Illinois Tool Works Inc (ITW) — Q2 2015 Earnings Call Transcript

Great. Thanks, Madison. And good morning. Welcome to ITW's second quarter 2015 conference call. Joining me this morning are our CEO, Scott Santi; and our CFO, Michael Larsen. During today's call, we will discuss our second quarter financial results and update you on our earnings forecast. Before we get to the results, let me remind you that this presentation contains our financial forecast for the 2015 third quarter and full-year as well as other forward-looking statements identified on the slide. We refer you to the company's 2014 Form 10-K and first quarter 2015 Form 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. Also, this presentation uses certain non-GAAP measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the press release. So with that, I'll turn the call over to Scott.

Thanks, Aaron, and good morning, everyone. In the face of a fairly unprecedented combination of currency translation headwinds and contracting demand in two of the company's highest growth core businesses, ITW delivered another solid quarter of execution with earnings per share of $1.30, an increase of 7% over the last year. Excluding the $0.12 negative impact of currency translation, our earnings per share would have been up 17%. Operating margin in the quarter was up 80 basis points year-on-year, and operating margin of 21.3% was a new all-time record for the company. In addition, after-tax return on invested capital reached our Enterprise Strategy target of 20% plus. Despite the current challenges associated with the external environment, we continue to focus on and invest in our strategy to accelerate organic revenue growth across the company. In the first half of 2015, we invested roughly $300 million in our businesses, as we added capital equipment to expand capacity, launched new products, and continued to simplify our businesses in order to focus them on their largest and most compelling growth opportunities. Our pivot and focus to organic growth is already delivering solid above-market growth in our Automotive OEM and Food Equipment segments, and we saw nice improvement in the organic growth rate in our Construction segment this quarter. As a result, we now have three of our seven segments growing organically in the mid-to-upper single-digit range. Revenues in our Welding segment and Test & Measurement platform were down significantly in Q2, Welding down 6% and Test & Measurement down 7%, as both businesses are seeing contracting demand from the oil and gas sector and the continued soft capital spending environment for industrial equipment more generally. Both of these businesses have traditionally been among ITW's fastest and most consistent organic growers, and we believe that the long-term fundamentals for growth and profitability in both of these businesses remain very strong. As a result, we continue to invest to ensure that they are well positioned to return to their historic growth rates as conditions in their end markets improve. As we wrap up the second quarter of 2015, we are also at the halfway point of our five-year Enterprise Strategy. And while we have a lot of work left to do, we've made substantial progress in executing our strategy to position ITW to deliver solid above-market growth with best-in-class margins and returns on capital. We've divested over 30 businesses including two full segments in conjunction with our portfolio strategy to focus the company exclusively on businesses that have strong and sustainable differentiation attributes. Our business teams are currently executing the product line level component of this strategy through our product line simplification initiative. As a result, ITW today has a much more differentiated set of businesses with better overall earnings quality and significantly higher organic growth potential. As an aside and as an illustration of the significantly higher overall level of quality of the ITW business portfolio, last year, ITW's operating income of $2.9 billion was an all-time record for the company. The prior record of $2.8 billion was set in 2012 when the company's revenues were $3.4 billion higher. So in other words, last year, we made more money than we ever had in the history of the company and revenues that were $3.4 billion lower than the prior record. Our focus now will increasingly turn to leveraging this much higher quality business portfolio into accelerated organic growth. Activities associated with business structure simplification are starting to lessen with significant incremental benefits still to come. Strategic sourcing is now fully embedded in our operations and delivering consistent above-plan benefits. Organizationally, as the effort and attention required to mobilize, execute, and support these initiatives winds down over the next 18 months, we will be increasingly able to shift our focus towards leveraging our much more highly differentiated portfolio and to accelerate organic growth. Since we started executing on the Enterprise Strategy two and a half years ago, we have expanded operating margin and ROIC by more than 500 basis points, and we remain solidly on track to meet or exceed our 2017 performance goals of 23% operating margin, 20% plus after-tax ROIC, and organic growth of 200 basis points above global GDP. I'll now turn the call over to Michael.

