Illinois Tool Works Inc (ITW) — Q3 2020 Earnings Call Transcript

Okay. Thank you, Julienne. Good morning, everyone, and welcome to ITW's third quarter 2020 conference call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter 2020 financial results and provide an update on our strategy for managing through the global pandemic. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2019 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations, including the ongoing effects of the COVID-19 pandemic on our business. This presentation uses certain non-GAAP measures and a reconciliation of those measures to the most comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our Chairman and CEO, Scott Santi.

Thank you, Karen. Good morning, everyone. We saw solid recovery progress in many of the end markets that we serve in the third quarter, as evidenced by our revenue being up 29% sequentially versus the second quarter. In fact, demand levels returned to rates approximating year-ago levels in five of our seven segments, with two of those, Construction and Polymers & Fluids, delivering meaningful growth in the third quarter. On the flip side, demand levels in our Food Equipment and Welding segments continued to be materially impacted by the effects of the pandemic, although we did see good sequential improvement in both in Q3 versus Q2. We talk often about the flexibility and responsiveness inherent in our 80/20 Front-to-Back operating system. And those attributes were clearly on display in our Q3 performance. Supported by our decision early on as the pandemic unfolded to refrain from initiating staffing reductions and to focus on positioning the company to fully participate in the recovery, our people around the world responded to a rapid acceleration in demand by leveraging the ITW business model to provide excellent service to our customers, while keeping themselves and their coworkers safe. Perhaps the most pronounced example was our Auto OEM segment, where our team executed flawlessly from both a quality and delivery standpoint in responding to demand levels that essentially doubled in Q3 versus Q2, and with a very demanding customer base. Across all seven of our segments, our teams can cite numerous examples of how our ability to sustain high levels of service in the face of rapidly accelerating demand resulted in incremental business for the company in Q3. In addition to leveraging our best-in-class delivery capabilities, our divisions remain laser-focused on leveraging our strengths to capture sustainable share gain opportunities that are aligned with our long-term enterprise strategy. These efforts are just beginning to take hold. And I'm confident that they will contribute meaningfully to accelerating our progress towards our long-term organic growth goals. The operating flexibility that is core to our 80/20 Front-to-Back operating system also applies to our cost structure, which showed through our operating margin performance in Q3. Operating margin of 23.8% in the quarter included meaningfully higher restructuring expenses versus a year ago in two segments-specific one-time items, which Michael will provide more detail on in a few minutes. Excluding these factors, operating margin was 25.3% in Q3, the second highest in the history of the company. Overall, the pace of recovery in the third quarter exceeded our expectations heading into the quarter, as we delivered revenue of $3.3 billion, operating income of $789 million, free cash flow $631 million, and GAAP EPS of $1.83. In addition, after-tax return on invested capital improved to 29.6%, an all-time high for the company. It goes without saying that I could not be more proud of how the ITW team is managing through this challenging period. And I want to sincerely thank my 45,000-plus ITW colleagues around the world for their continued exceptional efforts and dedication in serving our customers and executing our strategy with excellence. In the face of unprecedented challenges and circumstances, our operational and financial performance over the last few quarters supports our decision to remain fully invested in the key initiatives supporting the execution of our long-term enterprise strategy and provides further evidence that ITW is a company that has both the enduring competitive advantages and the resilience necessary to deliver consistent upper-tier performance in any economic environment. Moving forward, we remain focused on delivering strong results while continuing to execute on our long-term strategy to achieve and sustain ITW's full potential performance. I'll now turn the call over to Michael for more detail on our Q3 performance.

