Illinois Tool Works Inc (ITW) — Q2 2016 Earnings Call Transcript

Thank you. Good morning and welcome to ITW's second quarter 2016 conference call. I'm Michael Larsen, ITW's Senior Vice President and CFO, and joining me this morning is our Chairman and CEO, Scott Santi. During today's call, we will discuss our second quarter 2016 financial results and update you on our 2016 earnings forecast. Following our comments, we will be happy to take your questions. And so that we can accommodate as many people as possible, we will limit each Q&A participant to one question and one follow-up question. Before we get to the results, let me remind you that this presentation contains our financial forecast for the 2016 third quarter and full-year, as well as other forward-looking statements identified on this slide. We refer you to the company's 2015 Form 10-K and Form 10-Q for the first quarter of 2016 for more details about important risks that could cause actual results to differ materially from our expectations. Also, this presentation uses certain non-GAAP measures. While we use very few non-GAAP measures, a reconciliation of those non-GAAP measures to the most comparable GAAP measures is contained in the press release. With that, I’ll turn the call over to Scott.

Thanks, Michael, and good morning. Overall, we were very pleased with our second quarter performance as we continue to execute well and, as a result, delivered strong results and set several new all-time performance records for the company. EPS of $1.46 was up 12% year-on-year and came in $0.07 above the midpoint of our guidance; $0.04 from better margins, a penny from slightly higher revenue, and $0.02 from non-operating items largely related to our minority ownership interest in our former decorative services segment. Operating income of $792 million was up 8% year-on-year and was the highest quarterly operating income in the company's history. Q2 operating margins of 23.1% were up 180 basis points and after-tax ROIC improved 260 basis points to 22.9%, both of which were all-time records for the company. As I commented in our Q2 earnings release, these record results reinforce our conviction in the performance potential of ITW's business model and reflect directly on the great progress that our people around the world continue to make in positioning the company to leverage its full potential. While we have made significant progress in this regard over the last 3.5 years, we see plenty of opportunity for further improvement ahead. I'm also pleased with the progress that we’re making in our transition to focusing on accelerating organic growth. Organic growth, excluding PLS impact of 2% at the enterprise level, was pretty solid in this environment, particularly when factoring in the 11% decline in our welding segment in the quarter. All six of our other segments delivered positive year-on-year organic growth in Q2. Net of welding and PLS impact, organic growth for our six other segments combined was 4% in the quarter. On a year-to-date basis, our 2016 organic growth rate has improved by 130 basis points versus full year 2015 despite significant further erosion in welding demand and tough first half comparisons in our auto OEM segment. A couple of final comments before I turn the call back to Michael. First, earlier this month, we completed the acquisition of the Engineered Fasteners & Components business from ZF TRW. This is a great addition to the company and I would like to publicly welcome the 3,500+ members of the EF&C team to ITW. And second, I would like to once again thank all of my ITW colleagues around the world for the great job that they continue to do in serving our customers and executing our strategy with excellence.