Thank you, Scott, and good morning. Let's get started with the financial summary on page four. EPS for the quarter was $1.30, an increase of 7% versus prior year, and came in at the high end of our guidance range, driven by better margins and favorable currency relative to the exchange rates assumed in the guidance we provided on April 21. On a year-over-year basis, currency was a $0.12 headwind, and on a constant currency basis, EPS growth would have been 10 points higher at 17%. Softness in the capital spending environment in oil and gas end markets in our Welding and Test & Measurement businesses resulted in essentially flat organic revenue, which was offset by record margin performance as Enterprise Initiatives again contributed 100 basis points of operating margin expansion. Revenues were $3.4 billion, up 0.2% organically after the expected 1% impact from product line simplification. Positively, we saw continued strong organic growth performance from our Automotive OEM and Food Equipment segments at plus 6% and plus 4% respectively, and a nice acceleration in our organic growth rate in Construction of plus 6%. I'll cover the segments in a little bit more detail in a few slides. Cash generation continues to be very good, free cash flow at $384 million, 80% of net income, and we remain on track to meet or exceed our target of 100% for the year. On capital allocation, we invested approximately $180 million in share repurchases and are on track for $2 billion for the year. Also really good progress in the after-tax return on invested capital, now solidly above our long-term target of 20% plus. In summary, excellent execution of our Enterprise Initiatives continues to deliver strong financial results in a challenging capital spending environment. Turning to revenue by geography on page five, organic revenue was up slightly in North America and international, and up 1% excluding the impact of product line simplifications. Our businesses in EMEA continued to do well. EMEA was up 2% with another quarter of double-digit growth in Automotive OEM. Asia-Pacific was down 3% due to Welding and Test & Measurement and Electronics, partially offset by growth in Construction Products and Polymers & Fluids. China, which represents approximately 5% of total revenues, was down this quarter 2% due to Welding's oil and gas business. Our Automotive OEM business, however, was up 8% and continues to outperform the underlying market. Overall, strong organic growth in three segments with Automotive, Food Equipment, and now Construction Products joining the mix, offset by softer demand in our Industrial equipment businesses, Welding and Test & Measurement. On page six, operating margin performance continues to be excellent with 21.3% this quarter being an all-time high for the company and 80 basis points better than last year. Operating margin improved in five of our seven segments with Food Equipment up 250 basis points, Construction up 170 basis points, and Polymers & Fluids up 130 basis points. Welding was down slightly, and Specialty was down 70 basis points on a tough comparison versus prior year. On the right side, you can see the key drivers of margin expansion this quarter with Enterprise Initiatives as the primary driver with 100 basis points of positive impact; price/cost was favorable 20 basis points, and other was a slight headwind due to a project in Specialty Products last year that did not repeat this year. As you can see, 150 basis points of margin expansion in the first half as we target to exceed 21% operating margin for the year. Let me just point out that while first half revenues are down more than $500 million, operating income is essentially flat, and EPS is up 13%, 23% on a constant currency basis. And so, overall, a lot of good things going on in terms of execution on self-help in an external operating environment that remains challenging and somewhat uncertain. Turning to page seven, we get into the segment results. And on the left side, we listed organic growth by segment for the first half of 2015. You can clearly see the three segments growing solidly at 6%, 4%, and 4% year-over-year, and you see the impact of the soft capital spending environment on our Welding and Test & Measurement and Electronics segments. As Scott said, our Welding and Test & Measurement businesses have historically been strong above-market growth businesses. In fact, from 2010 to 2014, both businesses grew organic revenue at a 6% CAGR. As we've discussed previously, Specialty Products and Polymers & Fluids are still impacted by a significant amount of product line simplification. Now let me give you some additional color by segment starting with Automotive OEM. Automotive OEM continues to leverage ITW's unique approach to innovation and drive product penetration gains for strong organic growth. As you can see, organic revenue in the second quarter was up 6% on flat worldwide auto builds. By geography, Europe continued to outperform with double-digit revenue growth; and in North America, the business was up 5%, again solidly above 2% auto