Scott Santi - Chairman, Chief Executive Officer Chris O'Herlihy - Vice Chairman Karen Fletcher - Vice President of Investor Relations.

Good morning. My name is Adam, and I will be your conference operator today. At this time I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you.

Karen Fletcher, Vice President of Investor Relations, you may begin your conference..

Thank you, Adam. Good morning and welcome to ITW’s Second Quarter 2021 Conference Call. I’m joined by our Chairman and CEO, Scott Santi; and our Vice Chairman, Chris O'Herlihy. Senior Vice President and CFO, Michael Larsen is recovering from a sports related injury and is not able to participate in today’s call.

We certainly wish Michael all the best and look forward to seeing him next week. During today’s call we will discuss ITW’s second quarter financial results and update our guidance for the full year 2021. Slide two is a reminder that this presentation contains Forward-Looking Statements.

We refer you to the company’s 2020 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. So please turn to slide three, and it’s now my pleasure to turn the call over to our Chairman and CEO, Scott Santi..

Thank you, Karen, and good morning everyone. In the second quarter we saw continued recovery momentum across our portfolio, and we delivered strong operational execution and financial results. Revenue was up 43% with organic growth up 37%. We saw double digit growth in every segment and geography.

Earnings per share of $2.45 was up 143%, 108% if you exclude the one-time tax benefit of $0.35 that we recorded in the quarter.

In this strong demand environment and in the face of a very challenging supply conditions, our teams around the world leveraged our long held close to the customer manufacturing and supply chain approach, and the benefits are staying fully staffed and invested through our win and recovery positioning, to continue providing world class service levels to our customers, while also continuing to execute on our long term strategy to achieve and sustain ITWs full potential performance.

We're certainly encouraged by our organic growth momentum as order intake rates remain pretty much strong across the board, and during the second quarter we saw multiple examples of how our ability to sustain our differentiated delivery capabilities by remaining fully invested through the pandemic resulted in incremental share gain opportunities for our businesses.

While there is no doubt that the raw material supply environment is as challenging as we have experienced in a long time, maybe ever in my 38 years and ITW, we are as well positioned as we can be to continue to set ourselves apart through our ability to respond for our customers.

We worked hard over the last nine years the position ITW to deliver differentiated performance in any environment, and I have no doubt that the ITW team will continue to execute at a high level as we move to the balance of the year and beyond. Now for some more detail on our performance in the second quarter.

As I mentioned, organic growth was 37% with strong performance across our seven segments. The two segments that were hardest hit by the pandemic a year ago led the way this quarter with Automotive OEM up 84% and Food Equipment up 46%. By geography, North America was up 36% and International was up 38%, with Europe up 50% and Asia Pacific up 20%.

GAAP EPS of $2.45 was up 143% and included a one-time tax benefit of $0.35 related to the re-measurement of net deferred tax assets in the U.K. due to a change in the statutory corporate tax rate there. Excluding this item, EPS of $2.10 grew 108%. It was a Q2 record and was 10% higher than in Q2 of 2019.

Operating income increased 99% and incremental margin was 40% at the Enterprise level. Operating margin of 24.3% improved 680 basis points on strong volume leverage, along with 150 basis points of benefits from our enterprise initiatives.

Year-to-date our teams have delivered robust margin expansion with incremental margins for our seven segments ranging from 37% to 48%, inclusive of price cost impact. Speaking of price cost, price cost headwind to margin percentage in the quarter was 120 basis points.

While the pace of raw material cost increases accelerated in the second quarter, our businesses have been active in implementing pricing actions in response to rising raw material costs since early in the year. Consistent with our strategy to cover raw material cost inflation with price adjustments on a dollar for dollar basis.

In Q2 we ended up just short of that goal due to some timing lags, and as a result net price cost impact reduced EPS by $0.001 in the quarter. We continue to expect price cost impact to be EPS neutral or better for the year, and I’ll come back and provide more color on the price cost environment a little later in my remarks.

In the quarter after tax, return on invested capital was a record at 30.8%. Free cash flow was $477 million with a conversion of 72% of net income on adjusted for the one-time tax benefit I mentioned earlier. And that was due to the additional working capital investments necessary to support our strong organic growth.

We continue to expect approximately 100% conversion for the full year. We repurchased 250 million of our shares this quarter as planned, and finally our tax rate in the quarter was 10.1% due to a one-time tax benefit. Excluding this item, our Q2 tax was 23%. Now moving to slide four for an updated on price cost.

We continue to experience raw material cost increases, particularly in categories such as steel, resins and chemicals. And now project raw material cost inflation at around 7% for the full year, which is almost 5 percentage points higher than what we anticipated as the year began.

And just for some perspective, this is roughly 2x of what we experienced in the 2018 inflation TerraCycle. We learned a lot from that experience and as a result of the timeliness and pace of our price recovery actions, are well ahead of where we were in 2018.

As I mentioned, we expect price cost impact to be EPS neutral or better for the full year, with pricing actions more than offsetting cost increases on a dollar for dollar basis.