Thank you, Scott, and good morning, everybody. Once again, ITW delivered another strong quarter with high quality of earnings and solid execution, and improving growth performance in many parts of the company drove record results. We grew GAAP EPS 12% to $1.46 and exceeded the midpoint of our guidance range. Organic revenue was up 2% growth, 1% when including PLS, with fairly stable demand globally and improving organic growth focus and performance across the company. Good progress in Q2 with six of seven segments achieving positive organic growth, with welding the only exception. In Q2 of last year, three out of seven segments were growing organically. Consumer-facing businesses were up 3%, industrial-facing down 2%, no material change from Q1. On the regional basis, North America was up 0.4%, EMEA up 2.9%, APAC up 1%, and China was up 0.4%. A comment on the U.K., which represents 5% of ITW sales. In Q2, our U.K. sales were up 2% with no signs of a slowdown and in our opinion, it is too early to tell what the longer-term impact from Brexit may be. But at current FX rate, the weakening of the British Pound is modestly unfavorable, which is expected in our updated guidance. As Scott mentioned, we established new all-time records on a number of our key performance metrics, operating margin of 23.1% up 180 basis points versus last year. Enterprise initiatives contributed 120 basis points to margin expansion, with price cost and volume leverage and other contributors accounting for the remaining 60 basis points. We grew operating income 8% to $792 million, making this the most profitable quarter ever in ITW's history. After-tax, ROIC improved 260 basis points and was also a new all-time record at 22.9%. We invested about $140 million in our businesses for growth and productivity. Free cash flow of $471 million was up 23% versus Q2 of last year, and 90% to net income conversion was consistent with typical Q2 seasonality. In the second quarter, we allocated $500 million to share repurchases and plan to repurchase an additional $1 billion in the second half, bringing the total for the full year to approximately $2 billion, with $1.2 billion from overseas funds and about $800 million from normal surplus cash flow. In the second quarter, ITW's operating margin exceeded 23% for the first time, and we listed the margin drivers on the right side of the page, starting with 120 basis points from our enterprise initiatives. Price cost came in as expected, modestly favorable at 20 basis points, and volume leverage and other contributed the balance. Continued strong margin expansion across the company, with construction products up 440 basis points to 24.3%, Food Equipment up 300 basis points to 25%, Specialty Products, Test & Measurement, and Electronics both up 250 basis points, and Automotive up 130 basis points to 25.8%. Polymers & Fluids was flat due to restructuring and in welding, despite a 140 basis point restructuring impact in the quarter, operating margin was 24.9%. Welding's peak-to-trough revenues are now down approximately 20%, and yet operating margins are still solid in the mid-20s. This performance, although challenging within the cycle, is a good example of the resilience of the ITW business model. Turning to the segment discussion and starting with Automotive OEM, another solid quarter with organic revenue up 4% against tough comparisons last year, as Scott mentioned earlier. In North America, 3% organic growth, Europe was up 8%, and China was up 13%, despite the fact that overall builds were only up 4% and flat at Western OEMs. We expect growth rates to continue to improve in the second half as comparisons ease. Another very solid quarter in Food Equipment, up 5% organically with broad-based strength on the equipment side, including refrigeration, warewash, cooking, and scales. North America was up 6% despite tough comparisons, with equipment up 9% driven by end market demand in K through 12, lodging, health care, and retail service, up 1%. International was up 3%, with equipment up 4% and service up 2%. Continued strong margin performance as volume leverage and savings from enterprise initiatives improved operating margin by 300 basis points to 25%. A very solid quarter for Test & Measurement and Electronics, as organic revenue grew 3%. The electronics platform grew 6% due to end market strength in solar and semiconductors. We discussed the margin expansion potential in the segment before, and we were pleased to see 250 basis points of improvement to 18.6%. Remember that the 18.6% includes 370 basis points of acquisition-related non-cash amortization charges that will be amortized over time. Declines in welding demand continued in Q2 with organic revenue down 11% in the quarter, with equipment down 13% and consumables down 10%. The decline breaks down as 5 points from oil and gas, 5 points from industrial, which is mostly heavy equipment related to agriculture, infrastructure, and mining, and 1 point from commercial. North America was down 8%, with equipment down 10% and consumables down 5%. International was down 21%, again due largely to oil and gas. If demand holds steady at current levels, year-on-year percentage declines should moderate in the back half of 2016 due to easier comparisons. And as I said earlier, solid operating margin performance of 24.9%, which includes a 140 basis point restructuring impact. Polymers and Fluids delivered another quarter of positive organic revenue growth of 2%, as this segment continues its pivot to growth after an extensive period of PLS process over the last three-plus years. On a regional basis, North America was up 1%, and international was up 3%. Approximately half of the segment revenues are related to the automotive aftermarket, which grew 3%. The balance is primarily industrial MRO applications, as fluids improved 1% and polymers remained flat. Overall margins were unchanged at 20.9%, which includes 70 basis points of restructuring impact. Similar to our Test & Measurement and Electronics segment, 20.9% also includes 420 basis points of acquisition-related non-cash amortization charges. Another solid quarter in construction products as organic revenue increased 3%. North America was down 1% due to tough year-on-year comparisons of 15% in Q2 last year. Renovation remodeling was down 6% after being up 22% in the first quarter; in North America, commercial was up 5% and residential up 1%. Overall, we feel like we’re exiting the quarter in good shape from a demand perspective. In our last call, we mentioned how quarterly numbers in construction can be a little choppy and not necessarily a good indicator of overall levels of demand. To normalize trends, if you look at North America in the first half, it's up 4%; renovation remodel is up 6%; commercial up 7%; and residential up 2%, giving a more accurate picture of the underlying demand levels, which are quite solid. Asia Pacific was up 7%, driven by Australia; Europe was up 6%, driven by the U.K., which is up 7%, France is up 6%, and Germany is up 10%. Again, very strong progress in operating margin, up 440 basis points to 24.3%. Finally, another solid quarter in specialty products, with organic revenue flat, solid growth in consumer packaging offset by some lumpiness on the equipment side. Very good progress on our operating margin, with an increase of 250 basis points to 26%. Turning to EF&C, we’re very pleased to complete this terrific acquisition on July 1. As you know in the automotive OEM space, with ITW's very focused strategic positioning, we’ve demonstrated the ability to outgrow global auto builds by over 400 basis points on average since 2012. Given the visibility that we have in this business, we are confident that we will continue to outgrow auto builds by 200 to 400 basis points over the next several years. We are excited about adding EF&C to ITW because it gives us some additional leverage on this very focused strategy and broadens our ability to serve and grow with our global and regional automotive OEM and Tier customers. It expands our ability to drive our global content per vehicle and increase our share of the relevant market. For reference, our global content of $30 per vehicle compares to a relevant market that is greater than $200 per vehicle. Specifically, EF&C adds a number of things to our current position. First of all, it adds several new strategic differentiated product platforms that have similar characteristics to the core product platforms that we support today. On a regional basis, with its global strategically located manufacturing facilities, it is very complimentary to our geographic footprint, which is a little more weighted towards North America, giving us better global balance overall. Certainly, we continue to see significant potential to leverage our 80/20 business management process and help the EF&C team continue to improve its operating metrics. Operating margin entering ITW is about 10%, and we’re confident that we have a clear path to doubling that rate at a minimum over the next five years. EF&C already has a very experienced and capable operating team with a reputation for delivering reliable quality and excellent customer service performance. From the standpoint of the transaction and the financial components, the purchase price of $450 million is less than one-time sales and the business is actually performing slightly better than expected. For the 2016 financial impact, we expect $2.20 million to $2.40 million of revenues, so $110 to $120 in Q3 and in Q4. From a margin standpoint, EF&C is dilutive approximately 50 basis points to ITW's operating margin, and after-tax ROIC is dilutive approximately 200 basis points to the Automotive OEM segment. So to be clear, excluding EF&C, we would have guided to approximately 23% operating margin for the full year; to date, including EF&C, we’re maintaining our prior guidance of greater than 22.5%. From an EPS standpoint, we expect no impact in 2016 due to typical acquisition accounting-related impacts but certainly accretive in 2017. We are confident that we can generate after-tax returns in the mid to high teens by year seven. Last page, our updated guidance for 2016 assumes current foreign exchange rates and includes the acquisition of EF&C. We're raising full-year GAAP EPS guidance by $0.10 at the midpoint to a new range of $5.50 to $5.70. The $5.60 midpoint represents 9% earnings growth on a year-over-year basis. We expect demand to remain stable at current levels, and as a result, we’re narrowing our full-year organic growth forecast to 1% to 2% due to the more challenging than expected market conditions in welding. Consistent with our prior forecast, our guidance includes approximately one percentage point of PLS impacts. Therefore, excluding PLS, we expect full-year organic revenue growth of 2% to 3%. Keep in mind that while PLS does reduce revenues in the short term, it is both a critical driver of our margin performance and a key component of our portfolio management strategy, as we exit slower growth product lines and focus on our most compelling opportunities to accelerate organic growth at ITW caliber margins. As I said earlier, operating margin guidance is unchanged at greater than 22.5%, but now includes approximately 50 basis points of dilution from EF&C. We're maintaining our previously communicated target of $2 billion in share repurchases for the year. Finally, for the third quarter, our GAAP EPS guidance including EF&C is $1.42 to $1.52, assuming operating margin of approximately 23% and 1% to 3% organic growth. So that concludes our prepared remarks. We will now open up the call to your questions. Please be brief, and as a reminder, one question and one follow-up question.