builds. And in China, organic revenues grew 8%, outperforming auto builds also. Operating margin improved 80 basis points to 24.5%. In our Test & Measurement and Electronics segment, organic revenue declined 5% in the quarter. Organic revenue in Test & Measurement declined 7% due to the previously-discussed impact of the softer capital spending environment, and the Electronics business was down slightly at 3%. Operating margin for the segment increased 90 basis points to 16.1% in the quarter or 20.1% excluding the intangible amortization. In the appendix, we included the schedule with a margin impact of amortization expense from acquisition-related intangible assets by segment and in total. Food Equipment organic growth was up 4% with North America Equipment up 9%, driven by new products and penetration gains in warewash, refrigeration, and cooking. Internationally, Equipment revenue was flat on a tough year-over-year comparison. Good performance in Service as revenues grew 5% in North America, 3% internationally. The segment's operating margin of 22% was 250 basis points higher than the prior year period, driven by strong execution of Enterprise Initiatives and growth from new products. In the Polymers & Fluids segment, still a significant amount of product line simplification in the quarter, as organic revenue declined 2% while operating margin expanded by 130 basis points. Polymers was down 3%, Fluids & Hygiene was down 2%, and Automotive Aftermarket was flat. Turning to Welding, this segment is clearly being impacted by softer demand on the equipment side, which represents two-thirds of the business. In addition, there is a fair amount of product line simplification this quarter, and as you can see, organic revenue was down 6%, as operating margin remained essentially flat above 26% and solidly best-in-class. As expected, demand for equipment in oil and gas related end markets remained soft in the quarter, very much in line with Q1 run rates. And in addition, the commercial business and the industrial businesses were impacted by the soft capital spending environment as well. On slide 10, the Construction Products segment exceeded top line growth expectations this quarter with organic revenue growth of 6%, the highest growth rate in four years. North America is about 40% of the segment and led the way, up 15% with growth in all end markets, particularly renovation and remodeling. Asia-Pacific increased 3% for the quarter, and Europe was down slightly, as strength in the United Kingdom was offset by softness in Continental Europe. Operating margin came in at 19.9%, an improvement of 170 basis points. In Specialty Products, organic revenue was down 3% due in part to product line simplification. North America was down 5%, and International was down 1%. Operating margin fell slightly, but was still very good at 23.5%. So that wraps up the segment discussion and now I'll turn to the outlook for the balance of the year on slide 11. As you saw this morning, given the strong EPS performance in the quarter, we're raising our full-year EPS guidance by $0.05 at the midpoint. We now expect full-year EPS of $5.07 to $5.23, which is 10% growth at the $5.15 midpoint. As a reminder, EPS for the year would be up 18% on a constant currency basis. Based on current demand trends, full-year organic revenue growth is expected to be approximately 1%, up 2% excluding the impact of product line simplification. As you know, product line simplification remains a 1 percentage point drag throughout 2015 and then moderates starting in 2016. Total revenue is expected to be down 6% as a result of currency, which creates a 7% headwind at current exchange rates. We clearly expect that slightly lower revenues will be offset by record margin performance. Its operating margin remains solidly on track to exceed 21% for the full year, and it's worth pointing out that in spite of a 6% or $850 million revenue decline, we're on track to set a new record for operating income dollars this year. In terms of capital allocation, we continue to invest aggressively for growth, pay an attractive dividend that grows in line with earnings over time, and as I said earlier, we expect to invest approximately $2 billion in share repurchases with $1.8 billion completed to-date. Turning to the third quarter, we expect EPS to be in a range of $1.32 to $1.40, up 6% in the midpoint with $0.11 of negative impact from currency assuming current exchange rates. We expect organic revenue growth to be flat to up 1%, and we should achieve a record operating margin of approximately 22% as Enterprise Initiatives deliver 100 basis points of margin expansion. So that summarizes the quarter and our guidance for the balance of the year. As you can see, the operating teams continue to execute well in a challenging external operating environment. And we remain solidly on track to meet or exceed our 2015 and 2017 performance goals as we continue to focus on and invest in our strategy to accelerate organic revenue growth across the company. So with that, let me turn it back over to Aaron.

