Illinois Tool Works Stock

Good morning. My name is Trevor and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Second Quarter Earnings Conference Call. [Operator Instructions]

Erin Linnihan, Vice President of Investor Relations, you may begin your conference.

Thank you, Trevor. Good morning, and welcome to ITW's Second Quarter 2026 Conference Call. I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter 2026 financial results and provide an update on our outlook for full year 2026.

Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.

Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, the ITW team delivered strong operational and financial performance in the second quarter. Highlights include 4.5% organic growth, operating margin expansion to 26.7%, and a 10% increase in GAAP EPS of $2.84. Notably, operating income reached $1.15 billion, a 7.4% increase, marking the most profitable quarter in ITW's history.

Our top line momentum this quarter was propelled by significant acceleration in our CapEx-related businesses, led by organic growth of 14% in Welding, 10% in Test & Measurement and Electronics alongside 7% in Polymers & Fluids. In addition to capitalizing on favorable market conditions, we continue to make progress on our long-term organic growth agenda, most notably through customer-back innovation or CBI, which contributed 3% to revenue growth in the first half compared to 2.4% for full year 2025. Delivering a 3%-plus CBI contribution is the single biggest catalyst for achieving sustained high-quality enterprise organic growth of 4% or higher.

Our first half performance offers another proof point that disciplined execution on our enterprise strategy priorities is yielding strong results and that we're firmly on track to achieve our 2030 performance goals. Operationally, the ITW team continued to execute at a high level with enterprise initiatives contributing 120 basis points to our operating margin. We also expanded free cash flow by 41% and returned over $1.2 billion to shareholders through dividends and share repurchases.

Looking ahead, we are raising both top and bottom line full year guidance with all 7 segments expected to deliver more positive organic growth and expand operating margins. Full year organic growth guidance is raised by 1.5 percentage points to a new midpoint of 3.5%. The EPS is raised by $0.15 to a new midpoint of $11.45, reflecting 9% year-over-year growth. This marks our second guidance increase of the year.

As we've said before, ITW's unique business model, resilient portfolio and Do What We Say execution demonstrated daily by our colleagues worldwide, ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle. As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline and best-in-class customer-facing metrics position us to fully capitalize on these positive demand trends that we are now seeing.

With that, I'll hand the call over to Michael to walk you through the segment details and updated full year outlook. Michael?

Thank you, Chris, and good morning, everyone. In Q2, total revenue grew 6.1%, driven by 4.5% organic growth, a 1.4% contribution from foreign currency translation and 0.2% from an acquisition. As Chris said, organic growth performance was particularly strong in our CapEx and semiconductor-related segments as well as Polymers & Fluids. Our customer-back innovation efforts continue to gain momentum and CBI was a key top line catalyst, contributing 3% to growth in the first half.

From a regional perspective, organic growth was up 6% in both North America and Asia Pacific, 3% in China and flat in Europe. Moving to the bottom line. Operating margin expanded by 40 basis points to 26.7%, with a solid 120 basis points contribution from enterprise initiatives. In the quarter, price increases more than offset higher raw material costs in dollar terms, though timing lags between inflation and price adjustments temporarily diluted margins by [ 40 ] basis points. As demonstrated in prior cycles, we fully expect to recover this margin impact over time as evidenced by the implied incremental margin guidance for the full year of 40%.

Free cash flow increased 41%, delivering a 77% conversion rate, in line with typical seasonal trends. In Q2, we opportunistically pulled forward our planned Q3 share repurchases, buying back $750 million or about 1% of ITW's outstanding shares at an average price of $255 per share.

Turning to Slide 4. Our sequential trajectory from Q1 to Q2 underscores accelerating strength across every key performance metric. Sequential revenue growth was plus 7% versus our historical average of plus 2%, operating margin expanded 130 basis points, and operating income grew 12%, making Q2 the most profitable quarter in company history.

Moving to the segment highlights, starting with Automotive OEM. Organic revenue was roughly flat, with North America up 1%, China up 1% and Europe down 5%. We maintain our full year expectation of outpacing global [ bills ] by 200 to 300 basis points. The bill is projected to be down 2%. Operating margin improved by 30 basis points to 21.6%, with enterprise initiative gains partially offset by price-cost timing lags.

Turning to Slide 5. Food Equipment organic revenue was flat overall, as service strength of plus 5% helped offset a 2% decline in equipment, a notable sequential improvement from the 6% equipment decline in Q1. Regionally, North America was down 4% despite some institutional demand improvement in areas such as health care, while international delivered strong growth, up 6% in the quarter. Looking ahead, we expect that organic revenue growth will turn positive and that margins will improve in the second half.

Test & Measurement and Electronics had an outstanding quarter with 10% organic growth, led by a 21% surge in electronics, which represents about 40% of the segment. The 2 main drivers of this strong growth that we're seeing are, one, our electronic assembly businesses, which serve the printed circuit board industry; and two, our semiconductor-related businesses, which serve the chip manufacturing industry. Our businesses in these 2 sectors are able to fully capitalize on the growth opportunities ahead of them and gain market share based on their expanded capacity, the highly differentiated product portfolios and best-in-class customer-facing metrics. Operating margin expanded by 240 basis points to 25.2%, and we expect further improvement in the second half of the year. Lastly, it is worth noting that order growth continues to outpace revenue growth in this segment, which is also the case in our Welding segment.

Speaking of welding and moving on to Slide 6. Welding delivered record top line results driven by 14% organic growth as equipment surged 19% driven by market tailwinds and strong new product adoption. North America, which represents about 85% of the Welding segment, led the charge of 19% with broad-based growth across both industrial and commercial markets as demand continued to strengthen in areas such as infrastructure, energy, aerospace and defense. Operating margin remained best-in-class at 32.4%.

As you may have heard, a storm impacted 2 of our Welding facilities in [ Appleton, Wisconsin ] yesterday, with 1 manufacturing facility and 1 warehouse building sustaining damage. First, we're grateful that all our ITW colleagues are safe and accounted for. As for the business, our teams are in the process of executing contingency plans with a focus on minimizing disruption for our customers. In terms of our guidance, we do not expect any material impact on ITW.

In Polymers & Fluids, organic growth reached 7%, driven by strength across the board including 7% growth in Automotive Aftermarket as a result of traction on new products and continued market share gains. Polymers grew 7% and Fluids rose 8%, supported by strong momentum in general industrial and biopharma markets. Operating margin expanded 160 basis points to a record 29.3%.

Turning to Slide 7. In Construction Products, organic growth was positive 2%, marking the highest organic growth rate in 4 years. All regions grew with North America up 2%, Europe up 1% and Australia and New Zealand up 2%. Residential renovation in North America grew 1% and commercial construction, which represents about 15% of the region, was up 13%.

Specialty Products revenue was up 3% with organic revenue up 2%. North America grew 2% and international grew 1%, with strong growth in medical, aerospace and consumer packaging, offset by product line simplification in appliance components.

With that, let's turn to Slide 8 for an update on our guidance. Looking ahead, ITW is well positioned to deliver strong performance on both the top and bottom line in 2026. Starting with the top line, our organic growth projection is now 3% to 4%, up from 1% to 3%. The updated midpoint of 3.5% represents an increase of 1.5 percentage points versus prior guidance. And per our usual process, our guidance is based on current levels of demand, adjusted for typical seasonality and prevailing foreign exchange rates. On the bottom line, operating margin guidance is unchanged at 26.5% to 27.5% as enterprise initiatives are expected to contribute more than 100 basis points. We are raising our GAAP EPS guidance by $0.15 to a range of $11.35 to $11.55 with a new midpoint of $11.45, representing 9% year-over-year growth. Today's guidance increase follows a $0.10 increase to guidance in Q1.

The effective tax rate remains unchanged at 23% to 24%. Free cash flow conversion is projected to exceed 100% of net income with full year share repurchases of approximately $1.5 billion. Lastly, with respect to potential tariff refunds, we do not expect any material recovery and haven't included anything in our updated guidance. We entered the second half of 2026 with strong operational momentum, highlighted by organic growth of 4.5% in the second quarter. As evidenced by today's raised guidance, which implies sustained organic growth of 4.5% in the second half, our best-in-class margins and returns and our disciplined operational execution, ITW is well positioned to deliver strong financial performance in 2026 and beyond.

With that, I'll turn the call over to Erin.

Thank you, Michael. Trevor, please open the lines for questions.

[Operator Instructions] Your first question comes from the line of Andy Kaplowitz of Citigroup.

Nice quarter. Chris and Mike, obviously, the growth in your CapEx-focused segments was quite impressive. But maybe you could talk about the durability of that growth? You mentioned orders continue to outpace revenue. So while we don't think of ITW as a backlog business, does that mean you're building significant backlog in those segments? And I know you're forecasting current run rates, but I would surmise you obviously have more confidence regarding your CapEx business in particular.

Yes. So Andy, you're absolutely correct. I mean we typically don't forecast the economy, our forecast is largely based on run rates and also what we're hearing from our customers. And we don't carry a whole lot of backlog. But it has to be said that the order activity that we've seen in Welding and Test & Measurement and Electronics has been a good bit ahead of the revenue rates we've been demonstrating. So getting a bit more backlog there than normal, I would say, we're very confident going to the back half of the year based on what we see in terms of the order rates based on what we hear from our customers. And I would also underscore the fact that the whole thing is also underpinned by some real nice progress on customer-back innovation, which again strengthens our confidence that the growth is very sustainable here in the back half.

And Chris, to that point, maybe we can do a double-click on CBI. It's been a few years since your Investor Day, but you mentioned 3% CBI in the first half. I think that's ahead of where you want to be even at this point. I think your long-term growth algorithm includes 2% to 3% CBI. So again, can you keep up that kind of CBI? Is it time to think about maybe even more CBI moving forward? We always want more. So what do you think about that?

Yes, yes. Yes, 100%. I mean, look, I would say, Andy, that we are really, really encouraged with the strong momentum that we're seeing in CBI, right into our divisions, the followership, the engagement and the progress that we're making, and we continue to see the strength in terms of our pipeline of new products that we're working on. This is 1 of the reasons that we're demonstrating these results.

At 3%, no, it's probably a little earlier than we thought, but no surprise, given the way we -- and our teams have embraced this. The way we approach this is very similar to how we approach 80/20 front-to-back 10, 12 years ago in terms of really investing and building capability over the last number of years in CBI. We have lots of great innovation practice throughout the company. As we mentioned, we codified this into a very effective and holistic innovation framework, and we launched this in the back half of 2024. Since then, we have relentlessly implemented it at a very high quality of practice, very similar to how we approached 80/20 front-to-back.

And so in my mind, this innovation progress that we're seeing is not a huge surprise; b, is very sustainable. And most of all, I mean, really encouraging in terms of what we see the projects we're working on extensively throughout the company in every segment, and we would see CBI contribution increase in every segment this year and on into the future. So pretty encouraged about it.

Our next question comes from the line of Tami Zakaria from JPMorgan.

Congrats on very nice results. My first question is on organic growth. I appreciate you don't give much color on intra-quarter trends. But from a segment perspective, are you seeing any improvement quarter-to-date in some categories or largely trends have remained stable versus the second quarter based on the -- of the 7 segments.

Yes. I'd say, Tami, really, I would say the big thing about Q2 is the acceleration on the top line relative to Q1. So 7% sequential growth compared to our historical 2%. It was really across the board. Every segment came in above their historical kind of typical sequential growth rate with the largest improvement in Welding and Test & Measurement as well as in Polymers & Fluids.

As we went through Q2, April was off to a really good start, sustained that in May and June was even better than that. And we're off to a good start here to Q3 right on track with where we want to be and consistent with the updated guidance that we're providing today, which implies that we can sustain the growth here in the back half of the year at 4.5% organic. So I'd say that was kind of the big new news, the acceleration in demand that we also talked about on the last earnings call, it really continued throughout the second quarter and into the third quarter.

Understood. That's very helpful. And then more of a longer-term question. I think you're targeting 30% operating margin by 2030. And 3 of your 7 segments are already at or above that. So of the remaining 4, which ones do you expect to see more outsized margin growth in the next 12, 24 months? Or are we thinking about it the wrong way in the sense that the 3 segments that are already above 30% have room to grow even higher?

Well, Tami, I mean, I think in the spirit of continuous improvement, which is so embedded in our DNA here at ITW, we would expect and the segments themselves would expect that margins will continue to improve here as they move towards their full potential. And certainly, as long as the incrementals, our margins are significantly above 30%, and we're guiding to 40% for the full year, those margins will continue to improve as the businesses grow.

At the same time, obviously, we've talked about margin improvement in Automotive OEM, approaching kind of the target we laid out in 2023 at Investor Day and kind of the low to the mid-20s. Still a lot of runway in Test & Measurement. You saw a nice improvement this quarter, 200 basis points plus improvement in Test & Measurement. That will continue. There's no reason why Food Equipment shouldn't be at 30% plus over time. Polymers & Fluids putting up a new record this quarter at 29% plus. And -- by the way, Construction with very little help on operating leverage is putting up 30% plus.

So I think really across the board, every segment will continue to improve. And as Chris said, in the second half year -- of the year in the near term, we expect every segment to improve the organic growth rate and every segment to improve margins, and there's no reason to believe that that's going to stop anytime soon. And as Chris also said, we are well on our way to our 30%-plus enterprise targets by 2030 with the big driver, obviously, still the enterprise initiatives, the organic growth and the operating leverage that comes with it. And then the other big factor here is all these new products that are coming in that Chris talked about with the CBI contribution of 3% are coming in at higher margins. And so you put all of these things together. And at least from our vantage point, you see a very clear path to that 30% plus that we've committed to.

Our next question comes from Scott Davis from Melius Research.

Numbers look solid overall. The CBI number really caught my eye, and I don't want to hit a dead horse, but I feel like that's the key here in the quarter. Give us a sense of how you measure it and how you kind of think about the contra account, meaning any cannibalization that potentially occurs from from iterative new products versus kind of clean sheet paper stuff. Just help us understand how you guys kind of think about it, measure it, incentivize it. That would just be helpful color, I think.

Sure. Yes. So the CBI number is a truly incremental number, Scott. It's basically incremental revenues from new products introduced within the last 3 years. It doesn't -- I mean, cannibalization is taken out. So it's all new. This is all really -- these are new actual revenues. Obviously, we audit these and so on and so forth. So these are subject to a very high scrutiny within the company. .

In terms of how we incentivize, this is 1 of our 4 long-term metrics that we incentivize inside the company. We just introduced this as a metric actually last year when we launched the framework. So basically, everybody from the divisions and up are compensated on progress in this. But it doesn't measure -- or doesn't measure cannibalization. It nets that out and measures true new product year-over-year incremental revenues, and it measures them for 3 years at which point these roll off, and you got to have a new product coming along, otherwise the CBI number falls off.

Yes. That makes sense. I didn't realize it's part of the compensation. That's good. So just switching gears a little bit. The -- you're doing a lot of buybacks, which is great, still a very clean balance sheet. The M&A pipeline, have valuations come down at all? I know in some areas they have and some they haven't, but stuff that you guys are looking at, have you seen much movement there that could potentially make things worthwhile?

Yes. I would say, Scott, we haven't seen a lot of movement in terms of coming down. As we said before, I think we would characterize our approach on M&A as active but disciplined, I would say. We're sticking to our disciplined portfolio management strategy here. Obviously, we believe and we're now starting to realize this really compelling opportunity on organic growth. And so to the extent that we can find high-quality acquisitions that can extend our long-term growth potential, then we're certainly very interested.