Thank you, Scott, and good morning, everyone. Since the beginning of the pandemic, maintaining ITW's considerable financial strength, liquidity, and strategic optionality has been a priority. Our objective was to fully leverage the strong financial foundation and resilient profitability profile that we have built over the last seven years to position ITW for maximum participation in the recovery. And as the recovery progressed ahead of our expectations going into the quarter, we were ready to meet customer demand, and we delivered strong financial results. Q3 revenue was up 29% or almost $750 million sequentially versus Q2. And on a year-over-year basis, organic revenue declined only 4.6% compared to a 27% decline in Q2. The impact of last year's divestitures was 1% and was essentially offset by 0.7% of favorable currency impact. Product line simplification was 30 basis points in the quarter. Despite the negative volume leverage and our decision to stay invested in our key strategic priorities, Q3 operating margin was 23.8%, down only 120 basis points compared to prior year. If you set aside the impact of higher restructuring expenses and two one-time segment items that I will describe in a moment, operating margin would actually have increased year-over-year to 25.3%. Strong execution on our enterprise initiatives was a big contributor once again at 120 basis points as all segments delivered benefits in the range of 70 basis points to 190 basis points. As expected, our decremental margins were a little higher than normal at 46% in the third quarter. Excluding the two one-time items that I just mentioned and the higher restructuring expense, our decremental margins would have been about 20%, significantly better than our historical decrementals of 35% to 40%. Operating income was $789 million and GAAP EPS was $1.83, with an effective tax rate of 21.3%, in line with last year's 21.6%. Solid working capital performance contributed to free cash flow of $631 million and a conversion rate of 108% of net income. On a year-to-date basis, free cash flow was $1.9 billion, with a conversion rate of 127% compared to 105% last year. We now expect free cash flow to end the year significantly above $2 billion. Our balance sheet remains strong. At quarter end, we had $2.2 billion of cash on hand, no commercial paper, and a $2.5 billion undrawn revolving credit facility, Tier 1 credit ratings, and total liquidity of more than $4.7 billion. In terms of our debt structure, you can see an increase of $350 million in the short-term debt, which is simply a reclassification from long-term to short-term as our 2021 bonds are coming due in less than 12 months. So in summary, a very good quarter operationally and financially as the recovery progressed well ahead of our previous expectations. Moving on to Slide 4 for a closer look at the third quarter recovery and response by each segment. You can see that every segment responded effectively to the increase in demand recovery and improved sequentially on both revenues and operating margin. I would highlight just a few things that Scott mentioned, including the fact that our Automotive OEM segment was able to essentially double their volumes in a quarter or just 90 days as operating margins swung from negative to over 20%. In addition, six of seven segments had operating margins, not segment margins, operating margins above 20%. FEG, Food Equipment was just below 20%, but we expect them to get above 20% in Q4 despite the fact that they are operating in a pretty challenging environment. Next to Slide 5, starting with a quick look at organic revenue by geography. As you can see, customer demand improved in every region. North America declined by only 5% in Q3 compared to down 26% in Q2. Europe also improved significantly, down only 8%, a sequential improvement of almost 30 percentage points. Asia Pacific turned positive this quarter, up 3%; and China was the standout, up 10% as the recovery continued to take hold. In China, specifically, Automotive OEM, Polymers & Fluids, and Specialty Products all grew double-digits. So in summary, broad-based geographic recovery in the quarter. Now let's walk through each segment, starting with the one that experienced the most pronounced recovery, Automotive OEM. In a matter of weeks, our customers went from being shut down to operating close to full capacity. The team responded by leveraging their experienced workforce, local supply chains, and flexible operating system to quickly ramp up and meet customer demand. Overall, organic revenue was still down 5% year-over-year, with North America down 10% and Europe down 5%. China, which had already turned positive last quarter at 6%, also improved sequentially and was up 15% this quarter. Lastly, as we discussed on our last call, we did initiate a few restructuring projects that were part of our 2020 plan pre-pandemic which led to a reduction in operating margins of 150 basis points to 20.8%. Turning to Slide 6. As expected, Food Equipment was the hardest hit segment in the quarter as organic revenue declined 20%, a significant improvement, though, from being down 38% in Q2. North America and international organic revenue were both down about 20%. Equipment sales were down 21% and service was down 17%. Institutional demand was down about 30% and restaurants, including QSR, were down a little bit more than that. On a positive