Thanks, Michael. We'll now open up the call to your questions. Please be brief so as to allow more people the opportunity to ask a question. And remember one question, one follow-up question.

Thank you. Good morning, everyone.

Good morning.

Good morning. Can I start with product line simplification (PLS)? How, Scott and Michael, do you have confidence that PLS is working and that this is basically going to incite underlying growth, call it starting – or improved underlying growth starting in 2016? I mean, plus it's a bit of a black box, so could you just tell us, because obviously growth is probably investors' number one concern with you right now, not Enterprise Initiatives that are clearly working. So how does the PLS – how do you have the confidence PLS, as it dissipates, will incite better underlying growth?

Well, absolutely the elimination of the negative is the obvious first part of that, right? So the whole point of PLS is really around the idea of simplification, and embedded in 80/20 is a real strong discipline around focusing on the relative handful of product lines and customers that really can drive growth. So the PLS that we're doing now is a collection of 15 years of aggressive acquisition. So we're going through now – 50 to 60 deals a year, we're going through now and really simplifying our businesses, consolidating our focus on our best growth opportunities from a product line and end market and customer standpoint. It's not something that's new to the company but certainly it's something that's new in terms of being done at this level across the company all at once. The end result is that we eliminate the distractions both from the standpoint of operational distraction from the standpoint of distraction to the focus of our sales teams, marketing teams. So the growth agenda and the growth focus becomes very clear. PLS by itself doesn't create growth, but what it does is create a high degree of focus on the best growth opportunities we have, and we still then have to execute on that. But the elimination of that complexity, we have a lot of conviction about the fact that that's a really important step in this process.

Would you expect, Scott, some sort of a multiplier effect? So in other words, if it's dragging by one, you don't simply add one to future growth. The focus allows you to get a little bit better? I'm not trying to be leading, I am just...

No, no. Absolutely. We expect to accelerate organic. We expect to be an above-market grower by 200 basis points across the company. And that's because we are focusing the company on highly differentiated positions in end markets that fundamentally have reasonable growth prospects, but we expect to be able to outperform market level growth because we are focused on driving highly differentiated solutions to end customers that have complex and sophisticated business problems.

Is PLS – yeah, I was going to ask, is PLS dragging cash flow? Because you mentioned you expect cash to accelerate, I guess, based on it driving toward 100%, if not higher, for the back half. Is it dragging cash, I think, at 80% net income conversion this quarter?

Yeah, no. No, PLS doesn't create a drag on cash flow. I'd say actually quite the opposite over time. The 80% conversion is in line with our typical run rate for the first half. Same as we did last year in the first half of the year. And so we would expect it to accelerate here in the back half and we're confident that we'll be at or above our 100% target for the year.

Just last, China auto, 8% is probably a relief for a lot of folks, but the question is with production rates expected in that country to come down, how are you thinking about your trends juxtaposed against your performance penetration, but then obviously slowing production rates in that market?

You're talking about just auto, John, or the whole company?

Yeah, just auto in China.

Well, I think the auto China business, it's largely a penetration story. I think we are at the early stages of sort of moving from the global OEMs – not moving from but supplementing a very strong position with global OEMs in China with an accelerating level of penetration for the sort of major domestic players over there. So I think there's plenty of runway for us. The build rates or the production rates are certainly going to have some impact overall, but we're still running high-single digits there in a market that last quarter, I think, was – the build rate was up a couple of percent. So I don't think – the macro in China is going to have some relative effect, but I don't think it's going to impact our overall ability to grow there over the next multiple years.

Well, then second half, is this going to be one for one? So for instance, if builds in China go from plus two to minus five, would that subtract seven points from your trend or do you think you do a little better, or is it too granular?

I think it's a little granular. I would say we're running 6 percentage points ahead of market, so figure five to six, I think, would be a good target.

Got it. Thank you.

Thank you. Good morning, everyone.

Good morning.

So I know the focus is shifting to growth, but let's talk about the margins for a second because they were still really good in basically a no-growth environment. The Enterprise Initiatives are coming through. I'm just curious, as the year progresses, how are you guys thinking about price/cost? And then secondly, can you talk a little bit about that negative 40 basis point impact you saw in the other line item? Is that mostly driven by mix this quarter?

So let's start with the 40 basis points of other negative impact on margins. And it's very simply – it was a project that we completed in Specialty Products last year that didn't repeat in this quarter. So that is a...

This is a high margin project.

That didn't repeat on a year-over-year basis, and so you'd expect that drag to go away for the balance of the year. For the balance of the year, you would also expect it to align with our guidance that our Enterprise Initiatives continue to generate 100 basis points of margin expansion. We have a lot of confidence around that number just given the projects underlying that in terms of our sourcing efforts and our business structure simplification projects. Price/cost was favorable again this quarter at 20 basis points, and we expect that to remain at 20 basis points favorability here in the second half of the year. We have not seen any change in the dynamics around our ability to get price. As you know, one of the byproducts of product line simplification is that your portfolio is much more differentiated, and so if anything we should have the ability to maintain our pricing if not do a little bit better. And on the cost side, I'd say on the question we talked about on the last call around material deflation as a result of crude oil and other commodities, we are still working on that. We have not seen it in the numbers yet. I think it would be reasonable to assume that we'll get some favorability in the second half, but again we're not counting on it. So those are soon to call out here and certainly not in our planning assumptions for the second half.

