclays. Your line is open. Julian Mitchell : Good morning and thanks for squeezing me in. Maybe I just wanted to circle back to the organic sales growth guide and totally understand you don't take an elaborate macro gyration within that, and that's a very sensible approach. But you've got the 4% growth guide for the year as a whole organically at the midpoint. You just did low double digit the most recent quarter. So just want to understand how we think about that sort of step down. Is it a steady deceleration as we go through the year? Anything in particular we should bear in mind on one or two-year stacks? Any color at all really that you could give on and how we think about the plus four moving through 2023? Michael Larsen : It's all in the comparisons year-over-year, Julian. So like I said, we expect the year to play out from a revenue standpoint, in line with our typical cadence. And so Q1 starts out a little bit lower and then we kind of improve from there. But there's nothing baked in, in terms of a big acceleration in the back half or deceleration in the back half. We've kind of done our best here to model current levels of demand risk adjusted for the areas where we're seeing some slowing in demand and we come up with 3% to 5%. I think if you run the math, you'll see kind of the first half is the growth rates are maybe towards the higher end of that 3% to 5% and the second half is towards the lower end, and that's all driven by the comps on a year-over-year basis. Julian Mitchell : That's very clear. Thank you. And then within Construction products, I don't think we built with that one yet. Apologies if you have to repeat anything. But that's sort of down for guide for the year. There's a bit of price in there, some maybe volumes are down high single digit or something. But maybe just help us understand what's embedded within that? I think simplistically, you have 1/3 is resi new build, 1/3 is resi replacement, 1/3 is commercial. Those three big pieces, how are you sort of thinking about those this year? Michael Larsen : I mean the big driver, Julian, is the housing market, new housing. And so the residential side is about 80% of our business here in North America, and that's where we're seeing some slowing, which we've talked about since the summer, I think. So there's nothing new here. And that's the big driver here. Scott Santi : The commercial side is hanging in there. As I said, it was also our strongest business in the summer after the pandemic. Michael Larsen : Right. I mean... Scott Santi : Part of the advantage of the different end market exposures that we have. And we can -- we're always going to have some in the tailwind mode and some in the headwind mode, but the net mix of it all is pretty positive. So... Michael Larsen : Yes. It's going to be down a little this year, but it's also been a business that's really performed well for us when other parts of the macro have been challenged. So... Julian Mitchell: That makes sense. Thank you. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Okay. Thank you, Rob. Good morning and welcome to ITW’s third quarter 2022 conference call. I am joined by our Chairman and CEO, Scott Santi and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s third quarter financial results and our updated guidance for full year 2022. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2021 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 Chairman and CEO, Scott Santi. Scott Santi: Thanks, Karen and good morning, everyone. In what remains a very dynamic and challenging operating environment, we were pleased with our Q3 performance. On the top line, we delivered 13% revenue growth with 16% organic growth from our base businesses. While we did see some softening in channel inventory reduction actions in our businesses serving the construction, auto aftermarket, commercial welding and appliance markets, five of our seven segments delivered double-digit organic growth, led by automotive OEM, up 25% and food equipment, up 23%. With regard to margins, we were glad to see our incremental margins in Q3 return to our normal 30% plus level for the first time in five quarters as the impact of volume growth, enterprise initiatives, pricing actions and some moderation in the pace of input cost inflation drove incremental margin of 39% and a 130 basis point improvement in operating margin in our base businesses. We have lost roughly 250 basis points of margin due to price/cost during this period of rapid inflation, which we fully expect to recover over time once the current inflationary environment stabilizes and it was certainly good to see a nice solid first step in that direction in Q3. On the bottom line, strong growth and margin performance resulted in GAAP EPS of $2.35, up 16% versus Q3 of last year and that 16% growth includes $0.13 of negative impact from currency. Excluding currency, earnings per share were up 23%. Looking at our current performance, our decision to stay invested in our long-term strategy and in our people during the pandemic and the quality of our team’s execution of our recovery strategy coming out of it are fueling the strong organic growth and financial performance that we are currently delivering. While the economic outlook is becoming increasingly uncertain, demand remains solid across the majority of our business portfolio. And as a result, the company is well positioned to deliver a strong finish to what has been a very strong year. With that, I will now turn the call over to Michael who will provide more detail on the quarter and our updated guidance. Michael? Michael Larsen: Thank you, Scott and good morning everyone. In Q3, revenue grew 13% to $4 billion, with strong organic growth of 16%. The MTS acquisition contributed 3% to revenue. Foreign currency translation was a 6% headwind compared to a 4% headwind last quarter. And despite $0.13 of year-over-year EPS headwind from foreign currency translation, GAAP EPS was $2.35, an increase of 16%. Excluding MTS, incremental margin in our base business was 39%, which as Scott said, was a welcome return to our normal historical incremental margin rates. As a result of our strong revenue and margin performance, operating income increased 16% to $983 million, which was an all-time quarterly record. Operating margin was 24.5%, with operating leverage of almost 300 basis points and 110 basis points of enterprise initiatives. Excluding 60 basis points of margin impact from the MTS acquisition, operating margin expanded 130 basis points to 25.1%. Free cash flow was solid at $612 million, an increase of 46% versus Q2 and 12% year-over-year. The conversion rate of 84% is lower than our typical Q3 performance as we remain committed in the near term to intentional working capital investments to support double-digit organic growth, mitigate supply chain risk and sustain service levels to our key customers. Finally, share repurchases in Q3 were $500 million and our effective tax rate was 24% versus 21% in the prior year. With that, let’s turn to Slide 4 and starting with organic growth by geography. We delivered growth in the mid-teens across all major geographies, led by North America up 17%. Europe, which represents about 23% of our sales, grew 14%, led by automotive OEM up 26% and food equipment, up 15%. China grew 15%, led by Test & Measurement and Electronics, up 32% and automotive OEM was up 29%. Price/cost was accretive to income in Q3 and slightly dilutive by 40 basis points to margin. As we have said before, our business teams around the world have done an exceptional job of adjusting price to offset cost increases throughout the most significant inflationary cycle in over 40 years. And should the pace of raw material cost inflation continue to moderate, we expect price/cost to be accretive to income and slightly accretive to margin in Q4. As Scott mentioned, throughout this unprecedented 2-year inflationary cycle, the company has absorbed as much as 250 basis points of margin dilution impact from price/cost, which we expect to fully recover of the succeeding six to eight quarters after input prices stabilize. Moving on to the segments. Automotive OEM delivered strong organic growth of 25%, with North America up 21% and Europe up 26%. China was up 29%, which included some sequential recovery from the lockdown impact in Q2. When looking at these year-over-year growth rates, keep in mind that the comparisons are against the Q3 last year when the chip shortage led to a low point for auto production. We continue to make good progress on our content per vehicle growth as evidenced by our year-to-date organic growth rate of 9% compared to auto builds of 7%, in line with our long-term market outgrowth target of 2 to 3 percentage points. Consistent with our guidance all year, we do not expect a meaningful improvement in the chip shortage situation impacting automotive production until next year. And we continue to take a more conservative approach to our guidance, which assumes that automotive production essentially remains around current levels through the balance of this year. And as we have said before, as supply chain issues eventually get resolved down the road, we remain confident that the automotive OEM segment is well positioned to be a very meaningful contributor to the overall organic growth rate of the enterprise for an extended period of time. And as that plays out, we also expect that the automotive OEM segment returns to its typical historical operating margin rates in the low to mid-20s. Turning to Slide 5. Food Equipment delivered strong organic growth of 23% as North America grew 30% with double-digit growth in every major category and end market. Growth in institutional markets was 50% plus with strength across several categories, most notably lodging. Restaurants were up around 40% and retail growth was in the mid-teens. International revenue grew 14% with Europe up 15% and Asia Pacific up 9%. Test & Measurement and Electronics revenue grew 29%, with organic growth of 17% as Test & Measurement grew 20% and Electronics was up 14%. Growth was broad-based with continued strength in semiconductor and CapEx spending as evidenced by organic growth of 13% in the Instron business. Moving on to Slide 6, welding grew 14% organically, with equipment up 13% and consumables up 15%. Industrial was the standout with organic growth of 32%. The commercial side of the welding business, which sells to smaller businesses and individual users, was down 10% due to lower demand and inventory destocking in the channel. However, due to the strength on the industrial side, North America still grew 14% and international grew 12%. Sales to oil and gas customers were up 12% in the quarter. Operating margin improved 150 basis points to 31.5%, which was a new record for the Welding segment. Polymers & Fluids grew 8% organically, with Polymers up 21% on continued strength in industrial applications. Softening demand due to higher gas prices and the impact on consumer discretionary spend impacted the automotive aftermarket business, which was up 2%. Fluids was up 5% and overall North America grew 5%, international was up 14%. Construction delivered organic growth of 17% with continued strength in North America, which was up 35%. U.S. residential grew 42% and commercial was up 17%. That said, we did see some signs of slowing towards the end of the quarter and we expect that to continue in Q4, which we have reflected in our updated guidance. The international side of construction is slowing, with Europe down 1%. Australia and New Zealand was up 7% against an easy comparison. Specialty growth was essentially flat as product line simplification activities resulted in the elimination of a product line in one of our consumer packaging businesses. Excluding PLS, the segment would have been up 3%. Demand in our appliance components division slowed, which we have reflected in our updated guidance. On a geographic basis, North America was down 2% and international grew 4%. Looking on Slide 8 for an update on the year and starting with the top line, we are raising our full year organic growth guidance to 11% to 12% due to the strength of our Q3 organic growth performance and projecting current levels of demand, which remains strong across most of our businesses. But we are also anticipating further slowing in the end markets we talked about, including global residential construction, automotive aftermarket, commercial welding and appliance components, that combined represent about 20% of total company revenue. The MTS acquisition is expected to add 3% to revenue and at current exchange rates, currency translation will reduce revenue by 5%, resulting in total revenue for the year up 9% to 10%. For Q4, we are well positioned to deliver a strong finish to a very strong year with organic growth of approximately 10% and GAAP EPS growth of about 40%. In Q4 and consistent with our previously announced plan to divest certain business units, we completed the sale of a division within the Polymers & Fluids segment, with an estimated after-tax gain of $0.45 per share. We have included this Q4 gain in our updated full year guidance. And per our usual process, we have narrowed the range for the year with one quarter to go and updated our guidance to reflect current foreign exchange rates, which results in additional foreign currency headwind versus our prior guidance. So as a result of including the gain on sale and updating guidance with current foreign exchange rates, our updated full year GAAP EPS guidance range is $9.45 to $9.55. We are projecting operating margin of approximately 24% for the full year, which includes approximately 100 basis points contribution from enterprise initiatives, about 200 basis points contribution from volume leverage and estimated 100 basis points of negative margin impact from price/cost and about 50 basis points of margin dilution from the acquisition of MTS. We expect free cash flow conversion of approximately 80%, which, as we have talked about, is below our typical 100% plus conversion rate due to the intentional near-term working capital investments that support the company’s double-digit revenue growth, mitigate supply chain risk and sustained customer service levels. And finally, share repurchases are now expected to be $1.75 billion for the full year, an increase of $250 million versus prior guidance. Looking forward, we are obviously not immune to the macro challenges and uncertainties that may lie ahead. But through the execution of our enterprise strategy, we have positioned this company to deliver top-tier results in any environment, as reflected in our differentiated performance at the depth of the pandemic and in the very dynamic and challenging conditions that have characterized the recovery over the last 2 years. We remain confident that the combination of the powerful competitive advantages we derive from ITW’s proprietary business model, our high-quality business portfolio and our team’s proven ability to consistently execute at a very high level ahead well prepared to continue to outperform in whatever economic conditions emerge in 2023 and beyond. With that, Karen, I will turn it back to you. Karen Fletcher: Okay. Thanks, Michael. Rob let’s open up the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of Scott Davis from Melius Research. Your line is open. Scott Davis: Good morning, Scott and Michael and Karen. Scott Santi: Good morning. Scott Davis: I am not very good at math, but just thinking through this with your guidance on the full year on price/cost, I think it implies that you are actually going to be in meaningful positive territory on price/cost in Q4. Is that – am I reading that right? Michael Larsen: That is correct. So we are going – we’re expecting that if inflation stays where it is, and so based on the known increases and decreases and based on the price that we expect to realize in the fourth quarter, that price/cost will be accretive on an EPS basis and also, for the first time in a while, accretive on a margin basis as well. Scott Davis: Okay. That’s super helpful. And how do you – I mean, it seems like we’re walking into a construction recession, but how do you guys – I mean, are you planning – how do you plan for that, given 80/20 and just the business model that you have? It’s not like you’re going to go do a bunch of restructuring. But how do you get ahead of that so that you can limit the impact of it? Scott Santi: Well, we’ve talked about this before, but one of the fundamental elements of 80/20 is that we are – that we have a very flexible cost structure. So we are – we do a lot of outsourcing upstream. We want to assemble. We want to control the manufacturing elements that really matter from the standpoint of control of quality-controlled delivery. But we don’t necessarily have to bend all the metal. We don’t have to necessarily do all the upstream work. And so what that gets us fundamentally, in fact, we prefer not to, and what ultimately that gives us is a relatively flexible cost structure. So we are a read and react company. Our businesses are going to respond to whatever the demand is that sits right in front of them. We’ve talked about that before. We don’t do a lot of forward forecasting. We are producing today what our customers bought yesterday. And as demand rates start to decline in places like construction, then those adjustments will take place real time. Scott Davis: Okay, that’s a helpful reminder. Thank you, guys. I appreciate it. Good luck. Scott Santi: Thank you. Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open. Tami Zakaria: Hi, good morning. How are you? Scott Santi: Good. Good morning. Tami Zakaria: So I have two quick ones. The first one is, can you comment on which end markets you’re anticipating for this slowdown? Meaning the 10% implied fourth quarter organic growth, are you currently run-rating above that but you’re anticipating further slowdown and hence, you’re guiding to about 10%? Michael Larsen: Yes, that’s correct. So this is not our typical run rate. This has been adjusted with some anticipated further slowing in the end markets that we talked about. Tami Zakaria: Are you able to share like what the current run rate is? Michael Larsen: It is higher than the 10%. Tami Zakaria: Got it, got it. Okay, that’s helpful. And then the second one, can you comment on the price versus volume you saw in the third quarter? Because the last time you raised organic growth guidance earlier this year, I think you had mentioned that you saw some volume pickup. Did that sustain? Like what’s the expectation for price versus volume in the fourth quarter? Michael Larsen: Yes. So as you know, Tami, we don’t report price and volume separately. But what I think we can tell you is that we are seeing, in Q3, we saw meaningful volume growth across the company, including particularly in – if you look at the strength in Auto, Food Equipment, Test & Measurement, you’re not going to put out numbers like that without a meaningful contribution from volume. Tami Zakaria: Got it. And you expect volume to sort of sustain in most of these end markets in the fourth quarter as well? Michael Larsen: Yes. I think that’s the reason. Obviously, this is a very dynamic environment but there is a lot of strength in the businesses that I just talked about that more than offset some of the slowing we’re seeing at about 20% of the company. So I think we’re really well positioned for a strong finish here in Q4. And if you look at the implied guidance, we’re looking at organic growth, like we said, double digit. We’re looking at margin improvement of more than 100 basis points, GAAP EPS growth of 40%, 15% excluding the divestiture gain that we talked about earlier. So a really strong finish to what’s been a very strong year for the company. Tami Zakaria: Okay, perfect. Thank you so much. Michael Larsen: Sure. Operator: Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open. Andy Kaplowitz: Good morning, everyone. Scott Santi: Hi, Andy. Andy Kaplowitz: Scott, maybe just focusing on construction for a second, last quarter, you mentioned some potential incremental weakness in Europe and Australia. It seems like those are hanging in there. Obviously, North American residential up 42%, you talked about a little bit of weakening. So is this just strong share gains for ITW that have held up these businesses within construction? I know you mentioned you saw some slowing late in the quarter. Maybe give us more color to the rate of that slowing going forward? Michael Larsen: Well, I think what we’ve seen is primarily a slowdown on the residential side, which is about 80% of our business. And we talked about softening on the international side here on our call last quarter. And so we did see Europe down 1%. I think that’s pretty broad-based, UK, Continental Europe at this point, given some of the challenges, that’s probably what you would expect. Australia and New Zealand is also slowing here. And as the comps get a little more difficult, you’re going to see those growth rates start to come down. I think in North America, there is still a fair bit of, obviously, strength in the business. And then late in the quarter, we’re really starting to see the order rates starting to come down on the residential side, so… Scott Santi: Yes, I think the only thing I would add is that it is among the most interest rate-sensitive end markets that we serve. And so you’re seeing in the housing start data and a lot of other things that the rapid pace of interest rates rising is certainly starting to bite in the housing market. It’s – I’ll just point to the fact that it remains a very strong, very profitable business for us, and it points to just the value of the diversified portfolio is we’re going to see some pressure in some places, but we’ve got plenty of other places that are more than picking up and that’s really by design. That’s how we’re trying to position the company ultimately to outperform in any environment. Andy Kaplowitz: Totally understand. And then maybe just backing up, what you’re seeing across your industrial businesses, I mean, you talked a lot about the consumer businesses. Obviously, most of those businesses in the 20% are consumer facing. Have you seen any incremental weakness in your CapEx type businesses? Are they generally holding up? Scott Santi: Not yet. Andy Kaplowitz: Good enough. Thanks, guys. Operator: Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open. Joe Ritchie: Thanks. Good morning, everyone. Scott Santi: Good morning. Joe Ritchie: So nice to see the incremental margins ex MTS come back. Just given the comments that you’re making around price/cost and turning positive, if inflation kind of holds at these levels and we’re closer to peak inflation, would you expect to continue to achieve the same type of incremental margins going forward? Michael Larsen: I think it’s reasonable to assume that our incremental margins will be a little bit higher than our normal range, just given the recovery on price/cost that we talked about. So assuming again, Joe, that from an inflation side that things stay where they are or continue to moderate, then that would be a reasonable expectation. Joe Ritchie: Okay, okay. Great. And then you mentioned, Michael, that 23% of your business in Europe, obviously, there is a lot of concern out there as we head into the winter on rising energy costs and potential recession in the region. I know that you guys have given already some color around trend, but just maybe anything else that you can kind of tell us about that region and then specifically from a cost perspective, how that impacts your business? Michael Larsen: Well, I mean, I think there is certainly a reason to be a little bit more concerned about Europe, just if you look at the macro picture. I think the fact is our businesses are performing at a really high level right now. And so if you just look at Q3, I’ll just go back to a little bit of commentary on Europe specifically. We had six segments growing between 9% and 26%, and so double-digit growth in five of the seven segments and only construction was down 1%. And it’s not all Auto. If you take out Auto, Europe still grew 10%. I think obviously, we expect those growth rates to moderate here in the fourth quarter. But I think we’re really well positioned in Europe to deal with, just like the rest of the company, deal with whatever that’s ahead. And if we have a little bit more softness maybe in Europe, maybe we have a little more strength in other parts of the world, and that’s kind of how the company is set up, as Scott said. So we will read and react. We will deal with whatever is ahead of us, but we’re confident that we will continue to outperform on a relative basis. Joe Ritchie: Okay, great. Thank you. Operator: Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open. Jamie Cook: Hi, good morning. Congrats on a nice quarter. I guess my first question, I know on the top line, you addressed the trends that you were seeing in construction. I was surprised a little bit on the margin in the quarter. So if you could first provide a little color around that, that would be helpful. And then I’ll... Michael Larsen: Yes, Jamie, it’s all price/cost in construction so a little bit more headwind here than in some of the other parts of the company. And so I will also say that 25.7% operating margin in construction is not too shabby at this point. So – but still, you’re right. Relative to prior year, we’re down due to the price/cost dynamic. Jamie Cook: Okay. And then I know you didn’t want to answer in terms of as we’re thinking about the organic growth, which surprised on the upside. I know you don’t want to answer what you’re seeing in terms of price versus volume, but is there any update you can provide on which segments you’re seeing the most success in terms of gaining market share and how sustainable you think this market share is going forward? Thank you. Michael Larsen: Well, I think from the beginning in terms of the – so one, we’re confident that we are gaining market share across the portfolio and the kind of the guidance was only strategic long-term market share gains and not opportunistic kind of one-time orders from new customers. So we’ve really focused on serving our 80 customers, as we call them, our best customers better than anybody else. And because of our win the recovery positioning, we are doing that and as a result of that gaining market share. I mean, it’s hard to – we have 83 divisions so it’s hard to point to specific areas. But if you just look at our overall at the enterprise level, organic growth of 16% in the third quarter, I think relative to other industrial companies that will probably compare pretty well. Jamie Cook: Okay, thank you. Operator: Your next question comes from the line of Joe O’Dea from Wells Fargo. Your line is open. Joe O’Dea: Hi, good morning. Scott Santi: Good morning. Joe O’Dea: Can you talk about the raw materials and sourced components waiting within COGS? And then sort of what you anticipate in terms of the timing of seeing each of those start to sort of flow through with maybe a more favorable situation in the P&L? Michael Larsen: Yes. So if I understand your question, so we’re currently running at about 3 months on hand. We’re typically running at 2 months on hand in terms of inventory. And as supply conditions here begin to normalize and we’re going to see a return to normal levels in that 2 months on hand. When exactly that happens is difficult to predict, but we are starting to see some signs that supply chain is improving. So I think it’s reasonable to assume that once conditions normalize, that it will take us about six to eight quarters to get back to 2 months on hand. And obviously, just like our conversion rate is below our historical typical levels at this point, they are going to be above for that period of time as we benefit from significant working capital release. When exactly that plays out is difficult to say. It’s not all going to come back in one quarter. I mean, we’ve built this up over 2 years. It’s going to take some time to get it back out again. But we’re confident we’ve added the right level of inventory, and it’s really put us in a great position to serve our customers, mitigate supply chain risk and, like we said, take market share. Scott Santi: I think just – I think the question was more in terms of our cost of goods, what percentage of those are material costs. Michael Larsen: Correct. Joe O’Dea: Just kind of – yes. So all that was helpful. And I guess related to this, just with raw mats coming right, will raw mats flow through perfectly… Scott Santi: Okay. I think… Joe O’Dea: I think as components that you source, will you get cost down on that or do you think that’s a trickier dynamic? Scott Santi: Well, there is a lot of factors that go into the last part of your question. I think the simple answer on your first 1 is that the percentage of material as the – material cost percentage as an overall versus the overall COGS is going to vary. But let’s just say, roughly 60%, 65%, 35% freight labor, other elements of the cost structure if that helps. Joe O’Dea: Yes, okay. And then I wanted to ask one about the fourth quarter margin, excluding the divestiture. I’m getting something like a 50 basis point sequential decline from 3Q to 4Q. If that’s accurate, can you just help with the bridge? I assume there is a little bit of sort of sequential decremental on lower revenue, but then price/cost should be more favorable. Just any other items to kind of consider in that bridge? Michael Larsen: Yes. I think if you look at it historically, we typically – Q3 is our highest quarter and we go down in Q4. The primary driver is that there is just less shipping days in the fourth quarter. So I think this year, there are 61 shipping days in Q4. There were 64 in the third quarter and so that’s really the main driver here. On EPS, obviously, implied is slightly lower than what we just did in Q3. And the delta there is the foreign exchange piece. Joe O’Dea: Got it. Thank you. Operator: Your next question comes from the line of Steven Fisher from UBS. Your line is open. Steven Fisher: Thanks. Good morning. Just wanted to clarify on the construction side of things, you mentioned the slowing in Q4 on the U.S. residential piece. But I didn’t hear any follow-up comments on the commercial piece. Is that expected to slow too? Michael Larsen: Well, usually, residential is kind of the leading indicator. So, we just haven’t seen it yet. Scott Santi: On the commercial? Michael Larsen: Yes. Steven Fisher: Okay. So, maybe that would be something more like a 2023. I guess related to that, have you done any analysis to kind of look at the various stimulus programs that have been put in place and kind of to assess how that might end up flowing through your businesses? Michael Larsen: No, we haven’t really. If you have any great idea, send them over. But we are a short-cycle company. We read and react what’s in front of us, and trying to predict what the government is going to do, I think has not really been a winning equation for us anyway. It may work well for others but not in our case. Steven Fisher: Okay. And just one clarification maybe on the last question about the margin in Q4. I guess are there any particular segments that you anticipate margins actually improving in the fourth quarter or any that stand out kind of one direction or the other? Michael Larsen: I think the fourth quarter looks a lot like the third quarter, except the organic growth rates are coming down. And so from a margin standpoint, it’s pretty close to the third quarter. Steven Fisher: Okay. Thank you very much. Operator: Your next question comes from the line of Stephen Volkmann from Jefferies. Your line is open. Stephen Volkmann: Hey. Good morning guys. Sorry, maybe beating a bit of a dead horse here. But I just wanted to make sure I get this right because it feels like there is a lot of declining prices in various inputs from commodities to transportation, even energy. Are you seeing any of your input costs actually declining yet? Michael Larsen: Yes, we are. I mean we saw a meaningful decline here in Q3 from Q2, and we expect to see the same thing in Q4. Stephen Volkmann: Okay. That makes sense. Thank you. And then just curious, can you update us on where you are with the various divestitures? Is there – should we be expecting more here? Are you kind of ramping that back up or is it just kind of whenever it happens? Michael Larsen: I think there is maybe one more potentially here in the near-term. And then we will have to assess the remainder and whether now is a good time to move forward with those. But I think our views haven’t changed in terms of the portfolio and the raw material that we need in order to continue to deliver the type of results that we are delivering. And so we have about a handful of businesses that we had flagged for potential divestiture. We just completed one. Maybe one more to go and then the balance, we will kind of reassess in the New Year. Stephen Volkmann: Got it. Thank you. Operator: Your next question comes from the line of Julian Mitchell from Barclays. Your line is open. Julian Mitchell: Thanks very much and good morning. Maybe one element I just wanted to dial into again was around sort of inventories and the cash flow outlook. So, the conversion only around, I think 80% now this year, which is obviously somewhere below your very high standards. I think Michael, you were quite guarded as to the pace of when that cash flow conversion comes back up. So, maybe help us understand how you see inventories at the customer level, the pace of your own inventory liquidation and how you are thinking about capital spending within the cash flow. Scott Santi: Yes. I will maybe start on the first part with regard to inventory, and that is that we haven’t seen enough stability yet on the supply chain side to make us comfortable that we can start backing off. So, our first priority is to preserve our ability to serve our customers. And so at this point, we are still in the mode of keeping the inventories where they are. As we start to see things become more, let’s call it, reliable and consistent there, then we will certainly start making a move. But as of right now, we have – we are not in the mood of – in the mode of starting to reduce inventories. Michael Larsen: Yes, obviously. So, it’s not a matter of whether or not we are going to benefit from working capital coming back down to normal levels. That we are sure of, we just don’t know when. And in the near-term, we are absolutely committed to what Scott talked about, which is intentional working capital, including inventory to support double-digit growth and significant market share gains. So, we will update you if and when that changes. And then we will let you know what we think exactly the – how it might play out from a free cash flow standpoint. Scott Santi: And there is a question on CapEx. Michael Larsen: Well, CapEx, I mean I think we have always funded every good project inside of the company, including during the pandemic, and I think that’s going to continue. We are really fortunate that we are not a capital-intensive business, not – we are a pretty asset-light business model, as Scott described earlier. And so at maybe less than 2% of sales, CapEx doesn’t suck up a significant amount of our total cash flow. So, we are very comfortable with continuing to invest in the business as we have done for many years, including throughout the pandemic. Julian Mitchell: Thank you. And then just my follow-up would be on the demand outlook in Test & Measurement and Electronics. Very good growth there in Q3. There is obviously a lot of noise at different customers on electronics in particular within that division, but you are still putting up mid-teens organic growth. So, maybe sort of help us understand some of the exposures in that piece. And do you think strong growth is sustainable, again, given what’s going on in terms of a lot of customers in consumer electronics, semi equipment – semiconductor devices, how you are managing to grow at this rate? Michael Larsen: Well, yes. So, we think that the growth is sustainable. We have not seen anything to suggest that it’s slowing down. We are obviously a big beneficiary from all the growth on the semi side of things. But also on the CapEx side with our Instron business, which I think you are familiar with, we are seeing double-digit growth. On the – everybody’s electronics business, I think is a little bit different. I think when I just look at the businesses in there, including electronic assembly, contamination control, the pressure-sensitive adhesives, we are still showing really solid double-digit growth. North America up 18%, international up 16%. So, there is still some supply chain issues, but I think the team is doing a great job staying on top of those and gaining share. And so we feel very good about the outlook for the Test & Measurement and Electronics business. Julian Mitchell: Great. Thank you. Operator: Your next question comes from the line of Mig Dobre from Baird. Your line is open. Mig Dobre: Yes. Thank you. Good morning everyone. Michael, just wanted to go back to make sure I have this correct. The implied fourth quarter guidance, you said it was going to be down sequentially relative to Q3. Can you be a little more specific as to what the midpoint implies? And then I am kind of curious, as we are thinking about the year-over-year bridge relative to ‘21, I mean last year in the fourth quarter, we had a 200 basis point hit from price/cost. This year, it seems like we are going to be soundly positive. So, I am sort of curious how we bridge that, and then think about the incremental volume and also whatever is going on in terms of your internal initiatives that are flowing through. Michael Larsen: Yes. I don’t know, Mig, that I can tell you something I didn’t say already. I think if you take our full year guidance and the fourth quarter kind of implied, as we said, organic growth of about 10%, solid incrementals in our normal range, maybe a little bit higher than that. Operating margins improved more than 100 basis points on a year-over-year basis. We would expect another 100 basis points from enterprise initiatives. Price/cost goes from negative to slightly positive from a margin standpoint and also positive accretive to income, as I have said. So, those are kind of the high-level view on the fourth quarter. And again, we are not – we have adjusted our run rates on the top line, which is a little bit different than in prior years. We are just wanting to be a little conservative, hopefully, and account for some of the softness we are seeing in about 20% of the company, but also incorporate a lot of strength in the businesses that we talked about, including Auto, Food Equipment, Test & Measurement, Welding. And so that’s maybe – those are kind of the key elements of the fourth quarter. Mig Dobre: No, I appreciate that. I ask because I am also not very good at math. And as I am kind of looking at your guidance here, to me, it looks like you have raised your revenue by, call it, $300 million. You have reduced your operating income margin by 50 bps. Net-net, that’s more or less neutral to operating income, yet EPS came down $0.15 on a core basis. So, I am trying to understand if there is something below the line that’s going on here that we don’t have full appreciation for. Michael Larsen: I think I said this earlier, Mig. The reason why we are taking the EPS number down is incremental foreign currency headwind by incorporating current foreign exchange rates like we always do. So, that’s what’s accounting for the EPS adjustment. Mig Dobre: Alright. Well, I will leave it there. Thank you. Operator: And your final question comes from the line of David Raso from Evercore ISI. Your line is open. David Raso: Hi. Thank you. You mentioned earlier your capital spending businesses are not yet seeing a slowdown. I assume we are getting close enough to where you have had some conversations with those customers about their ‘23 planning. Are you getting capital budgets for ‘23 that are also very supportive of solid growth, or is that very much a 90-day type comment, even though you would think capital-intensive businesses must give you better visibility than a quarter at a time? Scott Santi: Yes. Go ahead. I was just going to say, David, we don’t – it’s a little early in the planning cycle for us in terms of ‘23, number one. Number two, I would say, given our sort of traditional delivery and lead times, which are relatively short, we don’t get a lot of forward visibility even in our CapEx businesses. So, regardless of what anybody has to say in terms of their outlook for the year, that’s going to certainly be a number that’s going to move around. In our sort of core operating MO is that we are going to produce what – based on what orders we are getting today, we are not going to sort of bite on our forecast on how optimistic or pessimistic, and we have the flexibility in our systems to do that. So, I don’t have a lot of forward, we don’t – coming back to our businesses and our customers, we don’t have a lot of input in terms of strong points of view one way or the other at this point. David Raso: I appreciate that. And I have a quick follow-up on the M&A environment, the divestiture, obviously, a nice gain there. Can you just give us an update on how you are looking at further divestitures and M&A versus obviously bumped up the share repo? Michael Larsen: Yes. So, I think I said there, we have one more potential divestiture that we are working through. And then we have three that are kind of in the pipeline that we are going to spend a little bit more time on next year and determine whether now is the best time to sell those businesses. They are all performing at a high level, significantly better than obviously pre-enterprise strategy. And so it’s just a matter of timing on those divestitures. On the other side of this, we talked about the M&A pipeline on most of these calls. I mean nothing has really changed. I mean I think to the extent we find acquisitions that are a good fit for us strategically, which really means that they can grow at 4% to 5% organically over a sustained period of time, we have significant margin improvement through the implementation of the business model. And we can – and their valuation is reasonable in the sense that we can generate a rate of return that makes sense for the company, then just like we did with MTS, when those opportunities come along, we are definitely going to lean in. And I think we have called our posture kind of aggressively opportunistic. So, when those come along, we don’t have a lot of those, but when we do see them, we are definitely going to lean in hard just like we did with MTS. And there is nothing in the pipeline here in the near-term is what I can offer. David Raso: That’s helpful. Thank you very much. Scott Santi: Alright. Thanks, David. End of Q&A: Operator: And thank you for participating in today’s conference call. All lines may disconnect at this time.

