Illinois Tool Works Inc (ITW) — Q3 2017 Earnings Call Transcript

Thank you, Nancy. Good morning, and welcome to ITW’s third quarter 2017 conference call. I am Michael Larsen, ITW’s Senior Vice President and CFO. Joining me this morning is our Chairman and CEO, Scott Santi. During today’s call, we will discuss our third quarter financial results and update you on our 2017 earnings forecast. Before we get to the results, let me remind you on slide two that this presentation contains our financial forecasts for the fourth quarter and full year 2017 as well as other forward-looking statements identified on this slide. We refer you to the company’s 2016 Form 10-K 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, and 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, all. In the third quarter, the ITW team continued to execute at a very high level and as a result, delivered another quarter of strong financial results. Q3 earnings were $1.85 per share, which includes a $0.14 per share benefit from a favorable legal settlement that Michael will discuss shortly. Excluding the impact of this legal settlement, earnings per share increased 14% year-on-year, and operating margins increased 130 basis points to 24.4%, with Enterprise Initiatives contributing 110 basis points of improvement. In addition, we continue to make good headway on organic growth acceleration with continued progress on our organic growth initiatives across all seven of our segments. Year-to-date, our organic growth rate of 2.7% is more than double last year's rate despite the fact that two of our fastest-growing segments, Auto OEM and Food Equipment, are experiencing a little bit of market softness. Based on our solid Q3 results and a fairly stable near-term end market demand environment; we are increasing our full year EPS guidance as we now expect to grow full year earnings by 14% at the midpoint, and that's excluding the 17% per share full year benefit from the legal settlement. Overall, we continue to be very pleased with the progress we are making in leveraging ITW's differentiated business model and high-quality diversified business portfolio to deliver consistent top-tier performance. We look forward to updating you on our strategy and long-term performance goals at our Annual Investor Day on December 1. With that, I'll turn the call over to Michael, who will provide you with more detail regarding our Q3 performance and 2017 forecast.