Price costs will continue to have a negative impact on our operating margin percentage, however in the near term as we saw in Q2 the net impact will likely be modestly higher in Q3 versus Q2 before it starts to go the other way.

For the full year we expect price cost impact to be dilutive to margin by about 100 basis points, which is 50 basis points higher than where we were as of the end of Q1.

That being said, margin benefits from enterprise initiatives and volume leverage will provide us with ample ability to offset the negative affect of price cost and margin percentage, and deliver strong overall margin performance for the year.

And beyond the near term price cost impact, we remain confident that we have meaningful additional structural margin improvement potential from the ongoing execution of our enterprise initiatives. With that, I’ll turn it over to Chris for some comments on our segment performance in Q2. Chris. .

Thank you, Scott, and good morning everyone. Starting on slide five, the table on the left provided some perspectives on the growth momentum in our businesses when we look at sequential revenue from Q1 to Q2.

I would expect the pace of recovery in our Auto OEM segment has been dampened by the well-publicized shortage of semi-conductor chips, despite very strong underlying demand, and for that reason we added a role to the table to show portfolio demand trends ex-auto. Our Q2 revenue ex-auto increased 8% versus Q1.

This year Q2 had one more shipping date in Q1, so on an equal day basis our Q2 versus Q1 revenue growth and ex-auto is 6%, which is 2x of our normal Q2 versus Q1 seasonality of plus 3%. In addition, we added more than $200 million of backlog in Q2. Both of these factors show that demand accelerated meaningfully in Q2 across our portfolio.

Now let’s go into a little more detail for each segment, starting with automotive OEM. Demand recovery versus prior year was most evident in this segment with 84% organic growth. This of course was against easy comps versus a year ago when most of our customers in North America and Western Europe were shut down from mid-March to mid-May.

North America was up 102%, Europe was up 106% and China up 20%. We estimate that the shortage of semiconductor chips negatively impacted our sales by about $60 million in the quarter. Operating margin of 18.8% was up 26.6 percentage points on volume leverage and enterprise initiatives.

Price cost was a significant headwind of more than 200 basis points due to the long recycle time required to implement price recovery actions in this segment.

Given the ongoing semiconductor chip supply uncertainty, we now expect full year organic growth in automotive to be approximate 10% versus our original range of 14% to 18% at the beginning of the year. To be clear, this is not lost revenue, but simply delayed into next year.

Furthermore, the slower than expected growth in auto is offset by strength elsewhere in the enterprise. Please turn to slide six for Food Equipment. In Food Equipment organic revenue rebounded 46% with recovery taking hold across the board and the backlog that is up significantly versus prior year.

North America was up 39% with equipment up 42% and service up 33%. Institutional revenue was up more than 30% with health care and education growth in the low to mid-30s and lodging up in the mid-20s. Restaurants were up about 60% with the largest year-over-year increases in Food Service and QSR.

Retail grew in the mid-teens and continued solid demand and new product rollouts. International recovery was also robust at 58% with Europe up 66% and Asia Pacific up 29%. Equipment sales were strong 66%, with service growth of 39%, which continued to be impacted by extended lockdowns in Europe. Operating margin was 22% with an incremental of 46%.

Test & Measurement and Electronics revenue of $606 million was a Q2 record with organic growth of 29%. Test & Measurement was up 20%, driven by solid recovery in customer CapEx spend and continued strength in semicon.

Electronics grew 38%, continued strength in consumer electronics and automotive applications, and the added benefit in timing of some large equipment orders in Electronic Assembly. Operating margin of 28.1% was 240 basis points – was up 240 basis points and a Q2 record. Moving to slide seven, welding growth was also strong in Q2 at 33%.

Equipment Revenue was up 38%, and consumables growth of 25% was the time in positive territory since 2019. Our industrial business grew 52% on increased CapEx spending by our customers and the commercial business remained solid, up 26% following 17% growth in the first quarter.

North America was up 38% and International growth was 13%, primarily driven by recovery in oil and gas. Polymers & Fluids organic growth was 28%, led by our automotive aftermarket business up 33% on robust retail sales. Polymers were up 34% with continued momentum in MRO applications and heavy industries.

Fluids is up 8% with North America growth in the mid-teens and European sales up low single digits. Operating margin was an all-time record of 27.3% with strong volume leverage and enterprise initiatives partially offset by price cost. Moving to slide eight.

Construction organic grew up to 28% reflected double digit growth and recovery in all three regions. North America was up 20% with 16% growth in residential renovation and with 26% growth in commercial construction. Europe grew 61% with strong recovery versus easy comps in the UK and Continental Europe.

Australia and New Zealand organic growth was 13% with continued strength in residential and commercial. Operating margin in the segment of 27.6% was up 390 basis points and was a Q2 record. Specialty organic revenue was up 17% with North America up 15%, Europe up 24% and Asia Pacific up 14%.

Our Flexible Packaging business was up mid-single digit against tougher comps than the rest of the segment. The majority of our businesses were up double digits, led by appliance up more than 50%. Consumable sales were up 19% and equipment sales up 12%. And with that, I'll turn it back to Scott. .