And I would just add to that, we've got – given what we have already talked about in terms of our 2017 margin target, we've got 100 basis points of margin improvement from initiatives for another two years after this one, 100 basis points a year.

No, that's helpful. I guess maybe my one follow-up and shifting gears back into the growth side and the CapEx side, can you maybe provide a little bit of color on both Welding and Test & Measurement, and specifically what's happening within oil and gas? I think your expectations last quarter were for oil and gas to be down $30 million. And then within Test & Measurement, I know it's only about $100 million of that business, but that market was also down significantly this quarter. So any color on the oil and gas and non-oil and gas trends within those two segments would be helpful.

Well, I think from an oil and gas perspective, I think the first quarter run rates held up. They probably flipped around the percentages maybe a little bit just based on whatever happened last year in terms of seasonality, so no real uptick or further deceleration either way in the oil and gas side. I think on the Welding side, what we saw in the second quarter that we didn't see as much in the first quarter is the softness in Welding expanding beyond oil and gas, and Michael talked about it in his comments that the core industrial equipment business was down 4%, 5% I think in the quarter. And even the commercial business, that has been, which is the lighter duty part of the Welding capital equipment sector, which has been a little bit more robust, was down I think 1% or 2% in the quarter. So beyond oil and gas, at least in terms of the second quarter, the year-on-year trends got incrementally negative.

Okay. Great. And then on Test & Measurement?

I think the core business there just continues to be choppy. I think the year-on-year comps got a little worse. The non-oil and gas related end markets for our Test & Measurement equipment business in terms of second quarter were down probably mid-single-digit year-on-year. And again, no real changes in terms of run rate or demand patterns there, but more of the same.

Okay. All right. Thank you.

Thanks a lot. Good morning, everybody.

Good morning.

Question on the $0.05 increase to the 2015 guidance, could you help us a little bit more with the components that drove that? The organic growth went down a little bit, but everything else on slide 11 stayed reasonably constant with the equivalent slide in the Q1 presentation.

Yeah, so Andy – so you're right. I mean the revenue assumption is a little bit lower for the back half of the year, but that's offset by the stronger margin performance in the back half. The $0.05 really is the $0.04 of beat in the quarter here, which is a combination of primarily currency favorability relative to our guidance and slightly better margins, and so we're carrying that forward. And then as we sit here today, relative to the currency planning assumption we had in April, we have a little bit of favorability. So those things together make up the $0.05 that we raised the guidance for the year.

Okay. Thank you, Michael. And then if I look at – and I'm going to get a little picky here, but if I look at Auto OEM and Food Equipment, the operating margin was still really strong, but it softened a little bit in Q2 versus Q1. Is that a function of the shift to the organic growth acceleration or were there other impacts that caused around a 50 basis point, 60 basis point compression in the quarter?

No, Andy. There's really nothing unusual in terms of the margins. I mean, it can fluctuate a little bit quarter-by-quarter, but I just...

Based on mix shifts.

Yeah, I just look at the year-over-year performance. I mean, Food 250 basis points. And if you look at the schedule in the appendix, you'll see that was on higher restructuring, so it's actually over 300 basis points excluding that. And then Automotive at 24.5% is still very strong performance. I think if you look at our peers in that space, that's approximately 3x what everybody else does in that space. So I appreciate you being a little picky here, but I really don't – I don't want to be defensive, but I think we feel very good about the progress on margins.

Okay. Thank you very much.

Hi. Good morning. A pretty straightforward question. I'm just curious how July has started organically versus your third quarter guidance and, for that matter, even sort of the implied fourth quarter? The base growth a year ago accelerated a little bit 3Q, 4Q from what you had in 2Q?

Yeah, that's right. The comps are a little tougher here, David, in the back half, so the third quarter of last year, I think, was up 3.5% organically. As an aside, EPS was up 40% last year. So in July, it's in line with the guidance for the quarter. We said up in that 0% to 1% range, and that's kind of what we're seeing so far. Typically, sequentially the business in total is flat from Q2 to Q3. Auto typically is down a little bit, offset by some of the other businesses. But really nothing unusual as we go into the back half of the year. I'd say the things we just talked about, Scott talked about Welding and Test & Measurement certainly not improving and some tough comps particularly on the equipment side in those businesses. We talked about automotive China. We'll see how that plays out in terms of auto builds, but we'll outperform that market substantially, and everything else is kind of in line with what we've seen so far. And I think, David, just to add on, if you look at our guidance for the year, and the EPS of the first half of the year represents 49% of the total year and the second half is 51%, and so we're exactly in line with where we performed historically and we're not counting on an acceleration or things getting a lot better here in the second half of the year.