Thanks, Scott. I'm on Slide 3 and I'd like to start the financial discussion today by separating the impact of the legal settlement from our underlying operating performance in the quarter. The schedule on Slide 3 lays out the key performance metrics as reported, including GAAP EPS of $1.85, the impact of the legal settlement, you can see the $0.14 benefit to EPS here and all the metrics excluding the legal settlement, with EPS of $1.71, an increase of 14% versus prior year. When I discuss our financial results for Q3 on the following slides, all of the results presented and my supporting commentary exclude the impact of the legal settlement. Okay. So, I'm on Slide 4, and as I mentioned, EPS increased 14% year-over-year to $1.71 and exceeded the midpoint of our guidance by $0.09, with $0.06 contribution from margins and $0.03 from currency translation. As you may know, we've met or exceeded the midpoint of our EPS guidance every quarter since we began executing on our enterprise strategy five years ago. Total revenue was $3.6 billion, an increase of 4% with organic growth of 2%, which was right in line with the midpoint of our guidance. Six of seven segments had positive organic growth, led by Specialty up 5% and Welding and Construction, which were both up 4%. By geography, organic growth was strong internationally, up 4% led by China, which was up 13% and Europe was up 2%. As we discussed on the last earnings call, this quarter had one less shipping day, and in addition, Product Line Simplification ran a little higher than usual and was a 70-basis point drag on our organic growth rate in the quarter. Adjusting for these two items, the underlying organic growth rate is closer to 4% on an equal day basis. Just to remind you that the calendar for Q4 also has one less shipping day which is factored into our guidance. We increased the operating margin by 130 basis points to 24.4%, a new record for the company, driven by our continued progress on enterprise strategy initiatives and positive volume leverage. Enterprise Initiatives contributed 110 basis points of margin expansion, and we continue to have strong momentum on our Strategic Sourcing and 80/20 initiatives. Operating income grew 9% to $881 million, making this quarter the most profitable quarter in the company's history. Free cash flow was solid at 108% of net income, in line with typical seasonality, and it's worth reminding everyone that we raised the annual dividend by 20% in August. Overall, another strong high-quality quarter as the ITW team continues to leverage our highly differentiated business model to consistently deliver top-tier results. On slide 5, we've laid out the key drivers of our 130 basis points of operating margin expansion this quarter. Enterprise Initiatives continue to be ITW's main driver of margin expansion as they contributed 110 basis points of structural margin improvement, marking the best quarterly performance so far this year. Volume leverage was 60 basis points and as expected, price/cost was unfavorable 40 basis points, due primarily to higher steel costs, which impacted a few segments. For comparison purposes, please keep in mind that we do not include Strategic Sourcing savings in our price/cost calculation. Those are reported separately as a part of the Enterprise Initiatives savings number. If we were to include them, price/cost would have been positive and accretive to operating margin in the quarter. As in prior quarters, we more than offset the cost side with price on a dollar-for-dollar basis. We expect that price/cost for the full year will be positive in dollar terms by $30 million to $40 million and unfavorable by approximately 40 basis points to the margin percentage. Overall, really strong operating margin performance, record operating margin performance, in fact, in the quarter. On slide 6, on the left side of the page, you can see what Scott mentioned earlier, the solid progress on organic growth versus last year as reflected by our year-to-date organic growth rate of 2.7% and positive organic growth in all seven segments. Our growth rate of 2.7% is more than double the 1.2% we did in full year 2016 despite the fact that we were expecting a little bit of softness in two of our fastest-growing segments. In terms of operating margin, you can see the results by segment with meaningful sustainable margin expansion as six of seven segments have improved margin on a year-over-year basis. Test & Measurement and Electronics is leading the way in 2017 with 320 basis points followed by Welding up 230 basis points and Specialty up 200 basis points. As expected, Automotive OEM margins are down due to the margin dilution impact from the acquisition of EF&C last year. Excluding the 160 basis points of dilution from EF&C, Automotive OEM margins are up 20 basis points to 24.3%. I will now discuss the segment results starting with Automotive OEM, which delivered organic revenue growth of 1% in Q3 and grew above market in all key geographies as we continue to increase our content per vehicle. In North America, revenue was down 7%, which was better than the decline in auto builds, which were down 10% overall and down 14% at the Detroit 3 where we have relatively higher content per vehicle. Outside North America, growth continued to be very strong, with Europe up 8% and China up 10% versus market growth of 5% and 1%, respectively. The most recent IHS forecast for Q4 auto builds calls for more moderate declines year-over-year, including down 3% in North America and down 9% at the D3. As a result, we now expect full year organic revenue growth in our global Auto OEM segment of approximately 4%, pretty solid considering a second half decline in North America of 7% overall and 12% with the D3. Turning to slide seven. Food Equipment organic revenue this quarter was flat overall as strength in international markets was offset by market softness and difficult comparisons due to the timing of new program rollouts in North America. North America was down 4% with equipment down 6%. However, international equipment was strong, up 6%. Operating margin remained solid at 27.3% despite a little bit of a slowdown in the organic growth rate. Test & Measurement and Electronics organic revenue grew 1% as Test & Measurement grew by 4%. In the Instron, where demand is tied more closely to the CapEx cycle, organic growth was up 3% as the positive trend continues from the first half of the year. Electronics was down 3% due to a tough comparison versus last year when the business was up 13% due to some one-time large equipment purchases. Operating margin performance was very strong at 24.1%, an improvement of 310 basis points driven by Enterprise Initiatives. As a reminder, the 24.1% includes 300 basis points of non-cash expense associated with amortizing acquisition-related intangible assets. Turning to slide eight. The positive momentum in Welding continued with organic growth of 4% in Q3. By geography, North America was up 8% with equipment up 10% and consumables up 5%. Our industrial equipment business, which sells primarily into manufacturing, including automotive and heavy equipment, was strong, up 11% in the quarter, while our commercial equipment business, which sells through distribution to construction, light fabrication, farm and ranch customers, was up a solid 5% year-on-year. International was down 11% due primarily to oil and gas. And keep in mind though that international only represents approximately 20% of our Welding segment. Operating margin was solid at 26.6%, but was negatively impacted by increased restructuring costs in Europe. Excluding these added restructuring expenses, operating margin Q3 would have been up 70 basis points to 27.3%. Polymers & Fluids revenue improved 1% organically with automotive aftermarket up 1%. Fluids, which primarily sells highly-engineered lubricants and cleaners into industrial and commercial end markets, was up 4%, driven by demand internationally. Polymers, which primarily sells engineered adhesives and sealants for industrial MRO and OEM applications, was down 1%. Keep in mind that the 21% operating margin number includes 400 basis points of non-cash expense associated with amortizing acquisition-related intangible assets. On Slide 9, Construction Products organic revenue was up 4%. And demand in North America was solid with organic growth up 4% as residential led the way with 7% organic growth. Commercial, which is about 20% of our North American construction business, was down 3%. Europe and Asia Pacific was solid, both up 3%. Operating margin performance was very strong at 25.4%, which represents 280 basis points improvement year-over-year, primarily due to volume leverage and Enterprise Initiatives. Finally, in Specialty Products, organic revenue was strong, up 5% led by the international side, which was up 7% and operating margin was the highest in the company at 27.7%, an increase of 160 basis points due to volume leverage and Enterprise Initiatives. Let's turn to Slide 10 and our updated guidance for the full year and fourth quarter. Starting on the left side of the page, we're showing the as-reported numbers, which include the full year impact of the legal settlement. As a result of our strong Q3 results, we're raising our full year earnings guidance by $0.25 to a new EPS range of $6.62 to $6.72. And the $0.25 increase reflects the $0.09 beat from margins and currency in Q3, $0.14 from the legal settlement and $0.02 from higher operating margins in Q4. At current levels of demand, we expect full year organic growth of 2% to 3%, more than double our 2016 organic growth rate as all seven segments are poised to deliver positive organic growth for the full year. ITW's key performance metrics for the year are expected to be all-time records for the company. Excluding the legal settlement, we expect EPS growth of 14% at the midpoint and operating margin of approximately 24%, an increase of 150 basis points, with Enterprise Initiatives contributing 100 basis points. After-tax ROIC is expected to be approximately 23.5%, and free cash flow is expected to be greater than net income. As you can see, we are projecting another strong year for ITW, a record year. Finally, turning to the fourth quarter, our EPS guidance range is $1.55 to $1.65, an increase of 10% at the midpoint. You may recall that in the fourth quarter last year, we recorded a $0.06 EPS benefit from a special dividend related to an investment. Excluding this item, our fourth quarter EPS guidance represents 15% earnings growth at the midpoint. Finally, we expect organic revenue growth of 2% to 3% and as always, we're factoring current foreign exchange rates and current levels of demand into our forecasts. So, with that, we'll now open up the call to your questions.

