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Good morning. My name is Trevor, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. Operator provided instructions. Erin Linnihan, Vice President of Investor Relations. You may begin your conference.
Thank you, Trevor. Good morning, and welcome to ITW's Second Quarter 2026 Conference Call. I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter 2026 financial results and provide an update on our outlook for full year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?
Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, the ITW team delivered strong operational and financial performance in the second quarter. Highlights include 4.5% organic growth, operating margin expansion to 26.7% and a 10% increase in GAAP EPS to $2.84. Notably, operating income reached $1.15 billion, a 7.4% increase, marking the most profitable quarter in ITW's history. Our top line momentum this quarter was propelled by significant acceleration in our CapEx-related businesses, led by organic growth of 14% in Welding, 10% in Test & Measurement and Electronics, alongside 7% in Polymers & Fluids. In addition to capitalizing on favorable market conditions, we continue to make progress on our long-term organic growth agenda, most notably through customer-back innovation or CBI, which contributed 3% to revenue growth in the first half compared to 2.4% for full year 2025. Delivering a 3% plus CBI contribution is the single biggest catalyst for achieving sustained high-quality enterprise organic growth of 4% or higher. Our first half performance offers another proof point that disciplined execution on our enterprise strategy priorities is yielding strong results and that we're firmly on track to achieve our 2030 performance goals. Operationally, the ITW team continued to execute at a high level with enterprise initiatives contributing 120 basis points to our operating margin. We also expanded free cash flow by 41% and returned over $1.2 billion to shareholders through dividends and share repurchases. Looking ahead, we are raising both top and bottom line full year guidance with all 7 segments expected to deliver both positive organic growth and expand operating margins. Full year organic growth guidance is raised by 1.5 percentage points to a new midpoint of 3.5%. GAAP EPS is raised by $0.15 to a new midpoint of $11.45, reflecting 9% year-over-year growth. This marks our second guidance increase of the year. As we've said before, ITW's unique business model, resilient portfolio and Do What We Say execution demonstrated daily by our colleagues worldwide ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle. As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline and best-in-class customer-facing metrics position us to fully capitalize on these positive demand trends that we are now seeing. With that, I'll hand the call over to Michael to walk you through the segment details and updated full year outlook. Michael?
Thank you, Chris, and good morning, everyone. In Q2, total revenue grew 6.1%, driven by 4.5% organic growth, a 1.4% contribution from foreign currency translation and 0.2% from an acquisition. As Chris said, organic growth performance was particularly strong in our CapEx- and semiconductor-related segments as well as Polymers & Fluids. Our customer-back innovation efforts continue to gain momentum and CBI was a key top-line catalyst, contributing 3% to growth in the first half. From a regional perspective, organic growth was up 6% in both North America and Asia Pacific, 3% in China and flat in Europe. Moving to the bottom line. Operating margin expanded by 40 basis points to 26.7%, with a solid 120 basis points contribution from enterprise initiatives. In the quarter, price increases more than offset higher raw material costs in dollar terms, though timing lags between inflation and price adjustments temporarily diluted margins by 40 basis points. As demonstrated in prior cycles, we fully expect to recover this margin impact over time as evidenced by the implied incremental margin guidance for the full year of 40%. Free cash flow increased 41%, delivering a 77% conversion rate, in line with typical seasonal trends. In Q2, we opportunistically pulled forward our planned Q3 share repurchases, buying back $750 million or about 1% of ITW's outstanding shares at an average price of $255 per share. Turning to Slide 4. Our sequential trajectory from Q1 to Q2 underscores accelerating strength across every key performance metric. Sequential revenue growth was plus 7% versus our historical average of plus 2%. Operating margin expanded 130 basis points and operating income grew 12%, making Q2 the most profitable quarter in company history. Moving to the segment highlights, starting with Automotive OEM. Organic revenue was roughly flat with North America up 1%, China up 1% and Europe down 5%. We maintain our full-year expectation of outpacing global builds by 200 to 300 basis points with builds projected to be down 2%. Operating margin improved by 30 basis points to 21.6%, with enterprise