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spk01: 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. And if you would like to withdraw your question, again, press star one. 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.
spk04: Okay, thank you, Krista. Good morning, and welcome to ITW's third quarter 2023 conference call. I'm joined by our Chairman and CEO, Scott Santee, Vice Chairman, Chris O'Herlihy, and Senior Vice President and CFO, Michael Larson. During today's call, we will discuss ITW's third quarter financial results and provide an update on our full year 2023 outlook. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2022 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 three, and it's now my pleasure to turn the call over to our chairman and CEO, Scott Santee.
spk06: Thank you, Karen, and good morning, everyone. As you are all aware, on September 7th, we announced our CEO succession plan wherein I will be turning over the CEO role to my colleague Chris O'Herlihy at year end. Chris is an exceptional leader with deep expertise in ITW's highly differentiated business model, our focus strategy to leverage it to full potential, and the company's unique one-of-a-kind culture. He has been an invaluable partner and collaborator with me over the past 11 years. We have worked closely together to prepare for this transition. more than ready, and he will do an exceptional job as ITW's next CEO. If you allow me a brief bit of reflection on the last 11 years, I will simply say that everything we did was driven by our fundamental belief in the performance power of the differentiated set of strategic and operational capabilities and practices that we refer to as the ITW business model. In this past phase, we focused on getting the company properly positioned to be able to leverage them to their full potential over the long term. With this as our foundation, ITW enters our next phase in a position of great strength and resilience with these unique skills and capabilities sharply honed. I wholeheartedly believe that they will be an even bigger source of competitive advantage and differentiated performance in the company's next phase than they were in the last one, especially if you believe, as I do, that the level of volatility and unpredictability of the world will only increase from here forward. I have absolutely no doubt that Chris and the incredibly talented ITW leadership team behind him will utilize all of the differentiated tools at ITW's disposal to read and react to whatever comes our way and lead the company to even greater heights in our next phase. Let me close by saying that it has been both a privilege and an honor to lead this great company for the last 11 years. And I offer my deepest gratitude to all of my ITW colleagues past and present for all of their support and for their unwavering commitment to working every day to be the best ITW that we can be. With that, it is now my pleasure to turn the call and in a few months the company over to Chris O'Hurley. Chris, over to you.
spk07: Thank you, Scott, and good morning, everyone. First, I want to thank Scott and our board of directors for their trust and confidence in electing me as ITW's next CEO. I'm incredibly humbled by the opportunity to lead this great company, our exceptionally talented leadership team, and our 46,000 dedicated colleagues around the world. As Scott said, as a result of the work done over the last 11 years in executing our enterprise strategy to leverage the ITW business model to its full potential, our company has never performed better or been better positioned for the future. The central focus of the next phase of our enterprise strategy is to elevate high-quality organic growth and customer-backed innovation as key ITW differentiators on par with our best-in-class operational capabilities and financial performance. Our leadership team and I are deeply committed to doing just that in delivering on ITW's 2030 enterprise performance goals. Now let's turn to our Q3 performance. The strength and resilience of ITW's proprietary business model and high-quality diversified portfolio once again drove strong operational execution and financial performance this quarter. Starting with the top line, organic growth was 2% on an equal days basis, as demand for CapEx slowed down in test and measurement and electronics and welding. Our margin and income performance continues to be very robust. Operating margin improved 200 basis points year-over-year to 26.5%, as enterprise initiatives contributed 140 basis points. Quarterly operating income grew 9% to $1.1 billion. GAAP EPS grew 9% to $2.55, and free cash flow was up 40%. With three quarters behind us, we are narrowing our EPS guidance to a range of $9.65 to $9.85. which now incorporates a 12 cent adjustment for the impact of the auto strike in Q4. Looking ahead at the balance of the year, the company remains well positioned to deliver another year of differentiated performance. I'll now turn the call over to Michael to discuss our Q3 performance and full year guidance in more detail. Michael.