Thanks Chris. Let's move on to slide nine for an update on our full year 2021 guidance. We now expect full year revenue to be in the range of $14.3 billion to $14.6 billion, up 15% at the midpoint versus last year, with organic growth in the range of 11% to 13% and foreign currency translation impact of plus-3%.

This is an increase in organic growth of one percentage point at the mid-point versus the updated guidance that we provided at the end of Q1, driven largely by the incremental revenue impact of pricing actions implemented in Q2 in response to accelerating raw material cost increases.

While demand momentum accelerated in Q2 versus Q1 as we noted earlier in our presentation, we are admittedly being conservative in not projecting that forward in our guidance at this point in time, given the significant supply chain disruptions that continue to challenge many of our customers in auto and otherwise.

We are raising our GAAP EPS guidance by $0.35 to a range of $8.55 to $8.95 to incorporate the one-time tax benefit realized in the second quarter. The mid-point of 875 represents earnings growth of 32% versus last year and 13% over 2019. Factoring out the one-time Q2 tax side in the mid-point of our 2021 guidance is 10% higher than 2019.

With regard to margin percentage as discussed earlier, the incremental cost increases that we saw in Q2 will result in full year margin dilution of 100 basis points versus the 50 basis points that we project [Audio Gap] to a range of 24.5% to 25.5%, which would still be an improvement of more than 200 basis points year-over-year and an all-time record for the company.

And again, we expect zero EPS impact from price cost for the full year. We expect free cash flow conversion to be approximately 100% of net income factoring out the impact of the one-time, non-cash, tax benefit we recorded in Q2.

Through the first half we have repurchase 500 million of our shares and expect to repurchase an additional 500 million in the second half. Finally we expect our tax rate in the second half to be in our usual range of 23% to 24% and for our full year tax rate of around 20%.

Lastly, today’s guidance excludes any impact from the previously announced acquisition of the MTS Test & Simulation business, which we expect to close later this year. Once that acquisition closes we’ll provide you with an update. And with that, I'll turn it back over to you Karen. .

Okay, thank you, Scott. Adam, lets open up the lines for questions please. .

Yes ma'am. [Operator Instructions]. And your first question comes from the line of Andrew Kaplowitz with Citi. .

Best wishes to Michael!.

Thank you. He’s on short term IR, but he’ll be back next week. .

Excellent! So Scott or Chris, you mentioned the raw material cost inflation. We know when you said inflation will be as usual better for the year. Do you see the inflationary pressure stabilize enough where you can have a handle on these increases that you sort of put into the guide. So when you look at Q3 and Q4, you have confidence in your forecast.

And then in ‘22 you talked about last quarter, what’s the probability that these price increases are pretty sticky so you could exceed that 35% to 40% longer term incremental you have. .

Well, on the first question I think we're very confident that we will cover whatever, you know all the increases that have already been incurred and anything subsequent to that, I would not be comfortable describing the environment as stabilizing at this point, but ultimately I think we have demonstrated.

We’ve looked back over the last – you know going back to 2017 and even in ‘18 and certainly this year, you know sort of on a quarterly basis worst impacts on price costs and inflationary environments have been a $0.001, you know may be $0.02 one quarter.

So I think we're fully comfortable that we’ll be able to read and react to whatever might happen from here that the EPS impact of the company will be negligible for the full year, but I think as I said, I don't – it's not based on an assumption that things are going to stabilize from here for sure.

I don't think we're seeing – we’ve seen enough evidence of that and normally I’d predict things are going to continue to reach forward either. I think its wait and see. .

We saw a significant pickup in the case of inflation in Q2, yeah. .

Guys maybe I could just ask the question specific to auto in the sense that you know you give us the numbers, you know now 10% for the year. I think this quarter you said 200 basis points to price risk cost. As you know there is always a lag before you can catch up there.

So should we assume incremental margin is still getting a little worse before it gets better in that business, and how long would you surmise it takes to get on top of price risk costs in that business?.

Well, price versus cost in auto is always going to be challenging given the, you know the nature of the industry. I would say in terms of incremental in the second quarter in auto we had a 47% incremental, an impact of 47% incremental you know for the first half of the year.

So incrementals are strong in auto no double, but there is no doubt that the structure of the industry, the structure of the pricing agreements, it does take a lot longer. Hard to say how long it will take for us to catch up there with that. .

Thanks guys. .

And your next question comes from the line of Ann Duignan with J.P. Morgan. .

Hi! Good morning. .

Good morning..

Maybe you could talk a little bit more about both, construction products and Test & Measurement where you said you delivered or you did deliver a record Q2 operating profit footprint.

Can you talk about how sustainable those margins are going forward? Was there anything in Q2 mix or anything that we should be aware of that would result in those margins diminishing from here or are those sustainable at these levels?.

Yes, so we’ll say the construction margins are very sustainable. We’ve been improving via the construction for a long time now and certainly for the last few quarters here we've been in the mid to high 20s in terms of margin and construction. So despite the price cost environment, we’re seeing nice organic growth in construction.

