Illinois Tool Works Inc.

Good morning. My name is Adam and I'll 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. For those participating in the Q&A, you will have the opportunity to ask one question, and if needed, one follow-up question. Thank you. Karen Fletcher, Vice President of Investor Relations. You may begin your conference.

Karen Fletcher Thank you, Adam. Good morning, and welcome to ITW's second quarter 2021 conference call. I'm joined by our Chairman and CEO, Scott Santee, and our Vice Chairman, Chris O'Herlihy. Senior Vice President and CFO Michael Larson is recovering from a sports-related injury and is not available 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 Santee.

Scott Santee 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 percent, with organic growth up 37 percent, and 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 35 cents that we recorded in the quarter. In this strong demand environment and in the face of 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 of staying fully staffed and invested through our win-the-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 ITW's 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's 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 at 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've worked hard over the last nine years to 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 through 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%. Gap EPS of $2.45 was up 143% and included a one-time tax benefit of $0.35 related to the remeasurement of next preferred 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 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 a penny 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 when 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 the one-time tax benefit. Excluding this item, our Q2 tax rate was 23%. I'm moving to slide four for an update 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 five percentage points higher than what we anticipated as the year began. And just for some perspective, this is roughly 2x what we experienced in the 2018 inflation tariff cycle. We learned a lot from that experience, and as a result, 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-cost will continue to have a negative impact on our operating margin percentage, however, in the near term, as we saw in Q2, and that 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 diluted 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 effect of price cost on 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?