spk10: Thank you, Chris, and good morning, everyone. Organic growth in the third quarter was essentially flat and plus 2% on an equal days basis. as Q3 this year had one less shipping day compared to Q3 last year. Foreign currency translation impact was favorable by 1.5%, and divestitures reduced revenue by 1.2%. The net result was revenue growth of 0.5%. Third quarter operating margin was 26.5%, an increase of 200 basis points year-over-year, as enterprise initiatives contributed 140 basis points and price cost margin impact was positive 210 basis points. GAAP EPS of 255 was up 9 percent and included 7 cents net of favorable corporate items on a year-over-year basis, starting with unallocated expense, which improved by 43 million due to lower employee-related expenses, including health and welfare and a one-time insurance recovery. This favorable item was partially offset by $16 million of lower other income, primarily due to lower investment income. As I said, the net effect of these two items was favorable $0.07 net per share. Free cash flow grew 40 percent to $856 million with a conversion to net income of 111 percent as we continue to make solid progress on returning to our normal historical inventory levels. We repurchased $375 million of our shares this quarter and raised our dividend by 7 percent to an annualized payout of $5.60 per share, which marks our 60th year of raising the dividend. In summary, Q3 was another quarter of strong operational execution and financial performance. Turning to slide four, an organic revenue growth by geography. As you can see, North America was down 2 percent Europe was about flat, and Asia Pacific was up 6%, with China up 8% driven by the automotive OEM segment. Excluding auto, China was down 1%. Moving to the segments and starting with automotive OEM, organic growth was 4%. North America was down 5%, Europe was up 5%, and China was up 18%. There was essentially no impact on automotive OEM segment revenues from the auto strike in Q3. But as Chris noted, that will not be the case in Q4. As a reminder, our North American automotive OEM business represents approximately 40% of total segment revenues. And within that 40%, approximately two-thirds of our annual sales are tied to D3 automotive customers. Included in our updated earnings guidance today is our estimate that the impact of the auto strike will reduce our Q4 earnings by $0.12 per share, which is essentially based on October D3 domestic production levels continuing through the remainder of the quarter. Turn to slide five. Food equipment delivered solid organic growth of 6% as equipment was up 5% and service grew 9%. North America grew 10%. with institutional sales up in the mid-teens, restaurants up high single digits, and retail up in the high teens on the back of new product rollouts. Europe, however, was flat, and Asia Pacific was up 6%. In test and measurement and electronics, organic revenue was down 4%, weighed down 6 percentage points by semiconductor-related demand, which represents about 15% of segments and for context, only 3 percent of ITW revenues. Overall, test and measurement grew 2 percent as demand for CapEx slowed in the quarter, and electronics declined 13 percent. Moving on to slide six, welding's organic revenue declined 2 percent as equipment revenue was down 3 percent on the back of softer demand for CapEx. Consumables were down 1 percent as industrial sales declined 9% versus a tough comparison of plus 30% last year. Commercial, however, was up 6% against an easier year-over-year comparison of down 10%. Overall, though, North America revenue was down 3%, and international was essentially flat. Parmesan fluids organic revenue grew 3%, as automotive aftermarket grew 10% due to the launch of new products. Palmers was down 1%, and Fluids was down 4%. Margins were solid, as operating margin improved 280 basis points to 28.1%. Turning to slide 7, organic revenue and construction was down 2%, as North America grew 2% with residential up 2% with some strength on the residential renovation side, which was up 7%. Commercial construction was down 2%. International markets were soft with Europe down 8% and Australia and New Zealand down 4%. Margins were solid as operating margin improved 420 basis points to 29.9% with strong contributions from enterprise initiatives and price cost. Finally, specialty products, organic revenue was down 6%. North America was down 9% and international grew 1%. Consumables were down 9 percent, and equipment revenue, which represents about 20 percent of the segment, was up 9 percent. Moving to slide eight and our updated full-year 2023 guidance. As you saw this morning, we're narrowing the range of our GAAP EPS guidance to a new range of 965 to 985, which, as I mentioned earlier, includes a 12-cent adjustment for the estimated auto strike impact in Q4. Based on current levels of demand exiting Q3, and including the estimated impact of the auto strike, we're projecting organic growth of 2 to 3 percent for the full year. We are raising our full-year operating margin guidance to 25 to 25.5 percent to reflect our stronger margin performance exiting the third quarter, and we expect that margins for the full year will improve by 150 basis points at the midpoint. including a contribution of more than 100 basis points from enterprise initiatives. We are projecting free cash flow conversion of more than 100% of net income for the year. So while the overall demand environment clearly has some uncertainties in the near term, inventory normalization, elevated interest rates, increasing CapEx caution, and the auto strike, just to mention a few, the entire team at ITW remains focused on leveraging ITW's unique strengths and capabilities to optimize our ability to continue to deliver differentiated long-term performance. With that, Karen, I'll turn it back to you.