We are getting nice price realization and so we’re then starting to expect the margins there to be sustainable. Surely in Test and Measurement margins again you know currently in the high 20s here and have been like that for a long time. The segment that we like in terms of level of differentiation, I believe it’s our customer problems.

So we don’t see any issue with sustaining margins in either Test & Measurement or Construction. .

Okay. [Cross Talk] Go ahead, sorry..

I was going to add some color commentary that I think I was adding up the time when Chris was reading the comments, but I think we said all time record margins for Q2 and Q3 of our seven segments despite the price cost environment.

And I’ll just circle back to a comment I made, which is you know there is still room to run in terms of structural margin improvement across the company. We got 150 basis points of enterprise initiative benefit in this quarter.

So there is, you know these are certainly sustainable improvements and performance and we expect to continue to do better as we go forward. .

Okay, I’ll leave it there in the interest of time. I appreciate it. Thank you. .

And your next question comes from the line of Stephen Volkmann with Jefferies. .

Hey! Good morning guy. Maybe just following up on the comment about Enterprise Initiatives, you know you're talking about I think 100 basis points for the year, but you did 150 this quarter, I think 120 if I have my number's right. Last quarter you’ve been over overachieving.

Did those slow down for some reason or is there a chance that you did better than 100 this year?.

Yeah, I mean, I think we are saying 100 plus, so we will do better than 100 this year. And there's still a lot of interest on our price initiatives bought on sourcing and in ’20. You know these are all initiatives and activities that are very granular within out segments. Within each division there is a host of activity that we are working on.

And actually have been working on not just this year, but even starting last year, so we entered the year with a fair bit of tailwind in terms of enterprise initiatives. So we would expect to do a 100 plus for sure. .

And then maybe just following up on this price cost kind of question, just curious about how you think about the policy here. I mean it doesn't feel like there's a lot of pushback on pricing in any of the kind of verticals that we touch.

You know why not price $4 plus margin, you know why kind of create that headwind?.

Well, I don't know. You know the headwind from my perspective is a percentage headwind, it's not an earnings headwind.

You know the overall position that we wanted, we’ve created an incredibly profitable economic engine and the most important job we have is to grow it organically, and so from the standpoint of – to the extent we don't have to go up as high as other people do, we are leveraging that strong position and we can translate that into incremental share, that’s the preferred option.

I don’t want our people fighting over the next incremental. We ought to get the cost for sure, but then let’s get on to talk with our customers about how we can help them improve their business you know operationally, technically from a sales standpoint and so that’s basically it.

We can certainly do more to get all distraction and try to price optimize in the short term, but I don’t think that services our long term interest very well. We make plenty money, you know this is not a....

Fair point, thank you. Take care. .

And your next questions from the line of Jeff Sprague with Vertical Research. .

Hey, thanks. Good morning everyone..

Good morning, Jeff. .

Good morning.

Could we just drill a little bit into the kind of the whole availability issue? We talked about you know price cost and obviously it's tied to the availability of supplies, but outside of auto which is very visible and obvious, are there clear places in your portfolio where either you're struggling to meet demand because of availability in your supply chain or your feeling on the customer side, perhaps you can deliver, but they don't want it, because they've got problems elsewhere down the line.

Just wonder if you could give us some perspective on that, and any color on to what degree if any it may, just wondering the top line here in the quarter or into the balance of the year. .

One is the fact that we have long head, localized supply relationships with local manufacturing facilities, serving our customers locally. And then the other fact is what I – we talked about in our remarks, the fact that we kept all our people though the pandemic. We have not to scramble to bring people back.

So normally our supply chain manufacturing operations function in a very simple automated way. It’s definitely taking a lot more, let’s call it boot force for now, but I think we are not hearing any big issues from a standpoint of our own ability to supply our customers.

It doesn't mean that there's not an occasional you know $2 bracket that shows up late and there is a couple of other machines that can’t go on just making that out, but that’s – I'm sure that’s the case, but ultimately given the service level that we are now entering, you know as a standard part of our operating practices I would say that – I’m very comfortable saying that we are working a lot harder than we normally have to, but ultimately performing pretty well.

I would say that the supply chain area beyond auto is much more of an issue for us on the demand side than the supply side and I’d point to a couple of things, but we are seeing a lot of sort of timing changes in terms of orders and requirements, not because we can't deliver something, but because another supplier can deliver something to a customer.

And I’d also points to the $200 million of backlog, and we've talked about this before.

You know we should – basically today is what our customers ordered yesterday and so we operate with very little backlog and the fact that we built a couple of hundred million of backlog, I can’t analyze every dollar of it, but my contention would be that that's a lot more to do the – for the customer delays than it is our own ability to supply.

And with that we’ll see the $60 million in auto plus the $200 million in backlog, that’s another 10 percentage points of organic growth in the second quarter. You know again, I’m not necessarily contending that all of it could have gone, but my bet would be most of it and that’s the only thing… [Cross Talk].