Operator: Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the ITW Second Quarter Earnings Conference Call. [Operator Instructions] Thank you, Karen Fletcher, Vice President of Investor Relations. You may begin your conference. Karen Fletcher : Thank you, David. Good morning, and welcome to ITW's Second Quarter 2022 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter financial results and update our guidance for full year 2022. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2021 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 Chairman and CEO, Scott Santi. Scott Santi : Thank you, Karen, and good morning, everyone. The ITW team delivered another quarter of strong operational execution and financial performance with organic growth of 10.4%, operating margin of 23.1%, after-tax return on invested capital of 27.8% and GAAP EPS of $2.37. In the second quarter, we saw continued strong demand across our portfolio, supported by our 80/20 front-to-back driven operational capabilities. Our teams continue to do an exceptional job of delivering for our customers and aggressively executing our Win the Recovery strategy to accelerate profitable market penetration and organic growth. As a result of our advantaged operational execution and delivery performance, we are being rewarded with meaningful additional share by our customers as evidenced by our 10.5% organic growth in the first half of this year. While input cost inflation and supply chain issues remain challenging, we did see some stabilization on both fronts in Q2. In fact, for the first time in 2 years, price/cost margin dilution headwind improved sequentially from negative 250 basis points in Q1 to negative 160 basis points in Q2 as our businesses continue to do an excellent job of adjusting price to offset input cost inflation, and the pace and magnitude of input cost increases moderated somewhat. Importantly, our teams delivered these strong operational and financial results while continuing to drive meaningful progress on the execution of our long-term enterprise strategy. And they delivered another 90 basis points of margin improvement from enterprise initiatives in the quarter. Based on our first half results and projecting current demand and supply rates through the balance of the year, we are maintaining our guidance for full year 2022, with organic growth of 8.5% at the midpoint, margins in the range of 24% to 25% and GAAP EPS of $9.20 at the midpoint, which would be an all-time record for the company. Excluding onetime tax items in both years, this represents EPS growth of 12%. While the near-term environment remains challenging and the global macro is certainly uncertain, ITW remains strongly positioned to continue to deliver differentiated performance for our shareholders, differentiated service to our customers and continued progress on our path to ITW's full potential performance through the back half of the year and beyond. And with that, I'll turn the call over to Michael, who will provide more detail on the quarter and our full year outlook. Michael? Michael Larsen: Thank you, Scott, and good morning, everyone. In Q2, quarterly revenue grew 9% and exceeded $4 billion for the first time since 2012, with strong organic growth of 10.4%. The MTS acquisition contributed 3% to revenue. Foreign currency translation was a 4% headwind. Despite $0.10 of year-over-year EPS headwind from foreign currency translation and $0.05 of higher restructuring expense, GAAP EPS was $2.37, the second highest quarterly EPS ever. By geography, North America grew 14% and international grew 6%, with 6% growth in Europe and 3% growth in Asia Pacific. China organic revenue was down 4%, and we estimate that the China lockdowns reduced our organic growth rate by about 1 percentage point at the enterprise level, which we fully expect to recover in the second half. Operating margin was 23.1% with operating leverage of 200 basis points and 90 basis points of enterprise initiatives. Margin headwinds included 50 basis points each from the MTS acquisition and higher restructuring expense related to 80/20 front-to-back projects. And the margin dilution impact from price cost was 160 basis points. Free cash flow was $420 million, an increase of 69% versus Q1. So we remain committed to intentional working capital investments to support growth, mitigate supply chain risk and sustain service levels for our key customers. The routine resolution of a U.S. tax audit resulted in a onetime tax benefit of $0.16. And as you may recall, in Q2 last year had a $0.35 onetime tax benefit. As a result, our Q2 tax rate this year was 18.3% as compared to 10.1% last year. Excluding these onetime tax benefits, the effective tax rate was 23.9% this year and 23% last year. Please turn to Slide 4 with a look at price/cost and the beginning of the improvement trend on margin dilution that Scott mentioned. Thanks to our business's decisive price actions throughout this inflationary cycle, we have stayed ahead of inflation on a dollar-per-dollar basis. And the seemingly endless barrage of cost increases over the last 12 months appear to have leveled off such that we are beginning to recover the margin dilution impact. Based on all known costs and price increases, this positive trend is projected to continue such that the margin impact is expected to be neutral in the second half. Throughout this 2-year inflationary cycle, while we have more than covered cost increases on a dollar-for-dollar basis, we have absorbed as much as 250 basis points of margin dilution impact. As raw material cost inflation begins to moderate on a year-over-year basis, we are confident that we're going to recover this margin impact, hopefully, starting in 2023. Moving on to the segments. Automotive OEM delivered solid organic growth of 6% with 18% growth in North America. Europe was down about 1% and China was down 11%. At this point, and consistent with our prior guidance, we do not expect a meaningful improvement in the chip shortage situation impacting auto production until 2023. In effect, our guidance assumes that automotive production remains around current levels for the second half. While we are getting positive signals from several of our customers in terms of preparing for a Q3 and Q4 ramp-up in auto production, we are taking a more conservative approach to our guidance per our usual process. And even with revenue around current levels, keep in mind that the year-over-year comps ease in the second half, which sets the Automotive OEM segment up as a meaningful contributor to the overall organic growth rate of the enterprise through the balance of the year. Operating margin was 17% when excluding 270 basis points of 80/20 front-to-back restructuring impact this quarter. As supply chain issues get resolved down the road and auto production ramps up, we're confident that we'll see some strong organic growth rates for an extended period of time and a return to the segment's historic margin rates in the low to mid-20s. Let's turn to Slide 5 for Food Equipment, which led the way this quarter with an organic growth rate of 25%, record quarterly revenues of $614 million and operating margin of 24.7%. North America grew 27% with double-digit growth in every major category and end market. Both restaurants and institutions were up around 40% and retail growth was in the mid-teens. International revenue grew 23%, with Europe up 25% and Asia Pacific up 11%. Orders remain very strong in this segment. Test & Measurement and Electronics revenue grew 15%, with organic growth of 1%, which, as you know, is uncharacteristically low for this segment and entirely due to the timing of a large equipment order from an Electronics customer in Q2 last year. Adjusted for that order, segment organic growth would have been about 7%, which is a more accurate representation of how strong the order intake is. Test & Measurement organic growth was 8%, with continued strong demand for CapEx as evidenced by Instron growth of 5%, as well as continued strength in semiconductor-related end markets. Moving to Slide 6. On another positive note, Welding's organic growth was also strong at plus 22%, with equipment up 24% and consumables up 19%. Industrial grew 29% and the Commercial business was up 19%. North America, which is about 80% of our sales, grew 25%. Oil and gas was up 8%. Sequentially from Q1, revenue was up 8% with continued strong order intake. Operating margin improved 80 basis points to 29.3%. Polymers & Fluids grew 10% organically, with Polymers up 25% on continued strength in MRO and heavy industry applications. Automotive aftermarket was up 4% and Fluids grew 3%. On a geographic basis, North America grew 8% and International was up 13%. While sequential revenue grew from Q1, we did see some slowing demand in our automotive aftermarket business as consumers are dealing with rising inflation and gas prices. On to Slide 7. And Construction delivered strong organic growth of 15%, with continued strength in North America, which was up 29%. U.S. residential grew 34% and commercial was up 20%. While Europe and Australia and New Zealand were up 5% and 4%, respectively, the international businesses started to show some signs of slowing in their order rates towards the end of the quarter. Specialty was the only segment that didn't grow, with organic revenue down 2% as supply chain constraints caused a delay in the delivery of some larger international equipment orders that are now on track for the second half. On a geographic basis, North America was up 5%, while International was down 13%. Okay. Let's turn to Slide 8 for an update on our full year 2022 guidance, which remains unchanged. Per our usual process, our guidance is based on our actual results year-to-date and a projection of current levels of demand through the balance of the year. As a result, our organic growth projection of 7% to 10% remains unchanged. The acquisition of MTS is projected to add 3% to revenue, and based on current foreign exchange rates, the headwind from foreign currency translation is now 4% versus a prior expectation of 1.5%. We are maintaining our full year GAAP EPS guidance range of $9 to $9.40. And compared to our prior guidance on May 3, the onetime favorable tax benefit of $0.16 in Q2 is offset by $0.20 of additional EPS headwind from foreign exchange, which is now embedded in the outlook. Our operating margin guidance is unchanged at 24% to 25%, with about 100 basis points contribution from enterprise initiatives. Price/cost margin dilution impact is unchanged at 100 basis points, which implies that the second half margin dilution impact is about neutral as compared to 200 basis points of headwind in the first half. Finally, there's no change to free cash flow generation or share repurchases of $1.5 billion, and our tax rate for the full year is expected to be in the range of 22% to 23%. We've often talked about the fact that ITW is a company that can deliver top-tier results in any environment, and this year is no exception. We're obviously not immune to the macro challenges and uncertainties that may lie ahead, but we remain confident that ITW is very well positioned to continue to deliver differentiated best-in-class performance as we leverage our diversified high-quality business portfolio, the competitive strength of ITW's proprietary business model and our team's proven ability to execute at a very high level in any environment. With that, Karen, I'll turn it back to you. Karen Fletcher : Okay. Thanks, Michael. David, let's open up the lines for questions, please. Operator: [Operator Instructions] We'll take our first question from Andrew Kaplowitz with Citi. Andrew Kaplowitz : Scott or Mike, could you give us a little more color on underlying demand trends you're seeing in your more consumer versus capital goods businesses? I know you mentioned just tough comparison Electronics, some slowing in auto aftermarket. But obviously, we all have increased focus on macro slowdown. Are you seeing signs of moderating demand as consumer demand still holding up? Michael Larsen: Go ahead, Scott. Scott Santi: I was going to say, I think Michael told you exactly where we're seeing it, which is a couple of pockets. One is the auto aftermarket business for reasons that are pretty logical related to the gas prices and consumers' discretionary spending in that arena and then the other is our international construction businesses that we did see a little bit of a pullback. Those 2 -- those businesses combined represent, I think, less than 15% of the company's overall revenues. And for the other 85%, we see things remain very strong. Andrew Kaplowitz : That's helpful, Scott. And then Michael, I think you had talked about 200 basis points of price/cost impacting in Q2, and I think it read out of $160 million. So maybe you can give us a little more color on how you're thinking. I know you said neutral for the second half of the year, but obviously, commodity prices have come down pretty significantly lately. So how long does it take for that to read through? And is there maybe some upside to that second half neutral forecast? Michael Larsen: Well, I think I explained, Andy, can how we do this. I mean, based on all the known price and cost increases as we sit here today, we expect -- Scott Santi: And decrease -- Michael Larsen: And decreases in certain cases. That's all of those things are cost decreases. All of those things are baked into our assumption today. And when you project that in a pretty mechanical calculation, so there's no assumption here that things get better or worse, it's based on what we know today, that margin dilution impact is essentially neutral here in the second half of the year. And that's how you get that 200-basis point swing in the second half of the year relative to the first half of the year. Operator: Next, we'll go to Tami Zakaria with JP Morgan. Tami Zakaria: Just a quick follow-up on what you said earlier. I think you mentioned some weakness in international construction end markets. Is that focused on both resi and non-resi for you? Scott Santi: Yes. The biggest positions we have in both of those markets is by far residential. So I think they mostly speak to what's going on in those markets in the residential side in both Europe and Australia. Michael Larsen: Yes. And I would just add to that. I mean, we are also seeing a lot of strength in other parts of the company. So while less than 15% may be experiencing a little bit of a slowdown some of the other segments, Food Equipment, Welding, Test & Measurement, Electronics are off to a really strong start here in Q3. If you just look at our July numbers overall for the company, on a year-over-year basis, we're up 18%. So that is the highest monthly organic growth rate that we've seen all year. Sequentially, from June, we are up in July, where typically we are down and actually, 5 of 7 segments are growing double digits. So there's a lot of strength in other parts of the company that at least for the month of July are offsetting some of the slowing we've seen in the parts of the company that we've talked about. Tami Zakaria: That is super helpful color. And along the same line, has your expectation for overall organic growth in Europe changed since the beginning of the year? The reason I ask it seems like some people are thinking Europe would be in a recession in the back half. Does that alter your expectation for the region in the near term? A –Michael Larsen: I think we are pretty close to where we were on our last call, which I think we said we expect kind of low single-digit type growth rates in Europe based again on current run rates. As you know, we’re not assuming any change in the macro other than kind of what we’re seeing today. We are in Europe, I should say, we are hearing some positive – we are getting some positive signals, like I said in the script, from our automotive customers in terms of potential ramp-up in production here in September and in Q4. And likewise, that’s not baked into our guidance as we sit here today. So I hope you get the sense there’s a lot of puts and takes across the company. And overall, we’re on track to a really strong second half for the company. Operator: Next, we'll go to Jeff Sprague with Vertical Research. Jeff Sprague: Before my question, can we just clarify, Michael, interesting color on July, thanks for that. When you say in July the 85% that's not under pressure is up 18% or the total company is up 18%. Michael Larsen: The total company. Yes, on an EBITDA basis, the auto company is up 18% here in July. Jeff Sprague: That's interesting and surprising. Good to hear. I'm just curious on Welding. I would have guessed perhaps that seeing that stronger number in Welding that maybe oil and gas would have been stronger than up 8%. So it sounds like it must have been pretty broad-based strength across most of the markets that you can kind of see into. So maybe you could give a little bit of color there what's going on in Welding, both from a vertical market standpoint? And any color on what's going on maybe in the channels? Michael Larsen: Yes. I mean, as you know, 80% of our business is North America, and that's where the strength was, up 25%. And really, you heard equipment up 24%, consumables up 19%, strength in industrial and commercial. And then the international side was up 8%. And that's where our primary oil and gas exposure resides. Europe was up 20%. And then the China business was down, which was the lockdowns again. So down about 6%. And we, like I said earlier, are fully expecting to recover that here in the back half of the year. But a lot of strength in the North America business for sure. And I would be remiss if I didn't point out the margin performance of north of 29% operating margin. So a really strong quarter for the welding business, and Q3 is looking really good so far. Scott Santi: And just maybe a little additional color. The real strike there in Q2 is the Industrial side. I think, Jeff, part of your question was related to the channel, and that's not a product -- a category of products that typically is inventory in a significant degree of the channel. These are larger, more complex products, machines and systems and they are typically sold into end users for specific projects. So there's not a lot of channel inventory at any point on those products. Operator: Next, we'll go to Scott Davis with Melius Research. Scott Davis : Just to be clear, guys, I know you don't disclose price explicitly, but is price still going up and net realized price still going up? Michael Larsen: We are still -- there is a lag here, as you know, from the time we see the cost increases to the price is being realized. That is somewhere between 1 to 2 quarters, and we are still in catch-up mode here in the second half of the year. Obviously, on a margin basis, we talked about that and also on a dollar basis. Scott Davis : Okay. That's what I thought. I just wanted to clarify. And then what -- I know, obviously, the FX has a translation impact, but it can have a trade impact. Can you remind us what businesses you are doing much export -- Scott Santi: We do almost -- yes. Sorry to cut you off, Scott. I'll let you finish your question. I was just going to say, we are producing locally to sell locally. We do very little cross-border commerce, either on the input side or the export side. There's a little bit here and there, but less than 5% of our revenue. It's something like. Yes, it's something like 2% of our imports are from China. I mean, it's really de minimis. We are produced where we sell a company. Our suppliers are local, our customers are local so our exposure is largely translation. So we are sourcing in the same currency that we are producing and selling in the vast majority of cases. Operator: Next, we'll go to Joe O'Dea with Wells Fargo. Joe O'Dea : I wanted to start on the consumer and sort of the less than 15% that you were talking about. And I think you've talked previously where maybe over half of revenue kind of broadly tied to consumer. But can you help kind of segment that a little bit in terms of where you might have consumer exposure that would be a little bit more tied to something like overall consumer confidence and where you would have exposures that or a little bit more maybe durable in terms of demand trends and not as tied to what we would think about as sort of pressures related to a broad consumer slowdown? Scott Santi: I think, Joe, we really highlighted the 2 big ones, which is construction, residential and then the automotive aftermarket business. The other one maybe that I would add is in our specialty business, we do a fair amount of consumer packaging. So beverages and resealable closures for things like cheese and other food products that I think have generally proven to be pretty resilient during times of economic contraction, consumer staples basically. Joe O'Dea : And then on supply chain, I mean the PMI yesterday for July, I mean, still showing very extended lead times. I think you talked to stabilization, but I'm assuming that means exactly that, not that things are getting better. Can you talk about sort of any visibility that you have into timing of supply chain starting to improve a little bit from a point of stabilization? Scott Santi: What I would say overall is we have no visibility to any improvement. We are not planning on it. I'm sure that it will get better at some point. I think we have been -- our business has been very resilient in terms of working their way through various issues and challenges, computer chips, you name it. And we are finding a way to serve our customers, and that's that remains, I think, the posture that we have. And until it changes, we're not changing what we're doing and I think we're on it, but it's still not easy. Operator: Next, we'll go to Stephen Volkmann with Jefferies. Stephen Volkmann: I was wondering maybe if we could just go back to the price/cost margin dilution chart. I'm assuming there's some sort of a linear relationship here and that 3Q is probably still a small headwind and the exit rate at 4Q is probably a tailwind. Is that a reasonable expectation? Michael Larsen: I think as we sit here today, I think that's a reasonable expectation, yes. Stephen Volkmann: And so Michael, I'm trying to think a little bit further into '23 and just rather than think about volumes, they'll be whatever they are, but you're going to have a few things kind of moving here in terms of sort of price/cost and dilution from MTS and some of the restructuring that you've done. Any way to start to think about what incremental margins in '23 might look like sort of when all is said and done? Michael Larsen: Yes. I think you're right, Steve. There is a lot going on. What I can tell you is that as we kind of peel back the onion on our incrementals, so adjusting for all the things you just talked about, MTS, restructuring and price/cost, we are right back at our core incremental margins in that 35% range right now, and we wouldn't expect anything different in 2023. Obviously, we haven't done the planning yet, but that's kind of long term what you should expect from us is incrementals in that 35% range. Operator: Next, we'll go to Mig Dobre with Baird. Mig Dobre: I've been doing this for a while, but my name is always butchered on these earnings calls. Maybe to kind of follow up on Steve's question here thinking about '23. I'm curious, as you're looking at the amount of pricing that you had to put through this year. Is there a good way to think about the carryover that's going to go into '23 relative to '22 from a top line perspective, contribution to the top line? Michael Larsen: I think it's a little too early, Mig. I mean, clearly, there will be some carryover. But to try and quantify that right now for you, I don't think would be helpful. Scott Santi: We've got to get it to our planning process, which is really we're talking about November-ish before we'll have a reasonable view on that, and I think that's the appropriate time. Michael Larsen: Yes. I mean, I think the only thing I would point back to is what I said in these prepared remarks is that if you add up the price/cost margin dilution impact during this cycle over this year and last year of about 250 basis points, the expectation is that as things begin to normalize, we will recover that margin impact over time. Now how exactly that will play out and the timing around that is not entire clear as we sit here today. But there will be -- I think it's reasonable to assume that some of that impact will be in 2023. Mig Dobre: Okay. I guess, if I may follow up on this. I'm trying to probe a little bit about your degree of confidence that the business overall will be able to outgrow industrial production as we're thinking '23 and beyond. This has been a big topic, right, over the past few years. You talked about winning the recovery and investing through the downturn. So I'm curious if you can maybe update us a little bit on your degree of confidence that we can continue to see out growth. Scott Santi: Well, I don't know exactly what I can do to reassure you other than to tell you that it continues to be the #1 dominant priority of every member of ITW from China to Europe to North America to South America, and it is, certainly, we think we've got a terrific opportunity going forward. We have done a lot of things in terms of investing and positioning ourselves to execute on it and the proof will be in the pudding. But it's already happening. Michael Larsen: Yes. I agree with that, Mig. I mean, I think if you look at the results we put up so far, and granted there's some recovery in here, but last year, organic was up 12%. The first half is up 10% organic this year. I think relative to peers, we're certainly closing the gap compared to where we were kind of just a few years ago. So I think yes, the proof will be in the organic growth rate numbers that we're going to put up. But I also will tell you there is a high degree of confidence that we are making significant progress. Lots more to do, but certainly, we are headed in the right direction here for sure. Operator: And we'll take our final question from Julian Mitchell with Barclays. Julian Mitchell: Sorry about that. Just wanted to clarify on the margin outlook because I suppose the margin rate or the margin guide for the year implies the fourth quarter margins are maybe up 300, 400 basis points year-on-year or something. Just wanted to confirm that, that's roughly the right way to think about the back half guide. And maybe what are the main drivers of that big fourth quarter margin uplift? Michael Larsen: Yes. I mean, the big driver for the second half here is what we just talked about, which is 200 basis points of price/cost margin dilution impact in the first half, that's not projected to repeat in the second half. So that's probably the biggest driver. I think you also have to factor in -- if you just run rate -- if you just take our current revenues and project those into Q3 and Q4 because the comps are easing on a year-over-year basis, we'll be putting up some meaningful organic growth rates with all the operating leverage and the incrementals that are returning to something a lot closer to our historical incrementals in the back half of the year. And so those are kind of the big drivers here, less price/cost margin headwind and significant organic growth year-over-year with more normal incremental margins in that 35%, maybe plus range for the back half of the year. Julian Mitchell: I understand. And then just a follow-up on free cash flow. I think your sort of 90% odd conversion guide for the year on free cash, that implies, I think, sort of 50% growth in the free cash year-on-year in the second half. So just help us understand how do you get that monstrous sort of free cash flow expansion. Is that just a mass of sort of inventory destock because supply chains are easing? Maybe just any color around that because it is a big move for a sort of a company. Michael Larsen: It's a little bigger than usual. I mean, as you know, historically, our second half cash flows are always significantly higher than the first half. It's a little bit more this time. We've talked about the fact that we've been very intentional in terms of our working capital investments to support the growth that we're seeing double-digit growth at the top line, mitigate supply chain risk, which is still a reality and then sustain the service levels for our customers. So we will carry whatever inventory we need to do those things. If you look at our months on hand, we're running right around 3 months on hand. And we really only need a slight improvement in that in the months on hand to get to those free cash flow numbers. So as we sit here today, we do have a line of sight to a ramp-up in the second half. But like I said, we think it's a smart use of this balance sheet to support everything we're trying to do from an organic growth standpoint by taking care of our customers. And I will say this, if we come in at the low end of the range, it won't change anything in terms of our capital allocation plans for the year. We'll still do the buyback. We'll still do, obviously, investments. We'll still do the dividend. And so there's really no trade-off here. But obviously, we'd like to hit the free cash flow number, and we have line of sight to doing that for the back half of the year. And we are obviously aware that it's a little bit more of a ramp than what we normally have. Operator: This concludes today's conference call. You may now disconnect.

