Illinois Tool Works Inc (ITW) 2016 Q2 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants will be in a listen-only mode until the question and answer portion of today's conference.

(Operator Instructions)

This call is being recorded.

If you have any objections, you may disconnect at this time.

Now I'd like to turn the call over to Mr. Michael Larsen, the Senior Vice President and Chief Financial Officer.

Sir, you may begin.

Thank you, May.

Good morning and welcome to ITW's second-quarter 2016 conference call.

I am Michael Larsen, ITW's SVP and CFO, and joining me this morning is our Chairman and CEO, Scott Santi.

During today's call we will discuss our second-quarter 2016 financial results and update you on our 2016 earnings forecast.

Following our comments, we will be happy to take your questions.

And so that we can accommodate as many people as possible, we will limit each Q&A participant to one question and one follow-up question.

Before we get to the results, let me remind you that this presentation contains our financial forecast for the 2016 third-quarter and full year as well as other forward-looking statements identified on this slide.

We refer you to the Company's 2015 Form 10-K and Form 10-Q for the first quarter of 2016 for more detail about important risks that could cause actual results to differ materially from our expectations.

Also, this presentation uses certain non-GAAP measures.

While we use very few non-GAAP measures, a reconciliation of those non-GAAP measures to the most comparable GAAP measures is contained in the press release.

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

Thanks, Michael.

Good morning.

Overall we were very pleased with our second-quarter performance as we continued to execute well and, as a result, delivered strong results and set several new all-time performance records for the Company.

EPS of $1.46 was up 12% year on year and came in $0.07 above the midpoint of our guidance, $0.04 from better margins, $0.01 from slightly higher revenue and $0.02 from nonoperating items, largely related to our minority ownership interest in our former decorative services segment.

Operating income of $792 million was up 8% year on year and was the highest quarterly operating income in the Company's history.

Q2 operating margins of 23.1% were up 180 basis points and after-tax ROIC improved 260 basis points to 22.9%, both of which were all-time records for the Company.

As I commented in our Q2 earnings release, these record results reinforce our conviction and the performance potential of ITW's business model and reflect directly on the great progress that our people around the world continue to make in positioning the Company to leverage it to its full potential.

While we have made significant progress in this regard in the last 3.5 years, we see plenty of opportunity for further improvement ahead.

I am also pleased with the progress that we're making in our transition to focusing on accelerating organic growth.

Organic growth, excluding PLS impact of 2% at the enterprise level, was pretty solid in this environment, particularly when factoring in the 11% decline in our welding segment in the quarter.

All six of our other segments delivered positive year on year organic growth in Q2.

Net of welding and PLS impact, organic growth for our six other segments combined was 4% in the quarter.

On a year-to-date basis our 2016 organic growth rate has improved by 130 basis points versus full-year 2015, despite significant further erosion and welding demand and tough first half comps in our auto OEM segment.

A couple of final comments before I turn the call back to Michael.

First, earlier this month we completed the acquisition of the engineered fasteners and components business from ZF TRW.

This is a great addition to the Company and I would like to publicly welcome the 3,500-plus members of the EF&C team to ITW.

And second I would like to once again thank all of my ITW colleagues around the world for the great job that they continue to do in serving our customers and executing our strategy with excellence.

Michael?

Thank you, Scott, and good morning, everybody.

Once again ITW delivered another strong quarter with high quality of earnings and solid execution and improving growth performance in many parts of the Company drove record results.

We grew GAAP EPS 12% to $1.46 and exceeded the midpoint of our guidance range.

Organic revenue was up 2% gross, 1% when including PLS, with fairly stable demand globally and improving organic growth focus and performance across the Company.

Good progress in Q2 with six of seven segments achieving positive organic growth with welding the only exception.

And in Q2 of last year, three out of seven segments were growing organically.

Consumer facing businesses were up 3%, industrial facing down 2% -- no material change from Q1.

On a regional basis, North America was up 0.4%, EMEA up 2.9%, APAC up 1% and China was up 0.4%.

A comment on the UK, which represents 5% of ITW sales.

In Q2 our UK sales were up 2% with no signs of a slowdown.

And in our opinion it is too early to tell what the longer term impact from Brexit may be but at current FX rates the weakening of the British pound is modestly unfavorable, which is factored into our updated guidance.