Yeah, it’s the only thing I would say is just our, this cost comps, I think all over its going to be 18-24, because here it really creates a lot of the packages for us in terms of more sort of simplified and streamlined cost offerings.

Obviously it results in simplification of raw materials and components and that simplification and focus also extends to our suppliers. The key part of our strategy and its worked for us for many years is to have these you know very strong and long lasting supplier partnerships and we are a key customer for most of our raw material suppliers.

This becomes really, really important when supply chains become constrained and releasing that work to our benefit here in the last 12 months..

Great! And just a second question. Just on the M&A pipeline, obviously you don't have the deal until you've got something to do it now.

But you know can you give us a sense of how active your pipeline is? Have you been able to cultivate things, you know maybe handicap the odds of some of the things kind of coming in your strike zone?.

Well, I would tell you that we are excited about MPS. We are working hard to get that one finished off and you know that is what's kind of $50 million of annualized revenue, so that’s you know certainly enough work to do for a little while anyway.

I don’t want to unnecessarily comment on the pipeline as much as to say we remain and will remain very interested in adding high quality businesses to the company, but so the timing of all that is always a subject of the quality of what opportunities present themselves.

So there’s a lot of stuff going on, but it’s not a matter of how big or small the pipeline is; it's more we're looking for a much narrower set of criteria than I think, so it's more a function of the quality of what’s there than the quantity. .

Okay, understood, thanks. I’ll pass this on. .

And your next question comes from a line of Joe Ritchie from Goldman Sachs..

Thanks. Good morning everyone..

Good morning Joe..

So I know that, I know you guys guide to organic growth trends, you know really not improving or declining and that’s your power house, that’s just in your policy going forward.

I guess when I think about each of the different segments and how you're thinking about the sequentials from here, I don't really think about a lot of seasonality in your business, but maybe perhaps the construction business right, being a little bit seasonally weak during the fourth quarter.

How are you thinking about sequential revenue for the segments throughout the rest of the year? We see obviously you've given us the auto guide, but really the other segments?.

Yeah, you know I covered that I think overall in my comments, but you know we have sort of camped down the run rate that you know in terms of the guidance relative to run rate.

You know Chris talked to you about the fact that in the second quarter we saw organic growth rates accelerate by a net 3 percentage points of beyond seasonality, and we basically did project that signal manning forward through the balance of the year because of the supply risk involved, the supply chain risk to our customers, so we’re playing that pretty conservative.

And I think that ultimately is going to have more to do with the pace of the organic from here than you know trends of demand. There’s plenty of demand out there. It’s a matter of can our customers get enough raw material to support it. .

Got it. And maybe Scott just following on that, like is there – you know you had mentioned about involving the Food Equipment business.

Is it like where you're building backlog right now, is that – are you seeing that as more kind of like a 2022 opportunity, just given what you're seeing from a supply chain standpoint or does he expect some of that to convert in the second half. .

I'd say some of it is to convert. I think the only one you know that's probably you know definitely into 2022 is the loan that Chris mentioned and not where this, you know this dip sort of doesn’t look like it's going to get resolved any time soon.

But I'd say most of the – the rest of that backlog, that $200 million, I would expect that to – given our customers can take it, because they can get the other components of things they need, that should certainly convert in the back half.

I think our – you know it just doesn't make sense to up the revenue guide when you know everyone is so supply constrained right now. That I can't say it any more simply than that and that's how we see how things play out.

It just doesn’t make sense to take things too far from where they are now in terms of run rate until we see how that all – how the supply issues play out in affecting our customers willingness to, you know the ability to take what they’ve ordered from us and with more.

But I would say it is definitely you know from simpler border rates and the overall demand is definitely enough there to do you know well better than what's in our guide is this pricing situation. It's you know significantly better from here forward. .

Okay, yeah – no, that's helpful. I guess maybe one follow-up on price cost. I know we talked about it a little bit. You did mention that 3Q is expected to get a little bit worse from 2Q because they’ll be put through some pricing actions in 2Q.

So on this I guess I’m just wondering, does this take a little bit of time for some of the pricing actions to take hold or why would the headwind get worse than 3Q?.

Yeah Joe, I mean the only reason it’s getting worse in Q3 is because of the pace of inflation in Q2.

We saw significant pick-up in pace in Q2 and obviously there’s a little bit of a lag, so we see a little bit of a worsening in Q3 based on what we know today, based on the cost increases we see and the known price increases, we see a little worsening in Q3 from Q2, only on the base of the pace of inflation in Q2. .

Got it. Okay, great. Thank you both. .

And your next question comes from the line of Jamie Cook with Credit Suisse..

Hey! I guess just two questions, one following up on the revenue outlook.

Understanding why you’d guide sort of conservatively, but is there any way you can help us understand just what you're seeing in terms of percentage increases on the order intake rate, like by segment just to help us sort of understand what's out there, and to what degree are you concerned? Is there any sort of double ordering that's happening as customers are worried they can't get stuff? And then I guess my follow-up question, obviously the organic growth is performed very stronger.