Thanks and good morning, everyone. So I guess my first question is on organic growth. It was nice to see the organic growth improvement in 2Q versus 1Q despite the weakness that you guys saw in welding. I'm just curious, as you look into the third quarter guidance of 1% to 3%, are you seeing underlying trends improve as you exit the quarter because it seems like you're guiding to a number that's slightly better in the comps on a two-year basis, but doesn't really change much.

Well, Joe, if you look at it, we are assuming current levels of demand going into Q3, and the slight bump in overall year-over-year organic growth rate is due to the comps. So we’re assuming no acceleration in Q3 or Q4 at current demand levels.

Okay. Michael, and then I guess - I mean we're currently - where were you exiting the quarter at demand levels that were slightly better as you progressed through the quarter? I'm just curious to…

Pretty steady - pretty steady through the quarter.

Yes, it was pretty steady as we went through the quarter on a monthly basis. As we said, it was pretty firm overall in the second quarter, and we feel pretty good going into Q3 and Q4.

Okay. All right. That's helpful. And then I guess my one follow-up - maybe touching on welding for a second since clearly trends got a little bit worse this quarter. It was really nice to see the decrementals were solid on the welding side. I'm just wondering if trends persist, are you expecting the same type of decrementals for the second half of the year? And then to your comment earlier, Michael, on how to think about welding for the second half, are you just assuming maybe a 3 to 4 point improvement because comps eased by that much for the second half of the year?