As Scott mentioned, we established new all time records on a number of our key performance metrics, operating margin of 23.1% up 180 basis points versus last year.

Enterprise initiatives contributed 120 basis points to margin expansion with price, cost and volume leverage and other contributing the remaining 60 basis points.

We grew operating income 8% to $792 million, making this the most profitable quarter ever in ITW's history.

After-tax ROIC improved 260 basis points and was also a new all-time record at 22.9%.

We invested about $140 million in our businesses for growth and productivity.

Free cash flow of $471 million was up 23% versus Q2 of last year and 90% to a net income conversion was consistent with typical Q2 seasonality.

In the second quarter, we allocated $500 million to share repurchases and plan to repurchase an additional $1 billion in the second half bringing the total for the full year to approximately $2 billion with $1.2 billion from overseas funds and about $800 million from normal surplus cash flow.

In the second quarter ITW operating margin exceeded 23% for the first time and we listed the margin drivers on the right side of the page starting with 120 basis points from our enterprise initiatives.

Price costs came in as expected, modestly favorable, 20 basis points, and volume leverage and other contributed the balance.

Continued strong margin expansion across the Company with construction products up 440 basis points to 24.3, food equipment up 300 basis points to 25%, specialty products, test and measurements and electronics both up 250 basis points and automotive up 130 basis points to 25.8.

Polymers and fluids was flat due to restructuring.

And in welding, despite 140 basis points of restructuring impact this quarter, operating margin was 24.9%.

Welding's peak-to-trough revenues are now down approximately 20% and yet operating margins are still solid in the mid-20s.

This performance over a pretty challenging cycle is a good example of the resilience of the ITW business model.

Turning to the segment discussion and starting with automotive OEM, another solid quarter with organic revenue up 4% against the top comparison last year, as Scott mentioned earlier.

In North America 3% organic growth, Europe was up 8% and China was up 13% despite the fact that overall builds were only up 4% and flat at western OEMs.

We expect growth rates to continue to improve in the second half as comparisons get a little easier.

Another very solid quarter in food equipment up 5% organically with broad-based strength on the equipment side, including refrigeration, ware wash, cooking and scales.

North America was up 6% despite a tough comparison with equipment up 9% driven by end-market demand in K through 12, lodging, healthcare and retail and service up was 1%.

International was up 3% with equipment up 4% and service up 2%.

And continued strong margin performance as volume leverage and savings from enterprise initiatives improved the operating margin by 300 basis points to 25%.

Also a very solid quarter for test and measurements and electronics as organic revenue grew 3%.

The electronics platform grew 6% due to end-market strength in solar and semiconductor.

We've talked about the margin expansion potential in this segment before and we were pleased to see 250 basis points of improvement to 18.6%.

And remember that the 18.6% includes 370 basis points of acquisition-related non-cash amortization charges, which will [bleed off] over time.

Declines in welding demand continued in Q2 with organic revenue down 11% in the quarter with equipment down 13% and consumables down 10%.

The decline breaks down as 5 points from oil and gas, 5 points from industrial, which is mostly heavy equipment related to agriculture, infrastructure and mining, and 1 point from commercial.

North America was down 8% with equipment down 10% and consumables down 5%.

International was down 21%, again, due largely to oil and gas.

If demand holds steady at current levels, year on year percentage declines should moderate in the back half of 2016 due to easier comps.

And like I said earlier, solid operating margin performance of 24.9%, which includes 140 basis points of restructuring impact.

Polymers and fluids delivered another quarter of positive organic revenue growth up 2% as this segment continues its pivot to growth after an extensive PLS process over the last three-plus years.

On a regional basis North America was up 1% and international was up 3%.

Approximately half of the segment revenues are related to automotive aftermarket, which grew 3%.

The balance is primarily industrial MRO applications as fluids improved 1% and polymers was flat.

Overall margins were unchanged at 20.9%, which includes 70 basis points of restructuring impact.

As with our test and measurements and electronics segment, 20.9% includes 420 basis points of acquisition related non-cash amortization charges.

Another solid quarter in construction products as organic revenue increased 3%.

North America was down 1% with a tough year-over-year comparison of 15% in Q2 last year.

Renovation remodeling was down 6% after being up 22% in the first quarter.