There's particular segments or customers where you are more sort of confident that some of these, you know this organic growth is associated with you know market share wins that are actually you know sort of sustainable from here on. Thank you..

So in terms of you know acceleration of organic growth, you know we're seeing it. Obviously we talked about all our work, it's going in a different way, but certainly in Food Equipment, Test & Measurement, electronics and welding you know are certainly growing faster than we expected earlier in the year, so we’re seeing a nice acceleration there.

And you know we have no reason to believe that it's not sustainable based on our conversation with our customers, the order patterns and so on and you know obviously as we want to talk about the factor – it’s already busy here in terms of this winged recovery initiative you know over the last 12 months and you know it is still kind of early to quantify this.

We’re feeling pretty good about how we’re positioned and we – as you know we're very intentionally remain fully staffed to serve our customers, protect the investments and people and in addition to the customer backed innovation and suite of excellent and certainly there’s a lot of anecdotal evidence out there that would say that that is turning into share gains and if I ever just maybe highlight some, get the sort of examples and like sort of equipment where you know high level product availability, maintaining service level excellence as Scott talked about and being able to respond in supply where a competitor could not is enabling several share gain and incremental wins from competition in large chains, both in food service and food retail.

Another example might be in farmers [ph] influence, automotive aftermarket.

Staying invested here we will sustain our sales and innovation focus, coupled with high service levels means we grew as I mentioned in the commentary, automotive aftermarket grew by 33% in the quarter and this is well above customer point sales growth indicating that we are getting share in a meaningful way.

And in our measurements and construction in our roofing businesses, in association of 45% in the quarter, again we’d see very clearly we're gaining share there on competition who have certainly been supply chain and operationally constrained, extending delivery times and so on and we continue to maintain differentiated service levels.

So again, somewhat anecdotal, somewhat early in the window recovery strategy, but certainly ample evidence that we seem to be regaining share, and these are just a small selection of illustrative examples of tech products that we’re making across our seven segments. .

Okay, thank you. Anything on the order intake if you can share with us just what you're seeing, that you saw that by segment. .

You know we saw in acceleration the three segments that I mentioned in… [Cross Talk]. .

I was just trying to get numbers. You know I mean if you can’t, that’s fine..

Yeah, orders pretty much equalize shipments for last because of what I said, you know what we – what – our customers’ orders we shipped the next day, I would say that also your closer to about – I think you used the term double dip ordering in terms of customers trying to hedge you know orders more because they can’t get supply.

I actually can’t say that we’re not seeing any of that, but I would say that it would be much lower for us because of the fact that our service levels are so good and our customers understand you know in terms of orders shipped.

So you know some maybe certainly ordering more than they would normally, because they are concerned about things, but I will think that even in terms of our service levels we wouldn’t – there wouldn’t be anything – that wouldn’t be a significant part of the overall demand picture for us..

Okay, thank you..

And your next question comes from the line of Nigel Coe with Wolfe Research..

Thanks, good morning and best wishes to Michael, hoping he gets a speedy recovery..

Thanks Nigel..

That’s okay. I want to go back to the supply constraint.

Where are you kind of most – and I thought of automotive which was predictable, but where are you most concerned? I’m thinking about maybe electronics perhaps tools you know with the barriers, but what are you monitoring most closely in terms of not just for Illinois Tool Works but for your, you know your supply chain, which business or geography are you most concerned?0.

Yeah, I would say electronics in general you know have been fairly constrained, so that impacts segments like well in Food Equipment, Test & Measurement and electronics will be one that I would call out.

The [inaudible] obviously has been across the board in terms of steel, resins, chemicals and electronics, but in terms of supply chain constrains, electronics and certainly you know steel related business..

But beyond that I don't think there's anything that really concentrates up. You know I think again the color from our businesses, you know it's something different every day, but you know it’s not a – you now it takes a lot more work and it's not even the big dollar stuff.

It's again the $2 bracket, but it is a real offer right now, significantly more than… [Cross Talk].

And then [inaudible] the two best offices because of the high volume service plan. I wouldn’t think it could have created a big issue for you, but maybe address those two points and because that you know it could change very quickly, so I’m just wondering you know what impact from the spot purchases and the 3x betting. .

Spot purchases, if you can explain that a little more Chris..

I think given another company would purchase them with some hedges….

Yeah, we don’t have it and we don’t forward by. So you know everything – the current costs are flushing through right now, yeah..

And the second part of your question is I think related to freight and logistics, is that correct? And so with freight and logistics, I mean obviously there's no impact for us, but I don’t see a less of an impact than some of our peers maybe on the basis that the produce what we sell – the produce and so what we sell, the philosophy that we’ve long had that certainly mitigated the impact of freight and logistics on our cost structure and availability.

.

Thanks guys..

And your next question comes from the line of Scott Davis with Melius Research..

Hey, good morning guys. .

Good morning Scott..

Hope Mike feels better. There must be a good story, backstory to the sports injury. .

It’s his to tell. .