note, retail, which includes grocery stores, grew more than 30% supported by the rollout of new products. Despite the significant negative volume leverage and higher restructuring expense, operating margin was still 19.6%. Excluding the higher restructuring impact, margins would have been 21.4%. And I think it's worth noting that in this most challenging environment, the segment generated almost $19 million in operating income. In Test & Measurement and Electronics organic revenue declined only 2%, with Test & Measurement down 6% and Electronics up 2%. While demand for capital equipment remains soft, the segment benefited from considerable strength in a number of end markets, including semiconductor, healthcare, and clean room technology. As you can see from the footnote, the reported operating margin of 23.7% included 350 basis points of unfavorable impact from removing a potential divestiture from assets held-for-sale. Excluding this impact, the operating margin would have been 27.2%, which is a much more accurate representation of the underlying profitability of this segment. Given the current environment, we simply decided to defer this divestiture for now. Speaking of divestitures, let me make a broader comment on our portfolio management efforts and specifically the 2018 decision to divest seven businesses that we determined no longer fit our enterprise strategy framework, with revenue of approximately $1 billion. We expect the completion of these divestitures will improve our overall organic growth rate at the enterprise level by approximately 50 basis points and increase enterprise operating margins by 100 basis points. In 2019, we made good progress completing four divestitures with revenues of approximately $150 million. And we are seeing the benefits in our financials this year, including a 20 basis points of operating margin impact. While the pandemic put a hold on our efforts this year, our view regarding the long-term strategy fit of the remaining divestitures has not changed. Accordingly, we will resume the sale process for these businesses when market conditions normalize. Okay. Turning to Slide 7. In Welding, demand for capital equipment was down year-over-year as organic revenue declined 10%. However, the commercial business, which accounts for about 35% of revenue and serves primarily smaller businesses and individual users, was up 11%. In industrial, customers were holding back on capital spending, and organic revenue was down more than 20% this quarter. Operating margin, though, was remarkably resilient at 27.9%. On a positive note, Polymers & Fluids reported record organic growth of 6% in the quarter. The automotive aftermarket business benefited from strong retail sales to grow 10%, with double-digit growth in tire and engine repair products. Fluids was up 6%, with strong sales in healthcare and hygiene end markets. As a result of the volume leverage and strong incremental margins of 78%, operating margin expanded by 250 basis points to a record 26.6%. Moving to Slide 8. Construction had a remarkable quarter, benefiting from continued strong demand in the home center channel to deliver record organic growth of 8%. All geographies were positive, with North America up 12% with double-digit growth in the residential and renovation market, offset by commercial construction down 10%. Europe was up 6% with double-digit growth in the Nordic region, and Australia and New Zealand revenues grew 3% and were positive for the first time in more than two years. As a result of the volume leverage and strong incremental margins of 59%, operating margin expanded by 300 basis points to a record 28.1%. And some of you may remember that when we launched the enterprise strategy in 2012, Construction had the lowest operating margins in the company, seemingly stuck right around 12%, certainly good performance in the industry, but not really ITW caliber. The fact that the Construction segment delivered the highest margins inside of ITW in Q3 at more than 28% is, therefore, pretty remarkable. Specialty organic revenue was down 5%, with North America down 4% and international revenue down 7%. Demand for consumer packaging remained solid but was offset by lower demand in the capital equipment businesses. Operating margin was 25.2% and included a one-time customer cost-sharing settlement. Excluding the impact of this one-time item, operating margins would have been 28%. Let's move to Slide 9 for an updated look at our full year 2020. As I mentioned earlier, the demand recovery in Q3 exceeded the high end of our expectations going into the quarter, and as a result, we're updating our financial outlook for the year. As we sit here today, we expect organic revenue for the full year to be down 11% to 11.5%, operating margin to be in the range of 22% to 22.5%, and operating income in the range of $2.7 billion to $2.8 billion. As I mentioned, free cash flow performance continues to be strong, and we expect to end the year well above $2 billion. As you think about Q4, keep in mind the typical seasonality from Q3 to Q4 and that Q4 has two less shipping days. Also, please note that we expect a slightly higher tax rate in Q4 versus Q3, and our full year tax rate is expected to be in the 22% to 23% range. With respect to our outlook for 2021, we expect to reinstate annual guidance when we release full year 2020 results early next year.