And obviously, the second aspect of that is that we've got to leverage the business model to improve margins. So we review opportunities on an ongoing basis. We're pretty selective given all the organic growth potential that we have in our core businesses. As I said, active, but disciplined. And when we find those opportunities and when we do those opportunities, you will hopefully appreciate that we have subjected them to this level of screening, and ensure that they would be long term -- good long-term business for ITW. Obviously, MTS is the last significant 1 that we did, example of an opportunity that ticked all the boxes. And 3 years in -- 3, 4 years in now, this has turned out to be a great acquisition for us. We had 1 bolt-on acquisition in the semi manufacturing space late last year that had all the high-quality growth attributes that we look for. And so we'd be very open to doing more deals like that, but we're prepared to wait for them, particularly given the compelling organic growth opportunity that we have.

Yes. Makes sense. I only ask because you guys are great operators, and so you can typically make other people's mediocre pretty darn good. So that's all I got to say.

Our next question comes from Joe Ritchie from Goldman Sachs.

So it seems like you guys are in a pretty good spot from a capacity standpoint. I think you called it out in Test & Measurement and the Electronics segment, increasing capacity recently. I guess when I think about like your growth rate still being behind your orders, I'm just wondering like maybe you can give a little bit more color on what you're doing to make sure that you're matching the demand environment. And are there particular areas across your portfolio where you feel like you need to invest today?

Yes. So Joe, that's a natural [indiscernible] of how we do 80/20 as we use it to balance and match capacity. We never allow ourselves to get in a situation where we run our capacity. We're very proactive in ensuring that we add capacity in advance of growth. And effectively, that's what we've been doing for the last number of years. But you cite semi and electronics specifically, obviously, there's been a bit of a down cycle the last couple of years. But given our belief in the business, in our differentiation in that space, we continue to invest meaningfully over the last couple of years. I know that's really helping us is the semi industry particularly starts and has been ramping for the last 6 months. We are really well positioned to capitalize on that growth.

And -- but that's an approach we've taken all of our businesses. It's a natural outcome of how we do 80/20 in terms of ensuring that we balance capacity and that we invest proactively so that we don't get caught in a situation where we have growth, but we can't basically satisfy the growth because we don't have enough capacity.

Got it. That's helpful, Chris. And I guess, the follow-on question, I just wanted to touch on the Welding margins for a second. Obviously, the growth rate there was incredibly good, better than we expected this quarter and I guess, better start to the year, but nice to see the progress there. From a margin standpoint, we've been kind of like 32%-ish, 32%, 33% now for several quarters. Are we hitting kind of like a natural ceiling on that business from a margin standpoint? I just would have expected maybe a little bit more torque on the growth that you're seeing?

Yes. I'd say, Joe, we definitely expect further margin improvement in the Welding segment. And I'll go back to -- we have a little bit of near-term headwind from a raw material cost inflation standpoint and the lag between the price to offset those costs. And so once we get through that, our incrementals will return to kind of our typical 40% plus, and as we grow, margins will improve from there. So that's really the big driver here -- there.

When I look at the margin walk for that -- for the Welding segment, the operating leverage is really good, the enterprise initiatives are really good, a little bit of pressure on price cost. And then obviously, when you're growing at 14% organic, you are going to be paying out slightly higher commissions to your partners that help you achieve those growth rates. So that's really what we're talking about here. But like we said in the second half of the year, margins, we would expect them to improve as well as well into the future into next year and beyond.

Our next question comes from the line of Jamie Cook with Truist.

Congrats on a nice quarter. I guess just 2 questions. One, Michael, just on the guide, just given the increase in organic growth, I'm surprised we didn't raise our margins. And I know you're implying a 40% incremental margin typically. I mean that's nothing -- I mean, that's a high-quality incremental margin. But like I'm just wondering if there's upside to that 40% or what's limiting that and why we didn't increase our margins on the increased organic growth?

And then my second question is sort of similar to the last one, but just on Specialty, the organic growth was up. I think margins were down 110 bps. Any color behind which product line was driving that?

Yes, Jamie. So I think on the incremental margins would have been 48% in Q2 if it wasn't for the headwind on the price-cost timing lag that we just talked about, margins instead of being up 40 basis points year-over-year would have been up 80 basis points. And we do expect this lag will probably be with us a little bit into Q3, certainly some progress on price-cost. And then in Q4, there will be further improvement on price-cost.

And what -- and the guidance and what I'm talking about is based on all the known price and material cost increases as we sit here today. Obviously, as we just saw in Q2, it can be a pretty volatile environment, and particularly what we saw in Q2 to be a little more specific, was some of the crude oil derivatives like our resin purchases in Automotive and in Specialty coming through and the price -- associated price increase is lagging a little bit. Now the good news is those resin and crude oil prices are trending downwards in Q3 and the price increases are coming through. And that's exactly to your question on Specialty, what you're seeing in Specialty.

And so I think a reasonable growth and operating leverage, good progress on the enterprise initiatives and then headwind, actually the segment with the highest headwind on price-cost in the second quarter was Specialty. And so it just takes a little bit longer to get those price increases through in Specialty and in Automotive, to some extent, but they are coming. And the other thing that's happening is, like we said earlier, all these new products with the progress on CBI are coming through at higher margins. And so you'll continue to see Specialty margins improve in the second half and into next year.

But I guess on the total for the full year guide, would it be reasonable to assume more the mid- to high point of the margin range is probably more reasonable versus the low point? Or are we still just with inflation tariffs, whatever, it's still too uncertain to make that call?

Well, yes, I think, Jamie, if it wasn't for price-cost, we would definitely be talking about the high end of the range. And so just given what we're working through right now, we're providing the range, 26.5% to 27.5%. Incremental margins for the full year, about 40% if [indiscernible] price cost that would be in the mid maybe even in the high 40s. So it's just a temporary price-cost lag that we're working through, and we worked through it before. If you go back to the first round of tariffs, the second round of tariffs. And as you know, companies with highly differentiated products will not only be able to offset the cost of the dollar piece, which is what we're doing right now, but will ultimately recover the margins down the road and maybe do a little bit better than that.

It's a pretty dynamic environment on the price-cost front right now. .

Congrats.

Our next question comes from the line of Steve Volkmann from Jefferies.

So you almost on my question just there, Michael. But I'm curious just to hear your thoughts about how we should be thinking directionally about the incrementals in '27, assuming there's no more changes in all these things that have been changing.

Yes. Well, we haven't done the annual plans yet for 2027. And so I won't really have an accurate view until we get closer to the end of the year and early next year. But I think the long-term algorithm here, if you go back and look at our TSR model, has been incremental in that 35% range. We've said previously, that's now in the 40% to 45% range in a normal environment. And so I would characterize the current price-cost environment as a little unusual and kind of a temporary headwind. But I think as we go into next year, I think when we roll things up, if we don't see 40% plus, I think we would be a little surprised.

Yes, Steve, I would say, fundamentally, what drives our incrementals in the long term is the quality of our portfolio and the quality of execution of our business model. And the quality of our portfolio has continued to get better through the ongoing kind of portfolio pruning. We've gone through PLS over the years. The quality of our business model continues to get better in terms of the quality of 80/20 execution. And you couple that with the increased progress on CBI, then all those things would augur for a very strong incremental in 2027.

Great. Okay. That's helpful. And then maybe just sort of philosophical. It feels like we're sort of inflecting on organic growth, which is great to see. Do you sort of do a little less on enterprise initiatives as you grow faster, you focus more on growth? Or are those 2 things kind of not necessarily related?

No, I think we're definitely focused on not having any regression operationally and sustain the momentum on the enterprise initiatives. As we rolled up our long-range plans, this summer, we see a continued contribution from enterprise initiatives into the next 3 to 4 years. And so we would expect that to continue, and it's not mutually exclusive with organic growth. And so all those things kind of work together.

Our next question comes from the line of Steven Fisher with UBS.

You had a very big improvement in year-over-year growth in the Polymers & Fluids in Q2 versus 1. Wondering if you could just help us with how much of that was comps versus underlying true demand because the comps do get a bit easier, but you did mention some new products and share gains. I'm just curious how much more runway you have on those specific initiatives. Maybe that brings us back to some of the CBI discussion, but just curious for any help there.

Yes. So in terms of Polymers & Fluids, obviously, a very strong quarter, up 7%, nice margin improvement as well of 160 basis points. But the encouraging thing for us was that the strength was very broad-based. We saw strength across all 3 platforms, Automotive Aftermarket, Polymers & Fluids with a very healthy contribution to CBI. CBI was almost 5% in that segment in the quarter. So that was really what drove. And I think what this highlights is because of the sustainability of the CBI efforts that we are making. This just all highlights for us the fact that this segment is really well positioned to be a 4% grower for the enterprise on a sustained basis.

That's very helpful. And then I wonder if you could just give us a little more color on the automotive trends between Europe and China? Clearly, some differences there and maybe there's some export dynamics or what have you. But -- and I'm just curious, what is greater penetration of China auto globally mean for you?

Well, I think just to start with China. I mean I think what's driving and has been driving the growth there for a long period of time has been our penetration with local Chinese EV manufacturers. And if you look at EV production in the quarter, we're still up in the mid- to high teens globally and EVs are now almost 20% of global production. And so that favorable dynamic will continue to benefit our Chinese business.

Certainly, a little bit of a mixed bag here in North America. If you look at it by OEM, some of our customers had a strong quarter, others had a little bit more challenging from a production standpoint. So North America was up 1%, [ builds ] about flat here in North America. Europe, a fair bit of PLS in our European business, Europe down 5%. And then we don't talk about it much because it's still fairly small, but there's a lot of strength in our in our India business, which hopefully we'll be able to talk about that the way we talk about our Chinese business at some point in the future.

So overall, certainly, from a production unit standpoint, we are not expecting a lot of growth. This year, we said down 2%. We're not expecting a lot of growth either next year, but we are fully expecting that we'll continue to outgrow the underlying production numbers by 200 to 300 basis points, which is what we've done historically and which is how we're running the business and incentivizing the team is all about how do we grow our content with our -- with existing and potentially new customers. So that's kind of where -- how we would position the Automotive business.

I will say this, we expect continued margin improvement. We've seen some nice progress over the last few years with more to come. And I think, again, a little bit of near-term headwind on price-cost, which we'll work through. But all these new products, all this new content that we're talking about is coming in at meaningfully higher margins because they're solving real problems for our customers. So that's what's really encouraging in the Automotive segment.

Sounds good. Congrats.

The next question comes from the line of Mig Dobre from Baird.

Mig, are you there?

It seems that MEG has disconnected from the call. In the meantime, we'll move on to Andrew Obin from Bank of America, and we can circle back to Mig if he rejoins.

Andrew, we can hear you.

Okay, excellent. Sorry. Yes. So just a question on inflation. I just would appear that there was quite a bit of it. And I think you've sort of said that the timing of inflation is what influenced incrementals this quarter. What are you seeing 6 months out? And what levers internally do you have if inflation continues to persist?

Well, it's certainly true that we are seeing meaningful inflation this year. The kind of the Q2 impact was primarily from crude oil derivatives. So we're talking resin and chemicals. I'll also add to the -- and logistics transportation freight costs. Electronic components continue to be fairly inflationary. And so the biggest lever we have is obviously the price lever that we talked a fair bit about, but it's also driving productivity across our businesses and our strategic sourcing efforts, which are part of that enterprise initiative number that we report on a quarterly basis.

So those are kind of the big levers that we're working. I'd say inflation is for ITW, very manageable. Everything we know about is included in our guidance. We have this unique ability given how we're organized in this highly decentralized environment. Our divisions are so good at reading and reacting to what they're seeing from an inflationary standpoint. So we're highly confident that we'll be able to manage our way through this with some of the levers that I just described as kind of the more obvious ones.

And then maybe a question on Welding, was quite a bit better than what we modeled. Were you guys surprised internally by just how good North America was? And if you could just sort of dissect, is it reshoring? Is it just the industries that you're doing well in recapitalizing? What is it that -- driving America? Is it the cycle getting better? Just maybe dig into a little bit of that what's driving the strength of Welding and if you were surprised by how good it was in the quarter.

Yes. So we weren't surprised. We saw this happen -- it really started building in Q1, even late Q4 last year, I would say. So it wasn't a huge surprise to us. As Michael indicated, growth of 14%, order intake was higher than that. I would say the growth was pretty broad-based, not just in our industrial markets, like energy, infrastructure, aerospace, construction fabrication related to some data center construction, but also what was particularly encouraging was also we saw growth in our commercial platform. So areas like [ small ] fabrication. So really, it was a factor of the markets we are in are seeing some nice demand trends.

And again, I would continue to underscore the importance of innovation here. We've seen real nice progress on innovation in Welding over the last number of years, and we saw a lot of that momentum come through here in Q2 and throughout the first half of the year. So it's this combination of market and some great new products that we've launched in the last 12 months. And we continue to launch in the back of this year.

Our next question comes from the line of David Raso from Evercore.

Just wanted to make sure I understand, trying to think about the price-cost impact when I think about the margin walk from '26 to '27. When you're exiting the year, what's sort of baked into the guidance for price cost impact, say, in the fourth quarter? I know there was about a 40 bp drag this quarter. And maybe you can also help us for the full year, how you're thinking about price-cost? Just again, that sort of exit rate idea and then maybe the full year-over-year thought process for '27?

Yes, sure, David. As we said, 40 basis points here in Q2, some improvement in Q3, call it, maybe 30 basis points and further improvement in Q4 approaching maybe the 20 basis points. And so for the full year, maybe that's what it all averages out to. So about 20 basis points of headwind.

Kind of our historical normal price-cost contribution from a margin standpoint is kind of plus 10 to 20 basis points. And so again, that's based on historical, we'll see when we roll out the numbers as part of annual plan, but maybe that's a good way to think about it. And so what you'll see is still a little bit of headwind here on margins and incrementals in Q3, closer to kind of a more normal margin and incremental performance in Q4 and certainly, margin improvement sequentially from Q3 into Q4. And hopefully, as we go into next year, exiting Q4 will be back to kind of a normal price-cost dynamic. Certainly, nothing material that will prevent us from improving margins even further in 2027 as we head towards our 30% plus target by 2030.

It's fair to say with the organic growth acceleration, the baseline, how you're going to budget '27, you're going to try to price for price-cost still being that kind of 10 to 15 bps improvement. Is that a fair fair generalization?

Well, I mean, you make it sound like we have this very sophisticated pricing model at corporate. The reality is that there are thousands of pricing decisions made at ITW every day in our divisions and none of them are waiting for direction from the team here in [ Glenview. ]

But what we have done historically, maybe that's the best way to answer your question is we have seen a historical margin improvement from price cost in that 10 to 20 basis points improvement, and that's probably what we'd expect as we roll out the plans for next year. If we see something very different, we'll certainly let you know when we provide guidance and explain -- provide a little bit of context in terms of why it would be different. But I think that's a pretty good base case assumption as you think about modeling 2027.

The big drivers from a margin improvement standpoint will continue to be the enterprise initiatives, the new products coming in at higher margins. And so like I said earlier, we would be surprised if we don't have incremental margins in that 40%, 45% range as we go into 2027. And again, what Chris said a lot of that is because we've worked so hard on pruning the portfolio and making sure we're only in areas with high levels of sustainable differentiation where these pricing and buying decisions are not made purely based on price. They're made based on the value that our products and solutions and services can provide.