Yes, we anticipate that revenue for welding will experience a mid-single digit decline in the third and fourth quarters as demand rates have decreased. The situation may improve slightly due to easier comparisons, but based on current observations, we expect a further decline. Regarding incremental margins, we expect them to remain consistent, and some advantages from the restructuring charges incurred in the second quarter should become evident in the third and fourth quarters.

Yes, these are pretty steady margins as we go into the back half based on what we know today.

Okay. Great, thanks guys. I’ll get back in queue.

Thanks, good morning everyone. EF&C just now that the deal's closed, what sort of intangible amortization is part of this deal, and what kind of accretion are we looking at next year assuming the run rate?

Yes, so what I can tell you in terms of accretion, our view is that this will be modestly accretive in 2017. But let's get in there and take a look and make sure we give you a more accurate view than probably when we get to our Analyst Day in December. We'll be able to give you a little bit more detail. But we just bought the business; we got to get in there, and then we'll give you a more accurate view.

Did you say anything on the intangible amortization, Michael?

We are not completely done yet, so it wouldn’t be appropriate to comment on that. I think again we expect no EPS impact here in the second half of the year, neutral on EPS, slightly dilutive to our margins, and then next year modestly accretive with accelerating benefits beyond that.

All right. So shifting gears, I appreciate your comments on the UK. I think other companies have more or less said it's still too early to say anything. It's hard from our perspective, I mean generically our perspective, to surmise why Europe doesn't suffer some sort of economic deferral or confidence issues. Certainly you can see European investors rotating into US stocks. They're clearly concerned. Right? My question - you guys have a lot of European exposure relative to other industrial companies. What - you've done a fantastic job, and you've clearly - I think people see the flex in your business model. But I can't imagine you're complacent. Right? So I'm trying to understand - what is your strategy for managing through what could be possibly deteriorating fundamentals in Europe? And as the crawl rate to that, you - I'd like to know how this perhaps dovetails into your own M&A strategy. And specifically, you clearly want to do more deals; you just don't want to put the cart before the horse. But if things were to deteriorate, does that cause you to do more deals sooner perhaps or just push them out? Just how are you think about that? I'm sorry the question is long. There's just a lot of context to it.

Let me try to hit all the points, and let me know if I miss anything. Overall, our strategy is no different than how we operate the company day-to-day, which is we have a very - on a relative basis, a very flexible cost structure; we are fast reactors; we're not predictors of the future. And I think as you’re seeing in welding right now, we are certainly confident in our ability to react in an effective way to whatever cards are played out in Europe. Right now, and it's certainly reflected in our Q2 results, we're not seeing anything yet; it's obviously very early. But overall, I don't really see any difference between the kind of contingency planning we would do around the whole Brexit situation and the other contingency planning that we would do relative to global macroeconomic conditions in whatever region of the world. From an M&A standpoint, I think all I would say is that we have a collection of terrific assets, and our primary focus is operating the assets we already have to the best of our ability; there is certainly more runway to go in terms of getting to our full potential. The M&A we’re doing is largely bolting on to one of the existing seven businesses that we have, and as those opportunities emerge, we will certainly not hesitate. But I think we are very convicted about our ability to continue to grow earnings, growing and continuing to improve the operating metrics of the businesses that we own.

Maybe one more, Scott, just because you're such a big company in Europe, has Brexit or other issues in Europe caused you as a corporation to defer or modify what otherwise investments you might have been making into Europe and/or step up PLS in some manner or restructuring?

No. It’s just way too early. I don’t think we’re going to panic, and I certainly don’t think we want to try to anticipate what’s going to happen because nobody knows. But I wouldn’t go back to what I said earlier: our view to react effectively and quickly to whatever happens is pretty solid.

Hi, good morning. I know it's a little early being July, but the setup into the December meeting is going to be important about accelerating the organic growth, and you laid out about a year and a half ago the idea of businesses getting ready to grow. It seems like a sizable increase in the amount of your business as you feel will be ready to grow going into next year compared to this year. Can you help us point out which of the businesses do you feel are entering that phase, and we should look at particularly into next year as the ones that will make the jump to being ready to grow?

Well, we’re at the segment level; within each of our segments, there are businesses that are certainly there. I’m trying to sort of — it’s really hard to get at your question. I think clearly based on current performance, automotive is very far along; food equipment is very far along. I think we are making some really strong progress in the other five segments. And it’s not a matter of flipping the switch going from not ready to ready. It’s more of an acceleration over time as more of the divisions in five each segment make that transition. In my view, our second quarter results certainly reflect solid progress in the right direction, and we will expect it to continue to improve quarter by quarter. But it’s not a matter of flipping the switch and going from not focused on growth to all in with both feet.