Yeah, I'm not trying to nickel and dime it, but as you said, usually 2Q, 3Q are roughly similar. Things don't seem to be accelerating. But you were willing to put a nickel to actually $0.06 on the midpoint increase into your guidance 2Q to 3Q, which – I mean, I'll take it, but I was a little surprised that you were willing to guide 3Q where you did, given the trends. There must be some underlying confidence on the margins...

Yes.

...maybe July was stronger than we thought, but now it sounds like you're going to have to get that nickel sequentially $0.06 to the midpoint of the guidance really from margins. And maybe if you can help us maybe the share count at the end of the quarter, anything to...?

The share count is 368 million. And you're right. The improvement from Q2 to Q3 is all operating margin performance. So like I said, Q3 should be another record for the company at approximately 22%, and we just did 21.3%. And so on the same revenues, I think if you do the math, you'll see that it's a very reasonable assumption.

Thank you. Good morning, everyone.

Good morning.

So halfway through the Enterprise Strategy and, Scott, I recall that the big emphasis was there's going to be this pivot from two-thirds M&A and one-third organic to reverse that to two-thirds organic, one-third M&A. And my question is you really haven't seen M&A getting restarted, and Michael's comments on capital allocation, not one mention of M&A. And so at what point do you start to restart that M&A engine? Or do you want to recast a different percent of organic versus M&A?

No, I don't think – I think our intentions around this are pretty clear. We talked about it at the Investor Meeting in December in terms of first of all strategically where do we see M&A fitting in terms of the overall company's strategy. The simplified version of that is we would love to bolt great assets onto these seven great businesses that we have. The way I would describe it is we would be delighted to add a great company right now, and that's not new news. That's been true throughout. What I would say the difference is, is we're probably not as actively out in the prospecting mode around the opportunities to do that as we will be, as we get further down the Enterprise Strategy. But from the standpoint of, would we have appetite for a really good bolt-on acquisition tomorrow if we had one become available to us, absolutely we would. But the criteria is pretty strict, and it's pretty clear internally, what fits and what doesn't.

And I would just add, Deane, if you look at the transactions that have taken place in our space over the last couple of years, we've got a chance to see them all, and we don't feel like we've missed anything. And as Scott said, given the right set of circumstances, we'd love to bolt something on to one of our seven segments.

So that two-thirds, one-third is still a healthy target?

Yeah.

All right. Good. And then second question would be maybe if you could provide some comments and specifics around that North American Construction number of 15%. A lot of people have been hoping, wishing that the non-res would start gaining traction. So how much of that is on the non-res side, how much is renovation, housing, and so forth? And what's the outlook?

Yeah, so the big improvement, Deane, in the quarter was really on the renovation/remodeling side up – that drove the bulk of the increase, up 25%, that's what led to North America being up 15%. We did see some slight improvement in residential, up mid-single-digits. Last quarter, we talked about that part of the business being flat. And commercial was about the same, so up low-single-digits in commercial construction. Really the main driver renovation and remodeling, and we feel good about the current trends in the business.

Great. Thank you.

Thanks. Good morning.

Good morning.

This may just be rounding small numbers, but if I assume the midpoint of organic growth for Q3, it looks like you're anticipating a bit of acceleration in growth in Q4. Is that the way you're thinking about it? And if so, where might that acceleration come from?

It's really back, Steve, to the comps. And so Q3 last year was up 3.5%. Q4 was up a little less than 2.5%. And so it's really the way we model the guidance here is based on current run rates, adjusted for typical seasonality. And so that's really what's driving. It's not an acceleration in the fourth quarter relative to the third quarter. It's really the comps year-over-year.

Okay. That's fine. And then just a follow up on Deane's question on Construction. I know you've been fairly cautious on Construction. Obviously, this was your best quarter of growth in a long time. You talked about the North American trends. Is there anything in the business that's making you think just a little more optimistically about the business broadly? And then related to the European construction, you called out some softness in Continental Europe. Was that any particular market, France or Germany or anything else?