That's what I appreciate. I was fishing for the idea this year, maybe we're controlling costs a little bit more, just given price-cost. Next year, can I get a positive price cost or will you proactively increase your initiatives, your restructuring costs that might mute it, but it sounds like we can approach '27 sort of a pure traditional 10 to 20 bps as a baseline is kind of...

Yes, I think, David, that's a really good base case. And like I said, if it's very different in January when we give guidance, we'll let you know why that's the case.

This concludes the question-and-answer session. Thank you for participating in today's conference call. All lines may disconnect at this time.

Good morning. My name is Kath, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's First Quarter Earnings Conference Call. [Operator Instructions] Erin Linnihan, Vice President of Investor Relations, you may begin your conference.

Thank you, Kath. Good morning, and welcome to ITW's First Quarter 2026 Conference Call. I'm joined by our President and CEO, Chris O’Herlihy; and Senior Vice President and CFO, Michael Larsen.

During today's call, we will discuss ITW's First Quarter 2026 financial results and provide an update on our outlook for full year 2026.

Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.

This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.

Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O’Herlihy. Chris?

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid start to the year with results that were in line with our expectations. In the first quarter, we continued to outperform our underlying end markets, delivering revenue growth of 5% and a 12% increase in GAAP EPS to $2.66. Through disciplined operational execution, we expanded operating margin by 60 basis points to 25.4%. We continue to capitalize on positive demand trends in our CapEx-related segments, with organic growth in Welding up 6%, and Test & Measurement and Electronics up 5%.

While our consumer-facing businesses contended with challenging end market dynamics, the ITW team executed at a high level on the profit drivers within our control. Our enterprise Initiatives contributed 120 basis points to the bottom line, driving that 60 basis point overall margin improvement.

We were equally encouraged by our continued progress on ITW's organic growth agenda, specifically on customer-backed innovation, or CBI, as we call it. We are positioning the company to consistently deliver 3%-plus CBI contribution to revenue by 2030. As we've noted before, this is the key driver of our ability to consistently deliver 4%-plus high-quality organic growth at the enterprise level.

As we look ahead, and based on our solid Q1 results, we are raising our full year GAAP EPS guidance by $0.10. Our new guidance midpoint of $11.30 incorporates a slightly lower tax rate and represents 8% year-over-year growth. Our full year organic growth projection of 1% to 3% remains unchanged, reflecting current demand levels adjusted for seasonality. For the full year, we expect operating margin expansion of approximately 100 basis points powered by our enterprise initiatives. Notably, all 7 segments are projected to deliver positive organic growth and margin expansion in 2026.

As we've said before, ITW's unique business model, resilient portfolio and do what we say execution demonstrated daily by our colleagues worldwide, ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle.

As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline, and best-in-class customer-facing metrics position us to take market share and fully capitalize on these positive demand trends that we are now beginning to see.

With that, I'll now turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael?

Thank you, Chris, and good morning, everyone. In Q1, the ITW team delivered a solid operational and financial start to the year. Starting with the top line, revenue growth was 4.6%, driven by organic growth of 0.4%, a 3.9% contribution from foreign currency translation and 0.3% from an acquisition. As Chris said, we were particularly encouraged by positive demand trends and strong order activity in our CapEx and semi-related segments.

The combination of our product line simplification PLS efforts and delayed sales to the Middle East reduced our organic growth rate by approximately 1 percentage point. For context, our annual sales to the Middle East represent approximately $100 million, which is less than 1% of ITW's total annual sales.

On the bottom line, operating margin improved by 60 basis points to 25.4% with enterprise Initiatives contributing 120 basis points. Incremental margins were approximately 40% in the quarter, and we expect both operating margin and incremental margins to move higher as the year progresses.

Free cash flow grew 6% with a 69% conversion rate, reflecting typical first quarter seasonality.

We also repurchased $375 million of shares during the quarter.

Overall, a solid start to the year with revenue growth of 5%, earnings growth of 12% and some encouraging demand trends that bode well for the balance of the year.

Please turn to Slide 4 for a brief update on our enterprise initiatives. Since 2012, our strong execution on the enterprise initiatives have been the most impactful driver of margin improvement at ITW. The 120 basis points contribution this quarter from our strategic sourcing and 80/20 front-to-back activities was in line with our expectations, and we remain on track for a full year impact of approximately 100 basis points independent of volume.

Looking ahead, we expect these initiatives to continue to drive meaningful gains through 2030 as we track toward our 30% margin goal.

Now let's move to the segment highlights, starting with Automotive OEM, where revenue increased 4%. While organic revenue declined 1%, we outperformed global automotive builds, which were down more than 3%. On a regional basis, North America was down 5%, while Europe was flat. China declined 3%, but significantly outperformed Automotive builds, which were down 10%. Builds in China are projected to meaningfully improve sequentially in the second quarter, including double-digit growth in EVs, where we are particularly well positioned.

At the segment level, we continue to expect our typical 200 to 300 basis points of outperformance versus builds that are now expected to be down approximately 2% for the full year.

Operating margin improved by 170 basis points to 21%.

Turning to Slide 5. Food Equipment delivered revenue growth of 2% with organic revenue down 3%. Strength in service, which grew 3%, partially offset a 6% decline in equipment.

North America was down 5%. And A slower start than expected on the institutional side, particularly in the education end market was partially offset by growth in restaurants, including QSR, which was up double digits, and service, which grew more than 4%. Encouragingly, since January, we have seen gradual improvement in institutional demand trends. And at the Food Equipment segment level, we continue to expect positive organic growth and margin improvement for the full year.

The international business was flat and is projected to deliver positive organic growth starting in Q2.

Test & Measurement and Electronics had a standout quarter with 10% revenue growth and 5% organic growth, the highest growth rate in 3 years as the green shoots we talked about last quarter begin to look more like a sustainable recovery. Through this recent down cycle, our division stayed invested in their long-term growth strategies, including capacity and new products, and they are uniquely positioned to meet growing customer demand and fully capitalize on the growth opportunities in front of them. As a result, electronics grew 10% this quarter, and the semi-related businesses, which represent about $500 million of annual revenues or about 15% of the segment, grew more than 15%.

Looking ahead, market indicators like increasing fab utilization, encouraging customer signals and response to new products as well as strong order activity, all support the view that the positive demand trends that we're seeing in this segment today are sustainable in the near term.

Moving on to Slide 6. Welding delivered another strong top line performance as revenue grew 7% with organic growth of 6%. Equipment grew 8% with a strong contribution from new products. North America was the primary growth engine, up 8%, with mid-single-digit growth in filler metals. The growth was broad-based with mid- to high single-digit growth across our businesses, including in both industrial and commercial.

International was down 6% due to a difficult comparison of plus 14% in the year ago quarter. Operating margin was best-in-class at 32.1%.

Polymers & Fluids delivered 5% revenue growth and organic growth of 2%, driven by new products and robust market share gains primarily in automotive aftermarket, which grew 3%. Polymers was flat against a tough comparison of plus 6%, and fluids was also flat. Operating margin expanded 150 basis points to 28%.

Turning to Slide 7. In Construction Products, revenue was up 3%, and encouragingly, this quarter marked the best organic growth performance in 4 years. Overall, organic growth declined 1%. North America was flat as our residential and renovation business delivered positive organic growth of 1%. In this segment, we remain well positioned for the inevitable housing recovery down the road.

Europe was down 3% and Australia, New Zealand was down 2%.

Specialty Products revenue was down 1% with organic revenue down 5% due to the impact of PLS activities and delayed Middle East sales. Despite the top line pressure and with the margin tailwind for recent PLS activities, the segment expanded operating margin by 40 basis points to 31.3%.

With that, let's turn to Slide 8 for an update on our guidance. As we've said before, ITW is well positioned to deliver meaningful progress on both the top and bottom lines in 2026. On the top line, we are maintaining our total revenue growth projection of 2% to 4% and organic growth projection of 1% to 3%. Per our usual process, this is based on current levels of demand, adjusted for typical seasonality and prevailing foreign exchange rates.

On the bottom line, we continue to expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5% as enterprise initiatives contribute approximately 100 basis points.

We continue to expect that price/cost will be modestly accretive to margins after factoring in recent tariff changes and all known material cost increases offset by corresponding pricing and supply chain actions.

Our projection for incremental margins in the mid- to high 40s remain unchanged.

Incorporating our first quarter results and the lower effective tax rate projection for the year of 23% to 24%, we are raising our GAAP EPS guidance by $0.10 to a new range of $11.10 to $11.50, representing 8% growth at the $11.30 midpoint.

In terms of cadence, we are projecting a 48-52 EPS split between the first and second half of the year, which is less back-end loaded than 2025 and our previous guidance.

Finally, we expect free cash flow conversion to exceed 100% of net income, and we are on track to repurchase approximately $1.5 billion of our shares in 2026.

In summary, we're heading into the balance of the year with positive momentum on both the top and bottom line. All 7 segments are projecting positive organic growth and further improvement in their industry-leading margins. Overall, ITW is well positioned to deliver on our guidance, including solid organic growth with best-in-class margins and returns.

And with that, Erin, I'll turn it back to you. Thank you, Michael.

Kath, will you please open the line and inform callers on how to get back into the queue?

[Operator Instructions] Your first question comes from the line of Andy Kaplowitz with Citi Group.

So I know it's earlier, but when you think about growth in the segments, is it fair to say that your CapEx businesses, such as Test & Measurement and Welding are trending ahead of your expectations, maybe consumer specialty, I guess, and footprint was more institutional or a little below and they just kind of net out. Like how are you thinking about growth by segment versus your original expectations?

Yes. So Andy, as we've indicated, we expect all 7 segments to show a positive organic growth this year. I think you characterized the first quarter pretty well. I think what we saw as CapEx with other segments, like Test & Measurement and Welding. Test & Measurement, obviously, particularly in semiconductors and electronics, as Michael indicated, grew more than 15%. And I would say with continued order strength here into Q2. Welding has been a tough environment for a few years, we grew 6% in Q1. Mixture of some strong order activity, again, which continues into Q2 and continued improvement in CBI. And I think encouraging on Welling, the strength was pretty broad-based. It wasn't just in industrial markets, which we started seeing in Q4, but also Q1 bled into the commercial platforms as well.

So certainly, on those CapEx later markets, I think very strong trend, strong order activity. And then on the more challenged consumer-facing markets, even though they are challenged, we continue to outgrow those markets. If we look at automotive as a prime example where we again demonstrated a couple of hundred basis points of improvement over the market, similarly, in construction, and even in there is like Polymers & Fluids where automotive aftermarket, we showed a very healthy market growth versus retail point of sales in automotive aftermarket.

So I think it's a tale of 2 markets right now. We're seeing the industrial markets, CapEx market is very strong, [indiscernible] order activity, but even in those consumer-facing markets, which are improving a little bit, we're all growing those markets.

That's helpful, Chris. And maybe a similar question on margin for you, Michael. You reiterated the incrementals for the year in the mid- to high 40s. Are you getting there at all differently? Because I mean, Test & Measurement and Auto look good, but Food Equipment, obviously, was lower. Was that just call it, lower absorption in the quarter and it gets better from here? Are you seeing increased inflation sort of impact you at all? Like how do you think about that?

Yes. I think, Andy, overall, the incremental margin assumptions, the operating margin assumptions are unchanged from where we were when we gave guidance on our last call. We continue to expect incrementals in the mid- to high 40s, and we expect to improve operating margins by 100 basis points this year. Seasonally, Q1, as we talked about on the last call, always starts out a little lower and then margins and incrementals improve sequentially as we go through the year. We also expect based on current run rates that we will see some increased operating leverage as we go through Q1 to Q2 and into the back half of the year. So overall, the margin expectations, I think Chris said is that every one of our segments will improve operating margins this year. Obviously, the ones that are benefiting from some positive demand trends in particular should be expected to maybe outperform a little bit on those incrementals.

Just a word on food, I'd say, certainly an anomaly in that segment in terms of the margin performance and the incrementals in the first quarter. It's really an isolated challenge in one particular end market on the institutional side, and it relates back to the month of January. So we did see improving demand trends in Food Equipment as well as in that particular end market as we went through February, March and April, but it's certainly something we'll continue to keep a close eye on.

I would just add while we're on margins that while some of the more growth challenged businesses that we -- Chris talked about, Polymers & Fluids, maybe Automotive, Construction, continue to execute at a very high level. And you see that despite some of these top line challenges, they continue to expand margins, which is really encouraging.

Your next question comes from the line of Jamie Cook with Truist Securities.

I guess just my first question, can you just help us understand, I mean, last quarter, it sounds like you were pretty positive on short-cycle momentum, things improving. Your confidence level today with some of the uncertainty related to the war with Iran and macro and whether you saw any change in sort of the cadence of sales throughout the quarter or into April?

And then my second question, can you just give us an update on CBI, the contribution expected for 2026 and whether you're contemplating other parts of the portfolio that we're having a harder time with CBI, so perhaps there's opportunities to refocus to certain product lines, which are being more successful versus not?

Yes. Thank you, Jamie. So maybe I'll take the first part and then hand it over to you, Chris, for the CBI question. I'd say, in terms of overall confidence, I'll start with the context that we came in right and along with our plan for the first quarter. We talked about on the last call that we expected a step down from Q4 to Q1. And we actually, on the top line, did a little bit better than that. So I would say, if anything, we are more confident today. As we sit here today, I think it's important to mention that our guidance today is based on the current levels of demand that we're seeing in these businesses. And in some of these businesses, maybe Welding and Test & Measurement, in particular, we are seeing order rates that are meaningfully higher than the organic growth rates that those segments put up in the first quarter. That is not included in our guidance today. Again, based on kind of our past practice, this is based on current run rates.

And I think, certainly, maybe a little bit more of a challenge in maybe a place like Food Equipment, which we just talked about. But we believe as we sit here today, we have more than enough strength in those CapEx related and semi-related segments to offset any challenges there. And like I said, we're more confident in our organic growth guidance of 1% to 3% today than we were on the last call. So that's maybe how I would think about it. I would just -- just one last word on automotive because automotive did have a slower start in China. So you need to factor in that automotive builds in China were down 10% in Q1, and they are projected to be flat here in Q2. So we're expecting a pretty meaningful ramp from Q4 -- from Q1 to Q2 with sequential growth in kind of the low to mid-single digits.

We expect meaningful sequential margin improvement, more than 100 basis points. We expect incremental margins to improve. And if you just look at the the cadence that we outlined, which I think was your other question, you have the EPS split 48 to 52, we just did 23% in Q1, which is exactly what we said on the call last time, that would imply that for the second quarter, the EPS contribution would be about 25% to the full year. And as we sit here today, we feel very confident in our ability to deliver both Q2 and the full year.

And then, Jamie, on your question on CBI, although the opportunity profile in CBI can look at different segment to segment, divisions of division, what I would say is that we have strong momentum right across the company on CBI, and we're really encouraged by the progress that we're making in every segment. We continue to see this an increasing strength in our pipeline of new products. It's one of the reasons why even in some of these slower growth markets were outperforming those markets. We've several successful new product launches this year across the portfolio. I would the [indiscernible] segment, I could call it on [indiscernible], but I would say a welding Test & Measurement, Food Equipment and Automotive, good progress in '25, obviously, in CDI yield, 40 basis points improvement. And based on what we see in Q1, we were tracking really well here to deliver incremental improvement in 2026 on the path to 3% plus here by 2030, if not before.