spk04: All right. Thank you, Michael. Krista, please open the lines up for questions.
spk01: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Scott Davis from Malleus Research. Please go ahead. Your line is open.
spk11: Good morning, Scott and Chris and Michael and Karen.
spk09: Good morning.
spk11: Good morning, Scott. The price-cost positive 200 basis, 210 was better. I think we were thinking just in simple math, kind of more like, you know, 100 to 150. Were you able to get more price in the quarter or was it lower costs or a little bit of both or just a little color there would be helpful? Thanks.
spk10: Yeah. So let me give you a little bit of context here. So we are definitely on track to recover the margin impact now from more than two years of unprecedented inflation, which now appears to have stabilized. There's definitely still some pressure on the cost side, on the labor side components, as well as as energy. That said, we've made some good progress. You know, price cost was positive, 190 basis points in Q1, 216 Q2, which was the peak, and then 210 here in the third quarter. And we're now looking at somewhere around 150 basis points in Q4, and that'll put us around 200 basis points recovery for the full year. Price is holding, and we're seeing a little bit of more on the commodity side. So these would be the metals in particular, which drove the stronger performance here on price cost in the third quarter.
spk11: Helpful. Chris, I know it's early. You've got another couple of months, but is there kind of a plan for the first 90 days or where do you see the, you know, I guess the focus shifting? Is there a little bit more emphasis on on portfolio or, you know, I know you mentioned kind of driving higher growth rates, but they're just given the diversity of end markets you sell into, there's just so much you can do on that front. But maybe just a little color on where you plan on spending your first, you know, kind of three to six months and focusing.
spk07: Yeah, so Scott, I would say, you know, in general, you know, our plan is very much in line with what we outlined at our investor day in terms of really ensuring that we continue to strengthen our foundation, which is our business model, and obviously then building organic growth as a core strength on a par with our operational capabilities and financial performance over time. I think the first 90 days, I'm just learning the job. Just go out and pretty good understanding of our businesses already, but obviously working with our businesses to make sure that our strategy is well part of them with our businesses, which of course it is. That's really the plan for the first 90 days, I would say. But it's really in the context of being very committed to this strategy for the next phase, which is to sustain the strong foundation we have on our business model while really leaning in on continuing to build our organic growth capabilities to be on a par with our operational capabilities and our financial performance.
spk11: Okay. Best of luck. Thanks, all. And congrats, Scott. Fantastic run. Really exceptional. So thank you, all. I'll pass it on.
spk01: Your next question comes from the line of Tammy Zakaria from JP Morgan. Please go ahead. Your line is open.
spk05: Hi, good morning. Thank you so much. So my first question is I wanted to understand the operating margin expansion a bit better, 200 basis points. Enterprise Initiative 140, price cost 210. So what was the drag to get to the 200 basis points expansion? I remember you were investing in labor and compensation this year. Is that still there? And when do you expect that to taper off, especially as you look into 2024?