Okay. Thanks, Michael. Julienne, let's open up the lines for questions, please.

I guess two questions, sort of one strategically as we're getting through COVID, can you sort of speak to where you had a good opportunity to grow faster than the market or which markets do you see best positioned to grow faster than the market as you sort of take advantage of the opportunity right now and update on how the M&A is trending? And then I guess my second question, as we think about 2021, understanding you don't want to talk about incrementals yet outside of volumes. Is there anything that you can help us with headwinds versus tailwinds? I guess you don't have some of the salary cuts that other people will be comping or structuring. I'm just trying to think of the puts and takes and your ability to put up outsized incrementals.

Well, maybe let me take the sort of strategic questions and then ask Michael to comment on your second question. What I would say overall is this is very much a dynamic situation that's still playing its way out. We are certainly responding from a tactical standpoint pretty well at this point. Our ability to remain invested is certainly with the mission of focusing on making sure we serve our customers extremely well through this period and also that we are in a position to seize opportunities that come our way. We remain focused on that. I think at this point, it's way too early to sort out the sort of priorities of the rank order of opportunities other than I'll refer back to the comment I made in my opening remarks that every one of our segments can point to solid examples in the third quarter of where their ability to have immediate availability to respond to a customer need resulted in incremental business for the company. It remains a priority, but I think the situation in the near-term is just too dynamic in terms of having any real view at this point of what parts of the company have more opportunity than others. But I think the thing we want to be clear about is we are focused on it and expect those opportunities to continue to play out as we go forward. From an M&A perspective, although I would really say at this point is what we've said in the past is from the standpoint of the long-term strategy of the company, we remain very open to the good opportunities that come our way. But I would also marry that up with the fact that in this environment, sort of the flip side of our own experience on the divestitures, this is not a particularly good time for quality businesses to sell. We're not in the market for discussed assets. We're interested in bringing quality companies into the company, into ITW that we think we can fit our strategy and ultimately, that we can help even better companies. And in this kind of environment, this is not necessarily a great time to sell. So on a medium- to long-term basis, as we have said repeatedly in prior forums, it remains a core part of the overall growth strategy and profile of the company. But from a tactical standpoint, short-term, it's not a big focus right now.

Regarding your second question, Jamie, as we've mentioned previously, our planning process at ITW is very much a bottoms-up approach, and we haven't completed that process with our businesses yet. Therefore, I can't provide detailed comments at this time. I assure you that when we offer guidance in our next earnings call, I will be able to address your specific questions comprehensively. For now, I can point out that the year-over-year growth comparisons are clear. Concerning your question about incrementals, our long-term incrementals remain in the 35% to 40% range. However, as you noticed this quarter, both Polymers & Fluids and Construction show that when we achieve a reasonable level of organic growth, the incremental margins tend to be significantly higher, particularly in the near term. You might observe some of this when we delve into details for 2021.

Hey, Scott, what are you and your auto team saying about the prospects of returning to sustainable growth in North America and Europe? In other words, how much pent-up demand do you think will create a runway beyond just a quarter or two? Also, do you believe that the trend of the public avoiding mass transit in large cities and driving more, similar to what happened in China, will contribute to the potential recovery in the auto industry next year?

Certainly, I would say our thinking on that is not yet particularly deep. We're still in the tactical mode. Beyond the situation you mentioned or the shift in demand related to the COVID experience on a medium-term basis, we are also looking at dealer inventories that remain at five-year-plus lows. So, I don't think that we have a long-term perspective at this moment. However, we will incorporate some of that thinking into our planning process as we consider how to adjust our positioning regarding that long-term trend. Given the current market conditions, we expect Q4 to be solid and into Q1 at this point. We will have a clearer view when we announce our results and finalize our plans for 2021 and 2022 in early January.

