Illinois Tool Works Inc.

Good morning, and welcome to ITW's second quarter 2022 conference call. I'm joined by our Chairman and CEO, Scott Santee, and Senior Vice President and CFO, Michael Larson. During today's call, we will discuss ITW's second quarter financial results and update our guidance for full year 2022. Slide two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2021 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 the reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our chairman and CEO, Scott Santee.

Thank you, Karen, and good morning, everyone. The ITW team delivered another quarter of strong operational execution and financial performance with organic growth of 10.4%, operating margin of 23.1%, after-tax return on invested capital of 27.8%, and gap EPS of $2.37. In the second quarter, we saw continued strong demand across our portfolio. Supported by our 80-20 front-to-back driven operational capabilities, our teams continue to do an exceptional job of delivering for our customers and aggressively executing our win-the-recovery strategy to accelerate profitable market penetration and organic growth. As a result of our advanced operational execution and delivery performance, we are being rewarded with meaningful additional share by our customers. as evidenced by our 10.5% organic growth in the first half of this year. While input cost inflation and supply chain issues remain challenging, we did see some stabilization on both fronts in Q2. In fact, for the first time in two years, price-cost margin dilution headwind improved sequentially from negative 250 basis points in Q1 to negative 160 basis points in Q2, as our businesses continue to do an excellent job of adjusting price to offset input cost inflation, and the pace and magnitude of input cost increases moderated somewhat. Importantly, our teams delivered these strong operational and financial results while continuing to drive meaningful progress on the execution of our long-term enterprise strategy, and they delivered another 90 basis points of margin improvement from enterprise initiatives in the quarter. Based on our first half results and projecting current demand and supply rates through the balance of the year, we are maintaining our guidance for full year 2022 with organic growth of 8.5% at the midpoint, margins in the range of 24% to 25%, and gap EPS of 9.20% at the midpoint, which would be an all-time record for the company. Excluding one-time tax items in both years, this represents EPS growth of 12%. While the near-term environment remains challenging and the global macro is certainly uncertain, ITW remains strongly positioned to continue to deliver differentiated performance for our shareholders, differentiated service to our customers, and continue progress on our path to ITW's full potential performance through the back half of the year and beyond. And with that, I'll turn the call over to Michael, who will provide more detail on the quarter and our full year outlook. Michael.

Thank you, Scott, and good morning, everyone. In Q2, quarterly revenue grew 9 percent and exceeded $4 billion for the first time since 2012, with strong organic growth of 10.4 percent. The MTS acquisition contributed 3 percent to revenue. Foreign currency translation was a 4 percent headwind. Despite 10 cents of year-over-year EPS headwind from foreign currency translation and 5 cents of higher restructuring expense, GAAP EPS was $2.37 the second highest quarterly EPS ever. By geography, North America grew 14% and international grew 6% with 6% growth in Europe and 3% growth in Asia Pacific. China organic revenue was down 4%. And we estimate that the China lockdowns reduced our organic growth rate by about one percentage point at the enterprise level, which we fully expect to recover in the second half. Operating margin was 23.1 percent with operating leverage of 200 basis points and 90 basis points of enterprise initiatives. Margin headwinds included 50 basis points each from DMTS acquisition and higher restructuring expense related to 80-20 front-to-back projects. And the margin dilution impact from price-cost was 160 basis points. Free cash flow was $420 million, an increase of 69 percent versus Q1, Though we remain committed to intentional working capital investments to support growth, mitigate supply chain risk, and sustain service levels for our key customers. The routine resolution of a U.S. tax audit resulted in a one-time tax benefit of $0.16. And as you may recall, Q2 last year had a $0.35 one-time tax benefit. As a result, our Q2 tax rate this year was 18.3% as compared to 10.1% last year. Excluding these one-time tax benefits, the effective tax rate was 23.9% this year and 23% last year. Please turn to slide four with a look at price costs and the beginning of the improvement trend on margin dilution that Scott mentioned. Thanks to our business's decisive price actions throughout this inflationary cycle, we have stayed ahead of inflation on a dollar-per-dollar basis. And the seemingly endless barrage of cost increases over the last 12 months appear to have leveled off, such that we are beginning to recover the margin dilution impact. Based on all known costs and price increases, this positive trend is projected to continue, such that the margin impact is expected to be neutral in the second half. Throughout this two-year inflationary cycle, while we have more than covered cost increases on a dollar-for-dollar basis, we have absorbed as much as 250 basis points of margin dilution impact. As raw material cost inflation begins to moderate on a year-over-year basis, we are confident that we're going to recover this margin impact, hopefully starting in 2023. Moving on to the segments, automotive OEM delivered solid organic growth of 6% with 18% growth in North America. Europe was down about 1%, and China was down 11%. At this point, and consistent with our prior guidance, we do not expect a meaningful improvement in the chip shortage situation impacting auto production until 2023. In effect, our guidance assumes that automotive production remains around current levels for the second half. While we are getting positive signals from several of our customers in terms of preparing for a Q3 and Q4 ramp up in auto production, we are taking a more conservative approach to our guidance per our usual process. And even with revenue around current levels, keep in mind that the year-over-year comps ease in the second half, which sets the automotive OEM segment up as a meaningful contributor to the overall organic growth rate of the enterprise through the balance of the year. Operating margin was 17% when excluding 270 basis points of 80-20 front-to-back restructuring impact this quarter. As supply chain issues get resolved down the road and auto production ramps up, we're confident that we'll see some strong organic growth rates for an extended period of time and a return to the segment's historic margin rates in the low to mid-20s. Let's turn to slide five for food equipment, which led the way this quarter with an organic growth rate of 25 percent, record quarterly revenues of $614 million, an operating margin of 24.7 percent. North America grew 27 percent with double-digit growth in every major category and end market. Both restaurants and institutions were up around 40 percent, and retail growth was in the mid-teens. International revenue grew 23 percent, with Europe up 25 percent and Asia Pacific up 11 percent. Orders remain very strong in this segment. Test and measurement and electronics revenue grew 15%, with organic growth of 1%, which as you know, is uncharacteristically low for this segment, and entirely due to the timing of a large equipment order from an electronics customer in Q2 last year. Adjusted for that order, segment organic growth would have been about 7%, which is a more accurate representation of how strong the order intake is. Test and measurement organic growth was 8%, with continued strong demand for CapEx, as evidenced by in-strong growth of 5%, as well as continued strength in semiconductor-related end markets.