initiative gains partially offset by price/cost timing lags. Turning to Slide 5. Food Equipment organic revenue was flat overall, as service strength of plus 5% helped offset a 2% decline in equipment, a notable sequential improvement from the 6% equipment decline in Q1. Regionally, North America was down 4% despite some institutional demand improvement in areas such as health care, while international delivered strong growth, up 6% in the quarter. Looking ahead, we expect that organic revenue growth will turn positive and that margins will improve in the second half. Test & Measurement and Electronics had an outstanding quarter with 10% organic growth led by a 21% surge in Electronics, which represents about 40% of the segment. The two main drivers of this strong growth that we're seeing are: one, our electronic assembly businesses, which serve the printed circuit board industry; and two, our semiconductor-related businesses, which serve the chip manufacturing industry. Our businesses in these two sectors are able to fully capitalize on the growth opportunities ahead of them and gain market share based on their expanded capacity, the highly differentiated product portfolios and best-in-class customer-facing metrics. Operating margin expanded by 240 basis points to 25.2%, and we expect further improvement in the second half of the year. Lastly, it is worth noting that order growth continues to outpace revenue growth in this segment, which is also the case in our Welding segment. Speaking of Welding and moving on to Slide 6. Welding delivered record top-line results driven by 14% organic growth as equipment surged 19%, driven by market tailwinds and strong new product adoption. North America, which represents about 85% of the Welding segment, led the charge, up 19% with broad-based growth across both industrial and commercial markets as demand continued to strengthen in areas such as infrastructure, energy, aerospace and defense. Operating margin remained best-in-class at 32.4%. As you may have heard, a storm impacted two of our welding facilities in Appleton, Wisconsin yesterday, with one manufacturing facility and one warehouse building sustaining damage. First, we're grateful that all our ITW colleagues are safe and accounted for. As for the business, our teams are in the process of executing contingency plans with a focus on minimizing disruption for our customers. In terms of our guidance, we do not expect any material impact on ITW. In Polymers & Fluids, organic growth reached 7%, driven by strength across the board, including 7% growth in Automotive Aftermarket as a result of traction on new products and continued market share gains. Polymers grew 7% and Fluids rose 8%, supported by strong momentum in general industrial and biopharma markets. Operating margin expanded 160 basis points to a record 29.3%. Turning to Slide 7. In Construction Products, organic growth was positive 2%, marking the highest organic growth rate in 4 years. All regions grew with North America up 2%, Europe up 1% and Australia and New Zealand up 2%. Residential renovation in North America grew 1% and commercial construction, which represents about 15% of the region, was up 13%. Specialty Products revenue was up 3% with organic revenue up 2%. North America grew 2% and International grew 1%, with strong growth in medical, aerospace and consumer packaging, offset by product line simplification in appliance components. With that, let's turn to Slide 8 for an update on our guidance. Looking ahead, ITW is well positioned to deliver strong performance on both the top and bottom line in 2026. Starting with the top line, our organic growth projection is now 3% to 4%, up from 1% to 3%. The updated midpoint of 3.5% represents an increase of 1.5 percentage points versus prior guidance. And per our usual process, our guidance is based on current levels of demand adjusted for typical seasonality and prevailing foreign exchange rates. On the bottom line, operating margin guidance is unchanged at 26.5% to 27.5% as enterprise initiatives are expected to contribute more than 100 basis points. We are raising our GAAP EPS guidance by $0.15 to a range of $11.35 to $11.55 with a new midpoint of $11.45, representing 9% year-over-year growth. Today's guidance increase follows a $0.10 increase to guidance in Q1. The effective tax rate remains unchanged at 23% to 24%. Free cash flow conversion is projected to exceed 100% of net income with full year share repurchases of approximately $1.5 billion. Lastly, with respect to potential tariff refunds, we do not expect any material recovery and haven't included anything in our updated guidance. We enter the second half of 2026 with strong operational momentum, highlighted by organic growth of 4.5% in the second quarter. As evidenced by today's raised guidance, which implies sustained organic growth of 4.5% in the second half, our best-in-class margins and returns and our disciplined operational execution, ITW is well positioned to deliver strong financial performance in 2026 and beyond. With that, I'll turn the call over to Erin.