And in the quarter in North America commercial was up 5% and residential up 1%.

And overall we feel like we're exiting the quarter in good shape from a demand perspective.

On the last call we talked about how quarterly numbers in construction can be a little choppy and not necessarily a good indicator of overall levels of demand.

To normalize trends, if you look at North America in the first half up 4%, renovation remodel up 6%, commercial up 7% and residential up 2%, you get a more accurate picture of the underlying levels of demand, which are pretty solid.

Asia-Pacific was up 7% due to Australia.

Europe was up 6% driven by the UK up 7%, France up 6% and Germany up 10%.

And again, very strong progress in operating margin, up 440 basis points to 24.3%.

Finally, another solid quarter in specialty products with organic revenue flat.

Solid growth in consumer packaging offset by some lumpiness on the equipment side.

And very good progress on our operating margin with an increase of 250 basis points to 26%.

Turning to EF&C, we're very pleased to complete this terrific acquisition on July 1. As you know, in the automotive OEM space with ITW's very focused strategic positioning, we've demonstrated the ability to outgrow global auto builds by over 400 basis points on average since 2012.

And given the visibility that we have in this business, we are confident that we can continue to outgrow auto builds by 200 to 400 basis points over the next several years.

We're excited about adding EF&C to ITW because it gives us some additional leverage on this very focused strategy and broadens our ability to serve and grow with our global and regional automotive OEM and tier customers.

It expands our ability to drive our global content per vehicle and increase our share of the relevant market.

For reference, our global content of $30 per vehicle compares to a relevant market that is greater than $200 per vehicle.

Specifically, EF&C adds a number of things to our current position.

First of all, it adds several new strategic differentiated product platforms that have similar characteristics to the core product platforms that we support today.

And on a regional basis, with its global strategically located manufacturing facilities, it is very complementary to our geographic footprint, which is a little more weighted towards North America.

So it gives us better global balance overall.

And certainly we continue to see significant potential to leverage our 80/20 business management process and help the EF&C team continue to improve its operating metrics.

Operating margin entering ITW are about 10% and we're confident that we have a clear path to doubling that rate at a minimum over the next five years.

EF&C already has a very experienced and capable operating team with a reputation for delivering reliable quality and excellent customer service performance.

From the standpoint of the transaction and the financial components, purchase price of $450 million is less than one time sales and the business is actually performing slightly better than expected.

The 2016 financial impact is $220 million to $240 million of revenues, so $110 million to $120 million in Q3 and in Q4.

From a margin standpoint, EF&C is dilutive approximately 50 basis points to ITW operating margin and after-tax ROIC and dilutive approximately 200 basis points to the automotive OEM segment.

So to be clear, excluding EF&C we would have guided to approximately 23% operating margin for the full year-to-date.

Including EF&C we are maintaining our prior guidance of greater than 22.5%.

From an EPS standpoint we expect no impact in 2016 due to typical acquisition accounting related impacts but certainly accretive in 2017.

And we're confident that we can generate after-tax returns in the mid to high teens by year seven.

Last page -- our updated guidance for 2016 assumes current foreign exchange rates and includes the acquisition of EF&C.

We're raising full-year GAAP EPS guidance by $0.10 at the midpoint to a new range of $5.50 to $5.70.

The $5.60 midpoint represents 9% earnings growth on a year-over-year basis.

We expect that demand remains stable at current levels and as a result we're narrowing our full-year organic growth forecast to 1% to 2% due to the more challenging than expected market conditions in welding.

Consistent with prior forecasts, our guidance includes approximately 1 percentage point of PLS impact.

So excluding PLS, we expect full-year organic revenue growth of 2% to 3%.

Keep in mind that while PLS does reduce revenues in the short-term, it is both a critical driver of our margin performance and a key component of our portfolio management strategy as we exit slower growth product lines and focus on our most compelling opportunities to accelerate organic growth at ITW caliber margins.

As I said earlier, our operating margin guidance is unchanged at greater than 22.5%, but now includes approximately 50 basis points of dilution from EF&C.

We're maintaining our previously communicated target of $2 billion in share repurchases for the year.

And finally, for the third quarter our GAAP EPS guidance, including EF&C, is $1.42 to $1.52, assuming operating margin of approximately 23% and 1% to 3% organic growth.