Patent filings as well continue to be strong, obviously, up very strongly in the last couple of years, 18% in '24 and 9% to '25, and we see additional increases in 2026. And as we said before, patent filings continues to be a very strong leading indicator of CBI at ITW given the customer-backed nature of our innovation, which means that more often than that -- than not, patent filings are there to protect important customer solutions. And so increased patent activity is often pretty well correlated with future revenue growth. So really feel very positive on what we're seeing in terms of the engagement, the enthusiasm, the followership around CBI, and we're now starting to see this come through in patent filings and yield.

Your next question comes from the line of Tami Zakaria with JPMorgan.

I have 1 question, and it's rather long-term driven question. As you think about your Food Equipment business, how do you view the proliferation of GLP-1 drugs and its impact on demand from restaurants in the hospitality industry? I see you had really strong growth in the quarter from restaurants, you mentioned QSRs, but just longer term, is GLP-1 on your radar as you plan for this segment over the coming few years?

I would say, Tami, it's not something we're giving a lot of thought to say GLP-1, early days. And I would also say that if you look at Food Equipment, restaurants that represents a smaller, particularly QSR represents a smaller portion of our business. The biggest portion is institutional. We have a sizable restaurant business, but [indiscernible] certainly is in QSR, which is probably more directly impacted. So I'd say early to tell. It's not something that's on our radar at this point, but like I say, I think particularly, as you mentioned, QSR, it's not a huge part of our business, although it's growing nicely.

And I would just add, as we've said before, Chris, Food Equipment is one of the most fertile segments from an innovation standpoint. There's so much room for customer-back innovation, and we would expect that to continue to only accelerate from here and offset any pressures like the ones that you are talking about.

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

I was going to stick with food as well because that QSR comment kind of caught my attention. Do you think that, that market is actually turning? And -- or is there something that you're doing that's kind of ITW specific there? Yes, I'll leave it there.

Yes. I think it's hard to say that the market is turning, Steve. I do think that we've got some interesting innovations going on in that space. A large, as Michael mentioned, I mean, the Food Equipment space, very further from an innovation standpoint. We have new product launches in all product categories in 2026 here, really driven around true customer pain points like energy, water, labor savings. And all those trends are very relevant in QSR. So I'm pretty sure that a large part of our QSR growth is coming from innovation.

And I would just add, and we always talk about this is the strength of the service business. So while there may be QSR, in particular, can be a little bit lumpy. I think the service business is more of an annuity type business, and our ability to put up 3%, 4%, 5% organic growth on a consistent basis at attractive margins kind of buffers any kind of some of that lumpiness that you might see in the businesses that you're talking about.

Got it. Okay. And then, Michael, it sounded like there was a margin thing that happened in the quarter that was very specific. Should we assume 2Q is kind of back to normal?

Yes. I think there's really nothing unusual about Q1, I'd say, other than the slow start maybe in Food Equipment. I think if you look at kind of the -- how the quarter progressed, January started out a little bit slower because of Food Equipment, and then we improved from a growth standpoint in February, got even better in March. I think March organic was up 4%. And in April, we're off to a really good start with organic growth. If you look at our full year guidance range, 1% to 3%, we're probably turning towards the high end of that range here in April. And so that's really the top line.

And on margins, we expect a sequential improvement, like I said, from Q1 to Q2. We just did 25.4%. We would expect more than 100 basis points of improvement sequentially from Q1 to Q2. So that will put it somewhere around 26.5%, 27%-ish, and then a little bit of improvement further from Q2 to Q3 on margins and as well in Q4. From a growth standpoint from Q2 to Q3 revenues based on run rates, again, are kind of about the same in Q3 and Q4. But that is all that we need to deliver some meaningful organic growth towards the higher end of the range in the second half of this year. So hopefully, that gives you a little bit of context.

Your next question comes from the line of Julian Mitchell with Barclays.

And Michael, so there were a couple of other calls going on. But just to clarify, your comments on the top line just now, were you referring to sort of total company there in terms of the confidence of getting to the higher end of the range? Just -- obviously, we had some questions on you were just over flat in Q1, and you've got sort of 2% pegged at the midpoint for the year and you tend to just guide with run rates, as you say. Is there anything happening on price later in the year, maybe that comes in because of cost inflation that gets the growth moving up?

Well, I think, Julian, there's -- as we've said before, the first quarter was right in line with our plan. So the organic growth rate was as we described it on the last earnings call. And how the year is projected to unfold, the way we've modeled it is based on our typical seasonality. In terms of maybe just a comment on price since you asked, I mean, our -- we had a planned assumption going into the year around price as well as price/cost. Given some of the inflationary pressures that we're seeing, just like everybody else, we -- our divisions have reacted from a price standpoint. We now expect a little bit more price. And that will start to come through primarily in the second quarter and then carry forward into Q3 and Q4.

So I think it's fair to say maybe there might be a little bit more of a price impact there, but broadly, we are very close to our original plan as we sit here today, including the organic growth projection of 1% to 3%. Nothing has really changed relative to our guidance other than, as we said, we've seen some really positive demand trend in 2 segments in particular.

That's helpful. And when we're looking at the operating margin guidance, you're off to a good start versus that 70 bps or so acceleration that's guided for margins at the midpoint for the year as a whole. If we're thinking about some of the margins that were weakest, I think Food Equipment you've dealt with already, anything in Welding that we should think about over the balance of the year, the margins there, perhaps picking up steam? And sort of company-wide, is operating leverage fairly steady as you move through 2026?

Yes. I mean what I can tell you, Julian, is that as we sit here today, we would expect every segment to improve margins in Q2 relative to Q1, and then we would expect sequential improvement to those margins again in every segment in Q3 and into Q4. like we've said before, and you mentioned Welding specifically, those are, as you know, best-in-class operating margins by a fair margin. So you would expect maybe to see less improvement in the segments that have margins at or above 30%. And you should expect to see a lot more improvement in places like Test & Measurement, which there's a little bit of impact from some recent acquisition activity. But as volume and price begins to pick up as we go through the year, you're going to see some really solid operating leverage in the Test & Measurement business as well.

Julian, I would just add that we have really good line of sight on the 100 -- at least 100 basis points of improvement enterprise initiatives.

Your next question comes from the line of Andrew Obin with Bank of America.

This is David [indiscernible] on for Andrew Obin. Look, I think you've been very clear on expecting improvements in organic growth into the second quarter, calling out specifically for Food Equipment segment that positive. What about the Specialty Products segment?

Yes. So I think a little bit of an impact from the Middle East kind of delayed sales in the aerospace business, which is sitting on significant order and backlog that those sales have been delayed, so that was about to come back. That and the combination of PLS efforts that are somewhat, I'd say, front-end loaded this year, reduced the overall organic growth rate by 3 points in specialty in the first quarter.

We would expect that growth rate in specialty to improve from here. I'd say the equipment businesses in specialty are performing very well. And then in some of the more consumer-oriented businesses, there are some challenges, as you are well aware, as Chris talked about. And then there are places like the medical business that is growing leaps and bounds at this point in time.

So it's really all those factors offsetting each other. And as we said, we expect the specialty business to deliver positive organic growth this year and meaningful margin improvement based on what we're seeing in the businesses that make up specialty as we sit here today.

And then with the Supreme Court's ruling against the IEEPA tariffs, several manufacturing companies that filed for refunds, but where do you stand in that process for yourself?

So given -- with respect to tariff recovery, I mean, given our producer we sell philosophy, I mean, the reality is the direct impact of tariffs was largely mitigated at ITW. And to the extent that there was an impact, we were able to recover this in price. So in this regard, tariff recovery is not something that's on our radar, I would say. And we certainly do anything in our guidance for it.

And that concludes today's session. Thank you for participating in today's conference call. All lines may disconnect at this time.

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW's Fourth Quarter and Full Year Earnings Conference Call. Erin Linahan, Vice President of Investor Relations, you may begin the conference.

Thank you, Regina. Good morning, and welcome to our ITW's Fourth Quarter 2025 Conference Call. I am joined by our President and CEO, Chris O’'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's Fourth quarter and full year 2025 financial results and provide guidance for full year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2024 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.

This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.

Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris Christopher O'Herlihy. Chris?

Thank you, Aaron, and good morning, everyone. As you saw in our press release this morning, ITW delivered a solid finish to the year. In the fourth quarter, we outperformed our underlying end markets with revenue growth of more than 4% and and delivered a 7% increase in GAAP EPS to $2.72. Through disciplined operational execution, we expanded operating income and margins to record levels.

Starting with the top line. Organic growth of 1.3% marked our best quality performance of the year. Overall, Q4 demand improved as reflected in higher than normal sequential improvement of 4% from Q3. In addition to market outperformance, the ITW team continued to execute at a high level, resulting in operating income of $1.1 billion, an increase of 5%. Segment margins were 27.7%, up 120 basis points, with 140-basis-point contribution from enterprise initiatives.

Looking back on a challenging external environment in 2025, the ITW team delivered another year of robust financial performance. We consistently outperformed our markets, solidly improved profitability and made meaningful progress on our next phase key strategic priorities. Throughout the year, we remain laser-focused on building above-market organic growth, fueled by customer-backed innovation or CBI, into a defining ITW strength.

We are pleased to have achieved 2.4% CBI fuel revenue growth in 2025, a 40-basis-point improvement, as we track towards our 2030 goal of 3% plus. Furthermore, I'm encouraged by a key leading indicator of CBI contribution are patent filings, which increased by 9% last year following an 18% increase in 2024.

Turning to guidance. We entered 2026 with solid momentum. Per our usual approach, our organic growth projection of 1% to 3% reflects current demand levels adjusted for seasonality. We are well positioned to capitalize on any further improvement in the macro environment.

Our EPS guidance midpoint of $11.20 represents 7% growth, and we expect operating margin expansion of about 100 basis points powered by enterprise initiatives. Our 2026 forecast ensures we remain firmly on track to deliver on our 2030 performance goals.

In closing, I want to sincerely thank our global ITW colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence each and every day.

With that, I'll turn the call over to Michael to provide more detail on the quarter and our guidance for 2026. Michael?

Thank you, Chris, and good morning, everyone. In Q4, the ITW team delivered a solid operational and financial finish to the year. Organic growth was 1.3%. Foreign currency translation added 2.5% and acquisitions contributed 0.3%, bringing total revenue growth to 4.1%.

Notably, our 4% sequential revenue growth from Q3 to Q4 significantly outperformed our historical sequential average of 2%. On a geographic basis, North America grew about 2%, Asia Pacific was up 3%, while Europe declined 2%.

On the bottom line, we achieved a fourth quarter record operating margin of 26.5%, with enterprise Initiatives contributing 140 basis points.

As noted in our press release, segment operating margin was 27.7%, a 120-basis-point increase, with incremental margins of more than 50%. All 7 segments expanded operating margins driven by enterprise initiatives, which contributed between 80 and 210 basis points per segment.

Free cash flow conversion to net income was 109% for the quarter. We repurchased $375 million of our shares and our tax rate was 22.8%.

Please turn to Slide 4, and as Chris mentioned, CBI is our most impactful driver for organic growth. We're pleased with our 2025 progress reaching a 2.4% CBI contribution, a 40-basis-point year-over-year improvement. We expect meaningful progress again in 2026 on this key strategic initiative as we track toward our longer-term goal.

Now let's move to the fourth quarter segment results, starting with Automotive OEM, where revenue increased 6%, and organic revenue increased 2%. On a regional basis, North America was up 2%, while Europe was down 1% and China grew 5%. For the full year 2025, the segment outperformed relevant builds and we expect our typical 200 to 300 basis points of outperformance in 2026. Full year margins are a prime example of ITW's do what we say execution. In 2025, margins improved by 150 basis points to 21.1%, consistent with the goal established during our 2023 Investor Day.

Driven by our culture of continuous improvement, we expect to further expand these margins in 2026.

Turning to Slide 5. Food Equipment delivered revenue growth of 4% with organic growth of 1% and as equipment was flat, offset by 3% growth in service. By region, North America was flat, with institutional end markets up in the high single digits, offset by restaurants down also in the high single digits. Retail was a bright spot, up nearly 5%, and the international business grew 2%, with Europe up 2%.

Test & Measurement and Electronics had a solid quarter. Revenue up 6% and organic revenue up 2%. Test & Measurement was up 3% and Electronics was flat against a tough comparison year-over-year. Notably, we began to see a positive pickup in semiconductor and electronics activity with our semi-related businesses up mid-single digits in the quarter. Operating margins improved by 110 basis points to 28.1%.

Moving on to Slide 6. Welding revenue grew 3% with organic growth of 2% in the fourth quarter. Equipment was up 4%, and while consumables were flat, fillermetals were up in the high single digits. Regionally, North America was up 4%, while International declined 5% against a tough comparison of 9% last year. Notably, operating margin reached 33.3%, a 210 basis points improvement.

Powers & Fluids had a strong top line quarter, with 5% organic growth, supported by new product launches in automotive aftermarket, which grew 5%. Polymers was up 4% and Fluids grew 6%.

On a geographic basis, North America was up 5% and international grew 4%. Operating margin expanded 110 basis points to 29%.

Turning to Slide 7. In Construction Products, organic growth was down 4%. Regionally, North America was down 4% with residential renovation down 5%, while commercial construction was up 5%. Europe was down 5% and Australia and New Zealand was flat. Despite the top line challenge, the team successfully expanded margins by 100 basis points to 29%.

The Specialty Products revenue increased 4% and organic revenue was up 1%. Equipment growth was particularly strong, up 12%, and consumables were down 2% in the quarter. North America was flat and international grew 3%.

Moving to Slide 8 and full year 2025 results. Our global teams continue to execute at a high level, enabling us to consistently outperform our end markets and expand margins to deliver solid financial results in a mixed macro environment. Throughout 2025, we maintained our focus on maximizing ITW's growth and performance over the long term as we invested close to $800 million in high-return internal projects to accelerate organic growth and sustain productivity in our highly profitable core businesses.

At the same time, we increased our dividend for the 62nd consecutive year and returned a total of $3.3 billion to shareholders.

Moving to Slide 9 and our guidance for full year 2026. ITW is well positioned to deliver meaningful progress on both the top and bottom lines in 2026. For our usual process, our total revenue projection of 2% to 4% and organic growth projection of 1% to 3% is based on current levels of demand adjusted for typical seasonality. At ITW, growth is high quality, meaning it is delivered at attractive incremental margins in the mid- to high 40s for 2026.

In terms of overall profitability, we expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5%. This includes 100 basis points contribution from our enterprise initiatives, which provides margin expansion that is largely independent of volume.

We're projecting a GAAP EPS range of $11 to $11.40, representing 7% growth at the $11.20 midpoint.

Regarding the cadence for the year, we expect the first half, second half EPS split of approximately 47% and 53%, consistent with 2025. Factoring in typical seasonality, Q1 EPS should contribute roughly 23% of the full year total.

Lastly, we expect free cash flow conversion to net income of greater than 100% and plan to buy back approximately $1.5 billion of our shares in 2026.

Turning to our final slide, Slide 10. All 7 segments are projecting high-quality organic growth based on current run rates adjusted for seasonality, and every segment is well positioned to outperform its respective end markets again in 2026. Consistent with ITW's continuous improvement, never satisfied mindset, all segments are also projecting margin improvement, supported by another year of solid contributions from our enterprise initiatives.