spk10: Yeah, good morning, Tammy. So you're right. If you look at the margin improvement year over year, another really strong contribution from enterprise initiatives. I think the best performance in two and a half years, which is really remarkable given where we're at in the enterprise strategy. Price-cost, we talked about 210. And then 160 basis points of performance. I don't want to call it headwind necessarily because these are investments that we're making in our long-term organic growth initiatives, including new hires, as well as then obviously the regular wage and benefit inflation that everybody else is seeing. That all adds up to about 160 basis points. And that's how you get there. Even with all of those investments that we continue to make, you're getting 200 basis points of margin improvement on a year-over-year basis. to 26.5%, which I believe was a new record for the third quarter.
spk05: Does that 150 basis points headwind continue in the fourth quarter and maybe in the next several quarters? How should we think about that headwind?
spk10: Yeah, I think the normal run rate is somewhere, we've been running higher than that this year, the normal run rate, and we'll see how the plans roll up for next year. I don't want to get too far ahead of myself, but if you look at historically, that's about 100 to 150 basis points of headwind.
spk05: Got it. Can I ask one more quick one? The 12 cents headwind from the auto strike you're calling out for the fourth quarter, does that assume the strike continues through the end of the quarter? And what does that mean in terms of organic growth headwind for the fourth quarter?
spk10: Yeah, so, Tammy, let me just broaden the lens maybe a little bit here. I think given the uncertainty around auto and the fact that the strike is now in the sixth week here, we decided that we'd take a more prudent approach, which is basically based on what we're seeing in our businesses right now, maybe with room for things deteriorating a little bit further from where they are today. And if you take that quarter-to-date impact and extrapolate through year-end, that's how you get the 12 cents of EPS adjustment that's now embedded in our guidance. So assuming, to answer your question, it continues through year-end. If the strike ends before year-end, obviously we'll do better than that. If it gets worse, our businesses will do a great job in terms of reading and reacting to the conditions on the ground. The optimist might say that some of that production will get deferred into next year. But obviously, a lot of uncertainty. And given that, we don't really want to pin down a revenue number. We're just going to give you here the $0.12 of adjustment that I just laid out for you.
spk05: Great. Thank you so much.
spk10: Sure.
spk01: Your next question comes from the line of Andrew Open from Bank of America. Please go ahead. Your line is open.
spk03: Hi, guys. Good morning. Good morning. So, question. I think before you were talking about sort of 25% of the portfolio slowing structural over the past couple of quarters. Have any of those markets bottomed, like electronics, and have any new markets started to slow? Is it the same 25%? Just how do you look at the world?
spk10: Hey, Andrew. So there's definitely some puts and takes. I think, for example, if you'd asked me that question last quarter, I would have said automotive OEM, automotive aftermarket would be in that category. They were up 10%. So just an example of things moving in and out. So I'm not sure it's really that relevant to look at. But if you just look at what we would say now is kind of slowing the 25% On a combined basis, those businesses were down year over year 3% in the third quarter. However, sequentially, they did improve from the second quarter by a percentage point, which I would say fairly stable. Talking about electronics and semi-specifically, I think consumer electronics remains fairly weak. On the semiconductor side, you'll recall that we've talked about an expectation from industry experts, I'll call them, as well as our customers that there would be a reacceleration of demand here in the second half of this year. And that now looks like it's been deferred probably until sometime next year. Now, obviously, we remain, as we now do on an ongoing basis, committed to those businesses. We continue to invest and really position ourselves for the inevitable recovery down the road, which hopefully comes next year in 2024, and making sure that we're well positioned to take full advantage of the long-term growth opportunities that we believe are right in front of us in that part of our businesses.
spk03: Gotcha. And then maybe you've answered this question as you talked about the business overall, but in construction products and polymer and fluids, the changes in variable margin and cost was a material benefit. to margin year-over-year and has been year-to-date. Anything specific that you're doing in these businesses and how much more runway is there?
spk10: Well, there's a lot of work that's going on in those businesses to deliver these results, obviously. I'd say the categories you're familiar with, the first one is the ongoing contribution from the enterprise initiatives. And so both the segments that you mentioned had a significant contribution from enterprise initiatives, as well as favorable price-cost impact. So those are really the two big drivers in those businesses. And I think it is pretty remarkable that they're putting up record quarterly margin performance, given, frankly, not a lot of volume growth, not a lot of volume leverage. So you can imagine once we get the volume leverage going again, as Chris was talking about, at incrementals, kind of in that 35 to 40 range, there's even more runway for margin improvement.