That's reasonable. I wanted to follow up on the auto theme. I have some insights from original equipment manufacturers. They are currently facing significant issues with supplier quality. A lot of this seems to stem from employees taking time off and not showing up for work, which is putting a lot of pressure on the system, leading to overtime and increased rework requirements. Are you experiencing similar quality issues within your supply chain that supports ITW's plans? Additionally, I am curious if this situation presents an opportunity for you to utilize the 80/20 principle to gain market share, given that you can deliver quality where others may struggle. I understand your auto business operates on a program-by-program basis, which is why I'm asking this. There’s clearly a notable situation developing.

No, it varies by program, but we are not the only source for many of the programs we are involved in. Some of the issues you mentioned definitely impacted our overall results in the auto sector in the third quarter, and we anticipate this will continue to present incremental opportunities. There are many parts of the auto original equipment supply chain that we don't engage in, so we can't solve the entire problem. However, in the areas where we do serve our customers, we are very focused on ensuring they know we are in a strong supply position and ready to assist them as best as we can with the challenges you highlighted. From a quality perspective, we've previously noted that our company operates with localized supply chains and maintains strong, long-term relationships with our key suppliers. Going back to the second quarter, our ongoing plan has been to ensure that our supply chain remains robust and flexible. This approach is fundamental to our business model and how we operate. I should also express my gratitude to our supply base in my opening comments, as they have been exceptional thus far.

Maybe a question first for Michael, just around the free cash flow outlook. I think you've mentioned on the previous call that you should have a big step down in second half free cash, $600 million or so. But in Q3, certainly, the free cash flow looking pretty robust. So just wondered if you had any updated thoughts around sort of working capital management and what kind of pressures that could put on the cash flow? And how well do you think you're managing that working capital now as the sales are starting to improve?

Yes, that's a great question, Julian. The recovery has progressed more quickly than we anticipated this quarter, leading to much better free cash flow performance than expected. We anticipate similar results in the fourth quarter. So far this year, we have reached $1.9 billion and are on track to finish the year significantly above $2 billion. The working capital performance in the company has been quite impressive, especially in Q3, with the team excelling in managing receivables. We prioritized our credit and collection efforts early on, and although this is not visible externally, our past due performance within the company is in line with historical levels, which is notable given the pandemic's challenges. Therefore, you can expect continued strong free cash flow performance, and we anticipate concluding the year well above 100%, assuming conditions remain stable in the fourth quarter.

And then just a quick follow-up, perhaps for Scott. You mentioned the very low inventories in the Auto OEM vertical. Just wondered, looking across the disparate portfolio at ITW, how do you characterize the state of inventories at channel partners and customers when you're looking at the other businesses, are you seeing much restocking, for example, in general?

Yes. We've talked about this in the past. We have very little visibility there. The auto comment I made was more around dealer inventories, which is obviously a step or move and their approaches there are certainly their own and it's a number that's reported and is obviously very visible. In terms of most of our other channel partners, given the fact that you order from us today, we ship it to you tomorrow, there's very little buffer in terms of inventory. So I think from the standpoint of destock-restock, it's not a big factor for us really ever.

A question on the outlook, if I take the midpoint of the numbers that you provided, it seems to imply Q4 revenue kind of flattish with both Q3 and last year. But the margins are expected, if I'm doing the math right, to decline to about 22% to 23% from Q3 to just to $25.3 million and then last year’s 23.8%. Is that entirely mix or should we consider something else?

Yes. The main factor influencing our guidance for Q4 is the historical trend indicating that Q4 usually sees lower revenue and margins compared to Q3, largely due to having two fewer shipping days in the fourth quarter. Regarding the underlying sales trends, we've seen a notable sequential improvement throughout the third quarter, and that upward trend has continued into October, which is positive. As for margin performance, there is nothing particularly unusual expected in Q4. I did mention some one-time items affecting the third quarter, but we do not anticipate those recurring in the fourth quarter. I hope we've shared enough information for you to form your perspective on what Q4 may look like based on your own assumptions. What is presented in the materials reflects our current outlook for the full year.

Okay. And then if I may, last quarter, you gave us some information about market share win benefit to annualized revenue. Would you be willing to share where the company stands on that metric, meaning did it increase this past quarter? And if so, by magnitude, about how much?