Good morning, guys.

Hey Andy.

Can you give us a little more color regarding what's going on in Food Equipment? Obviously, U.S. restaurant seems to be a little weak. It's still a small portion of that business for you guys. Did institutional get a little weaker in the quarter? And you did mention the timing of shipments impacting quarter, so how are you thinking about the potential for recovery in the business at this point moving forward?

Right, Andy. So clearly, we've seen a little bit of pullback here on the demand side. If you look at it in North America, the equipment side, down 6%. If you look at it by end market, the institutional side was only down slightly, down 1%. And restaurants were actually positive for us, up 1%. And if you'll recall in the last quarter, restaurant was actually down 7%. So, restaurants were up 1%. And then the retail side is where we had the comparison challenge in terms of product rollouts last year that didn't repeat this year in the retail side, which was the scales and the weigh wrap equipment was down 13% on a year-over-year basis.

So, Mike, do you see these parts of Food Equipment recovering here, or how should we look at it over the next few quarters? I know in the last quarter, you have said sort of 2% to 3% growth moving forward, but obviously, it's been a little weaker.

I understand that it's been weaker than expected, and based on our current observations, we do not anticipate any significant changes in the fourth quarter. This outlook is purely based on our present run rates, and we do not see any indicators that suggest these markets will recover in the near future.