Hopefully he didn’t join some sort of football team or something, you know the over 50 football team. Anyways, I only have one question. It’s just on MTS. When you bring in MTS, how do you – how do you cadence 80/20? You know I mean how do you bring in a deal of this size, kind of bring 80/20 in without really disrupting it.

Is there kind of a playbook there you guys can walk through and help us understand?.

Yeah, absolutely Scott. So obviously you know we’ve completely reinvigorated 80/20 of the last two years with this front to back process and the fact that we – the process that we will employ on MTS is exactly the same process that we have employed on our 84 divisions across the company.

So we can’t really decide on what to do, we can’t really decide on how to do it and we can’t really decide on what the outcome should be when we get it done properly. Coupled with the fact that we’ve built a tremendous amount of capability in the company, our folks can go in and help you know guide MTS on the 80/20 journey.

So we feel very confident in the playbook, we feel very confident in our capability. We think the raw material in MTS are fantastic with respect to 80/20 opportunity, that’s one of the key attractions for us and when we bought it.

The other thing I’d say is that we got a very similar business in our portfolio, in Test & Measurements and this time where we’ve done this successfully before. So we are very confident that we can do this and do this successfully. .

[Cross Talk] It’s probably a three to five years process, and part of that is not disrupting the business. .

It’s really the pace that makes sense, we are in no rush here. .

Okay, super helpful. Good luck! Thank you. .

Thank you. .

And your next question comes from the line of Mig Dobre with Baird. .

Thank you. Good morning everyone.

Going back to your comments on pricing, obviously a lot changed over the past three months and can you maybe clarify for us what impact pricing had to your adjustment, to the overall organic growth guidance?.

For the year?.

Yes, please, thanks. .

Yeah, it's 1%. .

Okay, I'm presuming then that..

That was the 1% we added to organic, yeah. .

Okay, that's kind of what I figured, but I just wanted to confirm. So you know if this is impacting the back half of the year primarily, then at lease presumably you’ll have a couple of points of growth just from pricing in the back half.

If I look at the implied guidance, credits, the high-end we are talking about growing something like 7% organically, a couple of points of that is just your incremental price, and I mean look Scott, you were talking earlier, saying hey, I'm trying to take a conservative approach here, but at least to me when I'm adjusting out for this pricing element and I think about the comparisons that are still you know fairly easy relative to the prior year, it just strikes me that you really are being conservative here in terms of how you're thinking about your business progression on a fixed price, on a core basis.

So just to kind of clarify this, is it that there’s some lack of clarity as to where maybe demand is going to be because of what's happening with the supply chain, or is it that you're having some second thoughts with regards to how you're going to be able to convert revenue given your, some of the destruction that you're having to deal with. .

It’s the former not the latter, if I understand you correctly. Taking a risk for us by far is customer supply chain, and what that does to their demand patterns from here on out. It is – as I said before, it's about as volatile of a situation as I've seen in my career at ITW, and so I don't – I'm not trying to be mysterious about it.

I think until we see that start to stabilize, it’s just really hard to be comfortable sort of raising – I know we are serving the demand we have today really well and sort of run rate from the standpoint that our customers are able to sustain, and I think we are comfortable continuing to – our ability to do that will continue on for the back half.

There is a lot more orders and a lot more demand and that’s again why we built backlog, that’s – there is not a demand question. If we had, we – our customers had sort of unimpaired supply chains right now, we would have probably had 10 more points in the second quarter on this. It’s not a fact, that’s just my opinion.

But you know just looking at the backlog, and so I think demand is certainly much stronger right now given the pace of the recovery, it’s just the matter off from the standpoint of all the supply chain issues and the risks for our customers. Their pace of being able to – you know what they ultimately need from us.

As I said it’s just hard to justify going up with a lot of confidence from here, but it’s more their supply side than their demand side, if that makes sense. .

Yeah, I think it does. The follow up to all of this is that we're starting to think about 2022 and you know if we're using your framework for the back half of ‘21 as a starting point and thinking about 2022.

It begs the question as to how well growth is likely to look like next year, right, because there’s nothing we can do when pricing normalizes next year, so you won't have the kind of tailwinds you have this year on that. .

We are not thinking about ‘22 much yet, but I would just you know say as a general rule, a lot of the supply chain disruption I think just pushes, adds to the duration of the recovery. I think there is plenty of business now, and because all of it can't be satisfied, a point of demand now and Chris will gave an example of auto.

This $60 million we couldn't ship in audio in the second quarter, that's not going away, that’s just getting pushed out.

We got dealer inventories at all-time lows, you know I forget what it was, less than a month, maybe less than a month I think I saw you know and so to the extent, I don't think it's necessarily the worst thing in the world that all this demand that’s there right now can’t be fully serviced, because it’s going to allow us to – again this recovery duration gets extended by another two to four quarters maybe.

We’ll think harder about that as we get to that part of the year. .

Okay, that's helpful. Lastly from me, on the top of M&A you talked about portions of your business that you consider for divestiture before, that you’ve taken a step back on that this year. I'm sort of curious as activity has picked up multiples are pretty good.