Yes. Last quarter, we provided a few real examples that were already in motion at the time of our reporting. This is not an internal list we're maintaining. It is definitely a significant focus across all seven of our segments, and I assure you that our segments are monitoring it closely. However, I would expect that expanding further would be impractical, considering the vast number of customers we have. Keeping an ongoing record of all this information and reporting on it would not be feasible or accurate.

Scott or Michael, if you look at a couple of your segments in the quarter, such as Construction or Polymers & Fluids, the growth rates we rarely ever see in these segments. We know much of the growth is coming from strength, for instance, in construction renovation or auto aftermarket. But you've also done a lot of PLS in these segments which you mentioned are helping the margin side. So are we also seeing the fruits of the labor on the revenue side, too? Or is this just pandemic-related recovery? What could that mean for the sustainability of growth in these particular segments in 2021?

Yes. My answer to Andy is that some of both. There are certainly certain market sectors or product categories within both of those segments that are benefiting from some pandemic-related demand. We actually talked about that very question with the leaders of both of those businesses. And beyond those sort of pandemic-related benefits in the near term, both of their results also reflect solid progress in terms of improving the overall growth posture and profile in those two segments. We believe the recovery is likely to be slow and will take some time. When examining the portfolio, the Food Equipment segment is expected to recover at a slower pace for various reasons. For this quarter, the institutional sector is down around 30%, similar to the previous quarter, with healthcare performing slightly better. The lodging sector is the main area of decline, as anticipated. However, the restaurant and quick-service restaurant segments saw a sequential improvement compared to the second quarter, and there was significant growth—almost 40%—in the retail sector, driven by market factors and new product introductions. Therefore, we expect a gradual recovery in Food Equipment for the near term. Nonetheless, we remain optimistic about this business's long-term prospects, as we continue to see potential for growth above market rates and attractive margins. Notably, this business achieved a 20% operating margin and generated $90 million in income despite challenging conditions, which is a significant achievement. So, while the near-term outlook is slow, we are very positive about the long-term potential of this business.

Most of the short-term questions have been answered at this point. I thought maybe I could ask about the Automotive business in terms of what you're seeing out there for future programs. I know you bid on platforms many years in advance. And are you beginning to see more RFQs or RFPs coming out for electric vehicles and electric platforms? And how does that change the dynamics within the team, especially maybe in Europe ahead of the U.S.?

Yes, I'd like to mention a couple of points. Regarding new program activity, there has been a delay due to the pandemic's impact. Consequently, much of the activity in the second quarter diminished as anticipated, but in the third quarter, our engagement with customers about their future platforms and potential opportunities for us has improved significantly. We've addressed the electric vehicle topic extensively. We maintain a neutral position regarding internal combustion engines versus electric vehicles concerning the overall opportunity landscape for ITW and the types of solutions where we can provide value. In fact, the per vehicle opportunity is still somewhat higher for electric vehicles. While the number of projects related to internal combustion engines is greater at this time, we see a notable increase in the number of electric vehicle projects we are involved in, which is rapidly accelerating for various reasons.

Yes. To provide some context, in the first quarter, our sales in China decreased by 24%. In the second quarter, they remained flat with a slight increase of 1%. By the third quarter, as the recovery progressed, that business experienced a year-over-year growth of 10%. While the auto sector wasn’t the fastest-growing segment in China, it did see a rise of 15%, as did our specialty segment. Additionally, our Polymers & Fluids business in China grew by 30% in the third quarter. However, the Food Equipment sector continues to show a slower recovery, declining by mid-single digits. Nevertheless, there are encouraging trends as the recovery in China continues.

The results in Construction were really impressive overall. Can you provide some insights into whether those numbers were achieved despite any product shortages, and where those shortages were? Additionally, what role did pricing play in the strong results? I would assume you might have been able to implement some price increases given the supply-demand situation.