Okay. That's helpful. And then Scott or Mike, maybe you could just step back and assess the pivot to growth here in 2017. I know you talked about generating something like 130 basis points of higher organic growth this year versus last year, which is good. But as you move forward here, I mean, the global economy has clearly improved a bit. I'm not sure that you're going to generate 200 basis points above market this year but the goal was for exiting next year. So how does that look at this point, especially if a business like Food Equipment is a little bit slower?

Overall, I would say we are achieving much better balance across the portfolio. There has been a strong focus on our restructuring initiatives related to our Enterprise Initiatives. All 85 divisions in the company are making this shift at varying stages. The positive news is that all seven of our businesses are showing improvements in their year-on-year organic growth rates. However, it's not just about turning a switch; it requires consistent progress on their internal focuses and adjusting the balance of effort, energy, attention, and investment towards growth initiatives. As we assess our progress so far, we've seen our organic growth rate increase by more than a full percentage point this year compared to last, despite the two businesses with the fastest growth facing some short-term market challenges. Overall, this is encouraging. We understand what's happening within these businesses and the progress being made, and we believe we are well-positioned for continued advancements in 2018, which we will discuss in more detail in December.

Scott, I don't want – I know you don't want to get ahead of yourself, but do you still feel confident about accelerating organic growth, lower POS as you go into 2018 and generally momentum from the businesses from pivot to growth?

Yes, I feel confident that we will be able to make another significant improvement in overall organic growth rate in 2018 compared to 2017.

Great. Thanks guys.

Thanks. Good morning, guys.

Good morning.

I know you don't really guide quarter-by-quarter, but I'm just wondering it seems that you're not expecting Food to get better anytime soon. So, I'm just wondering if maybe you could just sort of broaden that out in terms of 4Q, the 2% to 3% organic, maybe just throw in a specific comment on Auto. Given the interest there, how do you see the segments relative to the 2% to 3%?

Yes. I think for Food Equipment, first, Nigel, I would expect a growth rate in Q4 on a year-over-year basis that is similar to what we just had here in Q3, maybe a little bit better than Q3 based on current run rates. I think for the Automotive business, the organic growth rate in Q4, on a year-over-year basis based on current run rates should be slightly better than Q3 and also factoring in the forecast from IHS that I just went through. So, if you look at in Q4, North America is down less than it was in Q4 and the Detroit 3 are down less in Q4 than they were in Q3. So, both those businesses should be in line with Q3, maybe a little bit better on a year-over-year basis in Q4.

Okay. And the rest of the segments will be pretty much consistent with what we saw in 3Q as well?

Exactly. As the momentum is solid in the other five, that's what I would say heading into Q4.

Yeah, I think what you'll see, Nigel, based on current run rates, most of our businesses will improve their year-over-year organic growth rate in the fourth quarter relative to the third quarter.

Thank you and good morning everyone.

Joe, good morning.

My first question is perhaps just welding margins for a second. I think the incrementals were, I think, slightly below 30% for the quarter. I know you guys put through some pricing increases as well, so would have just expected that to be a little bit higher. And Michael, I think in your prepared comments, I think you mentioned some restructuring that was coming through in Europe. So maybe to the extent that you can talk about that restructuring, when we’re going to be through it? And anything else that may have affected the incrementals this quarter?

The bulk of it, Joe, I mean, so you're seeing a little bit of steel inflation coming through on the Welding side, and then you saw the 70 basis points of increased restructuring costs year-over-year. I think if you look at the year-to-date performance and for the full year, we expect to be in this 27% range in Q4 and for the full year. So really nothing unusual beyond those two items.

And the European restructuring is a one-quarter event.

Yeah, yeah.

Got it. Maybe – and maybe just a little bit more color. What specifically were you guys doing in Europe from a restructuring standpoint?

Joe, we typically don't discuss the specifics of those projects.

It's related to Enterprise Initiatives. Nothing unusual out of the ordinary.