Operator: Good morning. My name is David, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the ITW Q1 2022 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thank you, David. Good morning everyone, and welcome to ITW’s first quarter 2022 conference call. I’m joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s first quarter financial results and update our guidance for full year 2022. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2021 Form 10-K 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. So please turn to slide 3, and it’s now my pleasure to turn the call over to our Chairman and CEO, Scott Santi. Scott Santi: Thanks Karen, and good morning, everyone. We have talked often about the fact that the core focus of our enterprise strategy is to leverage the performance power of the ITW business model to consistently deliver top-tier performance in any environment. And our teams around the world continue to do an exceptional job of doing just that as evidenced by the 11% organic growth and 23% operating margins that they delivered in Q1. In the quarter we saw continued strong demand almost across the board while input cost inflation and supply chain issues remain challenging to say the least and our business has responded. Across the company, we continue to leverage the advantaged supply capabilities inherent in our 80/20 front-to-back operating system to support our customers and execute our Win the Recovery strategy to accelerate profitable market penetration and organic growth across our portfolio. Many of our businesses continued to receive strong feedback from their customers that their current delivery performance is truly differentiated and that they are being awarded additional share as a result. And despite another step-up in input cost inflation in Q1, we more than offset cost increases on a dollar-for-dollar basis in the quarter. Looking ahead at the remainder of 2022 based on our first quarter results and projecting current demand, supply rates and all-known cost increases through the balance of the year, we are raising our guidance for full year 2022 organic growth to 8.5% at the midpoint and GAAP EPS of $9.20 at the midpoint, which is 14% earnings growth year-over-year and would be an all-time record for the company. While the near-term environment certainly has its challenges, we remain focused on delivering differentiated service to our customers, differentiated financial performance for our shareholders and continued progress on our path to ITW's full potential. Now I'll turn the call over to Michael, who'll provide more detail on the quarter and our full year outlook. Michael? Michael Larsen: Thank you Scott and good morning everyone. In Q1 demand was strong across the board and supported by our advantaged supply position, ITW grew revenue by 11.2% to more than $3.9 billion. Organic growth was 10.6% and the MTS acquisition contributed about $100 million, or 2.8% to revenue. Foreign currency translation reduced revenue by 2.2%. GAAP EPS of $2.11 tied last year's Q1 record. Foreign currency translation reduced GAAP EPS by $0.05. By geography, North America grew 13%, international grew 7% with organic growth of 7% in Europe, and China grew 1%. Six of seven segments delivered positive combined organic growth of 14%, while Automotive OEM was down less than 1%. Orders remained strong across the board. And while we're doing significantly better than many of our competitors in terms of lead times and delivery performance, we grew backlogs again in the first quarter. Sequentially from Q4 to Q1, organic revenue grew 6% on a sales per day basis, as compared to our historical sequential of minus 1%. And while we're on the topic of sequential improvement GAAP EPS of $2.11 grew 9% relative to Q4 2021. Operating margin was 22.7%, 23.4%, excluding 70 basis points of margin dilution from the recent MTS acquisition. Enterprise Initiatives contributed 90 basis points. And as we always do our business teams reacted appropriately to higher cost inflation by adjusting selling prices. And as a result, we remain positive on a dollar-for-dollar basis. Price/cost was still dilutive to operating margin by 250 basis points. After-tax ROIC was 27.6%, 29.8%, excluding the impact of the MTS acquisition. Free cash flow was $249 million with a conversion rate of 38%, which is below our typical 80% to 85% in the first quarter. As we've talked about before, the lower conversion rate is due to intentional working capital investments that support our strong growth momentum mitigate supply chain risk and sustained service levels to our key customers. And down the road once supply conditions begin to normalize, so will our working capital needs resulting in our typical strong cash flow performance. As planned, we repurchased $375 million of our shares in the first quarter and the effective tax rate was 23.1%, 70 basis points higher than Q1 last year. So, overall, for Q1 an excellent start to the year, characterized by strong broad-based demand supported by our differentiated supply position, as we delivered organic growth of 11%, operating margin of 23%, and GAAP EPS of $2.11. Moving to Slide 4. We're including an analysis of our current operating margin performance. Reported Q1 operating margin was 22.7%, but there are three factors pressuring our margins in the near term starting with 250 basis points of margin dilution impact from price cost. At some point in the future when raw material costs begin to normalize, we expect the margin impact from price/cost to turn positive and that we will fully recover the margin differential. Second, Q1 was also the first full quarter of the recent MTS acquisition, which as expected diluted margins by 70 basis points. As we've talked about before, it will take us a few years to fully implement the ITW business model on MTS and get the business growing organically at ITW caliber margins and returns. Finally, we had slightly higher restructuring associated with 80/20 front-to-back projects, which impacted margins by 20 basis points. And the point here is that our core operating margins are currently running around 26%-plus, which is closer to what we would expect from ITW in a normal environment and not far from our pre-pandemic target of 28%-plus and also further evidence of our continued progress on enterprise strategy driven structural margin improvement through the pandemic. If you recall 2019 pre-pandemic margins were right around 24% versus 26% on a core run rate basis here in Q1. And as we've said before, we have full confidence in our ability to deliver sustained above-market organic growth at 30% to 40% incremental margins. And as a result, we will continue to expand operating margins as we grow. Moving on. Automotive OEM was the only segment that didn't grow this quarter with organic revenue down a little less than 1% much improved compared to being down 16% in Q4 2021. By geography, North America grew 3%, Europe was down 11% and China grew 12%. You'll remember that the segment is up against a pretty tough comp of plus 8% organic growth in Q1 last year as the impact on auto production from chip shortages didn't fully materialize until Q2. At this point and for guidance purposes, we do not expect an improvement in the chip shortage situation until 2023. As a result, our guidance assumes that automotive production and our associated automotive OEM revenues are essentially capped at current Q1 levels through the balance of the year. Turning to slide 5 for Food Equipment, which led the way with the highest organic growth rate this quarter at 28%. North America was up 23% with Equipment up 24% and Service up 21%. Restaurants were up over 40% with strength across the board and institutional growth was almost 10% led by education and lodging. International growth was strong at 36% with Europe up 45% and Asia Pacific up 4%. Both Equipment and Service revenues increased around 36%. In Test and Measurement and Electronics, organic growth was 8% with Test and Measurement up 10% and Electronics up 6%. Strong demand for semiconductor-related equipment continued to drive organic growth in the mid-teens, while demand for capital equipment also remained strong with Instron, for example, up 6%. Finally, as expected the MTS acquisition diluted operating margin by about 400 basis points. Excluding the MTS impact margins were 26% versus 26.4% in Q4 2021. Moving to slide 6. Welding organic revenue grew 13% with Equipment up 10% and Consumables up 17%. Industrial grew 14% and the Commercial business grew almost 10%. North America was up 12% and International growth was 17% including 18% growth in oil and gas. Europe was up 20% and Asia Pacific was up 15%. Due to strong operating leverage and a solid contribution from enterprise initiatives, Welding operating margin was a record 30.8% an all-time quarterly record for an ITW segment and another proof point that as we deliver organic growth with best-in-class margins there's plenty of room for further margin expansion in all seven segments. In Polymers and Fluids, organic growth was 13%, as automotive aftermarket grew 17%. Polymers was up 11% with continued strength in MRO and heavy industry applications. Fluids grew 6%. On a geographic basis North America grew 15% and International was up 9%. On to Slide 7. Construction delivered strong organic revenue growth of 21% as North America grew 32% with Residential up 36% and Commercial up 15%. Europe grew 16% and Australia and New Zealand was up 10%. While construction margins were impacted by rising steel costs, operating margin was still a solid 24.7% with strong volume leverage and a meaningful contribution from enterprise initiatives. Specialty organic growth was 1% with North America up 7%, while International was down 9%. With that let's turn to Slide 8 for an updated view of our full year 2022 guidance. And based on our Q1 results and projecting current levels of demand through the balance of the year as per our standard approach to guidance, we are now projecting organic growth of 7% to 10% and total revenue growth of 8.5% to 11.5%. Due to the higher revenue growth projections, we're raising GAAP EPS by $0.10 to a range of $9 to $9.40 and the midpoint of $9.20 represents, 14% earnings growth and puts the company on track for another year of record financial performance. Operating margin guidance is unchanged with strong volume leverage and 100 basis points of contribution from enterprise initiatives. When it comes to price cost our operating teams will continue to more than cover inflation on a dollar-for-dollar basis. And as usual, our guidance includes all known costs and price increases as we sit here today. We expect strong free cash flow growth of 10% to 20% year-over-year with a conversion rate of 85% to 95% of net income. As we've talked about before this is below our target of 100%-plus. Because of our decision to invest in the working capital necessary to support the company's strong growth mitigate supply chain risk and sustained service levels to our key customers. Finally, we are on pace to repurchase 1.5 billion of our shares and we continue to expect an effective tax rate of 23% to 24%. So, in summary Q1 was another quarter of high-quality execution in a very challenging environment and as a result, we're off to a solid start on raising both our organic growth and EPS guidance for the full year. So, with that Karen, I'll turn it back to you. Karen Fletcher: Okay. Thanks Michael. David let's open up the lines for questions please. Operator: [Operator Instructions] We'll take our first question from Scott Davis with Melius Research. Your line is open. Scott Davis: Good morning, guys. Scott Santi: Good morning. Scott Davis: Thanks for making an uneventful quarter versus what we've seen in some other places. Scott Santi: You're welcome. Scott Davis: A couple of little things here. I mean first your guidance implies kind of - or perhaps doesn't imply, but you're not forecasting additional inflation. Does that mean that you've seen kind of some plateauing in the supply chain price increases and materials etcetera? Michael Larsen: Well -- so let me just -- it's a good question. So let me just explain kind of how we are modeling price cost because I think there's an opportunity to maybe clarify a few things. So, what we are doing consistent with our past approach around price/cost is we're including in our guidance today. all known cost increases and all of the associate price increases. Those are the two things that we know today. And based on that you saw the actuals of 250 basis points of margin headwind in the first quarter, but actually positive on a dollar-for-dollar basis. As we project into the future based on what we know today, that 250 basis points is going to become less of a drag on a go-forward basis and maybe even turn slightly positive in the back half of the year, okay? So that's kind of -- that's what we know. What we don't know and that's to your question what are the additional cost increases going to be? We don't know as we sit here today, we have not seen anything to really suggest that inflation is slowing down. But we do know that our operating teams will offset any cost increases with price on a dollar-for-dollar basis. And so therefore, EPS-neutral which is a really important point here. But obviously, that will create additional top line growth, but it will also put pressure on margins as this additional top line growth comes through at essentially no incremental margin if that makes sense. So, hopefully that answers your question. So that's what's embedded here. Everything we know as we sit here today is included in our guidance. Additional inflation will be offset on a dollar-for-dollar basis. And to the extent that happens that will put some further pressure on margins. And so hopefully that answers your question. Scott Davis: That's totally fair. Is there any way to disaggregate the content growth in auto versus kind of potential inventory builds versus sell-through et cetera? Just any color there will be helpful... Scott Santi: I'd say at this point, that would be really tough, just given all that's going on. Michael Larsen: Yes, I agree with that. I would just add. I mean, I think it's a tough number and it doesn't make a lot of sense on a quarterly basis. I think in terms of long term, we're highly confident that we're outgrowing the underlying market by two to three percentage points. What exactly that was in one quarter versus the other is a little bit more difficult to ascertain, especially in the current environment. But on a full year basis, certainly, the way these plans are set up is for two to three percentage points of outgrowth on an annual basis. Scott Davis: Okay. Sounds good. Thank you, guys. Appreciate the color. Scott Santi: Sure. Thank you. Operator: Next we'll go to Tami Zakaria with JPMorgan. Your line is open. Tami Zakaria: Hi. Good morning. Thanks for taking my questions. So I wanted to get some clarity on the improved organic growth guidance you're raising it by one point. And is that a reflection of better-than-expected first quarter performance versus your internal expectations or does it embed improved organic growth you're seeing quarter-to-date? And if the latter, which segments are driving that? And is it solely coming from incremental pricing or are you expecting volume improvement as well? Michael Larsen: Yes. So Tami, our growth projection is based on the Q1 actual results that we are reporting today. And then we are projecting based on historical run rates into -- through the balance of the year. So there's really no assumption here, no economic forecasts or an underlying assumptions, things are going to get better in the back half or worse than the back half of the year. It's based on again revenue per day in Q1 and projected into -- through the balance of the year. Tami Zakaria: Got it. And so, you're not embedding any pricing benefit into the updated guidance? Michael Larsen: No. I think the only pricing that is included in our guidance is what we know as of today. So we know, what price increases we have actioned and announced and so that is known. But any further increases beyond that would not be included in our guidance as we sit here today. Tami Zakaria: Got it. Super helpful. If I can ask one more follow-up? Scott Santi: Sure. Tami Zakaria: Have you seen any slowdown or impact in your business in the European markets since the war in Ukraine broke? Ask another way have you do you feel the demand environment has changed since then? Michael Larsen: Well, so I think in Q1 I think Europe was up 7%. I think we're seeing -- we saw some pressure. In -- if you look at the automotive numbers the sales numbers -- we saw a lot of strength on the food equipment side to offset that. I think and if you kind of look at the projection for the balance of the year, I think it adds up to somewhere in the low single-digit type growth rate in Europe. Just to maybe comment or put it down, I think so far through April, everything appears to be on track including Europe. Tami Zakaria: Great. Thank you so much. Michael Larsen: Sure. Operator: Next we'll go to Joe Ritchie with Goldman Sachs. Your line is open. Joe Ritchie: Thanks. Good morning everybody. Scott Santi: Good morning Joe. Joe Ritchie: I guess my first question I want to just touch on China, I know it's a relatively small part of your business. I saw that it grew double-digits in the auto business. But maybe just provide some color on what you're seeing on the ground there with the COVID shutdowns and how that's impacting your business if at all? Michael Larsen: Yes, I mean I think just to kind of dimensionalize it. China is about 8% of our revenues and I think we -- at this point, we've not seen -- we're obviously not immune to what's going on in China. But like I said so far through April, everything appears to be on track including in China. Joe Ritchie: Okay. Good to know. And then I guess just a follow-on question. You guys price/cost negative 250, but only down 100 basis points for the year. I mean it's fair to say I think like where you're seeing the most acute pressure in the auto OEM segment. So, I guess, just maybe confirm that that's correct or if you're seeing other pressure across other parts of your business as well? And then just within that improvement that you're seeing, how much of it is already like baked into the pricing of those auto contracts that come through as the year progresses? Michael Larsen: So ,everything that we know is baked in Joe. So and I think the -- it's fair to say that the inflationary pressures are real across all seven segments. They are a little more pronounced as you can see it in the margins in auto, maybe construction this quarter I mentioned that as well as Polymers & Fluids. I think there is a little bit of a -- we're still catching up to some extent. So, the 250 basis points of headwind will be better starting in Q2 based on what we know today somewhere closer to 200 and then from there in the back half if things stay the way they are like I said earlier we're starting to turn positive. And we're beginning -- I think the important point is we're beginning to recover the margin impact that we've had over the last four or five quarters now. So, I think once we get through this cycle like I said in the prepared remarks and when things do begin to normalize down the road from a supply chain and from a cost standpoint that is when the margin recovery begins. And so we're taking to some extent this is a -- we described it as a near-term pressure here in Q1 and over time we'll begin to recover those margins again. Joe Ritchie: That's helpful. Thank you. Operator: Next, we'll go to Jeff Sprague with Vertical Research. Your line is open. Jeff Sprague: Thank you. Good day, everyone. Just first on auto Scott or Michael. Is the idea that you're capped here what you're hearing directly from your customers, what you can see on kind of forward build schedules, or is this just for lack of a better term a dose of caution given the uncertainty? Michael Larsen: It's a combination of things. I think Jeff, if you go back to our last call the -- what was baked into our guidance at the time was half of the IHS growth build forecast of 9%. So we were basically at somewhere around 4% to 5% builds. And that's where IHS is today. So I think there's actually not a big change relative to where we were three months ago. And what we're basically based on various data inputs including from our customers, we thought the best way to update kind of forecast the auto business is to say that revenues stay where they are which is somewhere around $760 million in Q1 and that's what we've assumed for Q2, Q3 and Q4. So -- and then ultimately, I mean we still believe that down the road, when these supply chain issues get resolved and automotive production recovers, this segment is going to be very well set up as a strong contributor to the overall organic growth rate of the enterprise. But we just think it's going to take a little bit longer based on everything that we are seeing and hearing from our customers. Jeff Sprague: Understood. And then just back on price. Understanding that what you know is embedded in the guide, but if we think about the point addition to the organic growth guide, I suspect all of that maybe even more than 100% of it is price. Could you just give us a little color on that? Michael Larsen: So I think you tried this on the last call to get me to tell you a little bit more about price versus volume. So -- and just to reiterate, these are our best estimates. So I can't give you a lot of detail other than I can tell you that the -- there is volume leverage on the 1% revenue growth increase and that's really the 10% -- $0.10 a share that we're adding to our guidance, okay? So it is not -- from that you can infer, it's not all price. It's a combination of things. Jeff Sprague: Great. Understood. Thank you for the color. Michael Larsen: Sure. Operator: Thank you. Next, we'll go to Andy Kaplowitz with Citigroup. Your line is open. Andy Kaplowitz: Good morning, everyone. Michael Larsen: Andy. Andy Kaplowitz: Scott or Michael, so I know you probably don't want to update us on your segment revenue growth expectations. But outside of auto where you already gave a specific guide, it looks like Food Equipment & Construction accelerated versus your run rate specialty products maybe weakened a bit. Is that a fair characterization of where revenue growth is moving versus your original forecast? And can you give a little more color regarding what you're seeing in specialty products that's maybe holding down that business a bit segment? Michael Larsen: Yeah. I think the -- I heard your first part. What the second part was what did you say slowdown? Andy Kaplowitz: Specialty. Michael Larsen: Specialty. Yeah, I think specialty is really more of a timing issue related to some specific equipment projects in Europe and a few projects in China. So I think that's really more of a timing issue than anything else. I think if you just kind of take a step back I think you pointed out the right ones, in terms of a lot of strength in certainly Food Equipment, but also Welding. Test & Measurement there's some -- up against some difficult comps. Construction, there's certainly a lot of positive momentum, really across the board. And what does not come across and we've talked about this before, we're not a backlog-driven company. But in the segments that are more exposed to the capital equipment space, so that would include Test & Measurement, Welding, Food & Equipment, we are building significant backlog and really despite the fact that we are performing, like I said, at a high level relative to our competitors, we're building substantial backlog. That's not showing up, obviously, yet in our revenues. Andy Kaplowitz: And, Michael, you obviously had -- you had a large number in construction, specifically, you mentioned North American renovation, I think, up in the low 30% range. It's been going on for a while here, but this is a big number and you're getting stronger despite sort of concerns about rising rates. So are you taking share there? Is it just a lot of activity and sort of visibility going forward here in 2022? Michael Larsen: Well, I think as you know, I mean, there's still a lot of strength in the US housing market and that's where you saw these residential remodel numbers up 36%. And included in that is also some meaningful share gains, based on what we're seeing in portions of that business, where it's difficult to supply the market, we are taking advantage of our supply position to take share. The commercial side, 15%, that's a smaller part of the business. And then, really, on a geographic basis, it's not just North America, but it's also Europe, up 16%. For example, the UK up 20%; and then Australia and New Zealand still delivering a solid 10%. So it's pretty broad-based and again, we're modeling based on run rates. And so, we have not seen anything to suggest that the market is slowing down at this point. Andy Kaplowitz: Appreciate the color. Michael Larsen: Sure. Operator: Next we'll go to Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning. Michael Larsen: Good morning. Nigel Coe: And thanks for leaving a lot of time for -- yes, good morning. It's actually great that you give so much time to Q&A. So thanks, I wish all other company to do this. So, I know you don't like to talk about price. And I know Jeff took a crack at the question. But if I just put through the margin dilution from price/costs and it seem as neutral, then I get to a 9%, 10% type price impact. Is that the kind of scale of pricing we're seeing here? And is the message that pricing gets better from here through the year? Michael Larsen: Well, what does get better from here, if things stay the way they are, is price/cost as we talked about. And so, we're going from significant margin dilution here in Q1 of 250 basis points to maybe even slightly positive in the second half of the year. So that's -- and that's based on everything that we know today. And Nigel, it's not that we don't want to -- so the issue around price is that, it is an estimate at best. And it is not -- especially with -- in such a dynamic environment it would be very difficult to sit here and give you a number with a high degree of confidence and we’ve not done that historically. And like, I think, we talked about on the last call, we're not going to go down the path of breaking out price versus volume any further. So that's the best I can do here for you. Nigel Coe: Okay. No, that's fine. And then, just turn to page 4 as my follow-up the margin bridge. Enterprise was I think 90 bps of tailwinds. So if we put that in as sort of a tailwind to that bridge there would have been 90 bps elsewhere so -- as an offset. So, I'm assuming that productivity in the plans, et cetera, is that fair Michael? And how do you see sort of productivity, labor productivity, et cetera, improving through the year? Michael Larsen: Well, I think that's productivity. I'm not sure exactly how you get there. I mean I think there's 90 basis points of enterprise initiatives that's not on here. Scott Santi: That's embedded in the 26.1%. Michael Larsen: In the 26.1%. And so, is the -- any other productivity gains. There's a couple of things that are nodding here is there's some margin dilution from increased sales commissions. When you grow your revenues double-digit, your commissions are going to go up. But broadly speaking, what we try to do is give you a fairly accurate representation of these near-term pressures and therefore, what our core operating margins are running at, which is somewhere around 26%-plus in the current environment. And as we just talked about these price/cost pressures normalize, that's where we would expect margins to head as we continue on our path to our target of 28%-plus. Nigel Coe: No, that’s very clear. Thank you very much. Michael Larsen: Sure. Operator: Thank you. Next, we'll go to Mig Dobre with Baird. Your line is open. Mig Dobre: Good morning, everyone. So, Michael a question for you. I think I heard you mention that in the second quarter, the price/cost headwind moderates to the tune of about 50 basis points. So when we're thinking about year-over-year margin, is it fair to still embed roughly 200 basis points of year-over-year compression in Q2 and then things get better in the back half basically? Michael Larsen: Yeah. I think that's what I said. Yeah, I think that's a -- based again with the caveat that we are in a very dynamic uncertain environment. But to the extent that -- based on what we know today that is -- that would be correct. Mig Dobre: Okay. And then, sorry to keep beating up this topic on price. It's just that this environment, it's not something I've encountered in my career well frankly before. But when we're looking at PPI data, I mean we're seeing some pretty material increases in Food Equipment in Welding. And I'm sort of wondering if your business is sort of kind of keeping up with this industry data as well or if there are some divergence that we need to be aware of, because it would seem that most of the growth is really coming from pricing not volume if volume grows at all in 2022? Michael Larsen: Yeah. I mean, I... Scott Santi: We wouldn't share that view. Michael Larsen: Yeah. We don't agree with that one. Two, I'm not quite sure what you're -- what data you're looking at. So it's a little bit difficult for me to comment. All I can do is report the actual results for our Food Equipment business, for example. And I think we give you a fair bit of detail including by end market. And beyond that I can't really -- like I said before, we don't report price versus volume and so I'm not sure I can help you. Mig Dobre: Understood. Maybe one last follow-up. I'm curious as to how you're thinking about this pricing dynamic longer term? Because to your point eventually we're going to start to see material costs coming down, do you expect to be able to keep the pricing gains that you have had in this environment, or is it fair to assume some pressure is weakened about 2023 and beyond? Thank you. Michael Larsen: Well, so, I think let me just start by saying that our customer relationships are strategic long-term relationships. We're not trying to maximize price. We're trying to serve our customers and make sure that we get paid for offering a really differentiated product service or solution. So we've always had pricing power in these businesses. I think ultimately, these are going to be discussions with customers when costs start to normalize and there might be a few exceptions, but by and large, we expect to hold on to these price increases to recover the margins like I said earlier. So that's typically what happens. If you go back and look in time, we're going to end up with a period where we recover that margin percentage and we don't expect the current cycle to be any different. Mig Dobre: Okay. Thank you. Michael Larsen: Sure. Operator: Next, we'll go to Julian Mitchell with Barclays. Your line is now open. Julian Mitchell: Hi. Good morning. Maybe just wanted to try and understand the sort of earnings framework for the year a little bit. So it looks as if sort of operating margins are set to go up by about 300 basis points between kind of Q1 and Q4 with a flattish dollar revenue. Is that all simply the price cost removal of the headwind? Is there any other kind of major moving parts? And also to that point, are you sticking to that kind of 47-53 first half second half EPS split? Michael Larsen: Yeah. So let me address that. I mean, I think, we're still in that 46% to 47% in the first half and the balance in the second half. And the big driver really is, what we've talked about it feels like for a while here is price/cost beginning to turn positive, based again on the assumptions that we're making in our guidance. So that's the drive. Now historically, we do 49%, 51%. So it's a couple of percentage points. So, but it is a little bit more back-end loaded. We expect that as we go through the year, sequentially starting in Q2 margins will improve and so will revenues. And that's just based again on kind of historical run rates. And so we expect a steady kind of improvement in Q2, Q3 and in Q4 including on the margin side. Whether it's exactly the number you laid out, I can't really comment. But directionally that's – that is the right way to look at it. Julian Mitchell: Thanks, Michael. And then switching to the balance sheet, which I don't think has been touched on yet, and maybe some customer element as well. But your inventories are up, I think almost sort of 50% year-on-year, and up 10%-plus sequentially in Q1. Just kind of trying to understand, when do you think that starts to level out? And this major sort of inventory build that you're seeing how assure you that you're not seeing the same phenomenon across your customers and channel partners, as well with obviously some risk to that, if we do see final demand slowdown? Michael Larsen: Well, so I think if you look at our inventory levels, we were running at about three months on hand. Our historical is two months. And so we have an extra month of inventory on hand. And I think we've been very clear about why that is. It's to mitigate supply chain risk, it's to take care of our customers and ultimately to win this recovery and take share at a point where our competitors are maybe not able to service our customers. So that's the vast majority of these inventory increases, just kind of maybe a little housekeeping. If you look at our conversion rate here in Q1 the difference between the 38% and the 80% to 85% is about $300 million of working capital very intentional investments. We believe a really smart use of our balance sheet. And you saw the top line growth, right at 11% organic this quarter. That I would argue would not have happened if we've not taken this approach starting really last year to make a conscious decision to invest in inventory. And then, obviously, receivables will go up as you grow double-digit. Ultimately, we don't see any reason why structurally when supply chain begins to normalize both from an availability standpoint and also from a cost standpoint that we will go back to two months on hand. And at that point if that happens you'll see these free cash flow numbers will deliver above-average performance, until we're back to kind of normal levels. So we view this really as a temporary increase in working capital. How quickly that will come down, depends on a lot of things, including what you're talking about and -- which is inventory in the channel where we really don't have a lot of visibility. Other than I can tell you, for the most part the channel does not carry a lot of inventory because they're used to the fact that we will take care of them when they need products. So there's no incentive for them to carry a lot of extra inventory. So, that's probably the best I can give you Julian. Julian Mitchell: That's perfect. Thank you. Operator: That concludes today's question-and-answer session. Thank you for your participating in today's conference call. All lines may now disconnect.