The results in Construction were largely influenced by our capability to serve some of our most demanding customers, resulting in no shortages. As mentioned earlier, much credit goes to the operating team and our local supply chains for their responsiveness in meeting robust demand, particularly in home centers. The residential renovation business experienced nearly a 20% increase in Q3 following a strong Q2. This achievement can be traced back to our decision not to implement aggressive headcount reductions in Q2, focusing instead on capitalizing on the recovery. In Construction, we were able to supply and support our customers while achieving record margins, which were not driven by price but rather several factors this quarter, including volume leverage. Our enterprise initiatives have also significantly contributed, and pricing did not play a major role in this success. Well, it's more of a planned process. It's an annual cycle. It's certainly not something that we are in a position to be very tactical about. The goal is to offset any raw material cost inflation, and there is very little of that in the current environment. Therefore, price was really not a significant factor here.

Maybe just starting off from just on kind of the near-term and thinking about that 4Q implied growth number. Michael, I think you mentioned in your prepared comments that there's going to be 2 less shipping days. I just want to be clear, in the 2 less shipping days, is that on a year-over-year basis? Or is that versus just 3Q? And does that account really for the deceleration?

Yes, compared to the third quarter, there are 64 days in Q3 and 62 days in Q4, which is consistent with last year. Therefore, on a year-over-year basis, there's no significant difference. Additionally, it's worth noting that some of the shipping days between Christmas and the New Year are usually not very productive, so I would expect the impact to be more than just two days.

I believe what you're really asking is whether things are slowing down. That's certainly not true. We haven't seen any indication that there's a slowdown in the fourth quarter. Yes, in the second quarter, it was somewhat challenging to implement the product rollouts. However, this is a routine part of our annual cycle in Food Equipment, where we introduce new products with additional features. I believe our team would indicate that there were significant share gains in the third quarter due to these product launches. I hope that addresses your question.

Maybe just one more around the kind of short-term tempo. So it looks like you didn't really see any inventory whipsaw effect. And Scott, you explained clearly how your business operates. But did you get a sense that everybody was caught off guard here in Q3, and there's just a fair amount of catch-up from Q2 and Q3? So it may not be an inventory effect per se, but it's just kind of a snapback that does, in fact, create somewhat down as we move into Q4. It sounds like you're not seeing that yet, but just wondering your kind of antenna on the ground. Is there any sense that there's that kind of dynamic that play here?

It's difficult to provide a clear answer, Jeff. This situation is quite unprecedented in many ways. The best we can do is to focus on what we can control, which is to remain in a position to serve our customers. The third quarter marked the beginning of the recovery from an extensive shutdown affecting much of our customer base and the overall economy. I wouldn't dismiss any factors that could be influencing the current conditions, and we will have to see how they evolve. However, based on what Michael mentioned earlier, we have not seen any signs of a pullback at least through the third quarter and into October.

Yes. Our main focus right now is on managing the business and preparing our plans for next year. We paused the buyback program in the first quarter, having spent $706 million at approximately $167 per share, and we're essentially finished for this year. Our priority remains on operating the business and developing our plans. When we share our insights into what 2021 may hold, we will also provide an update on share repurchases at that time.

I have a couple of quick follow-up questions. Regarding the strategy to seize the recovery, it seems that automotive might be one of the most promising areas since you can fulfill orders that competitors may not be able to. I'm curious if it's premature to consider the possibility of your historical successes in auto builds increasing. Is it too early to discuss this?

I believe this presents a great opportunity for us to showcase the value we offer to our customers, particularly regarding ITW's role in the automotive OEM supply chain. Our ability to support our clients during challenging times will significantly influence their experience with us. As we navigate this period, I anticipate that it will enhance our capacity to secure more business in the future, highlighting the full range of value we can provide, especially in terms of our reliability in uncertain situations.

This is a one-time item, and it relates to an agreement with a customer that for obvious reasons I can't give you a ton of detail on. I think the important thing, this was a one-time item, and you're not going to see it again.

So maybe we can start with just the cadence of the quarter. Did you see continued improvement throughout the quarter? Or was the organic growth kind of similar across each month?

Yes. I think the sales trends in Q3 were pretty strong right out of the gate in July. I think we talked about that on our last earnings call. And really remain that way through August, September. And so far, what we've seen of October.

Okay. Thanks, Julienne. Thank you, everybody, for joining us this morning. Have a good day.