Okay. All right. Maybe switching then to price/cost. I know that this quarter, I think you guys did 40 basis points or the 40-basis point drag on margins. I think you guys had expected price/cost to be a little bit less of a drag in the second half of the year. And so, I'm just wondering whether that expectation has now changed. And how should we be then thinking about it also for 2018? Is there an opportunity potentially for this to turn into a tailwind to your margins next year?

So, Joe, regarding 2018, I think we'll have to hold off on that discussion until we meet in New York in December. We haven't finalized the annual plan yet, so I'm not in a position to comment on 2018 right now. What we mentioned previously was that we experienced a headwind of 50 basis points in Q2, and we expected improvements from that point onward. In Q3, we saw a 40 basis point impact, and we're anticipating it to be slightly better in Q4. For the full year, it should average around a 40 basis point headwind. To give you some perspective, we've actually increased our margin guidance for the year, now expecting an operating margin of 24%, even after accounting for the 40 basis points of price/cost headwind in 2017. Fundamentally, our view on the price/cost dynamic remains unchanged. We expect some improvement in Q4, and we'll provide further updates in December about our outlook for 2018.

Got it. That makes sense. Thanks guys.

Hi. Thank you. First question, I just want to bridge the gap on the faster organic growth in the fourth quarter than third quarter. You didn't call it out but is it Test & Measurement off of an easier comp? Is that really the notable acceleration in organic fourth quarter versus third? Is the other business still…

A little better Auto.

Yeah. I mean, that's part of it. I think, in Electronics this quarter, like, I think, we said in the script here is, Electronics was up 13% last year and so a tough comp and so they will get a little bit better here in the fourth quarter. But I think as we look at it, based on current run rates, the majority of our segments will have a higher year-over-year growth rate in Q4 than they did in Q3.

Okay. When you mentioned earlier about significant progress on organic sales growth for next year, it’s a bit tougher to assess with sales compared to margins. We used to consider a margin increase of 100 basis points annually, but this year, if you hit your target, the organic sales growth could accelerate to about 120 basis points. As we prepare for the December meeting, when you refer to significant progress, could you provide some insight? People are trying to determine if the capital expenditure businesses are not rebounding as quickly as we would like. The auto sector may also be experiencing slower growth given the strong performance at the start of this year. Which sectors do we anticipate will see accelerated growth? Are these the sectors currently performing well or are we looking at some of the slower ones like Polymers and Food improving? Any clarification on the acceleration you mentioned for next year would be helpful.

Yeah. I think we’ve got to defer you to December, sorry. Our plans are still coming together. I would expect every one of our seven businesses to be better in 2018 than they were in 2017.

Okay. Yeah.

So organically every business faster growth rate in 2018?

Organic and on margins, too.

Yes.

No, that's helpful. I appreciate it. Thank you.

Sure.

Yes. Good morning everyone.

Hi, Mig.

Just maybe to follow-up a bit on David's line of questioning here. I guess I'm wondering, when you're looking at your business this year, obviously, it's done better from an organic growth standpoint. But broadly speaking, growth has been considerably better. I mean, PMI, for instance, is now at the highest level since 2004 and who knows, chances are it's probably not going to accelerate from here as we look at 2018. So, if you're thinking about accelerating organic growth, how much of it would you say is going to be within your control, things like PLS or new products or things of that nature as opposed to simply end markets being better?

I have two comments to make. First, I want to remind you that PMI performed well in 2014, 2015, and 2016, even when overall organic rates in our industry weren't particularly strong, so I'm not convinced that's the best indicator. Overall, we focus on what we can control. As Michael mentioned, our forecasts are based solely on current run rates and our expectations for incremental improvements beyond that. Everything we commit to and focus on falls within the areas we can influence. Therefore, our pivot to organic growth is focused on identifying additional penetration opportunities with our largest and most valued customers, utilizing a robust and effective new product pipeline, and exploring various combinations across all our business sectors.

Is it fair to expect lower drag from PLS next year?