Yeah, so on the latter point in Europe, the U.K. and Scandinavia continue to be very good, and then with some challenges in France and Southern Europe as you would expect. I think we feel very good, not just about the current kind of daily order rates in the business but just look at the margin performance and the improvements since we embarked on the Enterprise Strategy. So think about how much more is flowing through the bottom line, given all the work that's been done on the Enterprise Initiatives. And so I think the team has done a really nice job positioning this business for growth, and right now we're taking advantage of some lift seen on the end markets, and we feel good about the current trends and we'll see how it plays out.

It's feeling a little more like it has some legs than it has in the past, but I say that with a whole bunch of caution. I'm talking about, first of all, just North America, but we've been down this road before a number of times. So I think we'll want to see another quarter or two before we really see it and feel comfortable with the trajectory in terms of underlying end market demand. But it does seem to be a little bit more consistent at least over the next two months or three months than what we've seen historically. So we're hopeful but certainly not ready to call it yet.

Okay. Thanks very much.

Hi. Sorry to harp on the Construction again, but just another follow-up question because some other companies cited some weakness in the second quarter on the construction equipment side, in particular May, and it could have been energy, it could have been weather. But I guess within your North American Construction, was the strength that you saw in North America consistent throughout the quarter or was it more, I guess, June weighted? And then I guess my second question is back to sort of capital allocation. I know you've guided for share repurchase for $2 billion in the year, but you bought back $180 million of stock in the quarter, which is the lowest number we've seen. Given the positive or improving free cash flow generation in the back half of the year and given that there doesn't seem to be a lot on the M&A side, is there upside to the $2 billion in share repurchase if the cash flow generation is there? And if not, what will the cash go towards? Thanks.

Yeah, so let's start with the first question first. So in the second quarter, same as – and this is true for the enterprise – very consistent throughout the quarter by month. June was our best month, but it typically is in the quarter. And so I wouldn't read too much into an acceleration in the quarter because we certainly did not see that. This was out of the gate really good growth on the Construction side as we talked about. On capital allocation, as you know, we did $1.6 billion in the first quarter. We did $180 million here in the quarter, so we have a commitment to do approximately $2 billion for the year. Feel very good about that, and if the company continues to perform as well as it is and nothing is going to change in terms of our view longer term of what this Enterprise Strategy will do in terms of the overall financial performance of the company. And so given that and given the alternative of letting the cash sit on the balance sheet, we will repurchase shares as an alternative to that.

Hi. Good morning, everyone.

Good morning.

Most of my questions have been answered, but maybe you could give us some insight into your forecast for automotive builds by region for the back half?

Yeah, so we're still in the same kind of low-single-digit type global auto builds. I think there's some seasonality here in the third quarter and some discussion around whether there will be shutdowns or not, but I wouldn't really expect much of a change in the second half versus what we have seen in the first half. So overall kind of in that low-single-digit range, which is good enough for us to grow the business in the high-single digits and in some regions like Europe, if you look at flat auto builds, we are growing the business double digits. So that's kind of what – more of the same in the back half of the year.

Okay. Thank you. And then on the Food Equipment side, maybe some color on the segments, institutional versus fast casual versus other sectors. What are you seeing in the segment?

Yeah, I think institutional, fast casual, which is – institutional is about 40% of our business. It's still very good. The growth here is not really – the end markets are not growing at 4%. I mean the outperformance here, I just want to be clear, is really the focus by the team on driving organic growth and it's the new products that are being launched and the Service business side that is performing at a higher level than what we have seen historically. So that's how I would describe it. So that's kind of the landscape there.

Okay. And just one philosophical question. One of your competitors is very proud of the fact that they have hired a few ITW folks and that they're now going to become an 80/20 company. Could you just talk a little bit about the barriers to implementing 80/20? I mean, you are unique and you have been doing this for a long time. How easy or how difficult is it going to be for somebody to replicate 80/20?

Well, I don't know what they're going to do. All I can talk about is our company and we have been applying 80/20 for going back to the mid-1980s. It is something that continually evolves. I'm not sure who you're referring to, but in general, the way we practice it today is pretty unique, and it's very different than we practiced it two years ago even in terms of the way it continues to evolve inside our company. So I guess that's all I can say.

And I think that takes us basically to the top of the hour. So that concludes our call. We appreciate everybody's time this morning, and we look forward to talking to you again in about three months. Great day.