I'm just trying to figure out, Scott, the idea of — of course the ability to grow is being characterized as not necessarily that sensitive to the end market. Right? It's more a change in attitude about how you're going to push the business going forward. But I'm just trying to package that in; which of the end markets that maybe I'm more comfortable with or less comfortable with in 2017? So I was just trying to pinpoint where are those particular end businesses that at least you kind of see their attitude's going to change a bit going from 2016 into 2017. It's been building towards it. Just so I can track that progression as we exit 2016 into 2017. Are there some businesses you would at least highlight outside of auto and food, right? Those are already pretty far along. Welding obviously has some macro issues. Just help us flesh it out for our own field work.

Yes, I mean, David, as Scott said, this is really a process that’s being orchestrated at all levels. So we have 84 divisions; at the end of last year, 60% of our revenues were in that ready-to-grow category. We look at the progress every quarter, and we are on track to get to the 85% ready-to-grow. Most of the company will be in a position to accelerate organic growth going into 2017, and it’s a gradual timeline. Every month, every quarter divisions reach that phase of being ready-to-grow. It’s hard to really comment at the segment and end market level beyond what we just walked you through.

Okay. So I mean just to leave it bigger picture — macro the same a year from now as it is today, the idea is with 25% more of the more of the Company ready to grow going into 2017 than you had going into 2016, the base case should be the Company should be able to accelerate organic.

That’s fair.

Well, and you saw the slide, the second slide really illustrates that point, right, where you look at our first half growth rate relative to last year in an environment that’s pretty similar. Good progress on the overall organic growth rate at the enterprise level.

And the PLS drag is less next year than this year? That's still base case?

Yes, we have to get through the planning process here in the fall. But I think it’s reasonable to assume that PLS will be less in 2017 than in 2016.

Yes, thanks. Good morning. Just wanted to circle back to welding. I think, Scott, you mentioned that the comps get a lot easier in the second half of the year. You're assuming that the business is sequentially stable from 2Q. We get into that mid-single-digit declines. I'm just wondering, just given the normalcy of knowing that business, do you think 2Q represents a flaw for that business, or would you expect the second half to be a little bit lower in line with normalcy now?

I don’t think of that. I wouldn’t — given what we’re seeing, I would certainly not call it a floor. I think our expectation heading into the year was that that was going to flatten out at some point in 2016. And clearly, based on the first two quarters, we’re not seeing that. So I think we got to see what the future holds there a little bit. Our planning assumption is sufficiently conservative in terms of influencing the overall forecast for the back half of the year. But it’s still a pretty choppy environment, and Michael gave you some numbers before: down to 15% year-on-year in industrial oil and gas. Six quarters in here, it’s still pretty challenging.

Yes. Understand. And then just switching to price cost as a follow-on. 20 basis points relatively modest. Maybe can you just maybe decompose that between price and raw materials? The reason why is that obviously we've got steel inflation coming through in the next six to nine months. I'm wondering how we should think about that price cost gap developing.

Yes. So, Nigel, the price cost came in as expected, as you point out, and slightly favorable at 20 basis points again. As you know, maybe different from some other companies, price cost has not been a significant margin driver over the last three years. What’s going on inside the businesses is really with the support from our strategic sourcing team. The businesses are closely monitoring the material cost side and taking appropriate action on the price side. On both price and material costs, we’ve not seen any significant impact or any change in terms of the result in the second quarter. So going forward, we remain confident that we can continue to generate this type of modest price cost favorability on a go-forward basis.

Okay, I’ll leave it at that. Thank you.

Hi, good morning, guys. So Test & Measurements and Electronics returned to growth for the first time I think since mid-2014. How much of the improvement is the markets getting better versus easier comparison versus ITW's specific focus on pivotal growth? I know you're probably going to say all three, but if there's any additional color on what is going on there, that'd be helpful. Have you seen any increase in capital equipment spending on the Test & Measurement side? And electronics at 6%, you mentioned the strength in semis; that does seem like a pretty strong result versus what you can see.

Yes, I think the way I would characterize it is things are pretty stable on the Test & Measurement side, but no big or even modest improvement in terms of underlying buying activity, but certainly a solid stable performance. On the Electronics side, as we talked about, we saw some nice sequential improvement in the two sectors that you referenced. I think we want to see another quarter or two before we decide that that’s a long-term trend. Overall, it’s a nice improvement.

Okay. That's helpful, Scott. And maybe - you've obviously done very well versus the enterprise strategy goal that you've set now really several years ago. How do we think about — it's a tough organic growth environment here in 2016 again. But the one goal that's out there is doing 20 basis points better than global industrial production still seemed a little hard to achieve if welding continues to be weak. How do you look at that goal here over the next couple of years? Do you need welding to improve? Can you do it with still weak welding if the other segments are good? How do you look at that goal?