In summary, all 7 segments are heading into 2026 well positioned to deliver solid organic growth with industry-leading profitability and incremental margins.

With that, Erin, I'll turn it back to you.

Thank you, Michael. Regina, I think we're ready to open the queue for questions, please.

[Operator Instructions] Our first question will come from the line of Andy Kaplowitz with Citigroup.

So Test & Measurement within the segment looks like it did improve meaningfully in Q4. You called out the commentary on semicon. It's been improving for you again, which is good to hear. You've had a couple of maybe I'll call it, head fakes in semicon. So are you seeing more definitive turn now? And are you seeing a bit more of an unlock of your CapEx businesses in general in terms of growth?

Yes. So Andy, in general, as you said, Test & Measurement had a pretty solid quarter. After what was a pretty challenging year, you might remember middle of the year, we had pretty much a CapEx freeze related to the China shipments for 2 quarters. And so we certainly saw an improvement in bookings in general and industrial here in Q4. As Michael mentioned, we also saw an improvement in demand for semi electronics. Just a context that, I mean, semi is about 15% of Test & Measurement. So just to give you a perspective. I would say that the semi at this point, seems sustainable based on what we see right now. But as you said, we had an uptick in Q2, came back down in Q3, but we've seen a recovery in Q4. And I think this is a part of the market we've a very strong competitive advantages, particularly as it relates to semi manufacturing Test & Measurement. So whatever happens, we're well positioned. We're particularly well positioned to take share as the end markets continue to improve in semi.

Yes. And I'll maybe just add beyond that, Andy, the general industrial orders are also improving in Test & Measurement as well as you've seen the improvement in revenues and our growth rates on the Equipment side and Welding. So all of that suggests that we are certainly seeing, I would say, a little bit more than green shoots at this point and a meaningful improvement, not just in sales, but also orders and backlog is looking pretty good at this point. And so we've got some pretty good momentum going into 2026 as reflected in the guidance that we gave for those 2 segments.

Yes, that's good to hear, guys. And then when we think about margin expansion across your businesses in '26, I know you expect, in all segments, normally, I would think we just model higher incrementals where you're modeling higher growth. But you, for instance, had really good margin performance in construction again in Q4. And there are some metals inflation out there. So any more advice on how to think about margin performance across the segments?

Yes. I would just say, I'll go back to kind of our prepared remarks here, Andy. We expect, based on bottoms-up planning with our segments, based on having a chance to review the enterprise initiatives savings, the actual projects for 2026, we expect every segment to improve their operating margins in 2026. And the biggest driver, as I think you pointed out, will be the enterprise initiatives again. So about 100 basis points from initiatives. And then also, there is some positive operating leverage and incremental margins that at this point are quite a bit higher than what we put up historically, as I said, kind of in that mid- to high 40s. So maybe that's the way to think about the margin improvement for each one of the segments in 2026.

Now I will say this, we do have 3 segments now that are above 30%. And so maybe you'll see a little bit less of improvement in those segments relative to the ones like auto that have been putting up some meaningful operating margin improvement, Test & Measurement as well that still have a ways to go to get to Test & Measurement to that high 20s, 30% level.

And improved CBI is the other driver of increased margins.

Yes. As you know, as we talked about the CBI progress is really encouraging, obviously, not just as a contributor to growth, but all of these new products that are coming in are coming in at higher margins. And so that's really the key to unlocking margin improvement on a go-forward basis, particularly in places like automotive OEM.

Our next question will come from the line of Joe Ritchie with Goldman Sachs.

Can we just -- can we touch on the price/cost dynamics. So I think think in the slides, you had mentioned that price/cost is expected to be positive in 2026. Can you elaborate on that a little bit? And then also seen that resin prices have continued to come down. At this point, how -- what percentage of your COGS is resin?

Well, let me start with the first part. I think on price/cost, we've been talking about this for a while in terms of this having kind of normalized after the wave of tariff-related increases we saw last year. So at this point, we're back to kind of where we used to be around price/cost, which is slightly favorable for full year 2026, but not a big driver of the margin improvement. Really, the efforts, particularly related to tariffs, have really been centered around, not just price, but also supply chain and making sure we do everything we can to mitigate some of these increases so we don't have to pass them on to our customers. So that's maybe one way to think about price/cost.

I'm not sure I have the resin number right in front of me. It's pretty small. I think here, again, I'm not quite sure where you were going with the question, but to the extent that there are increases or decreases in resin costs, those will be reflected in the pricing actions that are taking again at the division level where this is more of a meaningful driver of their material costs.

Yes. No, I appreciate the comments, Michael. I guess, I was thinking back like back in the, call it, 2016 time frame when you guys saw some deflation in resin. And I remember it being like 10% to 15% of your COGS back then, obviously, that's a long time ago. But there are areas like poly fluid, areas in like auto, like injection molding and like gas caps like plastic fasteners where you guys did see a benefit. So I was just really trying to think back at that time frame, where you had some deflation in your cost structure, but then you have these like longer-term contracts and like the auto business, we can get some pricing. And so I was just trying to understand whether that was going to be potentially a meaningful mover to the 2026 bridge?

Yes. So Joe, I say the longer-term dynamic -- long term contract dynamic is still there, but the percentage is less than considerably less than I think what we always tend back then, I would say...

Yes. And we have a very small portion of our business in Specialty Products that's index to resin costs. In Automotive, there typically aren't adjustments made on the way up or on the way down, as you are well aware. So not something that's on our radar here in a meaningful way just because it's not going to be material to the overall performance of the company this year as we sit here today so...

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe just wondered first off, if you could flesh out any sense of kind of seasonality for this year? Anything unusual or onward? And maybe remind us what we should expect typically for the first quarter, please?

Sure, Julian. So I'd say there's really nothing unusual going on this year. We expect the year to unfold in line with typical seasonality. It looks a lot like last year in terms of the quarterly splits. We kind of laid out the first half, second half EPS split, [ 47%, 53% ]. That's what we did last year. As you know, Q1 always starts out down few points of sequential revenue drop from Q4 to Q1. Like last year, that's about $100 million in revenue from Q4 25 to Q1 '26. Margins also dropped a little bit in Q1, and we typically end up around 23% of the full year EPS here in the first quarter.

Now I will say this that every quarter -- and then in Q2, we see a pickup again in margins from Q1 to Q2. Revenues picked back up again. And every quarter this year, if you model this on a run rate basis, you'll see pretty meaningful revenue growth on a year-over-year basis, in line with the guidance that we're giving in that 2% to 4% revenue growth. Every quarter is projected to have margin improvement on a year-over-year basis, including in Q1, maybe a little bit more modest in Q1 and then it picks up as we go through the year in Q2, 3 and 4.

Earnings per share grows in line with kind of the guidance range we're giving you here, which is 7% of the midpoint. And so that's kind of how we typically plays out. Free cash flow tends to improve as we go through the year. So that's maybe as much as I can give you here.

That's extremely helpful. And maybe my follow-up, just to understand, you talked about CBI, I think, a 2.4% contribution to sales in 2025, and that was 40 bps better than the prior year. Maybe sort of flesh out a little bit the progress there in 2026 what we should expect? And any thoughts on the product life cycle management side -- sorry, the product [indiscernible] side?

Yes. So on CBI, as you mentioned, Julien, strong momentum here in '25, encouraged by the progress that we're making across the company. And particularly encouraged, I think, by the strength -- the increased strength of our pipeline of new products. And it's really one of the reasons we believe we're overperforming our end markets. A lot of successful product launches this year across the company, I would say, most particularly in Welding, Test & Measurement, Food Equipment, Automotive. Good progress, 40 basis points of improvement in 2025, with continued incremental improvement here in 2026, well on the path to get to [ 3 plus ] by 2030. Particularly encouraged, I think, by patent filings. I mean patent filings were up 18% in 2024, up another 9% in 2025. And why that's particularly important is because at ITW, this is a really a leading indicator of progress on CBI where often our patent filings are more often than not protecting customer solutions. And so an increase in patent activity is often pretty well correlated with future revenue growth.

So really encouraged by everything we're seeing. More progress in 2026. It can be a bit lumpy. You can get ups and downs on this, but the trajectory is certainly on its way up, and we're very, very confident at this point that the 3% plus target is well within our reach.

I would not make -- I think PLS, to me, is a different kind of a conversation. I don't really see a correlation between them. The only overlap between PLS and CBI is that they're both focused on differentiation. PLS is about ensuring that we proudly prune our own differentiation and CBI, of course, is pursuing differentiation in a product development context. But PLS for us in '26, we see as more of a maintenance level, 30 to 50 basis points. That's lower than 2025. But it's very much a bottom-up number. It's really decided on at the divisional level. As we said before, it's a fundamental part of 80/20 front to back, and the ongoing strategic review portfolio pruning that goes on in our divisions. And we have obviously a very highly developed methodology around this. But we get a lot of benefit from PLS implementation when we do it. We get benefit in terms of growth from the standpoint of strategic clarity, ensuring that we're executing on our most important customers and products and then effectively deploying resources on the back of that. And then, of course, from a margin improvement standpoint.

The cost savings from PLS are a meaningful contributor to the enterprise initiatives that we generate every year and a lot of these projects with a payback of less than a year. So I think I would not really connect them that much. They're both very active in the company. PLS is a little lower this year, but all steam ahead on CBI.

Yes. So PLS a little bit lower year-over-year and CBI contribution to revenue a little bit higher on a year-over-year basis. So that's what's supporting the top line guidance that we're giving you today.

Our next question will come from the line of Scott Davis with Melius Research.

Congrats on turning the corner here on the top line. I have to ask -- the buyback is great, but I have to ask because you didn't mention M&A at all in the prepared remarks and is that kind of off the table for '26 or you didn't mention it just because it's more opportunistic?

It's so that, Scott. It's certainly on the table for the right companies. So as we've often said, we're focused on high-quality acquisitions that really will extend our long-term growth potential. We've been able to leverage the business model to improve margins. And we review opportunities all the time on an ongoing basis. We're pretty selective given that we genuinely believe we have a pretty compelling organic growth opportunity. But we're also pretty active in terms of reviewing opportunities and to the extent that we find the right opportunities, while acknowledging, I think the challenging valuation trends that we're seeing right now then we will be appropriately aggressive in pursuing them. We obviously did the MTS deal 3 or 4 years ago. It turned out to be a great acquisition, met all of our kind of criteria. Similarly, in the quarter just passed, we had one bolt-on acquisition in the semi manufacturing space, which is all the high-quality growth attributes that we look for. And we're certainly very open to doing more deals like this. And I would say we're actively prospecting around these deals. But we've got to find them, when we find them, we will do them.

Yes. I would just add, I agree with that and Chris. I think it's not necessarily an easy time to be a disciplined acquirer and often, the challenge is really around valuation. And we're not going to do deals that don't make sense to ITW, which means we're not going to do deals where we can't generate a reasonable risk-adjusted rate of return for our shareholders. And so that's kind of in our long-term positioning here, and that part of it is not going to change on a go-forward basis. And we agree with you that the buyback is a great way to allocate surplus capital to our shareholders, also contributes, frankly, $0.20 a share or 2% EPS growth on an annual basis. And so that will remain -- an active share repurchase program will remain an important part of our capital allocation strategy on a go-forward basis.

That's a good answer. Guys, I don't want to beat a dead horse, the CBI stuff is pretty interesting. And -- what does it take to get to 3%? Is it spending more or getting more out of what you have? And the reason I ask that question is that up 18% and even up 9% patents that's pretty big growth. Do you have to spend more to get to that 3%? Kind of what's the gating factor of bridging that gap?

Yes. It's not spending more, Scott. I think we've been meaningfully investing in a very focused way for a number of years to build up the muscle around this. And really what's moving the needle and is very much a similar approach that we took on 80/20 front to back 10 years ago, and we saw the results that accrued from that. But really, it's about a much higher level of leadership time and focus. It's certainly continuing to invest and build capabilities we had been doing for the last 4 or 5 years. And on that basis, we've seen innovation contribution more than double over the last 5 years. The capability that build that we're doing is at a segment level, but also in our divisions. We have lots of great innovation practice around the company. And as we've mentioned on prior calls, we really codified this into a very effective and holistic innovation framework, and we launched that framework in the second half of 2024. Again, this is the exact approach that we took in 80/20 front to back. So all that's certainly taken root. We see it in the patent filings. We see it in the yield, we're well on track here to do the 3% plus. But I think all the pieces are in place. And it's not a question of just building momentum and ensuring we get that consistently high quality of practice in every part of the company, and that will get us to more than 3% for sure.

Yes. And I might just add that we've added the CBI metric as one of the key elements in our incentive plans on a go-forward basis. So if you look at the long-term incentive plans here at in addition to margins, returns, EPS growth. We've added -- or the Board has added CBI yield just in alignment with the overall strategic importance of this metric and this initiative on a go-forward basis.

our next question comes from the line of Tami Zakaria with JPMorgan.

so the auto segment growth in China was, I think, about 5%. I think granted builds were also slower in the fourth quarter in China. But anything else to call out there? And how are you thinking about growth in autos in China as you look into 2026?

Yes. So we see strong growth in China in auto in 2026, largely on the basis of -- or the satisfactory work that we've done on really penetrating the EV space. Electric vehicles for us are very much a source of innovation and growth, what we see from our customers. We've been generally leveraging that EV growth through new product innovation. We made significant investments over the last number of years, targeting and building up our presence in EV. China still represents about 65% of worldwide EV builds, and we're growing very nicely there. We've a very strong position with Chinese OEMs, which is now over 70% of the market. So really we're positioned. We see the growth in China in auto as being very sustainable, really on the back of the work we've done on EV, in particular, around CBI-related to EV.

So I might just add, China has been a great growth story for ITW over the years, driven primarily by the Auto OEM business, which, as you said, grew 5% in Q4, but 12% for the full year. And the expectation remains the same in terms of outgrowing builds in China fueled by CBI and content growth with the Chinese OEMs as Chris said.

So we'd expect growth in China Auto OEM in that mid- to high single digits. I'd just make a comment overall on China, up 9% for the full year, again, strong growth in China within the auto business, but also Test & Measurement up high single digits, Welding up mid-teens. And so the expectation for next -- for this year, '26 is that China, which is now about $1.2 billion, 8% of our revenues will grow in the mid-, maybe even in the high single digits based on what we're seeing for 2026. And I might just add lastly that margins in China, as you know, are the same as everywhere else around the world. And as Chris said, we'll continue to invest in China and repatriate cash efficiently to the U.S. as we've done over many years.

That is fantastic to hear. And staying on the same topic, thanks for all the color on China. How are you thinking about growth in the U.S. or Americas versus Europe as it relates to the 1% to 3% organic growth outlook for the year?

Yes. So I think one of the things that was certainly encouraging here in the fourth quarter was the organic growth rate in North America, up 2% plus. And we expect about the same maybe a little bit better than that based on run rates in 2026. Europe is certainly a little bit more challenging. We don't expect much improvement in Europe. And then Asia Pacific was up 6% last year, primarily China, and we expect, like you said, another kind of meaningful contribution from Asia Pacific and China in the mid-single-digit range.

So North America, really, I'd say, pretty encouraging. Europe stays about the same, and Asia Pacific, up kind of in the mid-single digits, China up in the mid-, maybe high single digits. And so that's how you get to that 1% to 3% organic growth.

And like we said earlier, again, more contribution from CBI, less of a headwind to top line from PLS when you get to that 1% to 3% organic, 2% to 4% revenue for the full year.