I think it's hard to tell. It may align with what we're seeing this year, possibly a bit lower. The PLS does impact our organic growth rate, but it's really advantageous for our 80/20 strategy. It positions the portfolio for stronger organic growth moving forward with top-tier margins and returns. We haven't discussed it much this year; I mentioned it today because the numbers were higher, but they can be somewhat variable as we work through projects across 85 divisions. Initially, our rollout was above the average for this year. However, in 2018, we might shift to more of a maintenance mode. I can't specify what that number will be right now, but it's likely lower than what we have observed this year.

Okay. Great. Lastly, on Specialty Product, there were some headlines early in the quarter here that the Zip-Pak business had three trademarks canceled. I guess, I'm wondering if there's any comment as to how this might impact either the revenue stream going forward or any impact to margin for the Zip-Pak business. Thanks.

Yeah, thanks. There's no impact from that.

Hi, good morning.

Hi, Ann.

Just a point of clarification. On the price/cost versus the enterprise strategic sourcing savings, is the right way to think about that price/cost being more perhaps steel inflation showing up in the gross margins versus enterprise strategic sourcing savings maybe being more indirect savings like travel, et cetera? Is that the right way to think about it conceptually?

So, I'd say that the first point of your question was correct that you do see the impact of price/cost in gross margins. But you also see the impact of the strategic sourcing efforts in the gross margins.

At this point, that's where the 80 of the benefit is, right.

The focus is primarily on the direct side rather than the indirect side. My point, Ann, is that if we were to include those Strategic Sourcing savings in the price/cost number like some of our peers do, it would not only change how we report but would also make the price/cost equation look positive this year and in Q3.

Okay, I appreciate that. I just wanted to make sure I was thinking about it conceptually the right way.

Yeah. That's fair.

Then on the remainder of your businesses, could you just talk, I guess, specifically construction and maybe welding? Was there any impact on your business? I think about the welding business, you can use those welders with backup power units. Any impact on either welding or construction in the back of the storms or anything anticipated going forward?

Yeah, so Ann, let me just say first, we have more than 300 employees in Houston, 400 in Florida, 20 employees in Puerto Rico, and the most important thing as we talked about the impact of the storms is that they're all safe and we're only a small number of them are personally invited. And all of our facilities, the eight facilities in the region, we didn't have a lot of significant damage and we're back up – and they were back up and running pretty quickly. So, in terms of the results here in the near term, there were certainly some puts and takes by business, which is what you're getting at. We did see a little bit of an uptick on the welding side as well as the construction side. And that was offset actually by some Food Equipment orders that were not shipped into the region where the customer elected to defer for now. So overall, probably neutral for ITW here in terms of the third quarter. I think longer term this will probably be a net positive for some of our businesses, especially on the Construction side. But we've not put anything in the forecast at this point.

Okay. I’ll take it offline and get back. Thank you. Thanks.

Hi. Good morning. A couple of questions. I guess, first question, obviously, you guys have done a phenomenal job on the margin side in terms of Enterprise Initiatives. As we think about the different business segments, are there certain segments where you feel like you that story sort of played out and there's not as much to do within your control and we should think about margins more driven by volumes versus incremental help from the Enterprise Initiatives as we think to 2018?

Thank you, Jamie. We believe that despite the significant progress we've made at the enterprise level and within each segment, there is still potential for improvement. This perspective is based on feedback from our divisions, rather than just our viewpoint at corporate. We're optimistic about what 2018 will bring, and we anticipate at least another 100 basis points of margin expansion solely from the Enterprise Initiatives.

It's in 2018 over 2017.

In 2018 over 2017. And just as an aside, if you look at Q3, every one of the segments had at least 90 basis points of Enterprise Initiative impact. So, it’s broad-based, it's still going on and is having a meaningful impact on our margins. The other point, I'll just make, if you look at – if you go back to slide 6 on the deck, you can see that our seven segments are all starting to cluster around the mid to high 20s from an operating margin standpoint. And some of these businesses have improved by more than 10 percentage points since we started the enterprise strategy. And I think that the fact that they're now clustering in the mid-20s really speaks to how powerful, our differentiated business model is. And as we continue to focus on leveraging that, we expect to continue to see improved margins across the portfolio, and therefore also at the enterprise level.