Thank you, Michael. Trevor, please open the lines for questions.
分析師問答
Operator provided instructions. Your first question comes from the line of Andy Kaplowitz of Citigroup.
Chris and Mike, obviously, the growth in your CapEx-focused segments was quite impressive. But maybe you could talk about the durability of that growth. You mentioned orders continue to outpace revenue. So while we don't think of ITW as a backlog business, does that mean you're building significant backlog in those segments? And I know you're forecasting current run rates, but I would surmise you obviously have more confidence regarding your CapEx businesses in particular.
Yes. Andy, you're absolutely correct. We typically don't forecast the economy. Our forecast is largely based on run rates and also what we're hearing from our customers, and we don't carry a whole lot of backlog. That said, the order activity that we've seen in Welding and Test & Measurement and Electronics has been noticeably ahead of the revenue rates we've been demonstrating. So there is a bit more backlog there than normal. We're very confident going into the back half of the year based on the order rates and on customer feedback. I would also underscore that this is underpinned by real progress on customer-back innovation, which strengthens our confidence that the growth is sustainable in the back half.
And Chris, to that point, maybe we can do a double-click on CBI. It's been a few years since your Investor Day, but you mentioned 3% CBI in the first half. I think that's ahead of where you want to be even at this point. I think your long-term growth algorithm includes 2% to 3% CBI. So again, can you keep up that kind of CBI? Is it time to think about maybe even more CBI moving forward? We always want more. So what do you think about that?
Yes, 100%. We are really encouraged by the strong momentum in CBI down into our divisions, the followership, the engagement, and the progress we're making. We continue to see strength in our pipeline of new products. At 3% it is a bit earlier than we thought, but not surprising given the way our teams have embraced this. Our approach is similar to how we approached 80/20 front-to-back 10 to 12 years ago, investing and building capability over several years. We have strong innovation practices across the company, which we've codified into an effective, holistic innovation framework launched in the back half of 2024. Since then, we've relentlessly implemented it with high quality of practice, similar to 80/20. In my view, this innovation progress is not a surprise; it is very sustainable. We are working on extensive projects across every segment and we will see CBI contribution increase in every segment this year and into the future. So we're pretty encouraged about it.
Our next question comes from the line of Tami Zakaria from JPMorgan.
Congrats on very nice results. My first question is on organic growth. I appreciate you don't give much color on intra-quarter trends. But from a segment perspective, are you seeing any improvements quarter-to-date in some categories or largely trends have remained stable versus the second quarter based on the seven segments?
Tami, the big thing about Q2 is the acceleration on the top line relative to Q1. Sequential growth was 7% compared to our historical 2%. It was really across the board. Every segment came in above their typical sequential growth rate with the largest improvements in Welding, Test & Measurement and Polymers & Fluids. As we went through Q2, April was off to a strong start, sustained in May and even better in June. We're off to a good start in Q3, right in line with expectations and consistent with our updated guidance, which implies sustaining 4.5% organic growth in the back half. So the new news is the continued acceleration in demand that began in the prior quarter and continued through Q2 into Q3.
Understood. That's very helpful. And then more of a longer-term question. I think you're targeting 30% operating margin by 2030 and three of your seven segments are already at or above that. So of the remaining four, which ones do you expect to see more outsized margin growth in the next 12 to 24 months? Or are we thinking about it the wrong way in the sense that the three segments that are already above 30% have room to go even higher?
Tami, in the spirit of continuous improvement, we would expect margins to continue to improve as segments move toward full potential. As long as incrementals remain significantly above 30%, and we're guiding to 40% for the full year, margins will improve as businesses grow. Automotive OEM is approaching the low- to mid-20s target we laid out in 2023. Test & Measurement has plenty of runway; we saw a nice improvement this quarter of over 200 basis points and expect more. There's no reason Food Equipment shouldn't be 30% plus over time. Polymers & Fluids put up a new record this quarter at about 29% plus. Construction is also putting up 30% plus with limited operating leverage. So across the board, every segment should continue to improve. In the near term, we expect every segment to improve organic growth and margins. We're on track to meet our 30% plus enterprise target by 2030, driven by enterprise initiatives, organic growth, operating leverage, and new higher-margin products coming from CBI.