spk03: Thanks so much.
spk10: Sure.
spk01: Your next question comes from the line of Steven Fisher from UCS. Please go ahead. Your line is open.
spk09: Thanks. Good morning and congratulations, Scott. Wouldn't the welding segment It seemed like the year-over-year was a little weaker on the industrial side relative to last quarter and maybe a little better on the commercial. Is that something that you're projecting, at least in the near term? And to what extent is there a margin-mix difference between those two subsegments that you should be aware of?
spk10: So there's not a lot of difference in terms of the margin performance. But I think these are some great data points that illustrate kind of the dynamic nature of the environment that we're operating in. And really what I tried to lay out in the commentary was what's driving this on a year-over-year basis are just the comparisons. So it's really hard to draw any conclusions from the year-over-year comparisons. What I think we can say broadly in welding, as we said up front, is that the overall demand for equipment appears to be Slowing down a little bit in the near term, whether that will remain at those levels on a go-forward basis is difficult to say at this point. Backlogs have normalized. We're not really a backlog-driven company. We're now back to two to three weeks of backlog at the enterprise level. And then the last point I'll make is we're still seeing meaningful impact from our customers and channel partners reducing their level of inventory. So if you think about at the enterprise level, that was a point to a point and a half of organic growth drag. So just to maybe normalize the Q3 results a little bit on the top line, so 2% on an equal days basis, and then you factor in the inventory adjustments, you're back at 3, 3.5%. just to kind of put things in context a little bit. But there's no question that the activity slowed down a little bit on the welding side here in the third quarter.
spk09: Okay, that's helpful. And then when would you get an idea of how your price versus cost is going to shape up for 2024? I'm getting the sense, you know, broadly in industrials, it's going to be pretty tight. Would you agree with that? And Is that something you can sort of 80-20 to kind of tilt it in your favor?
spk10: Well, so we haven't even rolled up our plans yet for next year. That really happens at the end of this month, and then we'll have some good discussion with our segments, and we'll get a much better handle on what the price-cost equation might look like. I do think if you just look at the margin recovery trajectory that we're on, we haven't fully recovered the margin impact. And so I think it's not unreasonable to assume that there will be some carryover into maybe the first half of next year. And then you add on top of that maybe our normal pricing. But again, I don't want to get too far ahead of ourselves. We'll give you a lot more detail when we give you guidance for the full year, which will be early next year. But certainly If your price is holding at current levels and the raw material cost, direct material cost equation, that has stabilized. We're not seeing significant deflation at this point, but we're also not seeing anything close to the inflation we've seen over the last two years. So that's kind of the good news here.
spk09: Great. I appreciate the early thoughts. Thank you.
spk10: Yep.
spk01: Your next question comes from the line of Julian Mitchell from Barclays. Please go ahead. Your line is open.
spk00: Thank you. Good morning. Maybe one area I was interested in was test and measurement and electronics. Also, in light of sort of progress on the integration of the acquisition, how that's gone as it's been in the portfolio several quarters now, And also just on the base business, you know, very mixed reads from your various peers in that market. Any color you could give us on kind of expectations for Q4 on electronics versus, say, test and measurement within that, please?
spk10: Yeah, so, you know, Julian, we don't give quarterly guidance. But I think if you look at historical... information, you'll see that there's typically a ramp-up in test and measurement electronics in Q4 relative to Q3. And so we do expect some of that. I think overall, you know, the electronics side, like I said, the consumer electronics end market remains soft. You know, just semi and isolation is down 20%, 25% on a year-by-year basis, and that's Last year, that was about a $500 million segment, so we're definitely seeing that's what's driving these results. If you take out the semi-impact in test and measurement electronics, we're actually up 2% on a year-over-year basis. But we expect this pressure to continue. We're not counting on a recovery here in the fourth quarter. It's based on run rate and typical seasonality. I'd say on MTS overall, Maybe, Chris, you want to make some comments?