Will you reconsider this at a point of time down the like, maybe 2022?.

Yes. .

Okay, thank you. .

And your next question comes from a line of Julian Mitchell with Barclays..

Hi! Good morning. Maybe just a first question – good morning. Maybe just a first question around the free cash flow. I don’t think that’s been touched on yet. You know your inventories and receivables are up each sort of 100 million plus sequentially.

Just wondered how you see working capital playing out in the second half and what we should think about that as a sort of cash flow item for the year as a whole.

And also sort of more broadly on the CapEx side of things, you know how much is your CapEx coming up this year and have you revised at all your sort of median term CapEx planning assumptions because of these constraints?.

I think the best way to model our working capital requirements is our months on-hand and days sales outstanding. Sort of we managed the metrics on those. Generally speaking months on hand runs roughly 2.5 months, DSO I can’t remember off the top of my head, but whatever the average is, 60-ish maybe, so that’s where [inaudible] going to go.

Sales go up, month on hand is not going to go up, but the dollars invested, so today we stated that month on hand id going to go up. The same with receivables in terms of DSO. So it’s not a – it’s something that happens automatically.

We don’t have to sort of force that to happen, but as sales go up, inventory is going to go up and the month on hand is a function of that’s how 80/20 works.

There is some element of it, that give us you know we want X amount of inventory to be able to product the ability to react and respond to our customers, you know order today shipped tomorrow kind of system. So I think that’s the best guidance I can give you on working capital.

It’s just not let through and whether that’s cash flow, it’s not going to be – you know when you are jumping up as much as we did in Q2, where Q1 is going to obviously require some incremental working capital. And then the other question, I’m sorry, I’m trying to do my best Michael impersonation here as I can, so I’m trying to think hard. .

No, no it was just around the capital spending and sort of the rate of [Cross Talk].

So CapEx, I think the plan for the year was up like $300 million or so. .

$300 million is our target. .

Yeah, for the year. So there is no incremental CapEx. We did differ some incremental capacity investments last year because of the pandemic, we didn’t need them. Those are certainly all coming back on, but those are – you know we operate with another element of 80/20 as we want to be front end loaded on capacity, that’s how we serve our customers.

So as business continues to go forward, we will continue to invest and stay in that sort of increment, you know meaningful increment ahead of current demand, but that wouldn’t be again something out of the normal of what we always do and it wouldn’t be some big sort of lump coming through. .

That’s clear, thank you. And then just a quick follow-up on the auto OEM margins. Is the point that, you know after that step down sequentially in Q2, there is sort of 19%-ish level is a good base line or flow in the current sort of demand and cost environment.

And so from here they move up sort of slowly given what’s going, but 19 is where they should have bottomed out for now. .

Yeah, that’s a fair assumption. But we are seeing a bottom out here and I think it will be a slow recovery, based on what we are seeing today, a slow recovery from here on out. .

You must remember prior peak margins in auto, because it was probably 23 maybe. And so, there is still lot of item recovery to go in auto from where we were then and so I’d say low to mid-20s is certainly achievable over time. .

Thank you very much. .

Sure..

And your final question comes from the line of Joel Tiss with BMO..

Hey there! Scott, you shouldn’t be so hard on yourself. I think you guys sound a little less annoyed by how dumb all our questions are than usually. .

Now you know where the [inaudible] of the group is. .

So, I have like one topic and just two different angles on it.

One, can you give us any sense if you think the food industry is kind of distracted with all the consolidation that's going on? And then can we have a little more color on kind of what customers are back? You know our large pieces of your end markets still not really there; I'm thinking like airports and cafeterias and things like that.

Can you just give us a little more, a little more detail around sort of the share gains and where the customers are? Thank you. .

Yes, so I don’t know about this distraction from consolidation. I can tell you we are not distracted and we are basically focused on trying to win the recovery here, serve the needs of our customers with innovate new products and so on.

So generally I think we're seeing some real nice recovery in food faster than actually than we thought at the beginning of the year. We are certainly seeing the benefit of staying invested in food.

Even obviously on price cost, in fact there’s some uncertainly, but obviously that’s – some of that relates to the fact that the price cost environment, some of these are pricing actions here in the second half. We’re concerned about the end markets.

I mean basically with food, we are back to about – by the end of this year we expected back over 90% of the 2019 number, so faster than we though. And in terms of end markets, we are seeing a nice pickup in instructional, restaurants coming back, we mentioned restaurants being up 60%.

In terms of stuff that’s coming back a little slower, I would say service if we point to serve in Europe as an example. Obviously with significantly lockdowns we are still dealing with over there, we’ll probably come back a little slower there, but at least for the half.

We think we’ll see that pick up here in the second half, but generally most end markets are coming back. Lodging is a little slower I would say and transportation, right and airlines. .

Transportation, for sure..

That’s great. Thank you very much. .

And there are no further questions at this time. I'll now turn it back over to Karen. .

Okay, thanks Adam. We appreciate you joining us this morning and if you have any follow-up questions, please let me know.

Have a great day!.

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