Our next question comes from Scott Davis from Melius Research.
Numbers look solid overall. The CBI number really caught my eye, and I don't want to beat a dead horse, but it feels like that's the key here in the quarter. Give us a sense of how you measure it and how you kind of think about the contra account, meaning any cannibalization that potentially occurs from iterative new products versus kind of clean-sheet-paper stuff. Just help us understand how you guys kind of think about it, measure it, incentivize it. That would just be helpful color, I think.
Sure. The CBI number is a truly incremental number. It's incremental revenues from new products introduced within the last three years. Cannibalization is netted out. These are new revenues. We audit these rigorously, so they are subject to a high level of scrutiny. In terms of incentives, CBI is one of our four long-term metrics that we incentivize in the company. We introduced it as a metric last year when we launched the framework. Divisions and up are compensated on progress in this metric. It measures true new product year-over-year incremental revenues for three years, at which point these roll off and must be replaced by new products to sustain the CBI number.
Yes. That makes sense. I didn't realize it's part of the compensation. That's good. So just switching gears a little bit. You're doing a lot of buybacks, which is great, but still a very clean balance sheet. The M&A pipeline, have valuations come down at all? I know in some areas, they have and some they haven't. But stuff that you guys are looking at, have you seen much movement there that could potentially make things worthwhile?
Scott, we haven't seen a lot of movement in valuations coming down. Our approach to M&A is active but disciplined. We stick to disciplined portfolio management. Given the compelling organic growth opportunity, we're selective. If we find high-quality acquisitions that extend long-term growth potential and allow us to leverage our business model to improve margins, we're interested. We review opportunities continually, but we're prepared to wait. MTS is an example of a significant acquisition that has worked well three to four years in. We did one bolt-on in the semiconductor manufacturing space late last year that fit our criteria. We're open to more deals like that but will remain disciplined given our strong organic opportunities.
Yes. Makes sense. I only ask because you guys are great operators, and so you can typically make other people's mediocre pretty darn good. So that's all I got to say.
We appreciate that. Thanks, Scott. Thank you.
Thank you.
Our next question comes from Joe Ritchie from Goldman Sachs.
So it seems like you guys are in a pretty good spot from a capacity standpoint. I think you called it out in Test, Measurement and the Electronics segment, increasing capacity recently. I guess when I think about your growth rate still being behind your orders, I'm just wondering if you can give a little bit more color on what you're doing to make sure that you're matching the demand environment? And are there particular areas across your portfolio where you feel like you need to invest today?
Joe, our 80/20 approach is used to balance and match capacity. We never allow ourselves to run over capacity. We're proactive in adding capacity in advance of growth and have done so for several years. Specifically in semiconductors and electronics, despite a down cycle over the last couple of years, we continued to invest meaningfully because we believe in the business and our differentiation. That investment is helping as the semiconductor industry ramps; we've been well positioned to capitalize on that growth. This proactive investment is an approach we take across all our businesses to ensure we can satisfy growth without capacity constraints.
Got it. That's helpful, Chris. And I guess the follow-on question, I just wanted to touch on the Welding margins for a second. Obviously, the growth rate there was incredibly good, better than we expected this quarter and a better start to the year. From a margin standpoint, we've been at kind of like 32% to 33% now for several quarters. Are we hitting kind of a natural ceiling on that business from a margin standpoint? I would have expected maybe a little bit more torque on the growth that you're seeing.
Joe, we definitely expect further margin improvement in the Welding segment. We had a near-term headwind from raw material cost inflation and the lag between price increases and cost increases. Once we get through that, our incrementals should return to our typical 40% plus. When you analyze the margin dynamics in Welding, the operating leverage is strong, enterprise initiatives are contributing, and there was a bit of pressure on price/cost. Also, growing at 14% organic leads to slightly higher commissions to partners that help achieve those growth rates. We expect margins to improve in the second half and into next year.