spk07: We were just up there, so maybe you want to... Yeah, so I would say, Julian, that certainly the assumptions we made when we acquired the MTS business in terms of strategic fit and financial rationale have been very much validated by our two years of owning the business. The business has performed very well. We are currently in the process of implementing our business model. We're already starting to see some real nice results accruing from that, but we strongly feel this is going to be a very, very successful project. ITW acquisition. In fact, we are taking our board of directors up to MTS later this week for them to witness firsthand the level of progress that we've made on the integration in terms of implementing our business model. But like I say, two years in, so far so good. Great people, great brands, great technology, great opportunity to implement the business model. And like I said, this is going to be a great ITW business in the long term.
spk10: Yeah, I would just add maybe to quantify what Chris is talking about in the short term. This business grew double-digit top line in the third quarter. And you'll recall maybe margins coming in were somewhere around 7%. And through the implementation of the business model, at this point, the outlook for the full year is in the mid-teens. So right on track in terms of growth. the potential that we thought we had when we acquired the business. So good progress.
spk00: That's helpful. Thank you. And good to hear on MTS. Maybe just a broader question, perhaps, you know, amidst the sort of the CEO transition that was announced and congratulations to both Scott and Chris, but maybe on the sort of thinking about the top line a little bit and It looks like maybe some of the share gains that ITW had enjoyed just after COVID maybe have eased to date or eased in the last 12 months or so. Realize there's some destocking noise in various channels. And so looking at market share in that context may not be that helpful. But just wanted sort of perspectives on market share across the larger ITW businesses and and whether there was perhaps a need to redeploy a greater share of enterprise initiatives or price cost savings into sort of organic reinvestment in the base business.
spk10: Maybe I'll start and then Chris, you can jump in. I think I'll start by saying we completely disagree with the premise that we are not gaining market share, recognizing that it may be difficult for you looking in from the outside to decipher those market share gains on an annual basis. But if you go to every one of our divisions, they will have a very clear picture, all 84 of them, in terms of what market growth is and what their growth rate is and what their competitors are growing at. And in all cases, we would say that given our competitive advantages that we derive from the business model in terms of our customer-facing metrics, in terms of the value add that our customers are getting from buying our products, we're continuing to gain share in the markets that we're focused on. And in some cases, you're able to look at public company peers. You can peel back the onion a little bit. And if you do that work, if you were to do that work, you'll see that we are gaining market share in the areas that we are focused on. And I might just add, not only are we gaining market share, but just note the margin performance of our businesses relative to our competitors, which typically we are running at 2, 3x our competitors. And you can look at food equipment and Lincoln on the welding side, for example. and you'll see that that is the case. But maybe, Chris, if you want to comment a little bit.
spk07: Yeah, I would echo everything Michael just said in terms of the quality of our portfolio and in terms of the amount of room we have to grow in each segment, customer-facing performance and so on, and the focused investments that we've made in areas like sales and innovation, coupled with the fact that we've seen a nicely improving yield on customer-backed innovation. All this gives a lot of credence to what we're hearing from our businesses that we are gaining share in most of our key markets relative to our competition.
spk00: That's great. Thank you.
spk01: If you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Meg Dubre from Baird. Please go ahead. Your line is open.
spk02: Yes, thank you. Good morning and congrats to Chris. Just a quick question on construction. In your comments, you mentioned that the resi renovation channel is done quite well. Maybe a little more color there. Is that a function of new products or anything going on in the channel? I just found that to be a little bit surprising given where activity and interest rates and all of that seem to be.
spk10: Yeah, so again, Mick, you're right. This is on the residential renovation remodel side of things. So these are... typically sales through big box retailers, names that you'd be familiar with. And I think if you look at, I think somebody asked earlier about market share, this is a great example of really strong market share gains in this particular end market. Because I agree with you, if you just look at the underlying data, you might be a little surprised that that part of the business is up 7%. year over year in the current interest rate environment. And like I said, this is essentially all volume and share gain through the big box retailers.