Operator: Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions] Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thank you, Brent. Good morning, and welcome to ITW’s Fourth Quarter 2021 Conference Call. With me today are Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s fourth quarter and full year 2021 financial results and provide guidance for full year 2022. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2020 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 Chairman and CEO, Scott Santi. Scott Santi: Thanks Karen and good morning, everyone. In Q4 ITW team delivered another quarter of excellent operational execution and strong financial performance. Six of our seven segments combined and delivered 12% organic growth while our auto OEM segment continued to be impacted by near term limitations on auto productions due to component supply shortages and as a result was down 16% in the quarter. At the enterprise level we delivered organic growth of 5%, GAAP EPS of $1.93, operating margin of 22.7% and free cash flow of $695 million or 114% of net income. Throughout the entirety of 2021, our teams around the world did an exceptional job of delivering to our customers while responding quickly indecisively to rapidly rising input cost and aggressively executing our win the recovery strategy to accelerate profitable market penetration and organic growth across our portfolio. As a result for the full year, we generated organic growth of 12% with each of our seven segments delivering organic growth ranging from 6% to 18% and despite a seemingly constant rise of input cost increases, we expanded operating margin by 120 basis points to 24.1% with another 100 basis points contribution from enterprise initiatives. GAAP EPS was an all time record at $8.51, an increase of 28% versus the prior year. And in 2021, we also raised our dividend by 7%, returned $2.5 billion to our shareholders in the form of dividends and share repurchases and closed on a very high quality acquisition in the MTS test and stimulation business. Most importantly we delivered these results while continuing to drive meaningful progress on our path to ITW’s full potential through the execution of our long term enterprise strategy. As you may recall, early in the pandemic we made the decisions to remain fully invested in our people and in our long term strategy. The people that we retained in the marketing innovation and capacity investments that we continue to fund as a result of that decision are fueling the results that ITW is delivering today and have the company very well-positioned to continue to accelerate organic growth, add high quality bolt on acquisitions and sustain our best in class margins and returns in 2022 and beyond. I want to close by thanking all of our ITW colleagues around the world for their exceptional efforts and dedication. Their performance throughout 2021 provides another proof point that ITW is a company that has the enduring competitive advantages, the agility and the resilience necessary to deliver top tier performance in any environment. Now I’ll turn the call over to Michael, who will provide more detail on our Q4 and full year 2021 performance as well as our 2022 guidance. Michael? Michael Larsen: Thank you, Scott and good morning everyone. The strong growth momentum that we experienced in the third quarter continued into the fourth quarter as revenue grew 5.9% year-over-year to $3.7 billion with organic growth of 5.3%. The MTS acquisition added 1.3% and foreign currency translation impact reduced revenue by 0.7%. Sequentially, organic revenue accelerated by 6% from Q3 into Q4 on our sales per day basis, as compared to our historical sequential of plus 2%. By geography, North America grew 9% and international was up 1%. Europe declined 2% while Asia-Pacific was up 7% with China up 2%. GAAP EPS of $1.93 included $0.02 of headwind from the MTS acquisition and related transaction costs. Operating margin was 22.7% to 23.1% excluding MTS. As expected in the fourth quarter, we experienced price cost margin headwinds of 200 basis points, the same as in the third quarter. Our businesses continued to respond appropriately and decisively to rising raw material costs and in the fourth quarter and the full year, we were positive on dollar for dollar basis. Overall for Q4 excellent operational execution across the board and strong financial performance in what remains a pretty uncertain and volatile environment. Okay, let’s go to slide 4 for segment results starting with automotive OEM. As expected organic revenue was down 16% with North America down 12%, Europe down 29% and China down 3%. Despite these near term pressures on the top line, operating margin was resilient and remained solidly in the mid teens. While supply chain challenges continue to persist for the industry in the near term, we are confident that the inevitable recovery of the auto market will be a major contributor to organic growth for ITW over an extended period of time as these issues ultimately get resolved. Food equipment led the way this quarter with the highest organic growth rate inside the company at 21%. North America was up 22% with equipment up 26% and service up 15%. Institutional growth of 28% was particularly strong education and restaurants were up around 50%. International growth was strong and on par with North America at 20% mostly driven by Europe up 23% with Asia-Pacific up 9%. Both equipment and service grew 20%. Turning to slide 5 for test and measurement and electronics. Organic growth was 11% with electronics up 4% and test and measurement up 17% driven by continued strong demand for semiconductors and capital equipment as evidenced by organic growth rate of 17% in our Instron business. Scott said in December, we closed on the MTS acquisition which we’re excited about as it’s a great strategic fit for ITW and highly complementary to our Instron business. We acquired the Instron in 2006 and today it is a business growing consistently at 6% to 7% organically with operating margins well above the company average. We’re confident that MTS has the potential to reach similar levels of performance over the next five to seven years through the application of the ITW business model. Moving to slide 6. Welding delivered broad based organic revenue growth of 15% with 30% operating margin in Q4. Equipment revenue grew 14% and consumables were up 16%. Industrial revenue grew 18% and the commercial business grew 8%. North America was up 15% and International growth was 14% driven by 18% growth in oil and gas. Polymers and fluids organic growth was 3% with 8% growth in polymers with continued strength in MRO and heavy industry applications. Fluids was down 5% against the tough comp of plus 16% last year when demand for industrial hygiene products surged. Automotive aftermarket grew 4% with continued strength in retail. Onto slide 7. Construction organic revenue was up 12% as North America grew 22% with residential renovation up 23% driven by continued strength in the home center channel. Commercial construction which is about 20% of our business was up 21%. Europe grew 2% and Australia and New Zealand was up 10%. Specialty organic growth was strong at 7% with North America up 10% and International up 2%. With that let’s go to slide 8 for a summary of 2021. Operationally, the teams around the world continue to execute with discipline in a challenging environment as they sustained world class customer service levels, implemented timely price adjustments in response to rapidly rising raw material costs and executed on our win the recovery initiatives to accelerate organic growth across the portfolio. As a result, revenue grew 15% to $14.5 billion with broad based organic growth of 12%, 14% if you exclude auto OEM where growth was obviously very constrained due to two component shortages at our customers. Operating income increased 21% and operating margin was 24.1%. Incremental margin was 32%, which is below our typical 35% to 40% range due to price costs. Excluding the impact of price cost, incremental margin was 40%. GAAP EPS increased 28% and after tax ROIC improved by more than 300 basis points to 29.5%. Free cash flow was $2.3 billion with a conversion rate of 84% of net income, which is below our 100% plus long term target for free cash flow due to higher working capital investments to support the company’s 15% revenue growth and the strategic decision that we have made to increase inventory levels on select key raw materials, components and finished goods to help mitigate supply chain risk and sustained service levels to our key customers. Moving to slide 9 for our full year 2022 guidance. So, we’re heading into 2022 with strong momentum and the company is in a very good position to deliver another year of strong financial performance with organic growth of 6% to 9% and 10% to 15% earnings growth. For our usual process, our organic growth guidance is established by projecting current levels of demand into the future and adjusting them for typical seasonality. As you can see by segment on the next page, every segment is positioned to deliver solid organic growth in 2022 with organic growth of 6% to 9% at the enterprise level. Our total revenue growth projection of 7.5% to 10.5% includes a 3% contribution from MTS partially offset by 1.5% of foreign currency headwind at today’s exchange rates. Specific to MTS, guidance includes full year revenue of $400 million to $450 million. The expectation that margins are dilutive at the enterprise level by approximately 50 basis points and finally, consistent with what we’ve said before EPS neutral. Operating margin excluding MTS is forecast to expand by about 100 basis points to 24.5% to 25.5% as enterprise initiatives contribute approximately 100 basis points. We expect price cost headwind of about 50 basis points. Incremental margin is expected to be about 30%, including MTS and our core incremental margin excluding MTS is in our typical 35% to 40% range. We expect GAAP EPS in the range of $8.90 to $9.30 which is up 10% to 15% excluding onetime tax items from last year. The tax rate for 2022 is expected to be 23% to 24% as compared to 19% in 2021. We are forecasting solid free cash flow with a conversion rate of 90% to 100% of net income with further working capital investments to support the company’s growth, mitigate supply chain risk and sustain service levels to our key customers as needed. Our capital allocation plans for 2022 are consistent with our longstanding disciplined capital allocation framework. Priority number one remains internal investments to support our organic growth efforts and sustain our highly profitable core businesses. Second, an attractive dividend that grows in line with earnings over time remains a critical component of ITW’s total shareholder return model. Third, selective high quality acquisitions such as MTS that enhance ITW’s long term profitable growth potential, have significant margin improvement potential from the application of our proprietary 80:20 front to back methodology and can generate acceptable risk adjusted returns on our shareholders capital. Lastly, we allocate surplus capital to an active share repurchase program, and we expect to buyback $1.5 billion of our own shares in 2022. In addition, we have reactivated our previously announced divestiture plans and in 2022, we will reinitiate divestiture processes for five businesses with combined annual revenues of approximately $500 million. While these businesses are performing quite well, coming out of the pandemic, they operate in markets where growth expectations are not aligned with ITW’s long term organic growth goals. When these divestitures are completed over the next 12 to 18 months, we expect approximately 50 basis points of lift to ITW’s organic growth rate and operating margins. Given the timing uncertainties associated with these divestiture transactions, 2022 guidance assumes we own them for the full year. Finally, last slide is Slide 10 with the organic growth projections by segment. You can see that based on current run rates we’re expecting some solid organic growth rates in every one of our seven segments with organic growth of 6% to 9% at the enterprise level. For automotive OEM, our guidance of 6% to 10% is based on a risk adjusted forecast of automotive production in the mid single digits plus our typical penetration gains of 2% to 3%. With that Karen, I’ll turn it back to you. Karen Fletcher: Thanks, Michael. Brent, let’s open up the line for questions. Operator: [Operator Instructions] Your first question comes from a line of Andrew Kaplowitz with Citi Group. Your line is open. Andrew Kaplowitz: So Mike, I know you mentioned that you’re predicting to run rate growth as you usually do. But it looks like polymers and fluids are the only segment where you actually forecast the business to reaccelerate in 22 versus Q4 levels. Maybe you could talk about what you’re seeing there and then it seems like your CapEx businesses continue to be quite strong. Are you seeing customers step up CapEx in 22? And how does that factor into the forecast if at all? Michael Larsen: Yes, I think polymers and fluids is really the growth rate for 2022 is established the same way as the other segments, which is based on current levels of demand inside of the segment today projected into 2022 and adjusted for typical seasonality. So that’s where you get to that 5% to 9% range for polymers and fluids. On the CapEx question I’d say, we definitely continue to see very strong demand in our capital equipment businesses. We talked about an acceleration from Q3 into Q4 with revenue per day of 6%, when normally we’re only up 2% and we expect really that strong demand to continue into 2022. Again, we’re not assuming an acceleration in 2022. It’s based on current run rates but based on the trends we’re seeing, it’s possible that we fully expect that demand will continue at these levels. We’ve seen nothing in Q4 to suggest that demand is slowing down in any one of our segments. Andrew Kaplowitz: Appreciate that. And then you delivered mid teens margins in auto in Q4 which I think was in line with expectations. But as you know, steel prices have begun to come down. So can you give us more color and how to think about margin in auto in 22 and when you talk about your ability, I think he talked last quarter about maybe being able to re-price some auto OEM contracts. So have you had any success in doing that? Michael Larsen: Well, I think on auto margins, they’ve been remarkably resilient, considering that we’ve been down 15% to 20% in Q3 and Q4 and we’re still in that mid to high teen level. Obviously, as auto production comes back, we’re going to get positive volume leverage in the business. Price cost remains a significant headwind and it’s not so much steel is really more on the resin side in the auto business and we expect that those headwinds will continue in 2022 in the auto business. As we’ve talked about before getting priced takes a little bit longer in the in this space, just given the contractual nature of the industry. And we are continuing to partner with our customers as we renew contracts and add new content to vehicles and so I do think that longer term structurally auto margins will go back to levels that we’re at historically which is in the low to mid 20s. When exactly that happens really depends on when volume comes back and when we get ahead of these price cost headwinds that are pretty significant at this point. Andrew Kaplowitz: Appreciate it, Michael. Operator: Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open. Nicole DeBlase: Maybe we could just start with thinking about the quarterly cadence of revenue and margins. I totally appreciate that you guys don’t historically do specific quarterly EPS guidance. But if you could talk a little bit about maybe the price cost impact, how things kind of look versus normal seasonality, just because 2022 seems like it could be a bit of a strange year again? Michael Larsen: Yes, you’re right, I think it’s likely to be another strange year. If you look at it historically, our first half versus second half in terms of the EPS that we generate for the full year, we are typically 49% in the first half and 51% in the second half. Yes 49% and 51% will be good. That’s one way to do that. So we’re 49 and 51, historically, we think this year based on current run rates, and how we think price cost might play out, we’re more like a 47:53. So it’s close. But the plans are a little more backend loaded than typical. The one thing I’ll just call out is, if you look at Q1 specifically, in Q1 last year, there were no significant chip shortages in the automotive space. So that auto was up 8% last year in Q1. We still expect the auto business to be down here in the first quarter of 2022. Not as much as in Q4, but still a down quarter in automotive. And so that’s really what’s driving this more backend loaded plan that I talked about. I think I just add on price cost we’re going to continuing to work that our teams are doing a good job. It’s going to take a little bit of time to catch up here even though we are the lag that we historically have seen has become smaller as we’ve learned some things in the past and are doing a better job responding with timely and appropriate price adjustments as we deal with this really unprecedented raw material cost inflation. I might just add, we’ve also not really seen anything to suggest that those inflationary pressures are slowing down. Nicole DeBlase: Got it, that’s very clear. And just a quick follow up on the price cost situation. Is the expectation that we kind of enter 2022 with a similar headwind to what you experienced in the fourth quarter and then you exit with a price cost tailwind? Michael Larsen: So I think the expectation is that price costs will be margin dilutive 50 basis points for the year. And that consistent with our past practice, and all of 2021, the goal was to be EPS neutral or better and I think slightly positive is where we ended up as we said in Q4. But to be honest with you, it’s a really uncertain environment here. I mean, if there are further raw material cost increases we are going to read, we’re going to react to those raw material cost increases with further price and that will put further pressure on the margins. So it’s really difficult to predict what will end up for the year. In our guidance here in our model is 50 basis points of headwind. Scott Santi: It’s good to say that the net 50 basis points include all existing and known price increases. But I think just put up a bit of emphasis on your point. Subsequent increases that we don’t know about today that occur then certainly affect that level of margin dilution as we go through the year. Michael Larsen: So yes, there’s no assumption here that things are getting better or worse. This is based on what we’re seeing in our businesses today, based on incurred known and future costs and corresponding price increases. And it’ll be I think, again in 2022, as you said, a strange year, a pretty dynamic year from that perspective too. Nicole DeBlase: Thank you. I’ll pass it on. Operator: Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Your line is open. Jeffrey Sprague: I wonder if you could just provide a little bit more color on what’s going on at the customer level on supply chain and the nature of the questions, Scott, in particular gone back to Q2, but also in Q3 I think had some issues of just being able to deliver to customers, despite your own ability to deliver. Was that an impact in Q4 and do you see that sort of situation continuing into the early part of this year? Scott Santi: The way I would respond to that is, I think those issues in terms of customer impacted demand, customer supply chain impacted demand are better known today. So in Q2 it was sort of emerging situation, it was volatile. I would say that the sort of order the shipment, the timing of all that has been adjusted around a more known set of issues that our customers. So it’s less of us of a surprise, it’s hard to say it had any incremental impact in Q4 because it was just basically embedded in our plan, by that point, in our run rates in our plan so I think overall thing that I would say is we’re not seeing any evidence that things are improving in a dramatic fashion from the standpoint of all of the supply chain constraints. It’s still there are issues all over the place. We are reacting to those internally very well. Our customers are still challenged the automotive is just the most visible representation of that, but that these sorts of issues are applying to all customers of ours across all seven of our segments. But it’s still given the growth rates, the net-net of all of it is still very positive in terms of underlying demand. And if everybody had everything that access to every component, and every bit of raw materials that they might want right now, I couldn’t even guess sort of the incremental delta on that, but it’d be meaningful. Jeffrey Sprague: Could you provide us some context on what your aggregate realized price was in 2021 and what’s embedded in your guidance for 2022? Scott Santi: So we provided kind of an estimate. And that’s really what this is, at best is an estimate of the breakdown between price and volume for full year 2021. I think we said price of 3% to 4%, roughly for the full year and organic growth in that 8% range. So that’s what we talked about in the last call that’s where we ended up. And while I fully appreciate the question, I’m not sure I can be really helpful in terms of the guidance here for 2022 because as I said, price versus volume and these are estimates at best. And so in our opinion, the performance metric that really matters most is organic growth, which of course, includes both price and volume. And we try to be very transparent in terms of providing fully organic growth guidance at the enterprise level for the segments. And we report actuals as we go through the year both for the enterprise and for the segments, but that’s really as much granularity as we can give you with a high degree of confidence. Jeffrey Sprague: Great, and maybe just one last one for me. I mean, the auto guide you gave is pretty clear builds plus your normal content. So there’s no kind of bullwhip effect in the channel like we heard at 3am there was a lot of disconnect between build rates and what was in the channel and some real disconnects between the two. But it sounds like from your vantage point, and relative to your supply chain, everything is sort of evened out. Is that correct or there’s maybe some noise first half versus second half? Scott Santi: No I think that’s a fair way to characterize it. And maybe just to be clear, if you look at kind of third party leading industry, I hesitate to call them experts, but forecasts at least are suggesting builds for the year 2022 somewhere in that 9% to 10% range. What we have embedded in our guidance here is basically half of that. So we are somewhere in the mid single digits as our base assumption for automotive bills. They are plus 2 to 3 percentage points of penetration gains, which are essentially locked in at this point. And so hopefully that’s a fairly conservative assumption. It is also a little backend loaded. So I think like I said, we expect auto to be down at least in Q1 and then was gradual improvement from there as we go through the year and hopefully these supply chain issues get resolved and automotive like we said will become a really meaningful contributor to the overall organic growth rate of the company once those bottlenecks get resolved. Operator: Your next question comes from line of Scott Davis with Melius Research. Your line is open. Scott Davis: I think a lot of the good questions have been asked but can you tell us again, when you were talking about divestitures in your commentary, I kind of zoned out for a second. Yes I don’t know what was going on. But can you remind us kind of the periodicity and the size and timing of that? And then, I’m just kind of curious, are there MTS type acquisitions out there that you have in your sights that could offset some of that? Scott Santi: So just to kind of summarize on the divestitures real quick. So we’ve begun the previously announced divestiture plans. We’ve kind of reinitiate, the process for five business units here, with combined annual revenues of about $500 million and we expect the process could take anywhere between 12 to 18 months to get these completed. And of course, as you know, there’s a fair bit of uncertainty around the timing of these. And so, in our guidance today is embedded that we’re that we own these businesses for all 2022. And we’ve also not included any kind of onetime gains on sale that might flow through. The positive impacts of the company, obviously, the onetime gains on sale is one thing, but really the kind of the structural benefit is approximately 50 basis points improvement in the overall organic growth rate of the company, and 50 basis points of improvement in the overall operating margin of the company. So that’s kind of the addition by subtraction effect with the divestitures. And essentially, if you wanted to, you could say that we’ve added a really high quality asset with MTS and we were replacing these divestitures with a business that we know can deliver the type of performance that we’ve seen in our Instron business through the application of the business model. In terms of the pipeline of deals, I mean, I think we remain disciplined, but also opportunistic and to the extent that other opportunities come along that have the same characteristics that we’ve talked about many times and we’re going to certainly be leaning in on those and when that might, when these things might come to fruition that’s always a little bit of there’s some uncertainty around that, just like there’s some uncertainty around the timing of these divestitures. Scott Davis: Okay, thank you for that. I’ll pass it on. Operator: Your next question comes from the line of Jamie Cook with Crédit Suisse. Your line is open. Unidentified Analyst: Hi, this is [Indiscernible] on for Jamie. We were wondering if there’s any way you could quantify the market share gains they’ve been talking about and how sustainable they are? And then in terms of price cost, if you could give us any color on option for 1H versus 2H and if you’re hedged at all? Thank you. Scott Santi: So let me take a shot at this. I mean, I think on the market share gains, I mean, I think at the core of these when the recovery initiatives that we’ve talked a lot about is the goal of accelerating our organic growth efforts and gaining significant market shares at a time when competitors in many cases were not able to stay invested in their people, in their new products, in their capacity expansion plans, not able to maintain service levels at the same level as ITW. And so we are hearing across the company, from many, many of our divisions, lots of anecdotal evidence that we are gaining market share. It’s difficult to quantify. It’s an estimate at best and it’s not one that we’re confident reporting on externally, but I think there’s a lot of evidence inside the company that we are gaining share. I’ll just point to our 12% organic revenue growth last year with the challenges in auto and then 6% to 9% organic this year and maybe when we get to a point where the market growth rates stabilized, maybe we’ll be able to talk a little bit more about what our above market organic growth rates are. But we’re highly confident that we’re making good progress on our organic growth efforts. On your first half versus second half on price cost, I think we just talked about this. I mean, it remains a pretty uncertain environment. If things stay the way they are price cost will be a headwind in the first half and it’ll be maybe neutral in the second half. And for the full year, we ended up somewhere around 50 basis points of margin dilution impact. And to answer your question, we do not hedge. So the costs that are flowing through our P&L today are essentially today’s costs. And there’s a whole host of reasons why we think that’s a much better way of dealing with these costs real time maybe a little bit different than what you’re seeing at other companies. But that’s the quick answer on your hedging question. Operator: Your next question comes from line of Tami Zakaria with JPMorgan. Your line is open. Tami Zakaria: Hello, everyone. Good morning. Thank you for taking my questions. So my first question is your inventories saw a notable increase in the fourth quarter. How much is that is related to the MTS acquisition? And how should we think about its impact on margin and cost absorption as we look into the first quarter and the rest of the year? Scott Santi: So I think, the inventory increase this year, which, like I said, that was a strategic decision to really secure supply for our customers and mitigate any risk around supply chain about 100, a little over $100 million came from MTS here in the month of December as we closed in the transaction. The specific impact from MTS on margins this year is 50 basis points. And I don’t know if that was exactly your question or you had something else in mind. Tami Zakaria: I think that that’s helpful. I do have another follow up question on MTS actually. So when do you expect MTS to be margin accretive? Scott Santi: Well, I would say we’re not in a rush. We’re going to be very deliberate and thoughtful in terms of how we implement the business model like we always do. I might just add, we’re really excited about MTS because the business model never been more powerful than it is today. And so we’re excited about what it can do. I think what we said was it’ll take about five to seven years to get to ITW caliber, margins and organic growth rates that are in line with what we’re seeing in the instrument business. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Your line is open. Unidentified Analyst: Good morning. This is [Indiscernible] on for Julian. So first question around, it seems like the 22 guide implies around 30% incremental. You guys have talked a lot to kind of the MTS impact and test and measurement and some price cost impact in the first half in auto. Is there anything else to call out the other segments regarding margin expansion costs throughout 22, could you help us? Scott Santi: Well, I’ll just say 30% incrementals that is including the impact from MTS, actually if you adjust for that incrementals for 2022 are in line with our historical kind of 35% to 40% range. And I think as you look across the segment, there’s really nothing unusual going on in terms of margins I think consistent with kind of the bottoms up planning process that we do at ITW. Our segments have all told us that they expect to do a little bit better in 2022 than they did in 2021 despite the fact that they are all operating at best in class levels relative to the markets and the competitors in those markets. So nothing unusual, we expect. Like I said overall 100 basis points of margin improvement, which is what we typically do. The enterprise initiatives are, it’s great to see I think in page 10 another strong contribution from 80:20 and strategic sourcing that’s pretty broad based across all seven segments, so nothing unusual. We really expect based on what they’ve told us continued progress certainly on organic growth, as you can see on page 10, in the slide deck and also on operating margins. Unidentified Analyst: Great, thank you. That’s really helpful. And then just maybe one more follow up on capital deployment and the portfolio definitely more active and kind of this year in guiding for next year. Should we assume, though, in terms of when we think about priorities, just given the buyback guide for 1.5 billion can you just talk about how you prioritize M&A versus share repurchases kind of over the next 12 months, probably 18 months? Scott Santi: Well, I think we’re really fortunate that we are in a position to do both. And so these are not mutually exclusive. I went through the four priorities, they are 1.5 billion, I mean, something really unusual would have to happen for us to not complete that program. It’s really the allocation of our surplus capital. And there’s plenty of room for more MTS type acquisitions to the extent that they become available. Operator: Your next question is from the line of Joe O’Dea with Wells Fargo. Your line is open. Joe O’Dea: I wanted to start just on supply chain, I think it’s been clear that it’s not getting better, but I’m curious about not getting worse. And so the degree to which over the past three or four months, your confidence level and some stabilization and how that allows you to operate a little bit better and then just in general if you do have any better visibility into when things start to improve a little bit I think some of the semiconductor comments and improve timing of shipments maybe but anything you could touch on visibility to improvement? Scott Santi: I think from the standpoint of the tactical issues now, I would certainly say that the environment is pretty stable but that just means that we’ve gotten used to this environment, that there is, there are new issues popping up everywhere. I think, from the standpoint of the tactics that we’ve our businesses employed to continue to serve our customers at a high level in this environment. We have certainly learned some things. Michael talked about our willingness to use our balance sheet to support inventory and investments. We have talked about the fact that our localized supply chains have really come up big for us here. Our long term relationships with our key suppliers all of those things it certainly helped us operate in this environment. We’ve got in, I’m not going to say comfortable, but we’ve gotten used to operating in this environment. But I don’t think there’s any sort of the set of issues that we’re confronting on a daily and weekly basis are shrinking dramatically at this point. In terms of forward visibility I think our mode is not the guess and not the look ahead, I think we are I react company. We are well positioned to do that. You can read the same sort of industry level stuff that we read. And it’s interesting, but until it actually shows up, we’re not counting on it. And we’ll continue to read and react to the conditions on the ground as we always do. That being said, it obviously at some point is going to start to improve in a material way. And at that point things certainly get easier. We get the turn even more of our attention to leveraging the strong market positions into consistent above market growth. Joe O’Dea: That’s helpful. And then just a second one, when you talk about kind of the focus on when the recovery, I imagine that none of those folks who have lost share are all that happy about it. And at some point your focus becomes kind of sustained the victory. But what are the tools that you have in place? What’s your confidence level that the share gains through these disruptions are sticky game? Scott Santi: Well, our focus in these games is really with our biggest and best customers that were our biggest and best customers before the pandemic. And I think in all of these cases what this pandemic provides us and this is true across the portfolio is an opportunity to demonstrate how ITW is different that we were there for our customers in a time of significant stress and challenges. And I think there is we are not looking for opportunistic sort of transient opportunities in this. We are looking for opportunities where we can truly leverage what is an advantage position and an advantage operating model in ways that ultimately proved to our biggest and best customers as I said, what the ITW difference is. And I expect that our ability to perform the way that we have and there’s as Michael said, there’s plenty of sort of anecdotal evidence of this. We are winning business today because of our ability to supply and not just supply, but supply these little items of high quality products. So I think as we said at the outset, this is a real opportunity for ITW to demonstrate some pretty fundamental core differences in our capabilities in the markets that we serve and in our people, in our business model, in my view, have absolutely stepped up to the challenge. Joe O’Dea: And just to confirm my understanding correctly, the bigger portion of kind of the share wins would be better penetration at existing customers not so much about new customers? Scott Santi: Yes. That’s the first priority in this environment, absolutely, taking care of our existing key customers. Operator: Your next question comes from the line of Mig Dobre with Baird. Your line is open. Mig Dobre: Thank you for taking the question. Good morning, everyone. I wanted to go back to the discussion on pricing. And I certainly appreciate that there has been quite a bit of pricing that you had to put through in 21 and it looks like 22 is not going to be much different. I’m curious your view as to what happens when raw material inflationary pressures abate? How are your contracts structured or your conversations with your customers? Do you think these pricing increases actually stick and are there any differences various segments, one versus the other? Scott Santi: Well, I think given the differentiated nature of our product and service offerings across the company, I think, first of all, we’re very pleased that we’ve been able to make the appropriate price adjustments to offset these really unprecedented raw material cost increases. And I think if and when those costs start to stabilize or come back down I mean, there’s certainly going to be individual discussions with customers, but we don’t expect that we’ll have to adjust pricing in a meaningful way, certainly not in a way that you’ll see in the financials that we report. Mig Dobre: And then, my follow up is more of an operating question. You haven’t really talked much about the Omicron spike and what that might have done to your own internal operations. I’m presuming there was some absenteeism in various manufacturing sites related to this. And I guess my question is this, now that we’re maybe two years into this pandemic how have you changed the way you do business internally and the way you operate from a just pure output and resilience standpoint? With the question really being if we are seeing yet another wave, say, for instance, in three, four months how are you prepared to handle that relative to, frankly, what you’ve had to go through over the past couple years? Thank you. Scott Santi: Well, all I could do is point to our, the way we’ve executed through the various waves to this point. I think there is have we had to adjust to the challenges of the pandemic from a people a safety standpoint, let alone a production standpoint, absolutely. That’s been going on now for coming up on two years. So I don’t, I think the way the company has responded we talked a lot about resilience, and that’s certainly part of it. But we are a manufacturer. We’ve got to have in our people are key to our ability to execute. And so we have done everything we need, everything within our power to keep our people safe, to keep our production lines running to be able to serve our customers. Have we learned things in the process? Of course, like a lot of companies have. This is not a normal environment as you all know, but ultimately I’m very comfortable that we are negotiating our way through these challenges in a really strong manner and will continue to do so. We’ll deal with whatever comes our way. Operator: Your final question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: I wasn’t on the call, I apologize if I’m going over stuff that you’ve already covered. But I’m just curious, really in terms of, this is a very little of a question, but corporate expense number came in a little bit heavier than what we had modeled. And I know that you’ve been pushing more centralized costs over the last couple years. Just wondering what drove that and what we should be assume for 2022? Scott Santi: So, I’m assuming you’re talking about the unallocated number that’s a little bit higher in Q4 at $56 million, I think Q3 was $43 million and the difference is the MTS transaction costs. So kind of a onetime and I think for modeling purposes for next year, I would assume somewhere in that $30 million to $40 million range. Nigel Coe: Okay, so the one time production costs coming through there okay, that that’s very clear. And then again, sorry, if you’ve got this for the free cash conversion like 100%, I’m assuming that’s working capital investments as you recover, but anything else that would be helpful? Scott Santi: No, it’s just the investment in inventory. I mean, I think, obviously higher receivables with higher 15% revenue growth, and then the inventory to support our customers in a challenging supply chain environment. So we think that’s a pretty smart use of our balance sheet. So that’s what. Operator: There are no further questions. Thank you for participating in today’s conference call. All lines may now disconnect.