Well, I think if welding continues to shrink 11% a quarter, it is certainly going to be tough. It’s going to be a tough nut to crack. But clearly, that’s not our expectation. I don’t think it would be anybody’s expectation - that’s a whole industry; it’s a core part of the industrial economy around the world. We have a terrific position in it. They are certainly sort of the double whammy right now of oil and gas and slow industrial investment, but all of that’s creating a lot of pent-up demand at the same time. Historically in welding, coming out of these down cycles in the market, there is an 8 to 12 quarter run of some really strong recovery. I don’t think there is anything fundamentally changed in our view of the overall attractiveness of the welding market. In general, what I would point to in terms of our conviction remains unchanged in terms of our goal. We've worked really hard to shape this portfolio so that we are operating in spaces where the product really matters to our customers. As long as we continue to generate solutions that help our customers serve their customers better, we’ve got plenty of room to outgrow the underlying economy, and we're not stepping off that one bit in terms of our commitment to it and all the efforts going on inside the company to make that happen.

All right. Thanks, Scott.

Thank you. Good morning, everyone. I wanted to circle back on EF&C and get some more specifics on the business now that you own it. Scott, you called out some new platforms. I'd be interested in hearing just broadly what the new platforms are or the adjacencies, and then maybe where there might be overlaps? And is this where you're going to bring in product line simplification and what percent that might be versus the revenue base today?

Yes, not a lot of overlap; it’s one of the attractive things about it, both from a product line and customer standpoint. In terms of the complimentary platform, it probably gets a little too messy to try to get into in too much detail. Let me just say that they are similar to the current platforms that we are in and they are highly value-added engineered solutions tailored to specific OEM customer needs, some different categories in terms of the actual functionality. But largely the similar types of positions that we have in our core business. So lots of opportunity to add those categories to the existing categories we have. What I would say is we will clearly spend some time on this in December, and it would be more effective for us to do so then as we’ve had a couple of quarters' worth of business under our belt. From a standpoint of PLS, I certainly expect we are going to have a fair amount of it there under our normal application of 80/20; less so related to dealing with overlap, as I said; it’s not a big issue. We need some time to get in there over the next couple of quarters and really look at it in a much more fulsome way. It will be part of the mix for a while; part of the margin improvement agenda there.

Great. And then what about the margin goals that you've laid out to basically double margins by year five? Have you thought through, can you share what that progression might be? I would imagine the gains come more in the back half of that time frame as opposed to being linear.

Now, I would say they’d probably play out more linearly in sort of a typical integration. This is, as we've talked before, the application of 80/20 is not a quick fix; it’s a three to five-year process from go to full integration. I would say again we will have a better view of what we can get down in 2017 when we are a couple of quarters down the road. But I think in general, a more appropriate planning assumption might be a couple of points a year for the next five rather than a big hockey stick.

Got it. And then just as a follow-up, one of the things within the food equipment results today, I was surprised to see service not a little bit better given the kind of focus that you've put on it there. Is there anything in the quarter that might have been a drag there? Should we start seeing service become a more meaningful contributor?

The answer to the second question is absolutely; I think some of the problems with these quarterly calibrations are these are strategies that play out over the course of the year. You’ve got a lot of things bouncing around. Sitting here right now, I can’t say what the top profile was in service and food equipment. But in general, as you said, we’ve got a lot of focus on service. It’s a great business and a great competitive advantage for us. The other thing is that there is some PLS have a couple of parts of that business going on right now, but my assumption is that if I look at it deeper, my assumption is that’s probably had some impact in Q2.

Good morning, everyone. If I may just go back to the broader organic growth question from earlier, just kind of looking at the quarter here. EMEA certainly ended up outgrowing all the regions at 3% versus everywhere else growth at 1% or below. I'm just wondering, from your perspective looking into the back half of the year, do you still expect this kind of leadership from EMEA, or are you thinking that we're going to see acceleration from North America deliver those organic growth goals of yours?

Yes, I think, Mig, if you look at the first half growth rates, both international and North America kind of in the low single digits, that’s probably a good way to think about the back half of the year. We certainly don’t expect any acceleration on a regional basis, and as you know, we don’t run the company that way.

Okay. And then maybe again, going back to food equipment, can you provide any commentary in terms of what's been driving the growth in equipment? I'm wondering if there's anything to differentiate in terms of ware washing versus cooking, refrigeration; any color there would be helpful.

Yes, Mig, I made some comments earlier that this was broad-based strength in terms of the product lines with refrigeration, warewashing, cooking, and the retail side with scales, overall really strong performance across the board, but as you heard, equipment is up 9% in North America.