Our next question comes from the line of Jamie Cook with Truist.
Congrats on a nice quarter. Two questions. One, Michael, on the guide: given the increase in organic growth, I'm surprised we didn't raise margins. I know you're implying a 40% incremental margin, which is a high-quality incremental margin. But is there upside to that 40% or what's limiting that and why we didn't increase our margins on the increased organic growth? Second, on Specialty, organic growth was up. I think margins were down 110 basis points. Any color behind which product line was driving that?
Jamie, the incremental margin would have been 40% in Q2 if it wasn't for the price/cost timing lag. Margins instead of being up 40 basis points year-over-year would have been up 80 basis points. We expect the lag to persist into Q3 with progress, and then further improvement in Q4. Our guidance is based on known price and material cost increases as of today. In Q2, we saw crude oil derivatives such as resins impacting Automotive and Specialty, with associated price increases lagging. The good news is those resin and crude oil prices are trending down in Q3 and price increases are coming through. That's part of what's driving Specialty results. Generally, there's reasonable growth and operating leverage, good progress on enterprise initiatives, and a headwind from price/cost in Specialty in Q2. It takes longer to get price increases through in Specialty and in Automotive, but they are coming. Also, new products from CBI are coming in at higher margins, so Specialty margins should improve in the second half and into next year.
But on the full year guide, would it be reasonable to assume the mid- to high point of the margin range is more reasonable versus the low point? Or is it still too uncertain?
If it wasn't for price/cost, we'd definitely be talking about the high end of the range. Given current conditions, we provided a range of 26.5% to 27.5%. Incremental margins for the full year are about 40%. If not for price/cost, that could be in the mid to high 40s percent for incrementals. This is a temporary price/cost lag that we've worked through before, and companies with highly differentiated products will offset the dollar impact and ultimately recover margins down the road.
It's a dynamic environment on the price/cost front right now.
I appreciate it. Congrats.
Our next question comes from the line of Steve Volkmann from Jefferies.
You almost touched on my question there, Michael, but I'm curious how we should be thinking directionally about incrementals in 2027, assuming there aren't further changes in the environment.
We haven't completed annual plans for 2027 yet, so I won't have a precise view until later. Historically, our TSR model had incrementals around 35%. We've said previously that's now in the 40% to 45% range in a normal environment. The current price/cost situation is unusual and a temporary headwind. Going into next year, if we don't see 40% plus, we would be surprised.
Steve, fundamentally, long-term incrementals are driven by portfolio quality and execution of our business model. Our portfolio quality has improved through disciplined pruning and the quality of our 80/20 execution continues to get better. Coupled with increased progress on CBI, these factors support a very strong incremental in 2027.
Great. That's helpful. Philosophically, as you inflect on organic growth, do you dial back enterprise initiatives as you grow faster, or are those two efforts complementary?
We are focused on sustaining momentum on enterprise initiatives; they are not mutually exclusive with organic growth. As we rolled up long-range plans this summer, we expect continued contribution from enterprise initiatives over the next three to four years. So they work together with organic growth to drive margin improvement.
Our next question comes from the line of Steven Fisher with UBS.
You had a very big improvement in year-over-year growth in Polymers & Fluids in Q2 versus Q1. Wondering how much of that was easier comps versus underlying true demand? You mentioned new products and share gains. How much more runway do you have on those initiatives?
Polymers & Fluids was very strong at 7% growth with a 160 basis point margin improvement. The strength was broad-based across Automotive Aftermarket, Polymers and Fluids, with a healthy contribution from CBI. CBI was almost 5% in that segment in the quarter, which drove results. The sustainability of CBI efforts positions this segment well to be a consistent 4% grower for the enterprise.
That's helpful. Could you give more color on automotive trends between Europe and China? There are differences and maybe export dynamics. What does greater penetration in China mean for you globally?