Operator: Good morning. My name is Tammy, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions]. Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thanks, Tammy. Good morning, and welcome to ITW's Third Quarter 2021 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and update our guidance for full year 2021. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2020 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 Chairman and CEO, Scott Santi. Scott Santi: Thank you, Karen. Good morning, everyone. In the third quarter, we saw continued strong growth momentum in 6 of our 7 segments and delivered excellent operational execution and financial results. Revenue grew 8% with organic growth of 6% and earnings per share of $2.02 was up 10%. At the segment level, organic growth was led by welding at plus 22%; food equipment at plus 19%; Test & Measurement and Electronics at plus 12% and specialty products at plus 8%. Our automotive OE segment continued to be impacted in the near term by auto production cutbacks associated with the well-publicized supply chain challenges affecting our auto customers. In Q3, auto production cutbacks ended up being significantly larger than what was projected heading into the quarter. And as a result, our auto OEM segment revenues were down 11% in Q3 versus the minus 2% we were expecting as of the end of June. In a very challenging environment, our teams around the world continue to do an exceptional job of executing for our customers and for the company. In Q3, our people leveraged the combination of ITW's robust and highly flexible 80/20 front-to-back operating system. The company is close to the customer manufacturing and supply chain capabilities and systems and our decision to stay fully staffed and invested through the pandemic to sustain world-class service levels for our customers. They also executed appropriate and timely price adjustments in response to rapidly rising raw material costs. And as a result, we were able to fully offset input cost increases on a dollar-for-dollar basis in Q3, resulting in 0 EPS impact from price cost in the quarter. And, by the way, our teams also managed to continue to drive progress on our long-term strategy, execute on our Win the Recovery positioning initiative and deliver another 100 basis points of margin improvement benefit from enterprise initiatives. Moving forward, we remain very focused on sustaining our growth momentum and on fully leveraging the competitive strength of the ITW business model and the investments we have made and continue to make in support of the execution of our enterprise strategy. Before turning it over to Michael, I want to thank all of our ITW colleagues around the world for all their efforts and for their dedication to keeping themselves and their ITW colleagues safe to serving our customers with excellence and to driving continued progress on our path to ITW's full potential. Michael, over to you. Michael Larsen: Thank you, Scott, and good morning, everyone. As Scott said, demand remained strong in Q3 with total revenue of $3.6 billion an increase of 8% with organic growth of 6%. Growth was positive in 6 or 7 segments, ranging from 3% to 22% and in all geographic regions, led by North America, up 9%; Europe, up 1% and; Asia, up 5%. China was up 2% versus prior year and up 6% sequentially. GAAP EPS of $2.02 was up 10% and included a onetime tax benefit of $0.06. Operating income increased 7% and operating margin was flat at 23.8% despite significant price cost headwinds. Enterprise Initiatives were real positive again this quarter at 100 basis points, as was volume leverage, which contributed more than 100 basis points. Thanks to a great effort by our businesses, price cost was EPS-neutral in Q3 but still dilutive to operating margin percentage by 200 basis points as raw material cost increases further escalated in the third quarter. Throughout 2021, our businesses have quickly and decisively responded to raw material and logistics cost inflation with pricing actions in alignment with our policy to fully offset these cost increases with price on a dollar-for-dollar basis. And we've talked about this before, but given the current environment, I'll remind you that we don't hedge. So current cost inflation is always moving through our businesses in real time. After-tax return on invested capital was 28.5% and free cash flow was $548 million. Free cash flow conversion was 86% as our businesses have been very intentional about adding inventory to both support our growth and to mitigate supply chain risk and sustained world-class service levels for our customers. Overall, for the quarter, then strong growth in 6 of 7 segments and excellent operational and financial execution across the board. Let's go to Slide 4 for segment results. And before we get to the segment detail, the data on the left side of the slide illustrates our strong Q3 results with and without automotive OEM. I wanted to highlight 2 key points. The first is the benefit we derive from our high-quality diversified business portfolio in terms of the strength, resilience and consistency of ITW's financial performance. which is enabling us, in this case, to power through significant near-term headwinds in our largest segment and still deliver top-tier overall performance. The second is the accelerating growth momentum with strong core earnings leverage we're generating across the company. Excluding our auto OEM segment, given the issues affecting that market right now, the rest of the company collectively delivered organic growth of 11%. Operating income growth of 14% and an operating margin of 25% plus in Q3. As you can see on this slide, if you eliminate the price/cost impact, our core incrementals were a very strong 52% in the third quarter, which points to the quality of growth and profitability leverage that define the core focus of our business model and strategy. Now let's take a closer look at our segment performance in Q3, beginning with automotive OEM on the right side of this page. Organic revenue was down 11%, with North America down 12%, Europe, down 18%; and China, up 2%. And as Scott mentioned, supply chain-related production cutbacks were much larger in Q3 than what we and most, if not all, external auto industry forecasters were expecting heading into the quarter. While conditions in the auto market are obviously very challenging in the near term, but really good news from our standpoint is that the eventual and inevitable recovery of the auto market will be a major source of growth for ITW over an extended period of time once the current supply chain issues begin to improve and ultimately get resolved. Between now and whenever that is, we will remain fully invested and strongly positioned to support our customers and seize incremental share gain opportunities as production accelerates coming out the other side of this situation. Turning to Slide 5 for Food Equipment, and organic revenue growth was very strong at 19% and the Food Equipment recovery that began in Q2 continues to gain strength. North America was up 18% with equipment up 20% and service up 14%. Institutional revenue, which is about 1/3 of our revenue, increased more than 20%, with strength in education, up over 40% and health care and lodging growth of around 20%. Restaurants were up almost 50% with strength across the board. Strong demand is evident internationally as well with Europe up 20% and Asia Pacific, up 23%. Equipment sales led the way up 26% with service growth of 8%. In our view, this segment is in the early stages of recovery as evidenced by revenues that are still below pre-COVID levels. Test & Measurement and Electronics organic revenue was strong with growth of 12%. Test & Measurement was up 15%, driven by continued strength in customer CapEx spend and in our businesses that serve the semiconductor space. Electronics grew 8% and operating margin was 26.8%. So moving to Slide 6. Welding demand continued to be very strong with organic revenue growth of 22%. Equipment revenue was up 25% and consumables grew 18%. Our industrial businesses increased 32% in the commercial business, which sells to small businesses and individual users grew 18%. North America was up 24% and international growth was 12% with continued recovery in oil and gas, which was up 9%. Welding had an operating margin of 30% in the quarter. Polymers & Fluids organic growth was 3%, with demand holding steady at the elevated levels that began in Q3 of last year. And as such, had a tough comp of plus 6% a year ago. In Q3, growth was led by the Polymers business, up 8% with continued strength in MRO and heavy industry applications. Automotive aftermarket grew 4% with sustained strength in the retail channel. And Fluids was down 5% due mostly to a decline in pandemic-related hygiene products versus prior year. Margins were 24.2% with more than 250 basis points of negative margin impact from price cost driven by significantly higher costs for resins and silicone. Moving to Slide 7. And a similar situation with construction, where organic growth was also up 3% and also on top of a strong year-ago growth rate of plus 8%. All 3 regions delivered growth with North America up 2%, with residential renovation up 1%, on top of a plus 14% comp a year ago and commercial was up 10%. Europe was up 8% and Australia and New Zealand was up 2%. Specialty organic revenue was up 8%, driven by continued recovery in North America, which was up 15%, and international was down 4%. Equipment sales were up 10% with consumables up almost 8%. Let's move on to Slide 8 for an update on our full year 2021 guidance. As you saw in the press release, we're updating our GAAP EPS guidance to a range of $8.30 to $8.50 which incorporates the impact of actual and anticipated lower automotive customer production levels in Q3 and Q4 versus our previous guidance on July 30. We now expect the Automotive OEM segment revenue to be down about 15% in the second half, including being down 20% in Q4 versus the forecast of roughly flat second half auto OEM revenues that was embedded in our previous guidance. All other segments remain on track or better versus our previous guidance. Our $8.40 midpoint equates to earnings growth of 27% for the full year. We now expect full year revenue to be in the range of $14.2 billion to $14.3 billion, which is up 13% at the midpoint, with organic growth in the range of 11% to 12%. Of that organic growth rate of 11% to 12% volume growth, including share gains are 8% with price of 3% to 4%. For the full year, we expect operating margin of approximately 24%, which is up 100 basis points versus last year. And the fact that we're expanding margins at all in this environment is pretty strong performance, considering that we now expect raw material costs to be up 9% or more than $400 million year-over-year, which is more than 4x our expectation coming into this year. Our businesses are on track to offset raw material cost increases with pricing actions on a dollar-per-dollar basis, which, as you know, is EPS neutral but margin dilutive. As raw material costs and consequently, price have gone up more than what we predicted in our previous guidance, we now estimate margin dilution percentage impact from price cost for the full year at about 150 basis points versus our previous expectation of 100 basis points. These margin headwinds though, will be offset by strong volume leverage of about 250 basis points and another solid contribution from enterprise initiatives of more than 100 basis points. Free cash flow is expected to be approximately 90% of net income as we continue to prioritize sustaining our world-class service levels for our customers in this challenging environment, and as such, we will continue to invest in additional working capital to support our growth and mitigate supply chain risks. Our updated guidance is based on an expected tax rate for Q4 of 23% to 24% for a full year tax rate of approximately 19% to 20%. And as per usual process, our guidance excludes any impact from the previously announced acquisition of the MTS Test and Simulation business. We are awaiting one final regulatory approval and expect to receive that and close the transaction in Q4. So in summary, this will be a record year for ITW with double-digit organic growth, margin expansion, strong cash flow and EPS growth of 25% plus. We expect this strong demand momentum to continue in Q4 and well into next year with an additional boost from automotive OEM likely at some point in 2022 as the supply chain issues there begin to improve. ITW remains very well positioned to continue to deliver differentiated best-in-class performance as we leverage our diversified high-quality business portfolio, the competitive strength of ITW's proprietary business model and our team's proven ability to execute at a very high level in any environment. With that, Karen, I'll turn it back to you. Karen Fletcher: Thanks, Michael. Operator, can you please open up the lines for questions? Operator: [Operator Instructions]. Your first question comes from the line of Jeffrey Sprague with Vertical Research. Jeffrey Sprague: And maybe just on - so to start. Could you speak to what, if any, kind of maybe whipsaw effect that's going on as it relates to inventories. Just really trying to think about kind of how and when your sales might fully recouple with production? Or do you feel like they are fully coupled at this point? So any kind of nuances there to be aware of as we try to get out of this point. Scott Santi: Yes. I don't know a whole lot of nuances. I know that our customers expect us to be able to - as we've talked many times before, we work today, we ship tomorrow. In the auto space, we are certainly giving quarterly guides from our customers in terms of their production forecast. And obviously, those have been more volatile than normal of late. But I would say that we're not - there may be a little bit of inventory cushioning going on if you look at sort of build rates relative to our sales I think our sales were actually higher than production declines in Q3 by sort of an incremental margin about 3 percentage points. I don't know the exact number. But - so there may be a little bit of cushion building there just given the overall environment. But I would say once this thing starts to turn around, that we should see a pretty immediate effect. Jeffrey Sprague: And Scott, would you speak also just to the activity of your M&A pipeline. It looks like we're close to getting MTS done. Are you working an active pipeline at this point? Scott Santi: We've talked about this many times before. We are a very interesting opportunity to require. We get things run by us all the time. We have a very clear and well-defined view of what fits our strategy and our financial criteria. And so there are things that are continuously being evaluated. But it's just a matter of the right opportunity presenting itself as we go forward, and that was certainly the case with MTS, and I expect that there will be others at some point. But I would not speculate as to one. Jeffrey Sprague: And just one quick house cleaning one for Michael. The unallocated cost has kind of been running higher all year and bumped up a little bit more? Like what's going on there? And what should we expect? Michael Larsen: Yes, I think during the last four quarters, we're averaging about $30 million or so. And there are certain costs that we don't allocate out to the segments, example is health and wealth are costs are going up year-over-year. And there's really a laundry list of things there. I would assume that we'll stay somewhere in that 30% to 40% range on a go-forward basis. Operator: Your next question comes from the line of Scott Davis with Melius Research. Scott Davis: I love your slide deck. 6 real slides, 15 minutes of prepared comments, that's best-in-class from what I can tell. I appreciate the brevity and the information. Anyways, just switching gears a little bit. I mean it's a little bit of a hard to perhaps measure, but your comment maintaining world-class service levels. When you think about your on-time deliveries kind of today versus where they were few quarters ago versus perhaps pre-pandemic? Are they back up to kind of comparable levels? Did they ever slip that much? I'm sure your competitors - some of your competitors probably had major problems. Scott Santi: Yes. It is a bit of a summation of a number of different cases, but I would say, certainly, there are a number of our businesses that have sustained their traditional order and they ship tomorrow kinds of service levels throughout this environment, although I have had to certainly work a lot harder with a lot more brute force given the environment to make that happen. In some other cases, I'm thinking about, we've gone from ship tomorrow in order today to ship in a week. But I'm also thinking of cases where we've got people we compete with in certain markets that are now quoting deliveries into next year. So I think from a standpoint of relative advantage, I think we are - again, without 84 different cases, I can't necessarily excite every exact one of them, but my bet is that we are - that the relative advantage that we have is actually increased in that regard in terms of our ability to deliver in our service level to our customers in this pandemic period. Scott Davis: And does that make it, Scott, easier to get price than given the value promise that you have in delivery and predictability and such that your customer doesn't have to hold a lot of extra inventory because they can have some faith that you guys are going to be there for them. Scott Santi: I would imagine that's certainly part of it. I think the overall dimension of the value add in terms of the IP relationship as we try to outserve to give our customers the best overall value prop in terms of both the performance of the products we supply them, the service we delivered put around those, and it's not just the delivery service, it's service those businesses where we have service positions like food equipment. And so I think in all of that, I think all of our customers are well aware of their raw material environment. So I think from the standpoint of overall value delivery, our value to them, to the environment that we're in and the fact that we're just trying to recover on a dollar for dollar, we're not trying to get the margin back. I think, as we said before, because we're interested in and expanding our relationships with those customers, I think all of that speaks to the fact that we've been able to recover dollar for dollar. Operator: Next question comes from the line of Jamie Cook with Credit Suisse. Jamie Cook: Good job given the challenging environment. I guess just my first question, just on the margins on the construction business. You were up, the margins were down a little. So just trying to get some color there and when we can see sort of margin recovery. And then my second question, can you just give us an update on sort of what the opportunities are sort of the M&A pipeline and could help - could that further supplement the growth opportunity going forward? Michael Larsen: Jamie, I think you may have missed it. We just talked about the M&A pipeline a few minutes ago with Jeff. So I'm going to skip that. Jamie Cook: I'm sorry [indiscernible]... Michael Larsen: It's okay, don't worry about it. I mean I think in terms of construction as we look at kind of the margins on a year-over-year basis, good enterprise initiative contributions, good volume leverage. And then the headwind is really on the price/cost side. So we talked in this segment, in particular, steel costs are a significant headwind. Obviously, offset with price on a dollar-for-dollar basis, like are in line with our policy here but still margin dilutive pretty significantly at over 300 basis points here in the third quarter. I think once the timing in terms of when is that going to be - when is that impact going to start to diminish is difficult to say. What we can say with a high degree of confidence is and also at this point to our track record, our ability to read and react to whatever cost increases come our way and respond appropriately and decisively with price. I think kind of that track record speaks for itself, and we'll continue to do that. And we're certainly hopeful that the worst is behind us, but we're not counting on that as we look forward. And so you'll probably see a little bit of margin pressure in construction again here in Q4 relative to Q3. Q4 has some - we've got a couple of less shipping days, seasonality, typically, we go down in Q4 relative to Q3. But I'd say in terms of the long term, structurally, construction margins are going to be back in the high 20s at some point here once these near-term issues get resolved. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: So I know it's early to talk about '22, but maybe just big picture. Given the growth momentum in your businesses. Ex auto, up 11%, and auto potentially reflecting in '22, as you said. At this point, what's your conviction level that ITW can deliver, let's say, continuing above trend levels when we think about our longer-term goal of 3% to 5% organic growth. And maybe dovetailing with that, are any of your businesses actually snapping back faster than expected. Food equipment comes to mind that may continue to lead growth going into '22? Michael Larsen: Well, I think, Andy, like we said, I mean, we certainly have some really good momentum in our businesses in Q3 and Q4, if you kind of set the auto situation aside, those businesses are up 10% organically. And like you said, there's some really positive momentum, particularly in the more CapEx-oriented businesses. So welding, test and measurement, food equipment, and then I think like we said, once the automotive production challenges get resolved, I think we're set up really well for a strong recovery down the road. We think potentially in 2022, we'll see some positive momentum as well in automotive OEM. So we've not rolled up the plans yet fully embedded the plans fully for 2022 yet. But - and until we've done that, I don't really want to go comment too much. We'll give you a full update in February, like we always do when we provide guidance. But certainly, in terms of demand the volume leverage that goes with that, the momentum on still on enterprise initiatives 9 years in. Our ability to deal with whatever cost and supply chain issues come our way. I think we're really well set up for 2022 and beyond. Andrew Kaplowitz: Michael, that's helpful. And then you mentioned Q4, I mean there is some normal seasonality. You mentioned less shipping days. Obviously, you're forecasting EPS in the middle of the range to be down a little in Q3. Is there anything else going on? Is it maybe a lag in how costs still hit the P&L in auto and maybe polymers and fluids? And then would you say that Q4 maybe is the peak negative margin impact from materials and resins and that kind of stuff. Michael Larsen: Well, I hope so. We're not counting on it. I think if they don't go up anymore. Yes, look, what I can say just on the materials, I think the rate of increase - from Q2 to Q3, we saw a big step-up in our raw material cost inflation. I think it's unlikely we'll see the same thing here in Q4. I mean, we're already through October. But beyond that, who knows, I think, like I said, it's a typical seasonality for us. We go down from Q3 to Q4, revenues are down. Margins are down. We've got 2 less shipping days. Automotive OEM, we said down 20% year-over-year. The other 6 segments will all have positive organic growth. Margin performance in those segments will be similar to Q3, if not a little bit better. And then you just need to adjust for the tax rate, the discrete item, we gave you the detail on that in Q3 versus Q4. And then there is a little bit of currency headwind, which is really more of a rounding, but we have a little bit more currency headwind in Q4 than Q3. So - you put all of that together, you get to what hopefully is a risk-adjusted pretty good outlook for the fourth quarter, and we'll see where we go from here. So... Operator: Your next question comes from the line of Ann Duignan with JPMorgan. Ann Duignan: I'm laughing because it's like 20 years later. Perhaps just digging a little bit more. I know you've talked a lot about the momentum going into 2022, but you said in your nice brief opening comments, that other than automotive, some of your other businesses were actually doing better than you had expected. If you could just expand on that a little bit. And then on the food service equipment side, particularly on institutional, is there any risk that there's some pull forward of demand, a lot of institutions curtailed by the federal government with COVID aid. I mean, are you hearing anything about that driving demand on the institutional side. So broadly, first and then maybe a little bit more on the drivers of demand in Food Equipment. Michael Larsen: Yes. I think your first question kind of, I think, was what improved here relative to expectations. I mean food equipment and welding, certainly test and measurement. We did talk about on the last call, we had some onetime equipment orders in Q2. If you take those out, the momentum is really strong as well in the test and measurement business on the back of strong demand on the semiconductor side. So I'd point to those 3 as the strongest. In terms of the institutional side, we really don't think that there's a significant impact there. I mean from pull forward, overall, in the institutional side was up, like we said 20%, education was up 40%, but health so was health care. Health care was up 20%. So we don't really think that there's a significant impact. And we certainly haven't seen anything slowing down on the institutional side or really any of the other kind of end markets within Food Equipment. Ann Duignan: Okay. And then just following up on the Food Equipment side, are you seeing any changes in the types of equipment being demanded coming out of COVID, thinking about the changes to quick serve or to any restaurant side. Any notable like secular or structural changes in the types of equipment that are being ordered? Michael Larsen: Not really, Ann. No, I think this is very similar to kind of our normal product mix, if you like. So there's no real impact from that. Operator: Your next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: Can we spend a minute just talking about auto OEM margins and pricing - So my understanding is that historically, you guys price when you win your platforms, and it's difficult sometimes to get back and try to get price from auto OEMs? And so what I'm trying to understand, I guess, is like at what point do we start to see kind of the equation turn positive for you from a price cost perspective and thinking about the potential recovery for those margins longer term? Scott Santi: Yes, our - structurally derived under normal circumstances that generally, the pricing is much more sort of contractually negotiated in the auto space relative to the rest of our businesses. What I would say in regards to this current situation is the delta of inflation, raw material cost is certainly one where we're having discussions about with our customers about needing to adjust that. And we're not clearly the only ones in that respect with our auto customers. So we're working through that. I would say it's certainly - it remains the segment with the biggest lag in terms of our ability to recover, but ultimately, those - we're going to - our approach there is the same as it is in the rest of the company is that we're going to expect to get full recovery on the dollar amount of inflation that we're seeing. And I'd say the margin issue there is sort of the price cost is somewhat of an issue in the short run, but it's much more value. There's a lot of volume leverage there. And as we start - shipments start improving, volumes start to recover given some of the supply chain snacks get resolved, then we'll have - there's nothing that I see that won't get us back to sort of prior peak in terms of auto margins and have them go up from there as we grow that business. Michael Larsen: Yes. And if it helps, Joe. I'll just add, if you're a little worried about margins here in the near term in auto. I mean, I think we just did 17%, which I think is in this industry is probably top-tier performance, if not best-in-class. And I think in Q4, we expect maybe the typical step down from Q3 to Q4, but margins will still be solidly in the mid-teens. Overall, for the company, I think what we're - what's implied in our guidance is operating margins for Q4 and that 22%, 23% range. And so hopefully, that helps you quantify anything that you may be worried about in terms of the margin performance here. Joseph Ritchie: Yes. No, that's really helpful. I appreciate that color from both of you. And I guess just my one follow-up is just on MTS. It's funny, like I almost had forgotten that you guys had acquired the company or to or in the process of acquiring the company. I guess - can you elaborate a little bit on what's taking so long? I think I think you've got announced in the first quarter. And then... Scott Santi: Yes, I don't want to do that, Joe. We're at the I don't know, 2-yard lines. So let's just leave things where they are, and we'll get it over the goal line here soon. Joseph Ritchie: Okay. Is there anything you can tell us about the accretion from the business? Because we have it kind of sized like roughly $500 million business with like high 20s type gross margin. So any thoughts on potential accretion into 2022 if it closes this year? Michael Larsen: I think in year one, kind of we've said EPS neutral, we think that's still the case. I mean there's going to be a little bit of purchase accounting upfront here. And we didn't buy this business for what it's going to contribute to EPS or not in 2022. This is really much more of a long-term play. In terms of size, you can go back and look pre-COVID. I mean, your numbers are about right, a little over think it was $560 million in '19. The purchase price of $750 million is what we disposed entry margins, 6% EBIT in a space that we know quite well, and I think you're familiar with the Instron business. So we're really excited about getting this over the goal line and welcoming the MTS team to the ITW family and get to work. The one benefit is we've had a lot of time to get ourselves organized around integration planning and everything we've seen has confirmed what we saw in due diligence in terms of the raw material and how well we think this business is going to perform over the next 3,5 years plus. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to follow up on the near-term organic growth outlook. So it looks like, I think, implied volume growth year-on-year is maybe down in Q4 for ITW overall year-on-year. If you've got sort of pricing up mid-single digits. I just wanted to check that that's roughly the right way to think about it on volumes? And is that auto OE-related anything else where the volumes are soft? And how confident you feel in that overall sort of market share recapture effort? Michael Larsen: But to answer your question, it's all automotive OEM here in Q4 with revenues down 20%. The other 6 or 7 businesses are performing like we said at a really high level combined. If you just look at the other 6 segments, organic growth is almost 10% in Q4, or projected to be 10% margins, 25% plus, similar to what they - these businesses did in Q3. And so it's really this near-term issue in auto OE that's making the numbers look a little different than what we normally do. Julian Mitchell: Understood. And then just circling back on the divestment aspect. I think you discussed acquisitions a couple of times. In the recent past, you've talked about divestments maybe being on the table next year. And certainly, we've started to see some other industrial companies divesting assets now because valuations are very, very elevated. Just wanted sort of your latest thoughts on that divestment aspects, clearly multiples are high, just wanted sort of if you are planning to wait a bit more just to let the operating profit keep growing. Michael Larsen: Well I think this is a reminder to - so you said we pulled back on these planned divestitures right when COVID hit. That was not a good time to sell these businesses and we had a few other things going on and we really - And I think we said this, we thought these businesses would be worth more coming out the other side, and that's absolutely going to be the case, not just in terms of the underlying performance of these businesses. It's significantly better than before. And then you're right, we expect multiples have certainly gone up. And so we think that early next year will be a good time to kind of relaunch some of these processes. If you go back to when we announced this program. this plan in 2018, we've got a little less than half of the divestitures completed at this point. So we've got another $300 million to $500 million worth of businesses here, revenues that we're taking a close look at. Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: And Michael, good to have you back on the call. I want to just maybe ask Joe's question on a slightly different way. I know you have a multi-year contracts with the OEMs. But just given the extreme pressure on inflation, do you have any mechanism to pass along that by surcharges, et cetera? So just curious. And the spirit of my question is that if we do see volume recovering to maybe not 2022 but 2023 are we still going to be little bit under water on sort of the inflation recovery assuming you can't try to all the contracts in the . Michael Larsen: Scott talked about the contractual nature of the industry and so it's taking a little bit longer to get those prices adjusted and it's hard for us to say as we sit here how that going to play out next year. I think what happens ultimately - and we can go back and look what happened in '18 which was the last kind of inflationary cycle and then how we got way ahead of those cost in '19 and that's eventually how this will play out. Exactly when that happens is difficult to say. I'll just bring up the point in terms of the benefit we have from not being an auto company but being a multi-industry with a high quality diversified set up businesses that are differentiated and demonstrated again this year that every business can get price when faced with some pretty unprecedented levels of inflation, and that will be no different on a go-forward basis. We'll be - I think we're really well positioned to read and react in all of our segments, and then auto will take a little bit longer. So I think maybe that's the way to think about it. Scott Santi: Yes. Maybe just the one thing I'd add is that these are - while we talk about sort of the contractual elements of these relationships. They're also partnering with it. These are cooperative relationships. We've been partners with our customers for a long time. So I think given the environment, whether - and I don't think it's the contractual provisions that are the ultimate obstacle, it's about what's fair for both parties and each of us working together in the current environment. So I wouldn't overly - I don't know if this is word contractualize these relationships. These are long-term relationships with partners who need us and we want to do our best to serve them. And so there's - it will all be worked out. Michael Larsen: And maybe I'll just add, the price/cost equation is one element of the margin expansion here at ITW. I mean, if you look at the volume leverage that we're getting with just a little bit of organic growth, and look at the incremental margins here, once price cost starts to settle down a little bit. And then we still have the enterprise initiatives. So. I wouldn't get too negative on the price cost side as you look into next year. And again, in February when we get together and give you guidance, we'll give you a lot more detail on this. Operator: And there are no further questions at this time. I will now turn the call back over to Ms. Karen Fletcher. Karen Fletcher: Okay. Thanks, Tammy. I just want to thank everybody for joining us this morning for our short and efficient call, and have a great day. Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Company Representatives: Scott Santi - Chairman, Chief Executive Officer Chris O'Herlihy - Vice Chairman Karen Fletcher - Vice President of Investor Relations Operator: Good morning. My name is Adam, and I will be your conference operator today. At this time I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thank you, Adam. Good morning and welcome to ITW’s Second Quarter 2021 Conference Call. I’m joined by our Chairman and CEO, Scott Santi; and our Vice Chairman, Chris O'Herlihy. Senior Vice President and CFO, Michael Larsen is recovering from a sports related injury and is not able to participate in today’s call. We certainly wish Michael all the best and look forward to seeing him next week. During today’s call we will discuss ITW’s second quarter financial results and update our guidance for the full year 2021. Slide two is a reminder that this presentation contains Forward-Looking Statements. We refer you to the company’s 2020 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. So please turn to slide three, and it’s now my pleasure to turn the call over to our Chairman and CEO, Scott Santi. Scott Santi: Thank you, Karen, and good morning everyone. In the second quarter we saw continued recovery momentum across our portfolio, and we delivered strong operational execution and financial results. Revenue was up 43% with organic growth up 37%. We saw double digit growth in every segment and geography. Earnings per share of $2.45 was up 143%, 108% if you exclude the one-time tax benefit of $0.35 that we recorded in the quarter. In this strong demand environment and in the face of a very challenging supply conditions, our teams around the world leveraged our long held close to the customer manufacturing and supply chain approach, and the benefits are staying fully staffed and invested through our win and recovery positioning, to continue providing world class service levels to our customers, while also continuing to execute on our long term strategy to achieve and sustain ITWs full potential performance. We're certainly encouraged by our organic growth momentum as order intake rates remain pretty much strong across the board, and during the second quarter we saw multiple examples of how our ability to sustain our differentiated delivery capabilities by remaining fully invested through the pandemic resulted in incremental share gain opportunities for our businesses. While there is no doubt that the raw material supply environment is as challenging as we have experienced in a long time, maybe ever in my 38 years and ITW, we are as well positioned as we can be to continue to set ourselves apart through our ability to respond for our customers. We worked hard over the last nine years the position ITW to deliver differentiated performance in any environment, and I have no doubt that the ITW team will continue to execute at a high level as we move to the balance of the year and beyond. Now for some more detail on our performance in the second quarter. As I mentioned, organic growth was 37% with strong performance across our seven segments. The two segments that were hardest hit by the pandemic a year ago led the way this quarter with Automotive OEM up 84% and Food Equipment up 46%. By geography, North America was up 36% and International was up 38%, with Europe up 50% and Asia Pacific up 20%. GAAP EPS of $2.45 was up 143% and included a one-time tax benefit of $0.35 related to the re-measurement of net deferred tax assets in the U.K. due to a change in the statutory corporate tax rate there. Excluding this item, EPS of $2.10 grew 108%. It was a Q2 record and was 10% higher than in Q2 of 2019. Operating income increased 99% and incremental margin was 40% at the Enterprise level. Operating margin of 24.3% improved 680 basis points on strong volume leverage, along with 150 basis points of benefits from our enterprise initiatives. Year-to-date our teams have delivered robust margin expansion with incremental margins for our seven segments ranging from 37% to 48%, inclusive of price cost impact. Speaking of price cost, price cost headwind to margin percentage in the quarter was 120 basis points. While the pace of raw material cost increases accelerated in the second quarter, our businesses have been active in implementing pricing actions in response to rising raw material costs since early in the year. Consistent with our strategy to cover raw material cost inflation with price adjustments on a dollar for dollar basis. In Q2 we ended up just short of that goal due to some timing lags, and as a result net price cost impact reduced EPS by $0.001 in the quarter. We continue to expect price cost impact to be EPS neutral or better for the year, and I’ll come back and provide more color on the price cost environment a little later in my remarks. In the quarter after tax, return on invested capital was a record at 30.8%. Free cash flow was $477 million with a conversion of 72% of net income on adjusted for the one-time tax benefit I mentioned earlier. And that was due to the additional working capital investments necessary to support our strong organic growth. We continue to expect approximately 100% conversion for the full year. We repurchased 250 million of our shares this quarter as planned, and finally our tax rate in the quarter was 10.1% due to a one-time tax benefit. Excluding this item, our Q2 tax was 23%. Now moving to slide four for an updated on price cost. We continue to experience raw material cost increases, particularly in categories such as steel, resins and chemicals. And now project raw material cost inflation at around 7% for the full year, which is almost 5 percentage points higher than what we anticipated as the year began. And just for some perspective, this is roughly 2x of what we experienced in the 2018 inflation TerraCycle. We learned a lot from that experience and as a result of the timeliness and pace of our price recovery actions, are well ahead of where we were in 2018. As I mentioned, we expect price cost impact to be EPS neutral or better for the full year, with pricing actions more than offsetting cost increases on a dollar for dollar basis. Price costs will continue to have a negative impact on our operating margin percentage, however in the near term as we saw in Q2 the net impact will likely be modestly higher in Q3 versus Q2 before it starts to go the other way. For the full year we expect price cost impact to be dilutive to margin by about 100 basis points, which is 50 basis points higher than where we were as of the end of Q1. That being said, margin benefits from enterprise initiatives and volume leverage will provide us with ample ability to offset the negative affect of price cost and margin percentage, and deliver strong overall margin performance for the year. And beyond the near term price cost impact, we remain confident that we have meaningful additional structural margin improvement potential from the ongoing execution of our enterprise initiatives. With that, I’ll turn it over to Chris for some comments on our segment performance in Q2. Chris. Chris O'Herlihy : Thank you, Scott, and good morning everyone. Starting on slide five, the table on the left provided some perspectives on the growth momentum in our businesses when we look at sequential revenue from Q1 to Q2. I would expect the pace of recovery in our Auto OEM segment has been dampened by the well-publicized shortage of semi-conductor chips, despite very strong underlying demand, and for that reason we added a role to the table to show portfolio demand trends ex-auto. Our Q2 revenue ex-auto increased 8% versus Q1. This year Q2 had one more shipping date in Q1, so on an equal day basis our Q2 versus Q1 revenue growth and ex-auto is 6%, which is 2x of our normal Q2 versus Q1 seasonality of plus 3%. In addition, we added more than $200 million of backlog in Q2. Both of these factors show that demand accelerated meaningfully in Q2 across our portfolio. Now let’s go into a little more detail for each segment, starting with automotive OEM. Demand recovery versus prior year was most evident in this segment with 84% organic growth. This of course was against easy comps versus a year ago when most of our customers in North America and Western Europe were shut down from mid-March to mid-May. North America was up 102%, Europe was up 106% and China up 20%. We estimate that the shortage of semiconductor chips negatively impacted our sales by about $60 million in the quarter. Operating margin of 18.8% was up 26.6 percentage points on volume leverage and enterprise initiatives. Price cost was a significant headwind of more than 200 basis points due to the long recycle time required to implement price recovery actions in this segment. Given the ongoing semiconductor chip supply uncertainty, we now expect full year organic growth in automotive to be approximate 10% versus our original range of 14% to 18% at the beginning of the year. To be clear, this is not lost revenue, but simply delayed into next year. Furthermore, the slower than expected growth in auto is offset by strength elsewhere in the enterprise. Please turn to slide six for Food Equipment. In Food Equipment organic revenue rebounded 46% with recovery taking hold across the board and the backlog that is up significantly versus prior year. North America was up 39% with equipment up 42% and service up 33%. Institutional revenue was up more than 30% with health care and education growth in the low to mid-30s and lodging up in the mid-20s. Restaurants were up about 60% with the largest year-over-year increases in Food Service and QSR. Retail grew in the mid-teens and continued solid demand and new product rollouts. International recovery was also robust at 58% with Europe up 66% and Asia Pacific up 29%. Equipment sales were strong 66%, with service growth of 39%, which continued to be impacted by extended lockdowns in Europe. Operating margin was 22% with an incremental of 46%. Test & Measurement and Electronics revenue of $606 million was a Q2 record with organic growth of 29%. Test & Measurement was up 20%, driven by solid recovery in customer CapEx spend and continued strength in semicon. Electronics grew 38%, continued strength in consumer electronics and automotive applications, and the added benefit in timing of some large equipment orders in Electronic Assembly. Operating margin of 28.1% was 240 basis points – was up 240 basis points and a Q2 record. Moving to slide seven, welding growth was also strong in Q2 at 33%. Equipment Revenue was up 38%, and consumables growth of 25% was the time in positive territory since 2019. Our industrial business grew 52% on increased CapEx spending by our customers and the commercial business remained solid, up 26% following 17% growth in the first quarter. North America was up 38% and International growth was 13%, primarily driven by recovery in oil and gas. Polymers & Fluids organic growth was 28%, led by our automotive aftermarket business up 33% on robust retail sales. Polymers were up 34% with continued momentum in MRO applications and heavy industries. Fluids is up 8% with North America growth in the mid-teens and European sales up low single digits. Operating margin was an all-time record of 27.3% with strong volume leverage and enterprise initiatives partially offset by price cost. Moving to slide eight. Construction organic grew up to 28% reflected double digit growth and recovery in all three regions. North America was up 20% with 16% growth in residential renovation and with 26% growth in commercial construction. Europe grew 61% with strong recovery versus easy comps in the UK and Continental Europe. Australia and New Zealand organic growth was 13% with continued strength in residential and commercial. Operating margin in the segment of 27.6% was up 390 basis points and was a Q2 record. Specialty organic revenue was up 17% with North America up 15%, Europe up 24% and Asia Pacific up 14%. Our Flexible Packaging business was up mid-single digit against tougher comps than the rest of the segment. The majority of our businesses were up double digits, led by appliance up more than 50%. Consumable sales were up 19% and equipment sales up 12%. And with that, I'll turn it back to Scott. Scott Santi : Thanks Chris. Let's move on to slide nine for an update on our full year 2021 guidance. We now expect full year revenue to be in the range of $14.3 billion to $14.6 billion, up 15% at the midpoint versus last year, with organic growth in the range of 11% to 13% and foreign currency translation impact of plus-3%. This is an increase in organic growth of one percentage point at the mid-point versus the updated guidance that we provided at the end of Q1, driven largely by the incremental revenue impact of pricing actions implemented in Q2 in response to accelerating raw material cost increases. While demand momentum accelerated in Q2 versus Q1 as we noted earlier in our presentation, we are admittedly being conservative in not projecting that forward in our guidance at this point in time, given the significant supply chain disruptions that continue to challenge many of our customers in auto and otherwise. We are raising our GAAP EPS guidance by $0.35 to a range of $8.55 to $8.95 to incorporate the one-time tax benefit realized in the second quarter. The mid-point of 875 represents earnings growth of 32% versus last year and 13% over 2019. Factoring out the one-time Q2 tax side in the mid-point of our 2021 guidance is 10% higher than 2019. With regard to margin percentage as discussed earlier, the incremental cost increases that we saw in Q2 will result in full year margin dilution of 100 basis points versus the 50 basis points that we project [Audio Gap] to a range of 24.5% to 25.5%, which would still be an improvement of more than 200 basis points year-over-year and an all-time record for the company. And again, we expect zero EPS impact from price cost for the full year. We expect free cash flow conversion to be approximately 100% of net income factoring out the impact of the one-time, non-cash, tax benefit we recorded in Q2. Through the first half we have repurchase 500 million of our shares and expect to repurchase an additional 500 million in the second half. Finally we expect our tax rate in the second half to be in our usual range of 23% to 24% and for our full year tax rate of around 20%. Lastly, today’s guidance excludes any impact from the previously announced acquisition of the MTS Test & Simulation business, which we expect to close later this year. Once that acquisition closes we’ll provide you with an update. And with that, I'll turn it back over to you Karen. Karen Fletcher : Okay, thank you, Scott. Adam, lets open up the lines for questions please. Operator: Yes ma'am. [Operator Instructions]. And your first question comes from the line of Andrew Kaplowitz with Citi. Andrew Kaplowitz : Best wishes to Michael! Scott Santi: Thank you. He’s on short term IR, but he’ll be back next week. Andrew Kaplowitz : Excellent! So Scott or Chris, you mentioned the raw material cost inflation. We know when you said inflation will be as usual better for the year. Do you see the inflationary pressure stabilize enough where you can have a handle on these increases that you sort of put into the guide. So when you look at Q3 and Q4, you have confidence in your forecast. And then in ‘22 you talked about last quarter, what’s the probability that these price increases are pretty sticky so you could exceed that 35% to 40% longer term incremental you have. Scott Santi: Well, on the first question I think we're very confident that we will cover whatever, you know all the increases that have already been incurred and anything subsequent to that, I would not be comfortable describing the environment as stabilizing at this point, but ultimately I think we have demonstrated. We’ve looked back over the last – you know going back to 2017 and even in ‘18 and certainly this year, you know sort of on a quarterly basis worst impacts on price costs and inflationary environments have been a $0.001, you know may be $0.02 one quarter. So I think we're fully comfortable that we’ll be able to read and react to whatever might happen from here that the EPS impact of the company will be negligible for the full year, but I think as I said, I don't – it's not based on an assumption that things are going to stabilize from here for sure. I don't think we're seeing – we’ve seen enough evidence of that and normally I’d predict things are going to continue to reach forward either. I think its wait and see. Chris O’Herlihy: We saw a significant pickup in the case of inflation in Q2, yeah. Andrew Kaplowitz : Guys maybe I could just ask the question specific to auto in the sense that you know you give us the numbers, you know now 10% for the year. I think this quarter you said 200 basis points to price risk cost. As you know there is always a lag before you can catch up there. So should we assume incremental margin is still getting a little worse before it gets better in that business, and how long would you surmise it takes to get on top of price risk costs in that business? Chris O’Herlihy: Well, price versus cost in auto is always going to be challenging given the, you know the nature of the industry. I would say in terms of incremental in the second quarter in auto we had a 47% incremental, an impact of 47% incremental you know for the first half of the year. So incrementals are strong in auto no double, but there is no doubt that the structure of the industry, the structure of the pricing agreements, it does take a lot longer. Hard to say how long it will take for us to catch up there with that. Andrew Kaplowitz : Thanks guys. Operator: And your next question comes from the line of Ann Duignan with J.P. Morgan. Ann Duignan: Hi! Good morning. A - Scott Santi: Good morning. Ann Duignan: Maybe you could talk a little bit more about both, construction products and Test & Measurement where you said you delivered or you did deliver a record Q2 operating profit footprint. Can you talk about how sustainable those margins are going forward? Was there anything in Q2 mix or anything that we should be aware of that would result in those margins diminishing from here or are those sustainable at these levels? Chris O’Herlihy: Yes, so we’ll say the construction margins are very sustainable. We’ve been improving via the construction for a long time now and certainly for the last few quarters here we've been in the mid to high 20s in terms of margin and construction. So despite the price cost environment, we’re seeing nice organic growth in construction. We are getting nice price realization and so we’re then starting to expect the margins there to be sustainable. Surely in Test and Measurement margins again you know currently in the high 20s here and have been like that for a long time. The segment that we like in terms of level of differentiation, I believe it’s our customer problems. So we don’t see any issue with sustaining margins in either Test & Measurement or Construction. Ann Duignan: Okay. [Cross Talk] Go ahead, sorry. Scott Santi: I was going to add some color commentary that I think I was adding up the time when Chris was reading the comments, but I think we said all time record margins for Q2 and Q3 of our seven segments despite the price cost environment. And I’ll just circle back to a comment I made, which is you know there is still room to run in terms of structural margin improvement across the company. We got 150 basis points of enterprise initiative benefit in this quarter. So there is, you know these are certainly sustainable improvements and performance and we expect to continue to do better as we go forward. Ann Duignan: Okay, I’ll leave it there in the interest of time. I appreciate it. Thank you. Operator: And your next question comes from the line of Stephen Volkmann with Jefferies. Stephen Volkmann : Hey! Good morning guy. Maybe just following up on the comment about Enterprise Initiatives, you know you're talking about I think 100 basis points for the year, but you did 150 this quarter, I think 120 if I have my number's right. Last quarter you’ve been over overachieving. Did those slow down for some reason or is there a chance that you did better than 100 this year? Chris O’Herlihy: Yeah, I mean, I think we are saying 100 plus, so we will do better than 100 this year. And there's still a lot of interest on our price initiatives bought on sourcing and in ’20. You know these are all initiatives and activities that are very granular within out segments. Within each division there is a host of activity that we are working on. And actually have been working on not just this year, but even starting last year, so we entered the year with a fair bit of tailwind in terms of enterprise initiatives. So we would expect to do a 100 plus for sure. Stephen Volkmann : And then maybe just following up on this price cost kind of question, just curious about how you think about the policy here. I mean it doesn't feel like there's a lot of pushback on pricing in any of the kind of verticals that we touch. You know why not price $4 plus margin, you know why kind of create that headwind? Scott Santi: Well, I don't know. You know the headwind from my perspective is a percentage headwind, it's not an earnings headwind. You know the overall position that we wanted, we’ve created an incredibly profitable economic engine and the most important job we have is to grow it organically, and so from the standpoint of – to the extent we don't have to go up as high as other people do, we are leveraging that strong position and we can translate that into incremental share, that’s the preferred option. I don’t want our people fighting over the next incremental. We ought to get the cost for sure, but then let’s get on to talk with our customers about how we can help them improve their business you know operationally, technically from a sales standpoint and so that’s basically it. We can certainly do more to get all distraction and try to price optimize in the short term, but I don’t think that services our long term interest very well. We make plenty money, you know this is not a... Stephen Volkmann : Fair point, thank you. Take care. Operator: And your next questions from the line of Jeff Sprague with Vertical Research. Jeff Sprague: Hey, thanks. Good morning everyone. A - Scott Santi: Good morning, Jeff. Jeff Sprague: Good morning. Could we just drill a little bit into the kind of the whole availability issue? We talked about you know price cost and obviously it's tied to the availability of supplies, but outside of auto which is very visible and obvious, are there clear places in your portfolio where either you're struggling to meet demand because of availability in your supply chain or your feeling on the customer side, perhaps you can deliver, but they don't want it, because they've got problems elsewhere down the line. Just wonder if you could give us some perspective on that, and any color on to what degree if any it may, just wondering the top line here in the quarter or into the balance of the year. Scott Santi: I’ll give you some overall color and then certainly let Chris giving some segment level, sort of business levels specifics if some things come to mind for him. I would say, in terms of overall color, as we talked to our businesses around the world, there's no question that it is a daily battle that maintained supplier division as we service our customers. I would absolutely contend that we are doing better than most for a couple of reasons: One is the fact that we have long head, localized supply relationships with local manufacturing facilities, serving our customers locally. And then the other fact is what I – we talked about in our remarks, the fact that we kept all our people though the pandemic. We have not to scramble to bring people back. So normally our supply chain manufacturing operations function in a very simple automated way. It’s definitely taking a lot more, let’s call it boot force for now, but I think we are not hearing any big issues from a standpoint of our own ability to supply our customers. It doesn't mean that there's not an occasional you know $2 bracket that shows up late and there is a couple of other machines that can’t go on just making that out, but that’s – I'm sure that’s the case, but ultimately given the service level that we are now entering, you know as a standard part of our operating practices I would say that – I’m very comfortable saying that we are working a lot harder than we normally have to, but ultimately performing pretty well. I would say that the supply chain area beyond auto is much more of an issue for us on the demand side than the supply side and I’d point to a couple of things, but we are seeing a lot of sort of timing changes in terms of orders and requirements, not because we can't deliver something, but because another supplier can deliver something to a customer. And I’d also points to the $200 million of backlog, and we've talked about this before. You know we should – basically today is what our customers ordered yesterday and so we operate with very little backlog and the fact that we built a couple of hundred million of backlog, I can’t analyze every dollar of it, but my contention would be that that's a lot more to do the – for the customer delays than it is our own ability to supply. And with that we’ll see the $60 million in auto plus the $200 million in backlog, that’s another 10 percentage points of organic growth in the second quarter. You know again, I’m not necessarily contending that all of it could have gone, but my bet would be most of it and that’s the only thing… [Cross Talk] Chris O’Herlihy: Yeah, it’s the only thing I would say is just our, this cost comps, I think all over its going to be 18-24, because here it really creates a lot of the packages for us in terms of more sort of simplified and streamlined cost offerings. Obviously it results in simplification of raw materials and components and that simplification and focus also extends to our suppliers. The key part of our strategy and its worked for us for many years is to have these you know very strong and long lasting supplier partnerships and we are a key customer for most of our raw material suppliers. This becomes really, really important when supply chains become constrained and releasing that work to our benefit here in the last 12 months. Jeff Sprague: Great! And just a second question. Just on the M&A pipeline, obviously you don't have the deal until you've got something to do it now. But you know can you give us a sense of how active your pipeline is? Have you been able to cultivate things, you know maybe handicap the odds of some of the things kind of coming in your strike zone? Scott Santi: Well, I would tell you that we are excited about MPS. We are working hard to get that one finished off and you know that is what's kind of $50 million of annualized revenue, so that’s you know certainly enough work to do for a little while anyway. I don’t want to unnecessarily comment on the pipeline as much as to say we remain and will remain very interested in adding high quality businesses to the company, but so the timing of all that is always a subject of the quality of what opportunities present themselves. So there’s a lot of stuff going on, but it’s not a matter of how big or small the pipeline is; it's more we're looking for a much narrower set of criteria than I think, so it's more a function of the quality of what’s there than the quantity. Jeff Sprague: Okay, understood, thanks. I’ll pass this on. Operator: And your next question comes from a line of Joe Ritchie from Goldman Sachs. Joe Ritchie: Thanks. Good morning everyone. A - Scott Santi: Good morning Joe. Joe Ritchie: So I know that, I know you guys guide to organic growth trends, you know really not improving or declining and that’s your power house, that’s just in your policy going forward. I guess when I think about each of the different segments and how you're thinking about the sequentials from here, I don't really think about a lot of seasonality in your business, but maybe perhaps the construction business right, being a little bit seasonally weak during the fourth quarter. How are you thinking about sequential revenue for the segments throughout the rest of the year? We see obviously you've given us the auto guide, but really the other segments? A - Scott Santi: Yeah, you know I covered that I think overall in my comments, but you know we have sort of camped down the run rate that you know in terms of the guidance relative to run rate. You know Chris talked to you about the fact that in the second quarter we saw organic growth rates accelerate by a net 3 percentage points of beyond seasonality, and we basically did project that signal manning forward through the balance of the year because of the supply risk involved, the supply chain risk to our customers, so we’re playing that pretty conservative. And I think that ultimately is going to have more to do with the pace of the organic from here than you know trends of demand. There’s plenty of demand out there. It’s a matter of can our customers get enough raw material to support it. Joe Ritchie: Got it. And maybe Scott just following on that, like is there – you know you had mentioned about involving the Food Equipment business. Is it like where you're building backlog right now, is that – are you seeing that as more kind of like a 2022 opportunity, just given what you're seeing from a supply chain standpoint or does he expect some of that to convert in the second half. Scott Santi: I'd say some of it is to convert. I think the only one you know that's probably you know definitely into 2022 is the loan that Chris mentioned and not where this, you know this dip sort of doesn’t look like it's going to get resolved any time soon. But I'd say most of the – the rest of that backlog, that $200 million, I would expect that to – given our customers can take it, because they can get the other components of things they need, that should certainly convert in the back half. I think our – you know it just doesn't make sense to up the revenue guide when you know everyone is so supply constrained right now. That I can't say it any more simply than that and that's how we see how things play out. It just doesn’t make sense to take things too far from where they are now in terms of run rate until we see how that all – how the supply issues play out in affecting our customers willingness to, you know the ability to take what they’ve ordered from us and with more. But I would say it is definitely you know from simpler border rates and the overall demand is definitely enough there to do you know well better than what's in our guide is this pricing situation. It's you know significantly better from here forward. Joe Ritchie: Okay, yeah – no, that's helpful. I guess maybe one follow-up on price cost. I know we talked about it a little bit. You did mention that 3Q is expected to get a little bit worse from 2Q because they’ll be put through some pricing actions in 2Q. So on this I guess I’m just wondering, does this take a little bit of time for some of the pricing actions to take hold or why would the headwind get worse than 3Q? Chris O’Herlihy: Yeah Joe, I mean the only reason it’s getting worse in Q3 is because of the pace of inflation in Q2. We saw significant pick-up in pace in Q2 and obviously there’s a little bit of a lag, so we see a little bit of a worsening in Q3 based on what we know today, based on the cost increases we see and the known price increases, we see a little worsening in Q3 from Q2, only on the base of the pace of inflation in Q2. Joe Ritchie: Got it. Okay, great. Thank you both. Operator: And your next question comes from the line of Jamie Cook with Credit Suisse. Jamie Cook: Hey! I guess just two questions, one following up on the revenue outlook. Understanding why you’d guide sort of conservatively, but is there any way you can help us understand just what you're seeing in terms of percentage increases on the order intake rate, like by segment just to help us sort of understand what's out there, and to what degree are you concerned? Is there any sort of double ordering that's happening as customers are worried they can't get stuff? And then I guess my follow-up question, obviously the organic growth is performed very stronger. There's particular segments or customers where you are more sort of confident that some of these, you know this organic growth is associated with you know market share wins that are actually you know sort of sustainable from here on. Thank you. Chris O’Herlihy: So in terms of you know acceleration of organic growth, you know we're seeing it. Obviously we talked about all our work, it's going in a different way, but certainly in Food Equipment, Test & Measurement, electronics and welding you know are certainly growing faster than we expected earlier in the year, so we’re seeing a nice acceleration there. And you know we have no reason to believe that it's not sustainable based on our conversation with our customers, the order patterns and so on and you know obviously as we want to talk about the factor – it’s already busy here in terms of this winged recovery initiative you know over the last 12 months and you know it is still kind of early to quantify this. We’re feeling pretty good about how we’re positioned and we – as you know we're very intentionally remain fully staffed to serve our customers, protect the investments and people and in addition to the customer backed innovation and suite of excellent and certainly there’s a lot of anecdotal evidence out there that would say that that is turning into share gains and if I ever just maybe highlight some, get the sort of examples and like sort of equipment where you know high level product availability, maintaining service level excellence as Scott talked about and being able to respond in supply where a competitor could not is enabling several share gain and incremental wins from competition in large chains, both in food service and food retail. Another example might be in farmers [ph] influence, automotive aftermarket. Staying invested here we will sustain our sales and innovation focus, coupled with high service levels means we grew as I mentioned in the commentary, automotive aftermarket grew by 33% in the quarter and this is well above customer point sales growth indicating that we are getting share in a meaningful way. And in our measurements and construction in our roofing businesses, in association of 45% in the quarter, again we’d see very clearly we're gaining share there on competition who have certainly been supply chain and operationally constrained, extending delivery times and so on and we continue to maintain differentiated service levels. So again, somewhat anecdotal, somewhat early in the window recovery strategy, but certainly ample evidence that we seem to be regaining share, and these are just a small selection of illustrative examples of tech products that we’re making across our seven segments. Jamie Cook: Okay, thank you. Anything on the order intake if you can share with us just what you're seeing, that you saw that by segment. A - Scott Santi: You know we saw in acceleration the three segments that I mentioned in… [Cross Talk]. Jamie Cook: I was just trying to get numbers. You know I mean if you can’t, that’s fine. A - Scott Santi: Yeah, orders pretty much equalize shipments for last because of what I said, you know what we – what – our customers’ orders we shipped the next day, I would say that also your closer to about – I think you used the term double dip ordering in terms of customers trying to hedge you know orders more because they can’t get supply. I actually can’t say that we’re not seeing any of that, but I would say that it would be much lower for us because of the fact that our service levels are so