I would characterize it as much more of a function of significant parts of the food equipment business reaching that ready-to-grow stage. It’s been there for the last year or so and just been in a position to be much more aggressive in terms of attacking our growth opportunities. The innovation pipeline there is terrific. That’s certainly contributing, but it’s more of an end product of all the work done to get the portfolio right, get the business simplified, and get it focused on its best growth opportunities.

Right. And I appreciate that, but obviously the drivers are, I presume, a little bit different, ware washing versus hot-side cooking. Right?

I don’t think — I wouldn’t say they are a lot different based on what I just said. We’ve got highly competitive, highly differentiated product lines with great opportunity to grow and are now in a position to really focus on attacking that.

All right. Thanks for your comment.

Thanks a lot. Good morning, everybody. A question kind of going back to pricing. I know, as you just said, Scott, the Company focuses on differentiated product, and that kind of shields ITW from price competition. But we are seeing some evidence of competitive pricing in some of the markets that you really don't participate in directly. Did any of the segments realize negative pricing or see competitors resort to price actions to try to drive their volume?

Yes, I think, Andy, this was a Q2 that looked a lot like Q1 and a lot like Q2 last year. So we would say at the enterprise level and even at the segment level, no significant changes on the pricing side.

Okay. That's good news. And then on the EF&C acquisition, the accounting impact, do you expect to realize all that in Q3, or is that going to be kind of a carryover into Q4?

Yes, I really don’t want to get into too much detail here. But in terms of Q3 versus Q4, we are just getting going here, Andy. What I can tell you is for the second half, based on what we know today, we expect it to be neutral. I don’t think it will be a big swing on a quarterly basis, but I don’t know that for sure yet.

Okay. Thanks a lot, Michael.

Hi, good morning. I'm still with JPMorgan.

Thanks. Good to hear it.

At least I think I am. A lot of my questions have been answered, but maybe you could give us a little bit more color on China in general and how the various businesses progressed during the quarter in China?

Yes. So I think China overall was flat with strong performance in Automotive. Auto up 13%, Test & Measurement fairly solid, low single digit growth with some challenges you would expect on the Welding side and Food down slightly. But I wouldn’t read too much into that. Overall, a good quarter in China.

Okay. Thank you. And then just back to - overall, we've heard from some other suppliers that there are several OEMs who are shutting down production in Q3 for extended periods. I think you kind of alluded to that perhaps in the welding business, but are any of your other businesses seeing any extended shutdowns from the customers?

Not that I’m aware of.

Yes. Almost everything's been answered already. Thank you guys for taking the time. I just wondered generally acquisition prices, are they reasonable? Because you guys are a little different than everyone else. You're very zeroed in on specific areas, or you see a little inflation out there and it's tough to find things.

Well, we did one deal. So I’m not sure that we’re a market maker on can give you good feedback overall. It’s not something where I think we have enough of an active effort on to be able to give you any good insight or input on acquisition prices generally.

Okay, all right. Well, that was it. Thank you very much.

Hi, good morning. My follow-up first maybe this time. You made a comment earlier about PLS being less in 2017, but I guess that means it's not going to go away, right? Does it ever go away? Does it go to a normal level? I mean, how do we just think of the cadence of PLS longer term?

Yes, I think eventually it goes down to a level where it’s whatever is described as normal maintenance, probably less than half a percent a year I think. I don’t want to get too specific here because, as Michael said, we stop looking through the plating cycle. But the big lot of activity on this for the company over the last three-plus years has really been around the portfolio strategy execution. Once we get it to where we want, it certainly becomes something that we do some minor pruning on an annual basis. But it’s not something that we’ll even talk about anymore at that point, and maybe that’s a couple of years out from here.

Okay, great. That's helpful. And then just on restructuring, I wonder, do you have additional restructuring in your plans for Q3, Q4? And maybe if you could just touch on sort of what you're doing there and how we should think about that impact in 2017.

Yes, Steve, our restructuring assumption for the year in that $60 million to $70 million range is unchanged. We don’t expect any significant changes to that as we go through Q3 and Q4. Given current levels of demand, we are at 60 to 70 and don’t see anything right now that would take it outside of that range.

Great, thank you.

Hi. Good morning. Just two quick follow-ups. One, I know you don't want to comment on the auto acquisition. But I guess on your other businesses, as we exit 2016, how should we think about amortization expense from acquisitions? Because I would assume that's another tailwind as we think about 2017 versus 2016. And then another clarification just on FX impact to EPS. I think last quarter you guided to $0.20. Did you change that number with the pound? That's all I have.