In China, growth has been driven by penetration with local EV manufacturers. EV production globally is still up mid- to high-teens and EVs are about 20% of global production, which benefits our Chinese business. North America was up 1% with a mixed bag by OEM—some strong quarters, some challenged. Europe saw a fair bit of portfolio pruning and was down 5%. We also have strength in India, which is smaller but growing. Overall, production units won't see much growth this year—builds are projected down 2%—but we expect to continue outgrowing production by 200 to 300 basis points, which is consistent with how we run and incentivize the business. From a margin standpoint, we expect continued improvement with some near-term price/cost headwinds that we'll work through. New products and increased content are coming in at higher margins because they solve real customer problems.
Sounds good. Congrats.
The next question comes from the line of Mig Dobre from Baird. It seems that Mig has disconnected from the call. In the meantime, we'll move on to Andrew Obin from Bank of America, and we can circle back to Mig if he rejoins.
Okay. Excellent. Sorry. Yes. So just a question on inflation. It would appear that there was quite a bit of it, and you said the timing of inflation influenced incrementals this quarter. What are you seeing six months out? And what levers internally do you have if inflation continues to persist?
We are seeing meaningful inflation this year. The Q2 impact was primarily from crude oil derivatives—resin and chemicals—plus logistics and freight costs. Electronic components continue to be inflationary. The biggest levers we have are pricing, productivity across businesses, and strategic sourcing efforts, which are part of our enterprise initiatives. Inflation for ITW is manageable, and everything we know about is included in our guidance. Our decentralized divisions are good at reacting to inflation, and we're confident in our ability to manage through this with the levers I mentioned.
Then a question on Welding. It was much better than modeled. Were you surprised by how strong North America was? Can you dissect if it's reshoring, specific industries, recapitalization, or just cyclical improvement?
We weren't surprised. The strength started building in Q1 and even late Q4. Growth was broad-based across industrial markets—energy, infrastructure, aerospace, construction, fabrication for data centers—and also in commercial platforms like small fabrication. It was a combination of favorable market demand and new product momentum. We've seen real progress in Welding innovation over recent years, and much of that momentum came through in Q2 and the first half. So it's a mix of market improvement and new products we've launched and will continue to launch.
Our next question comes from the line of David Raso from Evercore.
Just want to make sure I understand price/cost impact when thinking about the margin walk from 2026 to 2027. When you're exiting the year, what's baked into guidance for price/cost impact in the fourth quarter? I know there was about a 40-bps drag this quarter. How are you thinking about price/cost for the full year and the exit rate idea for modeling 2027?
David, the 40 basis point drag in Q2 should see some improvement in Q3—call it about 30 basis points—and further improvement in Q4 approaching maybe 20 basis points. For the full year, that averages out to about a 20 basis point headwind. Historically, our normal price/cost contribution to margin is plus 10 to 20 basis points. Expect a little headwind in Q3, closer to normal performance in Q4, and sequential margin improvement from Q3 into Q4. Going into next year, exiting Q4 we expect to be back to a normal price/cost dynamic. That shouldn't prevent margin improvement in 2027 as we work toward our 30% plus target by 2030.
Is it fair to say with the organic growth acceleration, when you budget 2027 you'll price in price/cost still being around a 10 to 15 basis point improvement as a baseline?
Yes, David, that's a reasonable base case. There are thousands of pricing decisions made daily in our divisions; they don't wait for corporate direction. Historically we've seen price/cost contribute 10 to 20 basis points, and that's a good base case for modeling 2027. If things differ materially when we give guidance in January, we'll explain why. The big drivers for margin improvement will continue to be enterprise initiatives and new higher-margin products from CBI. We would be surprised if incrementals aren't in the 40% to 45% range into 2027 because of our portfolio pruning and focus on differentiated businesses.
I was fishing for whether this year you're controlling costs a bit more. Next year could you get a positive price/cost? Or will you use proactive initiatives or restructuring that might mute it? It sounds like we can approach 2027 in a traditional 10 to 20 basis point baseline.
I think that's a good base case. If it's very different, we'll explain it when we provide guidance.
This concludes the question-and-answer session. Thank you for participating in today's conference call. All lines may disconnect at this time.