Our next question will come from the line of Jamie Cook with Truist Securities.

Two questions. I guess just my first one, the sequential revenue growth in the quarter, the 4% relative to normally 2%, just color around that. Do you think that's more ITW specific, i.e., CBIs getting more traction? Or would you say it's probably more just industrial markets getting better with PMI readings starting to get better above 50 last month?

And then my second question, Michael, just on the incremental margins for 2026, obviously implied very strong, said mid- to high 40s. That's above your 35% to 40% medium-term target on okay organic growth. So I'm just wondering if there's an underappreciated margin story or incremental margins can be structurally higher, maybe it's CBI, but just trying to piece that above-average incremental margins versus your target on 1.5% organic growth, I don't know, it just seems better than...

Let me talk about incrementals, I'm glad you asked, by the way. So I think historically, we've been in that the 35% to 40% range. That's what our kind of our long-term TSR algorithm is based on 35% to 40%. If you look at kind of what we've been putting up over the last few quarters with limited growth, frankly, starting to improve. And when we look at kind of the plan for 2026, that's where we get to the mid- to high 40s. We can't really think of a reason why this wouldn't be sustainable over the long term. I mean we've done a lot of work around the portfolio over a decade of enterprise initiatives. So the margin profile, variable margin, gross margin, all of those things, the quality of the portfolio has never been better than it is today.

And then you add on top of that accelerating contribution from new products that all are coming in at higher margins. And then maybe most importantly, as Chris said and I mentioned in my remarks, we are doing all of this while we are investing in ITW to kind of maximize the long-term performance from a growth and profitability standpoint. So about $800 million this year in our organic growth initiatives, in our kind of productivity initiatives, the enterprise initiatives. And so it's not like we're holding back on investments. All of this is happening -- these incrementals in the mid- to high 40s are happening while we're fully funding all the quality projects that we have available to us inside the company. So I think that's -- anything else on the market?

Yes. No, I agree with everything Mike said. I would just highlight, Jamie, this is one of the side benefits of PLS now is this you do PLS for enough time. what happens is you get an improvement in the quality of the portfolio. PLS is effectively a portfolio pruning exercise. And so what's really driving this incremental and the reason that we fundamentally believe there are no sustainably in the mid-40s comes from improvement in the quality of our portfolio from many years of thoughtful PLS, coupled with a continuous improvement in the practice of the business model against that portfolio. So you got those 2 things working together, and that's ultimately the way this incremental to shifted from what was mid-30s to what we know the net in mid-40s.

Right. And then I think, Jamie, on your other question on the sequential from Q3 to Q4. So it was pretty broad-based. Nothing really stood out, which suggests that this is really kind of maybe a little bit of tailwind from the markets after a long time, years of headwinds. It was more pronounced in the segments that have a higher contribution from CBI. That is true. We didn't talk about Palmers and fluids, but high contribution from new products in the automotive aftermarket, but also in the fluids business that's the part of that business that's really centered around biopharma. And then in the Performance Polymers side, it was growth in China, again, taking advantage of the EV growth that Chris talked about earlier.

So Test & Measurement, also seeing a pickup here sequentially from Q3 to Q4, they typically do. Maybe a little bit more pronounced than usual, and I think that's part of the semi pickup that we talked about. We saw that start to come through, not just in order activity, but also in actual sales here in the fourth quarter. So it feels pretty good, good momentum going into 2026 and off to a pretty good start so far.

Our next question comes from the line of Steven Fisher with UBS.

If I take out the 100 basis points of enterprise initiatives, it seems like the margins are maybe really only flattish. I'm curious why they wouldn't be higher with the positive organic growth and the high incrementals you're talking about? Maybe the incrementals are a function of the enterprise initiatives, but why isn't the margins higher with that positive organic growth?

Yes, that's a good question, Steven. So first, let me just say, it's hard to quibble with margins, I think, that are in that 26% to 27% range to begin with. But if you look at 2026, there's definitely some positive operating leverage given our -- the midpoint of our revenue guidance here in that 3% range, 2% organic. We're getting about 100 basis points from the enterprise initiatives. Price/cost is slightly favorable. And then what you're seeing is an offset which is primarily inflation in some of our employee-related costs. So these are wages, health and welfare benefits. And there's also some investment that Chris talked about to really accelerate the organic growth rate inside the company and maintain high levels of productivity inside the company. So those are really -- we've talked about this category before. And so that's the offset to what we're giving you. And I might just say, we're giving you a range on margins, right? So 26.5% to 27.5%, about 100 basis points of improvement. And if we get -- if this short cycle demand recovery really materializes and we get organic growth rates moving up in our range here at the incrementals we're talking about, you're absolutely right, we should expect to see higher margins in 2026.

Super helpful. And then just maybe a clarification. Did I hear you say that commercial side of construction in North America was up in the quarter? And I guess, if so, how surprised were you to see that? Are you already seeing that in your run rates at the start of the quarter? Or is that something that changed? And are you seeing that carry forward? I mean you do have a pretty big inflection in construction in '26.

Yes. I'd say it's a fairly small portion of our business. And if you look at North America, it's about 20% of our sales into the commercial side of things. So they can be a little bit lumpy. There was some pickup in activity as you might expect, related to things like data centers, for example, which sounds very exciting. But keep in mind what I just said. This is a pretty small part of the company. But certainly encouraging to see a pickup on the commercial side, while the residential side, our most -- perhaps our most interest rate sensitive business, remains really kind of stuck in some pretty challenging end markets, housing starts down in the mid-single digits. But perhaps 2026 could be the year this really turns around on the residential side. That's not included in our guidance. That would -- but if it were to happen, we'd be really well positioned to take advantage of that.

Yes, the improvement drivers for '26 are more related to less PLS and more CBI.

Right.

Our next question comes from the line of Sabrina Abrams with Bank of America.

I wanted to follow up on something that I believe you said in response to Julian's question. If every quarter, we have revenue growing 2% to 4%. I think the FX tailwind, just based on the DX tail-end is pretty material in Q1, and then it tails off quite a bit in the remaining quarters of the year. So would it be fair to think that organic growth the organic portion of growth accelerates as we move through the year and just trying to think if that assumption is correct and what's underlying the assumption?

Yes. I think that's definitely, as you point out, a little bit more currency tailwind here in the first quarter. There is positive organic growth in Q1, but it's not as high as it is in Q2, 3 and 4. So maybe that's a way to think about it.

And then I don't think anyone asked on this segment, but polymers and fluids had a nice surprise to the upside, at least relative to what I was modeling. And it seems that it was pretty broad-based across aftermarket -- auto aftermarket and the fluids and polymer side. Anything to call out there that you're seeing from an end-market demand standpoint that maybe trended differently versus expectation? And it seems that the guide for 1% to 3% next year would be quite conservative given the run rate of what we saw in Q4. So just any color there would be great.

Yes. So we did actually talk about this a couple of minutes ago, but just real quick. So a big contribution from CBI new products in the automotive aftermarket, specifically in the car care business. If you're in the market for wiper blades, [indiscernible] wiper blades were up meaningfully here in the fourth quarter with the launch of a new wiper blade in that space. In China, specifically polymers, continues to gain share on the automotive EV side of things, up double digits, more than 10% in the fourth quarter. And then the reagents business that's part of fluids, which is really focused around biopharma, was up more than 20%. And again, so what you're seeing is more CBI, a little less PLS, and we're expecting more of the same here as we go into 2026.

Got it. I guess just as a quick follow-up then, just want to understand why guiding for deceleration from Q4 next year?

Well, I'm not sure that's really the case. I mean I think we're guiding 1% to 3%. If you look at the performance for the full year this year in [indiscernible] Fluids was a little bit different than the fourth quarter. And then obviously, we're not going to launch the same amount of new product every quarter. So maybe the fourth quarter was a little bit higher from a CBI standpoint than kind of the typical run rate. So maybe that's the way to think about it.

Our final question will come from the line of David Raso with Evercore.

I wonder if you could help us -- we're all sort of dancing around the organic cadence how is January playing out versus the 1% to 3% guide? It just feels like there's a lot of filler metals up high single digit, semis up mid-single. It feels like you're off to a relatively strong start to the year based off those cyclical trends exiting. Am I misreading the first quarter organic is at the full year guide, or even above it? Any color in January would be great.

And the company inventory, it went down a little bit sequentially. Historically -- I mean, it moves around a lot. I appreciate that. But it went down to where -- it wasn't even up year-over-year more than sales. And to me, that could be a little tell if we think things are picking up, you'd be building some inventory. So just trying to square all that together.

Yes. Thanks, David. So I think just on the inventory, that's kind of the typical cadence. Inventory -- levels of inventory do come down towards the year-end. I can tell you, there's nothing going on in terms of lowering inventory levels because we expect lower growth. I think, as a matter of fact, if you go back to kind of the middle of the year, we, in some cases, like Test & Measurement, as Chris talked about, with some of the tariffs, to mitigate the risk from a supply chain standpoint we actually added inventory in a few segments to mitigate that risk. So nothing unusual really from an inventory standpoint in the fourth quarter.

I'd say January is off to -- we are -- I can say this, we're right on track to where we thought we were going to be. I did say that our the revenue growth guide for this year, if you look at it on a quarterly basis, we will be up, if things stay the way they are and obviously, it's a pretty dynamic environment in that 3% to 4% range. The organic growth rate is slightly lower in the first quarter relative to Q2, Q3, Q4. That's typical seasonality based on what we know today. So it's not going to be 3%, 4% organic growth in the first quarter based on current run rates, but it will be positive organic growth.

We have a little bit more tailwind from currency at the beginning of the year, just kind of how the comparisons work out. And so that's how you get to a revenue growth rate in Q1 that's maybe closer to the other quarters, even though organic is lower. Does that make sense to you?

Yes. No, that's helpful. And semi, I know you said 15% of the business. I think it used to be a little bit bigger, but obviously, it's been slower. That incremental margin, I feel like historically, when that starts moving the incrementals, like the T&M margins were better than I was modeling for the quarter. Is semi a big part of that incremental margin improvement? Or am I overstating the impact of semis...

No, that is correct. I mean this is -- the positioning has always been -- we know this is a cyclical space. And when we are at the bottom of the cycle, we want to be profitable, very profitable. And when things are going well, orders are picking up, revenues are picking up, the incrementals come through at above average levels and above average levels of profitability. So that's a reasonable assumption.

Now it's 15% of Test & Measurement. It's 3% of ITW. So -- but it is a space, as you know, when the cycles start to pick up, you can see some really above-average meaningful growth rates for a period of time. And it's too early to tell whether that's what's going on here. But if you look at fab utilization, you look at the order activity, you look at plus 5% at attractive margins in Q4, it's looking pretty promising as we just start 2026.

I mean we're one month in. I'll just caution that things can change quickly in this environment, but we feel really good about where we're at. We feel confident in our guidance and well positioned to deliver some solid results here, both operationally and financially in 2026.

And that concludes our question-and-answer session and our call today. Thank you all for joining. You may disconnect at this time.

Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. Also, please be aware that today's session is being recorded. It is now my pleasure to turn the floor over to our host, Erin Linnihan, Vice President of Investor Relations. Welcome.

Thank you, Jim. Good morning, and welcome to ITW's Third Quarter 2025 Conference Call. Today, I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen.

During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2025. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2024 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.

Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?

Thank you, Erin, and good morning, everyone. As detailed in our press release this morning, the ITW team continues to perform at a high level, successfully outpacing underlying end market demand and delivering solid operational and financial execution within a stable yet still challenging demand environment.

For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts. Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate. Favorable foreign currency translation contributed 2% to revenue. Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion and significantly improved our operating margin by 90 basis points to 27.4%. We maintained excellent execution in controlling the controllables as enterprise initiatives contributed 140 basis points and effective pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margins in the quarter.

Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%. Additionally, year-to-date, we have repurchased more than $1.1 billion of our outstanding shares.

Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities. We remain laser-focused on making above-market organic growth, powered by customer-backed innovation and defining ITW strength. The strategy is working, and we remain firmly on track to deliver on our 2030 performance goals, which include customer-backed innovation yield of 3% plus.

As we stated before, ITW is built to outperform in challenging environments. As we look ahead to the balance of the year, we are narrowing our EPS guidance range, confident in our ability to continue leveraging the fundamental strength of the ITW business model, the inherent resilience of our diversified portfolio and the high-quality execution demonstrated every day by our colleagues worldwide. I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail. Michael?

Thank you, Chris, and good morning, everyone. Leveraging the strength of the ITW business model and high-quality business portfolio, the ITW team delivered solid operational execution and financial performance in Q3. Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of 1 percentage point from Q2. Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China.

Consistent with ITW's do what we say execution, we continue to demonstrate strong performance on all controllable factors. Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to record operating margin of 27.4%, which expanded by 90 basis points year-over-year. Furthermore, our pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margin in Q3.

Free cash flow grew 15% to more than $900 million with a conversion rate of 110%. GAAP EPS was $2.81 with an effective tax rate in the quarter of 21.8%. As detailed in the press release, the rate was driven by a benefit related to the filing of the 2024 U.S. tax return, partially offset by the settlement of a foreign tax audit.

In summary, in what continues to be a pretty challenging demand environment, ITW delivered a strong combination of above-market growth with a revenue increase of 2% and solid operational execution, resulting in consistent improvement across all key performance metrics as evidenced by incremental margins of 65%, operating margins of more than 27% and GAAP EPS of $2.81, an increase of 6%, excluding a prior year divestiture gain.

Turning to Slide 4 for a closer look at our sequential performance year-to-date on some key financial metrics. As you can see, ITW's organic growth rate, operating income, operating margins and GAAP EPS have all continued to improve in what has remained a mixed demand environment. Turning to our segment results and beginning with automotive OEM, which led the way on both organic growth and margin improvement this quarter. Revenue was up 7% and organic growth was up 5% with growth in all 3 key regions.

Strategic PLS reduced revenue by over 1%. Regionally, North America grew 3%. Europe was up 2% and China was up 10%. The team in China continues to gain market share in the rapidly expanding EV market as customer-back innovation efforts drive higher content per vehicle. In our full year guidance, we have incorporated the most recent automotive build forecasts which are projecting a modest slowdown in the fourth quarter.

For the full year, we continue to project that the Automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we consistently grow our content per vehicle.

On the bottom line, strong performance again this quarter with operating margin improving 240 basis points to 21.8%. And we're well positioned to achieve our goal from Investor Day of no to mid-20s operating margin by 2026.

Turning to Food Equipment on -- revenue increased 3% with 1% organic growth. While equipment sales were down 1%, our service business grew by 3%. Regionally, North America grew by 2%, driven by 1% growth in equipment and 4% growth in service. Demand remains solid on the institutional side. International, however, was down 1%. Operating margins improved [ 80 ] basis points to 29.2%.

For Test & Measurement and Electronics, revenue was flat this quarter as organic revenues saw a 1% decline. The demand for capital equipment in our Test & Measurement business has remained choppy as revenues declined 1%. In addition, electronics declined 2% as demand slowed in semiconductor-related markets. On a positive note, operating margin improved 260 basis points sequentially from Q2 to 25.4%. The excluding 50 basis points of restructuring impact in Q3 margins were 25.9% and both operating margins and revenues are projected to improve meaningfully in the fourth quarter.

Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth, with a contribution of more than 3% from customer-back innovation. Equipment sales increased 6%, while consumables were down 2%. Industrial sales increased [ 3% ] in the quarter as North America was up 3% and international sales grew 4%, with China up 13%. Operating margin of 32.6% was up 30 basis points as the Welding segment continued to demonstrate strong margin and profitability performance.

In Palmers & Fluids, revenues declined 2%. Organic revenue declined 3%, which included a percentage point of headwind from PLS. Polymers declined 5% against a difficult comparison in the year ago quarter of plus 10%, while Fluids was flat in the quarter. The more consumer-oriented automotive aftermarket business was down 3%. But although the top line declined, the segment expanded margin by 60 basis points to 28.5%, supported by a strong contribution from Enterprise Initiatives.

Moving on to Construction Products on Slide 7. Revenues were down only 1% as organic revenue declined 2% in the quarter, significantly better than last quarter's 7% organic decline. Revenue was also impacted by a 1% reduction from PLS. Regionally, revenue in North America declined 1%. Europe was down 3% and Australia and New Zealand decreased 4%. Despite market headwinds, the segment improved operating margin by 140 basis points to 31.6%.

For Specialty Products, revenue increased 3% with organic revenue up 2%. And revenue included a percentage point of headwind from PLS. By region, revenue in North America declined 1% against a difficult comparison in the year-ago quarter of plus 8%, while international was up 7%, driven by consistent strength in our packaging and aerospace equipment businesses. Operating margin improved 120 basis points to 32.3%, supported by a strong contribution from enterprise initiatives.

With that, let's move to Slide 8 for an update on our full year 2025 guidance. Starting with the top line, we remain well positioned to outperform our end markets in Q4. And we continue to project organic growth of 0% to 2% for the full year. Per our usual process, our guidance factors in current demand levels, the incremental pricing actions related to tariffs the most recent auto build projections and typical seasonality. Total revenue is projected to be up 1% to 3%, reflecting current foreign exchange rates.

On the bottom line, we're highly confident that the ITW team will continue to execute at a high level operationally on all the profitability drivers within our control. This includes our enterprise initiatives, which we now expect will contribute 125 basis points to full year operating margins, independent of volume.

Additionally, we expect that tariff-related pricing and supply chain actions will more than offset tariff costs and favorably impact both EPS and margins. Our operating margin guidance of 26% to 27% remains unchanged.

After raising GAAP EPS guidance by $0.10 last quarter, we are narrowing the range of our guidance to a new range of $10.40 to $10.50. Our EPS guidance range includes the benefit of a lower projected tax rate of approximately 23% for the full year and factors in that the top line is trending towards the lower end of our revenue guidance ranges.

With those 2 elements effectively offsetting each other, we remain firmly on track to deliver on our EPS guidance, including the [ $10.45 ] midpoint, which as a reminder, is $0.10 higher than our initial guidance midpoint in February.

To wrap up, we remain highly confident that the inherent strength and resilience of the ITW business model, combined with our high-quality diversified portfolio, and most importantly, our dedicated colleagues around the world, all put us in a strong position to effectively manage our way through a challenging macro environment. However, the demand picture evolves from here, we remain focused on delivering differentiated financial performance and steadfastly pursuing our long-term enterprise strategy, which is squarely centered around making above-market organic growth defining strength for ITW.

With that, Erin, I'll turn it back to you.

Thank you, Michael. Jim, will you please open the call for Q&A?

[Operator Instructions]. We'll hear first from the line of Jeff Sprague at Vertical Partners.

Maybe just 2 for me, hit 2 different businesses, if I could. First, just on construction. Clearly, you've been working the playbook. And one of the things that just jumps off the page to me is this is the 11th quarter in a row of organic revenue declines and the margins are still going up in the business. Maybe just -- anything in particular beyond kind of the normal 80/20 blocking and tackling that's behind that mix changes or other things? And just your confidence to be able to move those margins up further if and when the revenues do ever inflect positively?

Sure. Yes. So Jeff, I think the margins in construction are squarely related to 2 things. Number one, I think the quality of the construction portfolio. As we often say, we tend to operate in businesses which the cyclicality in their bad but long term are fundamentally very healthy. And our strategy is always to try and operate in the most attractive parts of those markets. And that's what you're seeing in construction.

We're in the most attractive parts of the market. We are executing very well from a business model perspective against those particular parts of the market. And that's ultimately what drives the margins. It's ultimately also what will drive the high-quality organic growth going forward. So very confident that not only will we grow in construction when markets recover, but grow at very high quality.

Great. And then maybe you could elaborate a little bit on -- it sounds like you've got a fair amount of visibility on Test & Measurement improving in the fourth quarter. Maybe you could speak to that, anything in particular that you're seeing orders, end markets? I'll leave it there, let you answer.

Yes. So I think it's -- Test & Measurement had a normal cyclical improvement in Q4, which we expect to achieve again this year. Q3 was a little bit mixed, obviously. We saw continued slowdown on the CapEx side. Really, we would believe on the basis of the tariff uncertainty in Q2, ultimately having a spillover effect in terms of CapEx demand into Q3. So we expect that to improve a little bit. And then the other thing we saw in Q3, which should improve is we saw a little bit of a deceleration in semi, which only represents about 15% of the segment, but where we saw some real green shoots in Q2, we saw somewhat of a deceleration, still growth, but a deceleration in Q3, and we expect that to get a little better.

Our next question will come from Andy Kaplowitz at Citi.

Chris or Michael, you obviously didn't change your organic revenue growth guide for the year. I think last quarter, you talked about embedded in it was 2% to 3% organic growth for the second half, which means you still need a big uptick in Q4. I don't think comps get a lot easier for you in Q4 versus Q3. So it's just more pricing that's laddering in Q4? Because I think you just said, right, you're run rating as usual. Any other businesses get better in Q4 versus Q3?

Well, I think what we are -- to give you a little bit of color on Q4, and you have to factor in what we said in the prepared remarks that we are trending towards the lower end of the organic growth guidance for the full year. We typically see a sequential improvement from Q3 to Q4 in that plus a couple of points of growth, primarily driven by the Test & Measurement business. As Chris just mentioned, and offset by the typical seasonal decline that we're seeing in our construction business.

So Q3 to Q4 revenue is up maybe 1 point or so. On the margin side, what we also typically see from Q3 to Q4 is a modest decline sequentially of about 50 basis points or so. So still in that 27% range and with a nice improvement on a year-over-year basis. And then the kind of the key driver of Q4 is then a more normal tax rate. So that's about a $0.10 headwind relative to Q3. So Q4 looks a lot like Q3 with the normal tax rate, and that's how you get to kind of the implied midpoint of our guidance here.

Maybe just a comment or 2 on Q3. I think it was a little bit of an unusual quarter in the sense that we came into Q3 after a strong June. We had a strong July, perhaps related to some of the tariff announcement and related pricing actions. And then we saw a little bit of a slowdown in August, actually pretty pronounced in August and then a more normal September and really a mixed bag in the quarter with a stronger automotive performance, certainly -- but also some of the green shoots we talked about last quarter in the order rates in places like Test & Measurement and semi didn't really materialize for us. So I think at the end of the day, though, we're able to offset some of this choppiness this macro softness with strong margin performance and as we typically do, we found a way to deliver a pretty solid quarter from a margin, earnings and free cash flow standpoint.

Michael, helpful color. And speaking of that, I mean, you're well up already in your range in auto in terms of margin, almost 22% in the quarter. And auto markets, as you know, overall, don't feel that rate yet. So can you actually -- I know you did 5% organic growth, but can you actually push to the higher end of your low to mid-20s over the next couple of years? How should we think about that given you're kind of already there?

Yes. I think we're pretty confident in the margin the target we laid out kind of low to mid-20s by next year. I think there's still a lot of opportunity here from an enterprise initiative standpoint, primarily. You also see a pretty healthy dose of product line simplification again this quarter, which -- that's all short-term headwind to the top line but really positions the remainder of the portfolio for growth and higher margin performance as we exit some of the slower growth and less profitable typically product line. So the market builds -- will be what they are next -- in Q4, they will be a little bit lower probably than what we saw in Q3. So we won't have the same amount of operating leverage but we'll still outperform as we have historically in the builds. And next year, you should expect kind of our typical 2 to 3 points above build. Whatever that build number is, obviously, as we sit here today, we don't know that.

Andy, just to add to that, the other big driver of margin improvement in auto is customer-back innovation. We're getting a real nice healthy contribution from that this year basically have to continue to accelerate over the next couple of years. and ITW innovation always comes to our margin.

Next, we'll hear from Jamie Cook at Truist Securities. Please go ahead.

The guidance relative to earlier in the year, I think earlier in the year, you assumed FX headwind of $0.30 that went positive or neutral last quarter, what's embedded in the guidance. You also have the benefits now from the lower tax rate. So I guess, Michael, I'm just trying to understand the puts and takes because it sounds like we have at least $0.40 of tailwind. You're lowering your organic growth to the -- sorry, your sales to the lower end, but it still seems like, I don't know, the guidance should be better, I guess, than what it is just based on those tailwinds. So if you can help me understand that I guess.

Yes, I think the short answer is that just given the choppy demand environment, we're maybe taking a more measured a more cautious approach to our guidance here as we go into Q4. We're off to a solid start in October, but things can change quickly as we saw both as an example, the auto builds, the swing in auto builds, semi not really panning out. So I think we're just being a little bit more measured in our guidance here with 1 quarter to go. And as always, we have a path to do a little bit better than what we were laying out for you.

You cut off initially, but I think you're talking about FX, what's embedded here is the current rates. As of today, and obviously, that they can change a little bit there a little bit of a headwind -- tailwind now relative to a headwind earlier in the year, but we're talking pennies. So I think in Q3, FX was favorable $0.04, but then other things like restructuring were unfavorable by a couple of pennies. So there's some puts and takes there. And we've also embedded obviously, as we said in the prepared remarks, the lower full year tax rate of 23%, and we expect a more typical 24% to 25% tax rate here for the fourth quarter. So hopefully, that's helpful.

[Operator Instructions]. We'll hear from Tammy Zakaria at JPMorgan.

Good morning to Team ITW. I hope you're doing well. Maybe on your long-term question for you. Given all the policy changes to incentivize bringing auto production back into the U.S. Do you perceive this to be an opportunity down the line given your market share with the big 3? Or would onshoring not be a net gain because you already supply parts to manufacture overseas. So how to think about that onshoring opportunity in other?

Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell a company. And so we were already -- we're positioned to supply our auto customers anywhere in the world wherever they are based on our current manufacturing setup. And that will continue. So business coming back to the U.S. would just mean more production for our U.S. factories, but they're already here. So we don't see -- I mean, there wouldn't be a huge net benefit that we can see based on the fact that we're produced where we sell the company.

Understood. And 1 question on PLS. I think it's about a 1% impact. Should we expect this to continue at that 1% range for the next few years? Or is this year more of a heavy lifting so it might fade as we go into next year and beyond?

Yes. So we haven't the planning process completed yet to tell you. But basically, what I would say is that for us, PLS is a bottom-up activity. It's driven by our businesses. It's very much an essential part of the ongoing kind of strategic review that we do in a critical part of 80/20 in our divisions. And obviously, deep into the company, we have this very tried-and-trusted methodology requires a lot of discipline, but it's not a benefit that our divisions get from this. But the point is that there's -- it's bottom up. We don't have the numbers for 2026 yet. But whatever it is, it's something that makes sense in the context of -- it makes sense from a long-term growth perspective in terms of it provides strategic clarity around where we want to focus, effective resource deployment on the back of that.

And also from a margin improvement standpoint, obviously, there's some cost savings, which are meaningful component of enterprise initiatives. And a lot of these projects have a payback of less than a year or so.

So we very much see it PLS, whether it's 50 bps or 100 bps as an ongoing value creating activity in our divisions. And like I say, we've got a lot of positive experience and expertise on this, but it's going to be a bottom-up number basically.

We'll hear next from the line of Joe Ritchie at Goldman Sachs.

I know that you'll typically like guide to trends. And I guess it's worth kind of thinking about potential initial framework with the moving pieces that you know today. Any color that you can kind of give us on how you're thinking about it, at least like this early on and what 2026 could look like?

Yes. I mean I think as you say, Joe, we don't really give guidance until we have gone through our bottom-up planning process here and talk to the segments about their plans for 2026, and that doesn't happen until in November here. To give you a little bit of a way to think about this, maybe I think you should expect that for our usual process, our top line guidance will be based on run rates exiting Q4, we'd expect some continued progress on our strategic initiatives, including the contribution from customer-back innovation. We'd expect some market share gains and the combination of those things leading to above-market organic growth again in 2026. And then the big question is really what will the market give us.

On the things within our control, we'd expect to see continued margin improvement and a healthy contribution from enterprise initiatives. You should expect to see some strong incremental margins that are probably above our historical average. And I think that was kind of the big items, then there'll be some puts and takes around price and FX and lower share count that may skew favorably. I'd expect a similar tax rate this year. And then as usual, like I said, we'll update you in February, which will include our usual kind of segment detail to help everybody kind of think through what the year might look like.

Okay. Great. That's helpful, Michael. And then I guess, just on capital deployment. I know you guys are doing the $1.5 billion buyback. It seems like you've got probably some room on your balance sheet if you wanted to lever up a little further and still stay investment grade. Like how are you guys like thinking about the right leverage for you going forward? And put that in the context of potential like M&A opportunities and what you guys are looking at across your different businesses?

Yes. I mean I think we're sitting here at about 2x EBITDA leverage, which is right in line with what our long-term target has been. The buyback specifically is really the allocation of the surplus capital that we generate, which is a big number for ITW, about $1.5 billion. And that's what is being allocated to the share buyback program and leads to a reduction in the overall share count of about 2%. But all of that only happens after we have invested in these highly profitable core businesses for both organic growth and productivity. We're fortunate that only consumes 20% to 25% of our operating cash flow.

The second priority here is an attractive dividend that grows in line with earnings over time. Chris talked about this being our 62nd year of consecutive dividend increases up 7%. And then when all said and done, we still have a lot of capacity on the balance sheet for any type of M&A opportunities. As you may know, we have the highest credit rating in the industrial space, we have arguably the strongest balance sheet. And so there's a lot of room here if the right opportunities were to present themselves.

Next question today comes from Stephen Volkmann.

So I'm curious whatever commentary you might wish to provide around what you're seeing on sort of price cost and obviously, it didn't impact you in the quarter. But are you seeing suppliers raising prices and you're kind of able to offset that, however you choose or you think maybe they're holding back and that's still to come? And then in that vein, just how do you ascertain that you will cover whatever cost? Will it be dollar for dollar or also on margin.

Yes. I think, Steve, the biggest driver of cost increases this year has been the tariff-related cost increases. And I think we've responded with both pricing actions that we've talked about and also supply chain actions. As you know, we are largely produced where we sell company. I think 93% or so of the company is produced where we sell. We had a little exposure that we talked about earlier in the year. We've worked hard to mitigate that and put ourselves in a really good position. We've been able to, through those actions, offset the impact from tariffs this year and in Q3. As we said in our prepared remarks, price cost was positive both from a dollar-for-dollar earnings standpoint and also from a margin standpoint.

So I feel like at this point, we're kind of back to a more normal environment at this point, from a price cost standpoint, we have not completely caught up yet, but we've got a quarter to go. And then for next year, who knows what the tariff environment might mean for next year. But I think we feel very confident, given our track record here in terms of being able to manage whatever those cost increases, whether they are typical inflationary increases or tariff increases might be as we head into next year.