Okay. Thanks. I’ll get back in queue.

Thanks. Good morning.

Good morning.

Michael, you mentioned that PLS can be lumpy, but to what extent was that PLS drag in the quarter plan going into the quarter? Or was that an adjustment that you made as the quarter progressed? Just wondering where you felt the need to do more PLS or kind of where you found the opportunity?

Yeah, so this was all planned, Steve, at the division level. So, I think I can't really point to any one segment. There's still –the 80/20 initiatives are broad-based across 85 divisions. And like I said, when you we rolled up the number for the quarter, it was 70 basis points, a little bit higher than what we had expected maybe, but that's actually a good thing, as I tried to say earlier.

Okay. And you mentioned some of the puts and takes of the hurricane in September. But more broadly, did you see any particular acceleration or deceleration as the quarter progressed?

No, I think when we looked at the monthlies they were all right in line with run rate and what we had expected. So, nothing unusual from a monthly standpoint.

Okay. And then just real quick, the commercial construction looked like it flipped to a minus 3% from positive 3% last quarter. Was that just a comps thing or is there something moderating there?

I think that business can be – commercial construction side can be a little lumpy. I think that market, I would probably say, is flat to maybe slightly negative, maybe slowing a little bit on the commercial construction side, but more than offset by the 7% growth that you saw in residential. And just if you look at commercial construction business on a year-to-date basis, it's flat, which is probably in line with where we see the market right now.

Okay. Thanks a lot.

Good morning, everyone.

Good morning.

Good morning.

Just a question on corporate expense. You guys have had fairly low corporate expense this year, even adjusting out the legal sentiment. Can you talk about what we should expect for our quarterly run rate, say in the fourth quarter and going into 2018?

So, if you look at, Nathan, so there's a line in the income statement in the schedule on the back where we typically, on a quarterly basis, have $20 million of unallocated cost. That has flipped positive with the legal settlement. I would expect for next year that our corporate cost will be flat on a year-over-year basis. And so, as a result of that, you'll see – we will come back to that $20 million of unallocated cost in the income statement as we go through next year on a quarterly basis. So, don't expect any big changes from a corporate cost standpoint.

Okay, so about $80 million next year. Then just one question on the international Welding business. You said that was mostly dragged down by the oil and gas market. Is it possible for you to give us any information on how the international Welding business did ex the oil and gas market?

It's really the majority of what we're showing there is oil and gas, so international was down. I think oil and gas international was down 11%, which is in line with the overall number for the international side.

The vast majority of our international sales, so I don't think we have much in terms of read-through.

Okay. Fair enough. Thanks very much.

Right.

Hi. Good morning.

Good morning.

Looks like another quarter of good growth out of China. And I think actually looked like some acceleration from 2Q, given a harder comp. We see the data on the Auto side, but just if you could talk about China a little bit more broadly, maybe where you're seeing some sources of acceleration there and kind of confidence that you have in those demand levels as we move forward.

Yes. I think, Joe, if you remember last year, the Auto business in China was up 40% year-over-year, so that was – so this was a tough comp, and despite that, the business was up 10%, the Automotive business in China. When we look at China, it's – the strength is really broad-based. So, Test & Measurement, Food, Polymers & Fluids, Welding all positive, Specialty Products all positive here in the third quarter, up 13%. And on a year-to-date basis, the same is true and our businesses in China are up 15% on a year-to-date basis.

That's really helpful. And then, I guess, just along that, no signs of something within the quarter that would have been a particular boost? That's more kind of stable demand that you see that's supporting that growth?

Yeah, no, I think across the board really stable overall, like I said, China up 13%.

Great. And then just on price/cost, when you talk about the split between the dollars and the margin, when you think about the typical lag, if you can kind of characterize it in any sort of typical fashion, what do you generally see as the lag time before we'd start to see margin come back so that you're at least net neutral on price/cost?

It's about two quarters until we've balanced the material cost with price, which has been consistent historically.

Perfect. Thanks very much.

All right. Thank you.

All right, thank you very much, and thanks for dialing in. Have a great day.