spk02: And presumably that has some staying power beyond this quarter?
spk10: Well, you know, I think overall construction in North America actually remains fairly stable. I'd say maybe a little bit more concern on the international side, which has been weak. You know, the market demand has been a lot softer on the international side. But, you know, North America, Keep in mind that in the fourth quarter, typically, we talk about seasonality. By segment, I said test and measurement usually does better. Construction is one where, for obvious reasons, the fourth quarter is typically a little bit lower than the third quarter. But in terms of the share gains and the strength in this particular part of the business, that absolutely has staying power.
spk02: Great. Then my follow-up, maybe on food equipment. I'm curious as to how the supply chain has sort of evolved for you here and where your lead times are. I know you've got a number of verticals within this segment, but some context here would be helpful. And also, where are you from a backlog perspective? Are you seeing any sort of noise in a channel around destocking, or is this segment perhaps less impacted than others? Thanks.
spk07: So maybe just from a lead time perspective, I would say that, you know, a natural outcome of our business model is best in class lead times and customer facing performance. And we are very much back to where we were pre-pandemic in terms of our ability to supply our customers. In terms of the channel, yeah, I think it's an area where there is a little bit of inventory in the channel. We're seeing that coming down. It's probably still out there. It's one of the segments that has been impacted, I think, by channel inventory. likely to come down over the next couple of quarters here, but it's there now for sure.
spk10: Yeah, and just on the backlogs, you know, we're back to normal levels, which in our case, you know, given our customer delivery performance is two to three weeks. So we're back to kind of normal levels here.
spk02: All right. Appreciate it. Thank you.
spk10: All right. Thank you.
spk01: Your next question comes from the line of Joe Odia from Wells Fargo. Please go ahead. Your line is open.
spk08: Hi, good morning. Thanks for taking my questions and congrats to both Scott and Chris. I guess I wanted to stay on that topic in terms of the channel inventory normalization. It's something you talked about last quarter. I think size pretty similarly last quarter. And so the question is just any changes that you've seen from June, July into where we are now in terms of the trends on some of that inventory rationalization, whether regions and markets, pace of it, or if it's all kind of trending in line with expectations as of a couple months ago?
spk10: I'd say this is trending right in line with expectations that we kind of laid out on the last call. Like I said, the The drag on the organic growth rate of 1% to 1.5% was pretty broad-based. Every segment had some impact, very similar Q3 as Q2, and we think this will probably be with us for a few more quarters. And I'll just say, if you just look at our own inventory levels, we are currently running slightly above three months on hand, where typically we're running at low 2s. And we estimate that in our case, it'll take us probably until kind of early, mid next year to get back to normal inventory levels. As we work through the exact same things that our customers and channel partners are working through. And I might just add here that that's obviously going to continue to drive some really strong free cash flow performance for ITW as well. inventory levels, working capital continues to normalize as a result of supply chain having stabilized.
spk08: And then how does that kind of compare or relate to some of what you're seeing from your customers right now? I think in the prepared remarks you talked about maybe a little bit of slower kind of CapEx demand trends out of your customers, what you're seeing in sort of tested measurement or welding and and the degree to which what you're hearing from customers is this is more inventory related or if it's something that's a little bit of a pause that's more maybe macro uncertainty related?
spk10: I think it's really hard to tell. I mean, I think overall the demand environment, as we said, there's clearly some uncertainties here in the near term. You know, inventory is part of that, the interest rate environment. everybody being maybe a little bit more cautious on the CapEx side. And then in one of our segments, particularly the auto strike. So there's a lot of things going on here. It is a pretty dynamic environment. It can change pretty quickly. The only thing we know for sure is that the ITW team will continue to read and react to whatever conditions are on the ground. And I think if you just look at our track record, we'll continue to deliver differentiated long-term performance. And so that's really our focus is on continuing to do just that. Understood. Thank you. Thank you.
spk01: Thank you for participating in today's conference call. All lines may disconnect at this time. Have a wonderful day.
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