Super. Okay. And then just pivoting China was obviously really good for you guys this quarter. I'm wondering if you might be able to drill in there a little bit. And give us a sense of what's driving that? And I don't know, maybe some of the CBI initiatives or something.

Yes, do you want to go ahead, Chris.

Yes. Yes. So basically, Steve, what's driving channel right now is auto in China, in particular, I think our penetration on EV in China, particularly with Chinese OEMs. We continue to make great progress on CBI and market penetration in China, particularly with Chinese OEMs. We continue to grow content per vehicle. As you know, China represents mid-60s in terms of percentage of worldwide EV builds. And we're growing nicely there, particularly with a strong position with Chinese OEMs.

In addition, you mentioned CBI, I would say that China, even though it represents about 8% of our revenues, we certainly get disproportionate along of our patent activities in China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive, is what's striking our progress there. And we're basically penetrating at a level well above the market.

Yes. And maybe to put some quantification around it. But I just look at kind of year-to-date in China, as Chris said, the big driver is our automotive business, up 15%. That's our largest business in China, but also Test & Measurement, Electronics up in the mid-teens, Palmers & Fluids up 10%, welding up 20% plus. I mean I think the fueled by CBI certainly, in most cases here, I think the team is doing a really nice job overall, up 12% in China on a year-to-date basis. and pretty confident that the things again that are within our own control will continue to be -- have a positive contribution to the top and bottom line in Q4 and headed into next year.

Next, we'll hear from the line of Julian Mitchell at Barclays.

Maybe just wanted to start with the operating margins. So I think you mentioned, Michael, that next year, you should be above the historical incremental. And I guess you have that sort of placeholder of 35% to 40% dating back to the Investor Day. So it's presumably in reference to that. But just wanted to understand as you look at next year on the margin side of things, is there a big kind of payback from the restructuring efforts that happened this year coming in? -- price/cost maybe for this year as a whole is margin neutral and then that flips positive next year? Maybe just any sort of fleshing out of the thoughts on some of those margin moving parts, please?

Yes. I think, Julian, the biggest driver of margin performance for, I'm going to say, the last decade or so has been the enterprise initiatives, and we've consistently put up 100 basis points of margin improvement from our strategic sourcing efforts and from our 80/20 front-to-back efforts. And so we would expect that to continue to be the case next year. Whether that's exactly 100 basis points or not, we won't know until we've rolled up the plans. But that will far outweigh any contributions from price cost for example.

And then the other big element and which is a function of really what end market demand will do is if you look just at our performance year-to-date or in the third quarter, our incremental margins are significantly above kind of our historical 35% to 40%, including 65% in the third quarter. And you look at the margin performance this quarter in the automotive OEM business, where 5% organic growth translates into income growth of 20% plus. So it's just an illustration of -- we don't need a lot of growth to put up some really differentiated performance from a margin and profitability standpoint. So I can't tell you, as we sit here today, what the incrementals might be for next year on the organic growth. But I would tell you, I believe that they -- it will probably be above the historical range that we just referenced.

That's helpful. And then just maybe 1 for Christmas, looking at Slide 8 and that CBI contribution of sort of over 2 points to sales and the sort of partial offset from PLS headwinds that you discussed earlier on this call somewhat. And I realize this isn't how you look at it, and it's sort of really bottom-up driven. But if we're thinking about that spread of, say, CBI versus PLS enterprise-wide. Is the assumption that, that should be more and more of a net positive as those CBI efforts that you talked about at the Investor Day a couple of years ago, increasingly get traction. Just trying to understand how to think about the delta between those 2, understanding that they are independent bottom-up process.

Yes. I'm not sure there's a huge amount. I mean CBI is really referencing our efforts around improving the quality of execution on innovation, whereas PLS we typically and our business is typically used for kind of product line pruning. I think the only correlation to is that there were affected to differentiation. PLS results is as a result of where we feel maybe we're on the same level of differentiation, and we're -- accordingly, where CBI, we're leaning in to basically create and develop more differentiated products. For sure, you're going to see an improvement in CBI over time. We've already seen that. the number has actually doubled since 2018, directionally in the 1% range, it was 2% last year, trending 2.3% to 2.5% this year, well on track to get to 3-plus by 2030. PLS is a circumstantial and ongoing review of our businesses by our businesses of their product lines, and they react accordingly. And as I said earlier, we see this as there's a lot of value creation comes from PLS but in a different way. So I'm not sure there's a huge amount of correlation between the 2. I can take -- kind of differently.

But the sort of net spread of them should be increasingly positive, I suppose?

It should be. No, absolutely driven by improvements in CBI.

Correct. That's correct. I mean PLS, as Chris said, is an outcome of a process or 80/20 front-to-back process. We've talked about kind of in the long run, maintenance PLS being in that 50 basis points range. We have a little bit more this year. We've talked about specialty and kind of strategically repositioning that segment for faster organic growth.

And then as Chris said, CBI will continue to improve from here. So that spread, to your point, will widen. But my thought for putting them right next to each other on Slide 8. They're completely independent of each other. And so I just want to make sure that's clear that there's no linkage between the 2. But mathematically, the spread will grow between the 2. And net-net will be a more positive contributor to organic -- above-market organic growth as we go forward.

Our next question today will come from Joe O'Dea at Wells Fargo.

Can you talk about the tariff impact a little bit? There were periods of time earlier this year where the math would have suggested something up to 2% kind of price requirement to offset. And it seems like we're in an environment now where the pricing required is probably less than 1%. But anyway, any thoughts around that? And then stepping back, it would seem like that's not necessarily a big hit to demand. And so the tariff kind of overhang would be more uncertainty related than magnitude of pricing required at this point related, but your thoughts on that?

Yes. I think price cost from in terms of kind of combined with supply chain actions, our ability to offset tariffs, I think, is not really the main event at this point. I think the impact on demand is probably something we talked about also on the last call that it may have led to a little bit of a demand -- orders being frozen back in the April kind of Q2 time frame. And there's probably a little bit of overhang still from that. I mean I think we saw -- what's been a pretty choppy demand environment, as I said earlier, we had some positive order activity in June, July, then it slowed, April, May, kind of pretty choppy also. So I think the impact maybe from a demand standpoint, at least initially was maybe more significant and who knows kind of where we go from here into next year. But I think it's largely behind us at this point. Certainly, from a cost standpoint and maybe from a demand standpoint, this is no longer tariffs are no longer the kind of the minivan here.

And so what -- like what do you think the main event is in terms of seeing kind of an unlock of better demand, right? Because you're outgrowing markets, but that market growth rate not kind of all that inspiring at this point. And so in sort of this protracted kind of challenged demand environment if tariffs are kind of easing as a headwind. What do you think is the key to the box?

Yes. So I think, Joe, we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously through a period right now where there's quite a bit of contraction and uncertainty and so on and so forth in areas like construction. But our fundamental thesis is that we're in markets which we believe for the long term are attractive. We want to make sure we're in the best part of those markets, and we believe that we are -- we believe we can see quite clearly in areas like automotive and construction and historically in welding and food equipment that were outgrowing markets at the point in which the cycle turns, we'll be really well positioned to Michael's earlier point, not just for growth. But for even higher quality of growth on the basis that our incrementals have strengthened from historical levels on the basis of portfolio pruning around sustainable differentiation, coupled with very high-quality execution on the business model. So we feel pretty good about both the long term where we're just going through a carrier where we see some short-term demand issues. But we feel we've got a really good portfolio for long-term growth.

Maybe just tying that into test and measurement and what you're seeing there. It seems like in an environment, you're investing in CBI, like we hear a number of companies talking about innovation. It would seem like they need your equipment. Like are you seeing this kind of build up in terms of what would have kept them on the sidelines. But if they want to invest in innovation, it would seem like they're going to need your help.

Absolutely. That's correct. I mean, Test & Measurement is a really fertile space for us in terms of long-term growth. There's lots of new materials being developed. There's increasing stringency in innovation standards and quality standards, all of which are acquiring more and more exacting testing equipment, and that's where we play. So again, short-term issues here around the CapEx environment and one. So a bit of compression in Q3, you were adding some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us. It will be a healthy environment for us on the basis of the quality of innovation in Test & Measurement and also the end markets they're lining up against like biomedical and so on, all of which have very strong fundamentals going forward.

Next, we'll hear a question from the line of Nigel Coe at Wolfe Research.

We cover a lot of ground here. Just want to go back to the comments around strong starts to the quarter and then it sort of peered out. Do you think there's any unusual behavior able to shut those around price increases or tariffs. Obviously, we have had the big tariff even middle of the quarter. Anything you'd call out there, number one? And then number two, obstruction actions in the first half of the year, did we see the full benefits in 3Q? Or is there still some benefit to come through 4Q?

Yes. So let me start with kind of the cadence as we went through the quarter. And I'm not sure we have a great answer for you, Nigel. I mean I think like we said, June and July were really some of our better months with meaningful organic growth on a year-over-year basis, then a slowdown in August and a recovery in September. And if you look at net-net for Q3, we were actually pretty close to kind of typical run rates. But -- so the point I think we're trying to make, it's just a pretty choppy environment and things can change pretty quickly, but we're not really making any long-term forecast in terms of kind of what that may mean on a go-forward basis. Some of it may be related to the tariff announcements and the associated pricing but really hard to tell. Restructuring for us, it's a little bit of a misnom. I mean these are funds that expenses that are funding our 80/20 fund-back projects. And so there's no big restructuring initiative going on inside of ITW. Our spend this year will be similar to last year in that $40 million range. We try to kind of level load things and do a similar amount every quarter. But it's really a function of the timing of tens of projects across the company and when the divisions want to execute on those projects. So those restructuring savings are -- these are projects with PayEx of less than a year. So it happens pretty quickly. And it's part of what's funding the enterprise initiative savings that we're getting next year. But these are not big kind of restructuring traditional restructuring projects, these are all tied to 80/20 front-to-back as per usual so.

Yes. Okay. Michael, that's helpful. A quick 1 on welding. We've seen, I think, now 2 quarters of reflection in growth on equipment. But consumables remain sort of stepped down in that low single-digit decline in territory. Is that primarily a price differential between equipment and consumables or anything to call out?

Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean commercial or consumables. I think, right? Is that right?

And equipment -- nicely.

Yes. Yes. I think it's a little bit of a head scratcher to be honest with you, equipment up 6% and consumables down to -- within that, there are some of the welding. Some of the filler metals are actually showing positive growth. The other thing, what we're seeing is a pickup on the industrial side. So these are typically large heavy equipment manufacturers. And then the commercial side or the consumer side, is a little bit slower, where it's a little bit more of a exposed to the kind of consumer discretionary spending.

So it's a little bit of a mixed picture. I think the real positive in welding is, this growth is fueled by CBI. And so it's not that the markets are picking up. It's really new products, primarily on the equipment side. as well as both in North America and international with some really nice growth in our European and in our China business. So that's probably the best answer I can give you.

Our next question will come from Avi -- excuse me, Ross Levich at UBS.

So I appreciate that you're saying that you're trending towards the lower end on the sales guidance. Can you just talk about some of the thinking for leaving that range unchanged and just kind of wider than you typically would for this time of year? I assume you're still thinking there could be some upside to get you to the midpoint or better for the year. And would that come from any particular segments or it sounds like more from demand than pricing. So just -- is that the right way to think about it?

Yes. I mean I think typically, we update guidance kind of halfway through the year. And at this point, with a quarter to go, we're well within the ranges. And so we didn't see the need to kind of update the whole thing. And the decision was to narrow the range and to explain why we're not flowing through the benefit of the lower tax rate, which is really due to the fact that we're trending towards the lower end on the revenues. So that's our way of being as transparent as we can be around the guidance. So I think your question kind of Q3 versus Q4, I think we've kind of covered that. Again, the segment that typically shows the biggest pickup from Q3 to Q4 is our Test & Measurement business, and then that's partially offset by the construction being down, kind of typical seasonality. And when all is said and done, revenues from Q3 to Q4 should be up by a point or so.

Certainly, we've also factored in, I should say, the lower auto bill forecast, there's been -- which is done by third-party kind of industry experts. And there's been some noise around some supplier issues for some of our customers, and all of that is included in our automotive projection here for the fourth quarter based on everything that we know as we sit here today. So hopefully, that answers your question.

Our next question will come from Mig Dobre at Baird.

Thank you for squeezing in. I also kind of want to go back to the POS discussion. And I guess my question is this, when you sort of look at your comments for delivering above normal incremental margins, how reliant are you on PLS in order to be able to do that? How important is PLS in that algorithm and just given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty outperforming anyone else out there that I'm looking at. Is there a point in time here where it's rational to sort of say, "Hey, look, maybe we can come back on PLS because we can actually deliver more earnings growth and more return for shareholders by just trying to accelerate organic growth rather than improving the portfolio?

Yes. So Mig, I think there is a relationship between PLS and incrementals and so on, but it's not the only factor. I mean PLS is an element of 20. It's not it's about holistic 80/20. So I think the implementation of the business model, again, the quality of the portfolio is ultimately what drives the incrementals ultimately drives the margins. In terms of your comment on, I guess, the comment on organic growth versus margin. And so from our standpoint, I mean, organic growth and operating margin and margin expansion kind of go hand in hand. And we talk about quality of growth. I think we've demonstrated that for instance, coming out of the pandemic, we saw a very health growth and margin expansion.

Winning over that period, we are investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it was calling the organic growth, 33% incrementals historically. We're now well above that, comfortably kind of visit the 40s. And that's, again, at a time when we are very much investing in our businesses in a very focused way our own innovations, reach marketing and so on.

So for us, the math is pretty simple with margins at 26% and with growth incremental margins at 35% plus or even 40% plus right now. It's the operating leverage that is really driving the margins forward for the year. And as we look at 2030 and our 30% goal, that's a goal that's not going to be achieved through structural cost reduction. That's going to be achieved through continuous improvement in organic growth at high quality and high incremental margins. So we see the 2 as being correlated, I would say.

Understood. But in terms of maybe more for '26 asking the question that somebody else asked earlier, right, if CBI is contributing 2.3 to 2.5. Maybe you can rethink product line simplification to some extent and maybe the end markets get better. Again, from my perspective, being able to get your organic growth back to that 4, 5-plus percent range. is really the thing that at this point seems to be needle moving in terms of both maybe investor sentiment as well as overall earnings growth. So I'm curious if -- I understand it's early for 2026. Curious though, if you think that it's plausible that we could be looking at that kind of growth as we can that next year.

It's -- I think, Mig, we're probably, as we said earlier, running a little bit higher on PLS than kind of the normal maintenance run rate. We're doing that specifically in a business like Specialty Products, where we've talked about, we're strategically repositioning that segment for growth. I will tell you that in other segments and industries that I know you follow like food equipment and welding, that number is significantly lower, maybe even 0 in some cases. So it's not an across the board. And it's also not a number that we want to or even could manage from the corporate -- from corporate. This is such an integral part of our 80/20 front-to-back process. It's a bottom-up number. And if we were to say -- and it's tempting, I know -- I understand how you're thinking about it. It's stepping to say, okay, no more that also would say no more 80/20 front to back. And that is certainly not in anybody's long-term interest. I can promise you that.

All right. That makes sense. Thank you.

Ladies and gentlemen, that was the final question in our Q for today. We'd like to thank you all for your participation in today's session, and you may now disconnect your lines. Please have a good day.