Yes, let me start with the last one. I think the $0.20 was a way back win at the beginning of the year. There was a lot of volatility, as you know, on the currency side of things. At current rates, we would expect it to be less than $0.20. It’s really hard to put a hard and fast number out there given all the volatility. On the intangible amortization, we expect that to continue to go down for two segments where we talk about this: Test & Measurement and Polymers & Fluids, it’s maybe something like 30 to 50 basis points of favorability on an annual basis in those two segments.

Okay, great. I will get back in queue.

Thanks, good morning. The Q3 margin guidance implies a moderating of the year-over-year improvements in margins, even if you adjust for the 50 basis points of EF&C. It doesn't sound like there's a lot more restructuring there. Are we just sort of getting to the maturity point of the margin improvement, or is there perhaps some conservatism there?

Yes, it’s certainly not like we’re getting to a level of maturity here. As you know, we have guided to 100 basis points of margin expansion this year and in '17, independent of volume. Scott talked a little bit about how much more potential we still have inside the company. Really the last year, if you recall, margins were up 180 basis points. We had a really strong third quarter last year. It’s really more of a comp issue than anything else.

Okay. That's helpful. And then how have your expectations changed for the industrial-facing businesses year-over-year? Last quarter I think you said there was maybe a chance that you could get to neutral exiting the year. Has welding now taken a step backwards there, or how are you thinking about that consumer versus industrial by kind of exiting the year?

Well, I think I’ll just go back to what I said earlier. I think welding, given the performance in the first two quarters, the contraction is certainly continuing longer than — expectation is a funny word because we tend to just react to the conditions that we’re seeing. Ultimately heading into the year, given the kind of decline we saw last year, I think we were hopeful things were going to flatten out in the back half. Given the first two quarters, that’s not the case. But at some point, it’s going to happen. In the short run, we’re managing the cost structure with some restructuring actions and other things we’re doing to do what we should be doing in the short term while preserving our position in the markets and certainly being ready to participate fully as things turn around up there. We’re performing better on margins; we’re certainly offsetting more than offsetting the impact of welding’s performance in the short term.

Okay. Thanks a lot.

Hi, thanks. Good morning, guys. I wanted to ask about the food equipment business, and the 300 basis points of margin improvement and if there's a way of measuring how much of that was 80/20 enterprise initiatives and how much was volume related.

Yes, the best detail and most detail we give you was in the appendix and the press release. If you look at Food total margin expansion of 300 basis points, 110 of that was from operating leverage. Similar to what you saw in Q1, as these businesses begin to accelerate growth, you see really nice improvement on the margin side as a result. Additionally, approximately 80 basis points of enterprise initiatives contributed to the margin improvement, and restructuring was slightly lower this year versus the second quarter last year. We break that out in the press release by segment and total ITW.

Okay. Got it, great. Okay. And just as a follow-up on the EF&C business, the doubling in margin - and it's been a while since you guys have done an acquisition like this. I wonder how much of this is new programs related to the business management system, and if at all you're thinking this is sort of like a new, like a test case for future acquisitions?

I wouldn’t characterize it as a test case. Our track record, even though it has been a while, I don’t think we’ve forgotten how to do this. We’ve been, in many ways, doing everything we’re going to do at the EF&C at all 84 of our other divisions over the last couple of years which is front to back. We’re applying our 80/20 management system. Our methodology inside the company is extremely well defined and proven. We have a fair all business running at mid-20s EBIT margin that we’re adding this to. I don’t think there’s any sort of mystery regarding what we need to do and the process we’re going to use to make it happen.

Okay, great. Thank you.

Thank you. Good morning. Most of the stuff has been answered. Just a clarification. You said restructuring is going to be about the same as planned before, but you had 140 basis point impact on welding and 70 basis point impact in polymers and fluids. What kind of an impact from restructuring should we expect on margins in the second half of the year from the ongoing restructuring?

Very similar to the first half. The way we plan this is at a very measured pace. If you go back, we’ve got a restructuring spend on the quarterly basis that’s very consistent in that $16 million to $17 million range. That takes us to $60 million to $70 million for the year, and obviously that is included in our guidance. We’re not adding anything back here.

Okay. And secondly, I think you said the $2 billion share repurchase - $1.2 billion is coming from overseas?

So, if you recall, in the back end of first quarter earlier this year, we were able to access a little over $1 billion, $1.2 billion of overseas funds that we’ve allocated to the share buyback program. That portion is done. The 800 million, the balance that takes us to $2 billion is, think of that as more normal run rate for the company. That’s our typical surplus cash flow that this year is being allocated to the share buyback program.

All right. Thank you very much.

All right. I think that brings us to the top of the hour. Thank you everyone for your time today.