good and our customers understand you know in terms of orders shipped. So you know some maybe certainly ordering more than they would normally, because they are concerned about things, but I will think that even in terms of our service levels we wouldn’t – there wouldn’t be anything – that wouldn’t be a significant part of the overall demand picture for us. Jamie Cook: Okay, thank you. Operator: And your next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: Thanks, good morning and best wishes to Michael, hoping he gets a speedy recovery. Scott Santi: Thanks Nigel. Nigel Coe: That’s okay. I want to go back to the supply constraint. Where are you kind of most – and I thought of automotive which was predictable, but where are you most concerned? I’m thinking about maybe electronics perhaps tools you know with the barriers, but what are you monitoring most closely in terms of not just for Illinois Tool Works but for your, you know your supply chain, which business or geography are you most concerned?0 A - Chris O’Herlihy: Yeah, I would say electronics in general you know have been fairly constrained, so that impacts segments like well in Food Equipment, Test & Measurement and electronics will be one that I would call out. The [inaudible] obviously has been across the board in terms of steel, resins, chemicals and electronics, but in terms of supply chain constrains, electronics and certainly you know steel related business. Scott Santi: But beyond that I don't think there's anything that really concentrates up. You know I think again the color from our businesses, you know it's something different every day, but you know it’s not a – you now it takes a lot more work and it's not even the big dollar stuff. It's again the $2 bracket, but it is a real offer right now, significantly more than… [Cross Talk] Nigel Coe: And then [inaudible] the two best offices because of the high volume service plan. I wouldn’t think it could have created a big issue for you, but maybe address those two points and because that you know it could change very quickly, so I’m just wondering you know what impact from the spot purchases and the 3x betting. Scott Santi: Spot purchases, if you can explain that a little more Chris. A - Chris O’Herlihy: I think given another company would purchase them with some hedges… A - Scott Santi: Yeah, we don’t have it and we don’t forward by. So you know everything – the current costs are flushing through right now, yeah. Chris O’Herlihy: And the second part of your question is I think related to freight and logistics, is that correct? And so with freight and logistics, I mean obviously there's no impact for us, but I don’t see a less of an impact than some of our peers maybe on the basis that the produce what we sell – the produce and so what we sell, the philosophy that we’ve long had that certainly mitigated the impact of freight and logistics on our cost structure and availability. Nigel Coe: Thanks guys. Operator: And your next question comes from the line of Scott Davis with Melius Research. Scott Davis: Hey, good morning guys. A - Scott Santi: Good morning Scott. Scott Davis: Hope Mike feels better. There must be a good story, backstory to the sports injury. Scott Santi: It’s his to tell. Scott Davis: Hopefully he didn’t join some sort of football team or something, you know the over 50 football team. Anyways, I only have one question. It’s just on MTS. When you bring in MTS, how do you – how do you cadence 80/20? You know I mean how do you bring in a deal of this size, kind of bring 80/20 in without really disrupting it. Is there kind of a playbook there you guys can walk through and help us understand? A - Scott Santi: Yeah, absolutely Scott. So obviously you know we’ve completely reinvigorated 80/20 of the last two years with this front to back process and the fact that we – the process that we will employ on MTS is exactly the same process that we have employed on our 84 divisions across the company. So we can’t really decide on what to do, we can’t really decide on how to do it and we can’t really decide on what the outcome should be when we get it done properly. Coupled with the fact that we’ve built a tremendous amount of capability in the company, our folks can go in and help you know guide MTS on the 80/20 journey. So we feel very confident in the playbook, we feel very confident in our capability. We think the raw material in MTS are fantastic with respect to 80/20 opportunity, that’s one of the key attractions for us and when we bought it. The other thing I’d say is that we got a very similar business in our portfolio, in Test & Measurements and this time where we’ve done this successfully before. So we are very confident that we can do this and do this successfully. Scott Santi: [Cross Talk] It’s probably a three to five years process, and part of that is not disrupting the business. Chris O’Herlihy: It’s really the pace that makes sense, we are in no rush here. Scott Davis: Okay, super helpful. Good luck! Thank you. Scott Santi: Thank you. Operator: And your next question comes from the line of Mig Dobre with Baird. Mig Dobre: Thank you. Good morning everyone. Going back to your comments on pricing, obviously a lot changed over the past three months and can you maybe clarify for us what impact pricing had to your adjustment, to the overall organic growth guidance? Scott Santi: For the year? Mig Dobre: Yes, please, thanks. Scott Santi: Yeah, it's 1%. Mig Dobre: Okay, I'm presuming then that. Chris O’Herlihy: That was the 1% we added to organic, yeah. Mig Dobre: Okay, that's kind of what I figured, but I just wanted to confirm. So you know if this is impacting the back half of the year primarily, then at lease presumably you’ll have a couple of points of growth just from pricing in the back half. If I look at the implied guidance, credits, the high-end we are talking about growing something like 7% organically, a couple of points of that is just your incremental price, and I mean look Scott, you were talking earlier, saying hey, I'm trying to take a conservative approach here, but at least to me when I'm adjusting out for this pricing element and I think about the comparisons that are still you know fairly easy relative to the prior year, it just strikes me that you really are being conservative here in terms of how you're thinking about your business progression on a fixed price, on a core basis. So just to kind of clarify this, is it that there’s some lack of clarity as to where maybe demand is going to be because of what's happening with the supply chain, or is it that you're having some second thoughts with regards to how you're going to be able to convert revenue given your, some of the destruction that you're having to deal with. Scott Santi: It’s the former not the latter, if I understand you correctly. Taking a risk for us by far is customer supply chain, and what that does to their demand patterns from here on out. It is – as I said before, it's about as volatile of a situation as I've seen in my career at ITW, and so I don't – I'm not trying to be mysterious about it. I think until we see that start to stabilize, it’s just really hard to be comfortable sort of raising – I know we are serving the demand we have today really well and sort of run rate from the standpoint that our customers are able to sustain, and I think we are comfortable continuing to – our ability to do that will continue on for the back half. There is a lot more orders and a lot more demand and that’s again why we built backlog, that’s – there is not a demand question. If we had, we – our customers had sort of unimpaired supply chains right now, we would have probably had 10 more points in the second quarter on this. It’s not a fact, that’s just my opinion. But you know just looking at the backlog, and so I think demand is certainly much stronger right now given the pace of the recovery, it’s just the matter off from the standpoint of all the supply chain issues and the risks for our customers. Their pace of being able to – you know what they ultimately need from us. As I said it’s just hard to justify going up with a lot of confidence from here, but it’s more their supply side than their demand side, if that makes sense. Mig Dobre: Yeah, I think it does. The follow up to all of this is that we're starting to think about 2022 and you know if we're using your framework for the back half of ‘21 as a starting point and thinking about 2022. It begs the question as to how well growth is likely to look like next year, right, because there’s nothing we can do when pricing normalizes next year, so you won't have the kind of tailwinds you have this year on that. Scott Santi: We are not thinking about ‘22 much yet, but I would just you know say as a general rule, a lot of the supply chain disruption I think just pushes, adds to the duration of the recovery. I think there is plenty of business now, and because all of it can't be satisfied, a point of demand now and Chris will gave an example of auto. This $60 million we couldn't ship in audio in the second quarter, that's not going away, that’s just getting pushed out. We got dealer inventories at all-time lows, you know I forget what it was, less than a month, maybe less than a month I think I saw you know and so to the extent, I don't think it's necessarily the worst thing in the world that all this demand that’s there right now can’t be fully serviced, because it’s going to allow us to – again this recovery duration gets extended by another two to four quarters maybe. We’ll think harder about that as we get to that part of the year. Mig Dobre: Okay, that's helpful. Lastly from me, on the top of M&A you talked about portions of your business that you consider for divestiture before, that you’ve taken a step back on that this year. I'm sort of curious as activity has picked up multiples are pretty good. Will you reconsider this at a point of time down the like, maybe 2022? Scott Santi: Yes. Mig Dobre: Okay, thank you. Operator: And your next question comes from a line of Julian Mitchell with Barclays. Julian Mitchell: Hi! Good morning. Maybe just a first question – good morning. Maybe just a first question around the free cash flow. I don’t think that’s been touched on yet. You know your inventories and receivables are up each sort of 100 million plus sequentially. Just wondered how you see working capital playing out in the second half and what we should think about that as a sort of cash flow item for the year as a whole. And also sort of more broadly on the CapEx side of things, you know how much is your CapEx coming up this year and have you revised at all your sort of median term CapEx planning assumptions because of these constraints? Scott Santi: I think the best way to model our working capital requirements is our months on-hand and days sales outstanding. Sort of we managed the metrics on those. Generally speaking months on hand runs roughly 2.5 months, DSO I can’t remember off the top of my head, but whatever the average is, 60-ish maybe, so that’s where [inaudible] going to go. Sales go up, month on hand is not going to go up, but the dollars invested, so today we stated that month on hand id going to go up. The same with receivables in terms of DSO. So it’s not a – it’s something that happens automatically. We don’t have to sort of force that to happen, but as sales go up, inventory is going to go up and the month on hand is a function of that’s how 80/20 works. There is some element of it, that give us you know we want X amount of inventory to be able to product the ability to react and respond to our customers, you know order today shipped tomorrow kind of system. So I think that’s the best guidance I can give you on working capital. It’s just not let through and whether that’s cash flow, it’s not going to be – you know when you are jumping up as much as we did in Q2, where Q1 is going to obviously require some incremental working capital. And then the other question, I’m sorry, I’m trying to do my best Michael impersonation here as I can, so I’m trying to think hard. Julian Mitchell: No, no it was just around the capital spending and sort of the rate of [Cross Talk] Scott Santi: So CapEx, I think the plan for the year was up like $300 million or so. Karen Fletcher: $300 million is our target. Scott Santi: Yeah, for the year. So there is no incremental CapEx. We did differ some incremental capacity investments last year because of the pandemic, we didn’t need them. Those are certainly all coming back on, but those are – you know we operate with another element of 80/20 as we want to be front end loaded on capacity, that’s how we serve our customers. So as business continues to go forward, we will continue to invest and stay in that sort of increment, you know meaningful increment ahead of current demand, but that wouldn’t be again something out of the normal of what we always do and it wouldn’t be some big sort of lump coming through. Julian Mitchell: That’s clear, thank you. And then just a quick follow-up on the auto OEM margins. Is the point that, you know after that step down sequentially in Q2, there is sort of 19%-ish level is a good base line or flow in the current sort of demand and cost environment. And so from here they move up sort of slowly given what’s going, but 19 is where they should have bottomed out for now. Chris O’Herlihy: Yeah, that’s a fair assumption. But we are seeing a bottom out here and I think it will be a slow recovery, based on what we are seeing today, a slow recovery from here on out. Scott Santi: You must remember prior peak margins in auto, because it was probably 23 maybe. And so, there is still lot of item recovery to go in auto from where we were then and so I’d say low to mid-20s is certainly achievable over time. Julian Mitchell: Thank you very much. Scott Santi: Sure. Operator: And your final question comes from the line of Joel Tiss with BMO. Joel Tiss: Hey there! Scott, you shouldn’t be so hard on yourself. I think you guys sound a little less annoyed by how dumb all our questions are than usually. Scott Santi: Now you know where the [inaudible] of the group is. Joel Tiss: So, I have like one topic and just two different angles on it. One, can you give us any sense if you think the food industry is kind of distracted with all the consolidation that's going on? And then can we have a little more color on kind of what customers are back? You know our large pieces of your end markets still not really there; I'm thinking like airports and cafeterias and things like that. Can you just give us a little more, a little more detail around sort of the share gains and where the customers are? Thank you. Chris O’Herlihy: Yes, so I don’t know about this distraction from consolidation. I can tell you we are not distracted and we are basically focused on trying to win the recovery here, serve the needs of our customers with innovate new products and so on. So generally I think we're seeing some real nice recovery in food faster than actually than we thought at the beginning of the year. We are certainly seeing the benefit of staying invested in food. Even obviously on price cost, in fact there’s some uncertainly, but obviously that’s – some of that relates to the fact that the price cost environment, some of these are pricing actions here in the second half. We’re concerned about the end markets. I mean basically with food, we are back to about – by the end of this year we expected back over 90% of the 2019 number, so faster than we though. And in terms of end markets, we are seeing a nice pickup in instructional, restaurants coming back, we mentioned restaurants being up 60%. In terms of stuff that’s coming back a little slower, I would say service if we point to serve in Europe as an example. Obviously with significantly lockdowns we are still dealing with over there, we’ll probably come back a little slower there, but at least for the half. We think we’ll see that pick up here in the second half, but generally most end markets are coming back. Lodging is a little slower I would say and transportation, right and airlines. Scott Santi: Transportation, for sure. Joel Tiss: That’s great. Thank you very much. Operator: And there are no further questions at this time. I'll now turn it back over to Karen. Karen Fletcher: Okay, thanks Adam. We appreciate you joining us this morning and if you have any follow-up questions, please let me know. Have a great day! Operator: Thank you for participating in today's conference call. All lines may disconnect at this time.

Operator: Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session [Operator Instructions] Karen Fletcher, Vice President of Investor Relations, you may begin your conference. Karen Fletcher: Thank you, Christie. Good morning, everyone, and welcome to ITW’s First Quarter 2021 Conference Call. I’m joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s first quarter financial results and update our guidance for full-year 2021. Slide 2 is a reminder that this presentation contains Forward-Looking Statements. We refer you to the Company’s 2020 Form 10-K 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 is now my pleasure to turn the call over to our Chairman and CEO, Scott Santi. Scott Santi: Thanks, Karen. Good morning, everyone. In Q1, we saw continued improvement in both the breadth and pace of the recovery, with six of our seven segments delivering strong growth in the quarter, with revenue increases at the segment level ranging from 6% to 13%, and that is with one less shipping day in Q1 of this year versus last year. At the enterprise level, organic growth was plus 6% in Q1 or plus 8% on an equal days basis, and that was despite the fact that our Food Equipment segment was still down 10% in the quarter. The fundamental strength of our 80/20 front-to-back business system and the skill and dedication of our people around the world, combined with the Win the Recovery actions that we initiated over the course of the past year allowed us to meet our customers’ increasing needs while at the same time delivering strong profitability leverage, as evidenced by our 19% earnings growth, 45% incremental margins and 120 basis points of margin benefits from our enterprise initiatives in the quarter. Despite rising raw material costs and a tight supply chain environment, we maintained our world-class service levels to our customers while also establishing several all-time Q1 performance records for the company, including earnings per share of $2.11, operating income of $905 million at an operating margin of 25.5%. Based on our first quarter results and our normal practice of projecting current demand rates through the balance of the year, we are adjusting our 2021 guidance. For the full-year, we now expect organic growth of 10% to 12%, operating margin in the range of 25% to 26% and EPS of $8.20 to $8.60 per share, which at the $8.40 midpoint represents 27% earnings growth versus last year. At the midpoint of our revised guidance, 2021 full-year revenues would be up 1% versus 2019 and EPS would be up 9%. Now stating the obvious, there is still a lot of ground to cover between now and the end of the year, and the near-term environment is certainly not without its challenges. That being said, I have no doubt that we are well positioned to respond to whatever comes our way as we move through the remainder of the year and to continue to deliver differentiated performance in 2021 and beyond. And with that, I will turn the call over to Michael to provide more detail on the quarter and our updated guidance. Michael. Michael Larsen: Alright. Thank you, Scott, and good morning, everyone. The solid demand momentum we had coming out of the fourth quarter continued to gain strength across a broad cross-section of our business portfolio in Q1. Our operating teams around the world responded to our customers’ increasing needs, as they always do, and delivered revenue growth of 10%. Organic growth of 6% was the highest organic growth rate for ITW in almost 10-years. And as Scott mentioned, Q1 had one less day this year. And on an equal days basis, organic revenue grew 8%. Organic growth was positive across all major geographies, with China leading the way with 62%, North America was up 4% and Europe grew 1%. Relative to Q4, the new trend that emerged in Q1 was a meaningful pickup in demand in our CapEx-driven equipment businesses, Test & Measurement and Electronics, which grew 11%; and Welding, which grew 6%. GAAP EPS of 2.11 was up 19% and an all-time EPS record for continuing operations. Operating leverage was a real highlight this quarter with incremental margins of 45% as operating income grew 19% year-over-year. Operating margins improved to 25.5% in the quarter, an increase of almost 200 basis points as a result of volume leverage and a continued strong contribution of 120 basis points from our enterprise initiatives, partially offset by the margin impact of price cost. Excluding the third quarter of 2017, which had the benefit of a onetime legal settlement, operating margin of 25.5% was our highest quarterly margin performance ever. As you know, supply chains around the world are under significant pressure, and ITW’s operating teams certainly had to deal with their fair share of supply challenges and disruptions in the quarter. By leveraging our produce where we sell supply chain strategy, our proprietary 80/20 front-to-back business system and supported by the fact that we were fully staffed for this uptick in demand due to our window recovery initiative, we were able to maintain our normal service levels to our customers. And once again, our ability to deal with the impact of some pretty meaningful supply chain challenges and disruptions and still take care of our customers, with strong levels of profitability, speaks to the quality of the execution at ITW. In the quarter, we experienced raw material cost increases, particularly in categories such as steel, resins and chemicals. And across the company, our operating teams have already initiated pricing plans and actions that will offset all incurred as well as known but not yet incurred raw material cost increases on a dollar per dollar basis, as per our usual process. As a result, price cost is expected to be EPS-neutral for the year. As you know, given our high-margin profile, offsetting cost increases with price on a dollar per dollar basis causes some modest dilution of our operating margin percentage and our incremental margin percentage in the near-term. In Q1, for example, our operating margin was impacted 60 basis points due to price costs. And our incremental margin would actually have been 52%, not 45%, if it wasn’t for this impact from price costs. For the balance of the year and embedded in our guidance are all known raw material increases and the corresponding pricing actions that have either already been implemented or will be. Again, EPS-neutral for the full-year. At this early stage in the recovery, our 25.5% operating margins are already exceeding our pre-COVID operating margins. Four of the seven segments delivered operating margin of around 28% or better in Q1, with one segment, welding, above 30% in a quarter for the first time ever. I think it says a lot of our operating teams, that when faced with the challenges of the global pandemic, they stayed focused on our long-term enterprise strategy and continue to make progress towards our long-term margin performance goal of 28% plus. After-tax return on capital was a record 32.1%. And free cash flow was solid at $541 million with a conversion of 81% of net income, in line with typical seasonality for Q1. We continue to expect 100% plus conversion for the full-year. As planned, we repurchased 250 million of our shares this quarter, and the effective tax rate was 22.4%, slightly below prior year. So in summary, the first quarter was solid for ITW with broad-based organic growth of 6%, strong profitability leverage, 19% earnings growth, 45% incremental profitability and record operating margin and EPS performance. So please turn to Slide 4 for the segment performance. And the information on the left side of the page summarizes the organic revenue growth rate versus prior year by segment for Q1 this year compared to Q4 last year. And it illustrates the broad-based demand recovery that we are seeing in our businesses. And obviously, there is a positive impact as the easier comparisons begin on a year-over-year basis. With the exception of Automotive OEM, every segment had a higher organic growth rate in Q1 than they did in Q4, and six of our seven segments delivered strong organic growth in the quarter, with double-digit growth in Construction Products, and Test & Measurement and Electronics, which were also the most improved segments in this sequential view, going from down 3% in Q4 to up 11% in Q1. Welding improved eight percentage points, growing 6% in Q1, providing further evidence that the industrial CapEx recovery is beginning to take hold as visibility and confidence is coming back. At the enterprise level, ITW’s organic growth rate went from down 1% in Q4 to up 6%. And I would just highlight that this is 6% organic growth with one of our segments, Food Equipment, while on its way to recovery is still down 10% year-over-year. As we go through the segment slides, you will see that this robust organic growth, combined with strong enterprise initiative impact, contributed to some pretty strong operating margin performance in our segments. So let’s go into a little more detail for each segment, starting with our Automotive OEM. And the demand recovery in the fourth quarter continued this quarter with organic growth of 8% and total revenue growth of 13%. North America revenue was down 2% as customers continue to adjust their production schedules in response to the well-publicized shortage of certain components, including semiconductor chips. We estimate this impacted our Q1 sales by about $25 million, and it is likely to continue to impact our revenues to the tune of about $50 million in Q2 and another $50 million in the second half of the year. As you can appreciate, the situation is obviously pretty fluid, but as we sit here today, that is our best estimate, and that is also what we embedded in our updated guidance. Looking past the near-term supply chain issues affecting the auto industry, we are pretty optimistic about the medium-term growth prospects as consumer demand remains strong and dealer inventories are very low by historical standards. By region, North America being down in Q1 was more than offset by Europe, which was up 4%, and China up 58%. And finally, the team delivered solid operating margin performance of 24.1%, an improvement of 320 basis points. Please turn to Slide 5 for Food Equipment. So revenue was down 7%, with organic revenue down 10%, but like I said, much improved versus Q4. And there are solid signs that demand is beginning to recover, as evidenced by orders picking up and a backlog that is up significantly versus prior year. Overall, North America was down 6%, with equipment down only 1% as compared to a 22% decline in Q4. Institutional, which represents about 35% of our North American equipment business was down 7%, with healthcare about flat and education is still down about 10%. Restaurants, which represents 25% of our equipment business, was down in the mid-teens, with full-service restaurants down about 30%, but fast casual up low single digits. Retail, which is now 25% of the business, was up more than 20% as a result of strong demand and new product rollouts. International was down 15% and is really a tale of two regions. As you would expect, Europe was down 22% due to COVID-19-related lockdowns. And on the other hand, Asia Pacific was up 44%, with China up 99%. Overall equipment sales were down 4% and service down 19%. Test & Measurement and Electronics delivered revenue growth of 14% with 11% organic growth. Test & Measurement was up 7% with continued strength in semiconductors and healthcare end markets now supplemented by strengthening demand in the capital equipment businesses as evidenced by the Instron business growing 12%. The electronics business grew 16%, with strong demand for team room technology products, automotive applications and consumer electronics. Operating margin of 28.4% was up 330 basis points. Moving to Slide 6. As I mentioned earlier, we saw a strong sequential improvement in Welding as the segment delivered organic growth of 6%, the highest growth rate in almost three-years. The commercial business, which serves smaller businesses and individual users, usually leads the way in a recovery, and Q1 was their third quarter in a row with double-digit growth, up 17% this quarter. The industrial business continued its sequential improvement trend and was down only 1% with customer CapEx spend picking up and backlogs building. Overall, equipment sales were up 10% and consumables were flat versus prior year. North America was up 7%. And international growth of 4% was primarily driven by recovery in China and some early signs of demand picking up in oil and gas. Solid volume leverage and enterprise initiatives contributed to a record margin performance of 30.3%, which, as I said, marked the first time an ITW segment delivered operating margins above 30%. Polymers & Fluids delivered organic growth of 9%, with polymers up 16%, driven by strength in MRO applications particularly for heavy industries. The automotive aftermarket business continued to benefit from strong retail sales with organic growth of 9%, while fluids, which has a larger presence in Europe was down 1%. Operating margin benefited from solid volume leverage and enterprise initiatives to deliver margins of 25.7%. Moving to Slide 7. Construction was the fastest-growing segment this quarter with organic growth of 13%. North America was up 12%, with continued strong demand in residential renovation and in the home center channel. Commercial construction, which is only about 15% of our U.S. sales, was up 3%. European sales grew 19% with double-digit growth in the U.K. and Continental Europe. Australia and New Zealand grew 7%, with strength in both residential and commercial markets. Operating margin of 27.6% was an improvement of 420 basis points. Specialty revenues were up 10% with organic revenue of 7% and positive growth in all regions. North America was up 6%; Europe, up 5%; and Asia Pacific was up 24%. Demand for consumer packaging remained solid at 6%. So please turn to Slide 8 for an update on our full-year 2021 guidance. And per our usual process, and with the caveat that we are only one quarter into the New Year and a significant number of uncertainties and challenges are still in front of us, we are raising our guidance on all key performance metrics, including organic growth, operating margin and EPS. In doing so, we have obviously factored in our solid Q1 results. And per our usual process, we are projecting current levels of demand exit in Q1, into the future and addressing them for typical seasonality. And as discussed, we have made an allowance for the estimated impact of semiconductor chip shortages on our Auto OEM customers. The outcome of that exercise is an organic growth forecast of 10% to 12% at the enterprise level. This compares to a prior organic growth guidance of 7% to 10%. Foreign currency at today’s exchange rates adds two percentage points to revenue for total revenue growth forecast of 12% to 14%. As you saw, we are off to a strong start on operating leverage and enterprise initiatives, and we are raising our operating margin guidance by 100 basis points to a new range of 25% to 26%, which incorporates all known raw material cost increases and the corresponding pricing actions. Relative to 2020, our 2021 operating margins of 25% to 26% are 250 basis points higher at the midpoint and they are almost 150 basis points higher than our pre-COVID 2019 operating margins of 24.1% as we continue to make progress towards our long-term performance goal of 28% plus, as I mentioned earlier. Our incremental margins for the full-year are expected to be above our typical 35% to 40% range. Finally, we are raising our GAAP EPS guidance by $0.60 and or 8% to a new range of $8.20 to $8.60. The new midpoint of $8.40 represents an earnings growth rate of 27% versus prior year and a 9% increase relative to pre-COVID 2019 EPS of $7.74. A few final housekeeping items to wrap it up, with no changes to: one, the forecast for free cash flow; two, our plan to repurchase approximately $1 billion of our own shares; and three, our expected tax rate of 23% to 24%. As per usual process, our guidance is for the core business only and excludes the previously announced acquisition of the MTS Test & Simulation business. The process to close the acquisition by mid-year remains on-track. And once the acquisition closes, we will provide an update. As we have said before, we do not expect a material financial impact to earnings in 2021. So in summary, a quarter of quality execution in a challenging environment, and as a result, we are off to a solid start to the year. So with that, Karen, I will turn it back to you. Karen Fletcher: Okay. Thank you, Michael. Christie, let’s open up the lines for questions, please. Operator: [Operator Instructions] Your first question comes from the line of Jamie Cook with Crédit Suisse. Jamie Cook: Hi congratulations on a nice quarter. Two questions obviously, the organic growth that you saw in the quarter was fairly strong. I’m just trying to understand how much of it is sort of just end markets recovering versus sort of structural market share gains that ITW has been able to achieve? I guess that is my first question, if you can help us on that. And then my second question, the incrementals that you are putting up, the 45%, and then 52% if we adjust for price cost. This is above your targeted range with supply with COVID, costs and inefficiencies and things like that, I’m just wondering if we should rethink, at some point, your targeted incrementals? Thank you. Michael Larsen: Okay, Jamie. So I think on the first one, it is a little too early to tell. I mean I think we certainly feel very good about how we are positioned with our Win the Recovery strategy and the fact that we stayed invested, giving us the ability to capture market share as we have talked about. So I think it is a little too early to tell how much of that growth in Q1 is really market versus market share gains. And I will just add to that, we have also seen an uptick from the contribution of our customer-back innovation efforts. And so again, that is a result of being able to stay invested in those. And then I would point to our supply chain and our ability to maintain our service levels, where maybe others are struggling a little bit more. So I think anecdotally, there are certainly lots of evidence, if you were to ask our divisions and our segments that we are picking up share. And again, we are going after sustainable, high-quality, profitable market share gains, not opportunistic. And so we feel really good about the start to the year on account of those things. I think on the incrementals, I agree with you, that was a real bright spot, significantly above our normal range of 35% to 40%. At these early stages in the recovery, we expect to be able to maintain the incrementals above the typical range. So 40% plus is what we are planning for and also embedded in our guidance, as you saw today. If you do the math, that is where you end up. I think it is a little premature to update kind of the long-term incremental margin expectations. I think we are comfortable with kind of long-term in the 35% to 40% range. We are certainly making a lot of improvement to the cost structure of the company. But let’s revisit that at a later stage in terms of what we think the long-term incrementals might be on a go-forward basis. For now, if you think kind of beyond this year, I would still stick to the kind of the 35% to 40%. Jamie Cook: Okay. Thank you and congratulations. Michael Larsen: Thank you. Operator: Our next question comes from the line of Jeff Sprague with Vertical Research. Jeffrey Sprague: Impressive. Scott, I was wondering if you could just update us on what you are thinking on M&A. Obviously, you got this MTS deal coming. I’m sure you could have taken a shot on goal at well build if you wanted to get passed there. Maybe just how you see the pipeline kind of going out this year. And I understand these things are always kind of idiosyncratic and have their own timing. But do you see a likelihood that the pace of activity on M&A could be picking up for you over the next six to 12-months? Scott Santi: Well, I think we are really happy with the MTS acquisition, that we have got some work to do, obviously, just to get it closed. All of it is basically standard, new team. But that is I think a great example of where I think acquisitions supplement our core growth focus, which is really owning great businesses that deliver great value to their customers and that we can grow organically. And MTS certainly adds and supplements our capabilities in terms of the Test & Measurement space and our ability to do so. I’m not going to comment on your specific reference or any other deals that others have announced recently, but I would say that we - our appetite for additional MTS-light deals remains certainly strong. I can’t remember exactly the term used, Jeff, but I think the phrase opportunistic is the right way to think about it. It is a combination of, ultimately, what we are interested in doing, what fits with the availability of assets that fit that profile. And that includes both their strategic attributes, the attributes that they offer in terms of our ability to improve their inherent financial performance and all at a value that we think makes sense for us and our shareholders and in terms of return on not just the capital, but the time, effort and energy that we are going to expend. So that is sort of the generic strategic narrative around it. My personal view is I absolutely think, on average, one to three MTS kinds of deals a year seems to be a reasonable - something that absolutely is achievable. We are not going to try to sort of force a deal every year on that. So some years are going to be zero because the circumstances are not going to present - the circumstances that we are looking for are not going to present themselves. But I think there is lots of room for other similar kinds of deals to be additive to what we are doing in a relatively consistent way over, let’s say, the 5-year period. I think I will stop there. Jeffrey Sprague: Thanks. I appreciate that. And also just wondering, outside of auto, which is kind of plain to see, Ford announcements and everything else. Are you seeing these sorts of - it sounds like your own supply chain, you are feeling pretty good about, but other things going on at customer levels that may cause top line disruption to you over the balance of the year? Scott Santi: I think it is hard to project the balance of the year. I would say, for sure, in the second quarter, there are broader issues than just automotive at play. And I would also say that it is absolutely fair that we are having to work a lot harder in terms of securing our own sources of supply than we would under normal circumstances. So we have, for a number of reasons, I think, been able to counter punch our way through a much more challenging supply environment in the first quarter and through the second quarter, I think we are going to be able to do the same, broadly speaking, partly because we source local, that is - we know our suppliers. We source where we produce. And I think partly because of the fact that we stayed invested. We hang on to our people, so we are not having to add people back to support this uptick in demand. But I don’t want to -- no one should take from that, that it is been smooth and easy the whole way through. So we are in it with everybody else and certainly having to work harder than normal to sustain our ability to supply. But I think so far, I feel like we have been able to, as I said, counter punch our way through it pretty well. And I would also say beyond the automotive space, there are certainly some pockets where we have some other - some of our customers being impacted by some of their own supply chain issues. Plastics remain tight in a number of areas. I don’t think anything is sort of concentrated and significant as in auto, but it is certainly a scramble right now on a lot of levels. Jeffrey Sprague: Yes, understood. Thanks for the color, I appreciate it. Good luck. Scott Santi: Thank you. Operator: Your next question comes from the line of Scott Davis with Melius Research. Scott Davis: Hi good morning guys and Karen, I would echo Jeff’s comments on exceptional numbers is going to become the usual here. Anyways, not a lot to pick on here. One of the comments you just made, Scott, on price or maybe it was Mike, price cost neutral, is that a comment that you would make across the entire portfolio, that segment by segment, you expect to be in a cost-neutral position this year or are there certain segments perhaps that take a little longer to get price or could be behind yes. Michael Larsen: I mean, I think the one obvious one, Scott, is the auto business, where just given the nature of the business and how the contracts are structured, getting price takes a little longer and requires a funnel of new products that are coming in at more attractive margins. So that is the one where, in the near-term, we are seeing the most significant pressure on margins from a price cost standpoint. And the other six segments, I think there is, given the differentiated nature of the products and services that we provide, we have a long history of being able to offset any cost increases with price. There is typically a little bit of a lag. I will tell you, we learned some things when we went through this in 2018. We are definitely much more, say, focused and on top of things earlier on. And our divisions are taking the actions that are required to kind of stay ahead of things this time around. So while there is certainly some pressure here, you saw 60 basis points of margin percentage impact and seven percentage points of incremental margin impact. The overall goal here is to offset on a dollar-for-dollar basis, and we are confident that we will be able to do that for the year and in total, even with the pressure and the difficulty in automotive. Scott Davis: Okay, that is helpful. And just as a follow-up, I’m just going to jump on the bandwagon of what Jeff was asking about on M&A. I would think that given the success you have had in kind of multiple different types of businesses, your assets, your confidence in going after a bigger asset and implementing 80/20 and really driving value perhaps way above what the - world could do or other strategic would perhaps widen that scope of ability to be able to do deals on the larger side. How do you guys think about that and applying 80/20 when you think about an M&A model? Scott Santi: Yes. I don’t think size is a barrier at all or a limitation or something that would scare us away. I would point to MTS as being - it is not quite $0.5 billion in annual revenue. So it is not a small business by any stretch. I would tell you a couple of things. One is that we have never been more prepared from the standpoint of discipline around integration, the quality of practice around our 80/20 front-to-back operating system, the depth of talent. This is all a result of the last nine-years of work on this. So all of that certainly is just additive to, I think, our ability to - if we find the right opportunity to do a really good job with it. So it is not an issue of - size doesn’t scare us. I think sometimes what does happen is the larger the size, there tends to be it is a time to sort of a pure play. This is the part of the business. We want it all. The bigger the asset, the more sort of nonstrategic, non-desirable stuff you have to deal with sometimes. But that is also just sort of part of the tactics. But again, I don’t think it is big or small that is the driving benefit to us as much as does it really fit with what we are good at, does it fit an area of the market we think has long-term above market organic growth prospects, et cetera. And whether it is large or relatively small, and by that I mean division size, those would be equally attractive options to us. Scott Davis: Makes sense. Thank you Scott, good luck folks. Scott Santi: You bet. Thanks. Michael Larsen: Thanks. Operator: Your next question comes from the line of John Inch with Gordon Haskett. John Inch: Scott and Michael, China, up 62% core. Have your factories and operations been able to keep up with that level of demand, which I get the premise of some compares, so it is not completely volume-driven, which presumably this is going to be up as much in the second quarter, just given it compares as well. Anything you would call out there? Because I understand the point that your factories are local and so forth, but that is a very high-growth rate. And I’m just curious how kind of the quarter played out. And did you have to leave any sales on the table that maybe kind of get picked up later even? Scott Santi: Yes. I actually probably can’t answer that last piece other than to say that the business for us that is really of the biggest scale in China is auto. And they did a phenomenal job, if you look at the kind of volume. Now that is a big number year-on-year, but remember that China was way down in the first quarter last year. So from the standpoint of the sequential, I don’t have that. I don’t know, maybe you have, Michael, from Q4 to Q1, it wasn’t a 58% jump, right. But I would say, overall, our decision to hang on to our people and just be ready for this has certainly given us an ability to respond. That if we were having to not only source scramble for raw material, but also scramble for people, it would certainly be a more difficult challenge than it was. John Inch: That is fair. I’m curious, so we all know sort of the constraints around semicon and auto, Scott, you already talked about. I mean, I have sort of alluded to these questions in the past about the post-COVID world, demand is going to surge pretty aggres8sively. And I’m curious, we have already started to see that, as evidenced by your own very healthy, robust results. Have your operations experienced any meaningful pinch points as global demand has come back that may have been surprising or that provides, per se, lessons learned, Scott, Michael, but you are applying as presumably, this is not a one or two quarter phenomenon. This is going to carry forward for a little while here. Is there anything you can share with us in terms of how you are thinking about sort of operations and just playing to the market share wins that sort of thing? Scott Santi: Yes. I’m trying to think about how to sort of tackle that one, John. Maybe the place to start is, inherent in our system is, we always talk about the fact that we produce today what our customers bought yesterday. So what makes that work is the fact that we are always carrying surplus capacity, on the order of magnitude of 15% to 20% over what current demand is. Because that demand comes, it is an average on a daily basis. So the only way we can produce today what our customers bought yesterday, as that number moves up and down, is to make sure that we have ample extra capacity to flex. So that sort of helps us as things accelerate, we do have a cushion to lean on. We also have - our supplier base is connected into that system in a way that they are also carrying that kind of ability to flex. Now it works really well. It doesn’t work perfectly, certainly with - we have our sort of rubs and issues along the way, and I’m sure we will. But there are things that we can overcome and work our way through. But maybe that is the best answer. I don’t know if that totally addresses it, but we start with a sort of level of flex that certainly helps us respond and add even more capacity as we are pivoting into kind of an environment where the economy is starting to tick off. John Inch: Well, maybe an example, it is going to be Food Equipment. That seems obvious that that is going to come back pretty aggressively in the second half, touch wood. Is there anything you are doing with respect to your operations to make sure that you actually don’t, say, lose share because -- or lose a sale because you can’t fulfill a product demand or something like that? Scott Santi: Yes, I’m completely comfortable that they know exactly what to do. I mean, again, we have hung on to all of our people through this. We have hang on to all of our capacity. We are locked and loaded and ready to go. I have no doubt about it, into equipment, and everywhere else in the company. John Inch: Got it. Great, thank you very much. Scott Santi: You bet. Operator: Your next question comes from the line of Ann Duignan with JPMorgan. Ann Duignan: Ho g good morning everybody. Could you dig a little deeper into your comments around capital, like equipment demand picking up? I mean, I know you talked about it in places like Welding. But just a little bit more color by region, by application, by segment. Would just like to hear from you in terms of what specifically you are seeing, because that is a big change. Michael Larsen: Yes. I think, Ann, as you are saying, that was kind of the new trend that showed up here in the first quarter. We did see orders and backlog starting to build last year on the equipment side. But really in Q1 here, if you look at the businesses that had the most significant improvement relative to historical run rates, they are Test & Measurement, as I mentioned, and Welding. And so those are businesses that are more driven by investment in CapEx. And I think as the visibility to the recovery and the confidence in the recovery takes hold, our customers are placing orders for larger equipment. And we saw a little bit of that also in Specialty Products, on the packaging equipment side. And it is really a broad-based trend. So I don’t really have the breakdown for you on a global basis, but really across the board, we saw really nice pickup in demand for the CapEx-driven products and those three businesses in particular. And I think we are off to a good start here in April. So I think we saw good momentum coming into Q1, kind of sustained that. March was a strong month. And April, everything is on-track here. Ann Duignan: Okay. I appreciate the color on that. And then just back to the whole maintaining your employee base and we see what a difference that makes this year. I mean, I don’t think that, that should be understated given that almost every other company we cover mentioned their inability to attract labor as an issue. So congratulations on that but what about your customers? I mean, is there any risk that your customers have to defer orders? I mean, it is kind of counter to what you just talked about. But if your employers like the restaurants, for example, if they cannot hire, is there any risk that they will have to defer orders as we go through the year just because they can’t get labor? Scott Santi: Yes. I would be pretty certain it is going to have some impact in terms of the overall pace of the recovery in a number of areas. My personal view, Ann, is that is maybe not even such a bad thing in terms of extending the duration of the recovery and sort of managing the pace a little bit in the short run. So even with this auto, auto is a real extreme example of that, not so much on labor, but from semiconductor chips. Michael talked about the fact that consumer demand for autos is strong. Dealer inventories are at, I think, around the world, historic lows. So the fact that all of that is not trying to be satisfied in two quarters and it actually gets spread out, and so I just use that same analogy in places like Food Equipment, as I don’t think it is necessarily a terrible thing that there are some limitations, either labor or other things, as we move through the recovery in some of our sectors. It doesn’t mean demand isn’t going to grow. It is not going to be this feeding frenzy of satisfying in a relatively short period of time. I don’t know exactly how it is all going to play out, but I don’t think some of those limitations in the near-term are necessarily bad things for the long haul, if that makes sense. Ann Duignan: Yes. No, I completely agree with you. It is kind of a forced rationalization of the industry. So yes, I appreciate the color. I will get back in line. Thanks. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Scott or Michael, you mentioned Welding margin now above 30%, which I think is a new record for you. And as you know, Welding isn’t close to fully recovered yet. If I go back to 2018, your margin at similar levels of revenue was approximately 28%. So if we step back and try to ingest that improvement, understanding that we haven’t changed the long-term 28% target for the company over the last couple of years, but does it give you confidence that maybe the whole company can even do better than that over time? Michael Larsen: Andy, the easy answer to your question is, with the types of incrementals that our segments are putting up - the enterprise level is 45, welding was also 45, the answer is that margins will continue to improve just from the volume leverage alone. And then we know that there is still a ways to go to reach our full potential from an 80/20 front-to-back implementation standpoint as well. You see these enterprise initiatives continue to come in at 120 basis points at the enterprise level. Maybe a little bit less than that in Welding, but still a significant contribution from the initiatives. And so I have said this many times, and I will continue to say this. I mean, and then it is based on the bottoms-up planning that we do. We expect that all of our segments will continue to improve their operating margin performance, like I said, as demand recovers. And maybe more importantly, we still have a lot of things within our own control here that regardless of what happens from a demand standpoint, we can continue to improve the margin performance... Scott Santi: While they grew at an accelerated rate organically. Michael Larsen: While growing... Scott Santi: That is the yin and the yang of the... Michael Larsen: That is right. That is right. We can do both, right. And then what I said in my comments is what is really encouraging, I think, is that with everything going on last year and right now, with supply chain as well, the fact that our teams leverage this Win the Recovery strategy, stayed focused on executing a long-term enterprise strategy, and we are sitting here really you could argue one quarter into the recovery, and we have a clear path in front of us as we continue to make progress towards our 28%. You said 28%. I thought my comments I may have said 28% plus. That we continue to make progress towards our long-term margin goal of 28% plus. Andrew Kaplowitz: Very helpful, guys. And then we talked a little bit about Food Equipment on the call already, but maybe just focusing on it. Obviously, reopening is happening faster, at least in the U.S. now. And you do have this large institutional business that could benefit from significant stimulus that already has been passed, especially for school cafeterias. So have you seen any of that money start to flow to that business or have you seen accelerating improvement in your restaurant business yet? Michael Larsen: Not yet is the answer. I mean, like I mentioned, we are starting to see a pickup in orders and backlog. As you know, these businesses are not really backlog-driven. But the quoting activity is solid, and it is reasonable to assume that there will be a pickup on the institutional side as we move forward, including for schools. So I think that is part of what is encouraging is we are not firing on all cylinders yet. We put up some pretty good results here in Q1 and we still have Food Equipment, as you mentioned, down 10% organic, with a strong recovery ahead of it. So I think that is really encouraging. Andrew Kaplowitz: Thank guys, I appreciate it. Michael Larsen: Welcome. Operator: Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Can we talk a little bit about, just returning to the issue of price cost. I know you guys said that it is a 60 basis points impact on margins in the first quarter. If we look at the full-year, how does that kind of flow from here? Maybe what is embedded for price cost headwinds in the full-year margin guidance? Michael Larsen: Yes. So let me start by saying I would be a little cautious on Q2. There is a little bit of a timing issue here. And just given how high our margins are, I think these price cost pressures will remain with us, particularly in the near-term. So Q2, this will be dilutive to margin percentage, again, EPS-neutral on a dollar-for-dollar basis. So it is purely a margin percentage, incremental percentage impact. So 60 basis points in Q2 -in Q1. Something around that same level, maybe a little worse than that in Q2, based on what we know today. And then it should begin to improve in the second half of the year. And maybe for the full-year, we end up somewhere around 50 to 60 basis points of margin impact. Nicole DeBlase: Okay. Got it. Understood. And the selling days impact that you guys had in the first quarter, does that normalize throughout the year, like I think a lot of companies have talked about the selling days impact reversing in 4Q. Is that how it is for ITW as well? Michael Larsen: It is not, no. we have 64-days in Q2 and Q3 and 52-days in Q4, which is the same as we had last year. So this was purely a Q1 issue. If you remember, last year was a leap year. So I hate bringing this up. That is how the calendar works. Nicole DeBlase: Okay. Thanks guys. I will pass it on. Operator: Your next question comes from the line of Mig Dobre with Baird. Mircea Dobre: Thank you and congrats on a really strong start to the year. I guess my question, Michael, maybe for you. I was observing that SG&A has been relatively flattish year-over-year on really nice, strong revenue growth in Q1. And I’m just sort of wondering here kind of how you constructed your outlook for the full-year, because you are obviously guiding for your revenues now above pre-COVID levels, above 2019 levels. I’m sort of wondering if it is fair for us to sort of expect that SG&A is going to remain relatively muted or are you essentially kind of baking in a return to more normalized, call it, pre-COVID levels? And I’m talking about the full-year run rate here. Michael Larsen: Yes. So I would say, Mig, I mean, I would expect somewhere around - as our sales grow, obviously, the cost to support those sales, including things like commissions, are going to grow. And those costs are pretty correlated. And I think the last time I looked at it here a few days ago, I would assume something around 17% of sales in SG&A. And so that is maybe from a modeling standpoint, the way to look at it. I would just point to the fact, I mean, what we talked about earlier, the fact that we didn’t have lots of people leave the company last year, and now we are hiring and a ton of costs are coming back in. That is not what I’m talking about here. These are simply primarily sales commissions and costs like that, that are going to grow in line with - as the top line of the company grows this year in the low teens. So that is what you would expect to see. Mircea Dobre: Got it. That is helpful. So around 17. I mean, that is basically going to be a bit higher than what you have done in Q1. That is probably the volume ramp that you are sort of talking about as the year progresses? Michael Larsen: Yes. I mean I think the one thing I know for sure is that there is going to be a big ramp-up here in Q2. Mircea Dobre: Right. And then my follow-up, and folks have been asking about the Food Equipment business, and I will, too, but I guess I will ask it this way. If I look at your business, it seems to me that this vertical, this segment is really the one that is probably been transformed the most by COVID In terms of sort of the end customers having to operate differently, having to think about doing business differently. And I’m sort of wondering where that leads you strategically longer term, right? Because the industry is consolidating, you obviously have an important market position and really good product. How do you think about the next five-years from an innovation standpoint, from ability to gain share and, more importantly, you sort of stepping up to the plate and consolidating the industry as well because there are a lot of smaller players that are still out there. Scott Santi: Yes. Well, I would be happy to try to address some of that. Let me start at the end of your question first. We are not interested in consolidation. We are not an economy scale company. We are not going to buy anything to consolidate. We are going to own great businesses that deliver value for their customers through the performance of the products and services that they offer. And so whether the industry consolidates or not, ultimately, we compete based on our ability to deliver superior value to the customers that we choose to target in those industries. And so that is essentially all I will say our businesses are very well positioned in this space. We expect that they will continue to grow at an accelerated rate with best-in-class margins and returns in that industry. And absolutely, to your point, we will have to continue to evolve and innovate as our customers evolve and innovate based on COVID or anything else in terms of what happens in that industry. And I think I will just leave it there. Mircea Dobre: Alright. Thanks for the color. Operator: Your next question comes from the line of Stephen Volkmann with Jefferies. Stephen Edward: Great. I just had one quick follow-up back on sort of your incremental margin discussion, Michael. If I remember correctly, I think the plan, obviously, dollar-for-dollar on price cost sort of in year one. But then as we move forward, I think the goal is to recover the margin on top of that. So why wouldn’t we have a higher incremental margin in 2022 than kind of your base case? Michael Larsen: I think that is a good question. I think on price cost, I mean, what we are talking about right now is this pretty significant increase in raw material costs and offsetting those dollar-for-dollar with price. And in the near-term, as I said, that puts pressure on margins. I think once you get past the surge in raw material costs and those start to kind of stabilize or maybe even come down a little bit as expected, frankly, for some of these commodities in the back half of the year, you are holding on to the price and you are going to end up in a favorable position again from a price cost standpoint. That is kind of how this has played out historically. And historically, that is what is been embedded in that 35% to 40% incremental margin rate that we have been able to put up. I think once we go through - there is kind of the planning for 2022, I will give you a better feel for the ability to maintain incremental margins either above the historical range or in the historical range. But as we sit here today, like I said earlier, for modeling purposes, I would stick to the 35% to 40% for now. And we will give you an update as we go through the year here. But clearly, this year and in Q1 and in the near-term, really strong incremental margin performance. I don’t know if I said this, but we are above the range of 35% to 40%, so 40% plus, and that is with price/cost for the full-year. Headwinds are somewhere around four to five percentage points to the incremental margin. So really strong performance here as the recovery takes hold. Stephen Edward: Right. Yes. I certainly agree with that. It just seems like maybe you get that four or five percentage points back next year. But I will look forward to your update whenever you are ready. Michael Larsen: Okay. That is fair. Operator: Your next question comes from the line of Steven Fisher with UBS. Steven Fisher: I just want to confirm that you have not baked in any cyclical increase in daily run rate of sales demand into your guidance. I imagine you are going to say you haven’t. But just in an accelerating economic growth environment, it seems like your approach would be particularly conservative at this point. Michael Larsen: Yes, I think that is for you to decide. I think the argument you are making is not unreasonable. I think what we do is we give you kind of the outlook for the company at current run rates. And if you think that Food Equipment is going to come back stronger or you think the auto issue is a bigger issue, then you can certainly make those adjustments to your model. And as you know, ITW is this is a pretty predictable company certainly at the enterprise level. And so you can get pretty close to the models that we are looking at. And so we think this is the best way to communicate the outlook for the company and being very transparent. And then it is for you to decide kind of segment-by-segment how you think things might play out based on whatever data points that you look at. Steven Fisher: Fair enough, that is what I thought you would say. I just want to confirm. And then what have you assumed for divestitures and kind of approximate timing on that, if any new updates there. Michael Larsen: Yes. So really no new update, I mean, as you recall, we put those on hold last year really to focus on the recovery here. And the most important thing we have to do is get the organic growth rate and demonstrate that we can grow consistently above market. The view was that working on divestitures is really a distraction from that. And by the way, we believe, and it is playing out that way, as these businesses are going to be more valuable when we kind of reinitiate the process, which will probably be somewhere at the end of this year, early next year. So from a strategic standpoint, these are still businesses that we are that are not a great fit for ITW, that are a much better fit, frankly, with other people, we think. And so that view has not changed, but we have kind of deferred all the activities to later this year or early next year. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just a question perhaps for Michael around the free cash flow. There is been a lot of P&L-related questions. So the free cash flow, I think, was flattish in Q1 year-on-year. The net income was up a good amount. So it seems like maybe there is some working capital headwind, receivables, perhaps something there. Maybe just help us understand sort of what impact the component and supply chain issues are having on your own sort of working capital management and any cash headwinds associated with that. And how we should think about CapEx this year kind of catching up or ramping back up for ITW. And I understand that, that conversion rate metric should fall year-on-year because you are in a growth year now. Michael Larsen: Yes. I mean, that is exactly what is happening. I mean, we are - clearly as the top line grows 10%, you are going to see, at least in the near-term, a corresponding increase in inventory levels, which is part of what Scott talked about as demand grows, inventory levels are going to grow. The same thing with receivables. The fact that receivables are growing is actually -- as you know, it is a good thing. I think what we keep an eye on is the working capital metrics around inventory months on hand are all trending in the right direction. I will just point out that if you can see you are looking at from the outside, but when we look at our receivable aging and our bad debt, we are below pre-COVID levels in a meaningful way. So I think the teams really did an excellent job managing working capital overall, including receivables last year. And I think we talked about in the last call, working capital headwinds, somewhere around $125 million was in the plan for this year. The growth is a little bit stronger, so it might be a little bit more than that, but it is not going to change. We still are confident we will get to 100% plus conversion rate. But the goal here really is - we generate plenty of cash. The goal here is to grow the company. It would make no sense for us to try to hold back on inventory levels at this point. So on CapEx, as you know, last year, some of the capacity expansions were deferred. A lot of those are coming back now. CapEx will be somewhere around 2% of sales, which is where it has been historically. That is not a set number. That is an outcome of how we allocate capital. So if you pencil in somewhere around $300 million, that is directionally, that is probably where we will end up. That is up. I think last year, we did $236 million or something like that. So we are definitely expanding. And you saw the CapEx number moved up a little bit here in the first quarter. And that is really as these capacity expansions we are adding equipment, we are adding injection molding machines in auto and other places to support our customers as demand recovers. So. Julian Mitchell: Great, thank you. Michael Larsen: Sure. Operator: Joe Ritchie, your line is open. Joseph Ritchie: Thanks for squeezing me in everybody. So my first question, maybe just focus on organic growth for a second. You raised the outlook for the year. I’m curious, were any segments not raised? So for example, like some of the headwinds that you talked about in Auto OEM and the maybe slower start to the year in Food Equipment? Michael Larsen: Yes. So all segments, except for Auto OEM, and this is based on the [run rate ratio,] right? So this is a pure mathematical, based on demand, one of the demand exit in Q1, six of seven segments are higher in terms of the organic growth forecast for the year. And in particular, the CapEx-driven businesses as we talked about, right so Test & Measurement, Welding. And then in auto, some of these supply chain issues and the allowance we made in our guidance, they are probably towards the low end of the range that we gave back in January. I think the range back then was 14 to 18. And we are probably at the low end of that. Auto builds are still projected to be up 12% for the year. So we will see. That is the one area where there is quite a bit of uncertainty particularly. And I will just maybe reiterate this, be a little cautious around the second quarter here and not get too excited. But medium term, we are very encouraged by the underlying consumer demand as well as inventory levels, as we talked about, in that segment. Joseph Ritchie: Got it. That makes sense. And then maybe my one follow-on, either for Scott or Michael. As you think about you guys used to always talk about your content on a regional basis in the auto segment. I’m just curious, does that change at all with the uptick that we are seeing in EVs? Scott Santi: We talked about it from a long-term opportunity perspective, it is actually roughly equivalent. it that we do around the power-train now that obviously wouldn’t exist, but there is a whole range of new sort of applications in the EV space. So I think the last time we looked at it, it was on a per car basis neutral to maybe a little higher with EV. Michael Larsen: Higher, actually, yes. Scott Santi: $2 versus maybe 5% to 10% higher. So net-net, we are pretty agnostic. I think the other thing that we have said in the past, this is not sort of current data, but roughly I think it was less than 1/4 of our sales would go away if every car was EV tomorrow, basically 20% or 25% of our revenues are at risk. 75% of what we do today goes in either place, and there is certainly plenty of new applications to replace that other 20% or so over time, plus a little bit. Joseph Ritchie: Got it. That is helpful. Have a good weekend everyone. Scott Santi: Alright. Thank you. Michael Larsen: Thank you. Karen Fletcher: Thanks, Joe. I think we are out of time now. So I would like to thank everybody for joining us this morning. Feel free to call me with any follow-up questions. And that concludes our call today. Operator: Thank you for participating in today’s conference call. All lines may disconnect at this time.