So that concludes our prepared remarks.

We will now open up the call to your questions.

Please be brief and, as a reminder, one question and one follow-up question.

(Operator Instructions)

Our first question is from Mr. Joe Ritchie from Goldman Sachs.

Your line is open.

Thanks and good morning, everyone.

Good morning.

Good morning.

So I guess my first question is on organic growth.

It was nice to see the organic growth improvement in 2Q versus 1Q despite the weakness that you guys saw in welding.

I'm just curious, as you look into the third-quarter guidance of 1% to 3%, are you seeing underlying trends improve as you exit the quarter?

Because it seems like you're guiding to a number that's slightly better in the comps on a two year basis -- don't really change much.

Well, Joe, if you look at it, we're assuming current levels of demand going into Q3 and the slight bump in overall year-over-year organic growth rate is due to the comps.

So we're assuming no acceleration in Q3 or Q4 current demand levels.

Okay.

Michael, and then I guess -- I mean we're current -- were you exiting the quarter at demand levels that were slightly better as you progressed through the quarter?

I'm just curious to --

Pretty steady through the quarter.

Yes it was a pretty steady as we went through the quarter on a monthly basis.

Like we said, pretty firm overall in the second quarter.

And we feel pretty good going into Q3 and Q4.

Okay.

All right.

That's helpful.

And then I guess my one follow-up -- maybe touching on welding for a second since clearly trends got a little bit worse this quarter.

It was really nice to see the decrementals were solid on the welding side.

I'm just wondering if trends persist are you expecting the same type of decrementals for the second half of the year?

And then to your comment earlier, Michael, on how to think about welding for the second half, are you just assuming like maybe a 3 to 4 point improvement because comps eased by that much for the second half of the year?

The expectation through the balance of the year on the revenue side for welding at current demand rates were down mid single-digits in Q3 and Q4.

That's slightly -- the rate is better because of the comps get easier.

But we're -- in our scenario, based on what we're seeing right now, we're still expecting some further decline.

From the standpoint of the incremental margins, they should be certainly right in line.

Some of the benefits from the restructuring charges that we incurred in Q2 should start to show up in Q3 and Q4.

Yes.

These are pretty steady margins as we go into the back half based on what we know today.

Our next question is from Mr. John Inch.

Thanks.

Good morning, everyone.

Good morning, John.

EF&C -- just now that the deal's closed, what sort of intangible amortization is part of this deal and what kind of accretion are we looking at next year assuming the run rate?

Yes, so what I can tell you in terms of accretion, our view is that this will be modestly accretive in 2017.

But let's get in there and take a look and make sure we give you a more accurate view than -- probably when we get to our analyst day in December we'll be able to give you little bit more detail.

And we just bought the business.

We've got to get in there and then we'll give you a more accurate view.

Did you say anything on the [intangible] amortization Michael?

We're not completely done yet so it wouldn't be appropriate to comment on that.

I think, again, we expect no EPS impact here in the second half of the year, neutral on EPS, slightly dilutive on margins and then next year modestly accretive with accelerating benefits beyond that.

All right.

So shifting gears, I appreciate your comments on the UK.

I think other companies have more or less said it's still too early to say anything.

It's hard from our perspective, I mean generically our perspective, to surmise why Europe doesn't suffer some sort of economic deferral or confidence issues.

Certainly you can see European investors rotating into US stocks.

They're clearly concerned.

Right?

My question -- you guys have a lot of European exposure relative to other industrial companies.

What -- you've done a fantastic job and you've clearly -- I think people see the flex in your business model.

But I can't imagine you're complacent.

Right?

So I'm trying to understand -- what is your strategy for managing through what could be possibly deteriorating fundamentals in Europe?

And as the crawl rate to that, you -- I'd like to know how this perhaps dovetails into your own M&A strategy.

And specifically you clearly want to do more deals, you just don't want to put the cart before the horse.

But if things were to deteriorate, does that cause you to do more deals sooner perhaps or just push them out?

Just how are you think about that?

I'm sorry the question is long.

There's just a lot of context to it.

Let me try to hit all the points and let me know if I miss anything.

I think overall our strategy is no different than how we operate the Company day-to-day, which is we are -- we have a very -- relative basis a very flexible cost structure.

We are a fast reactor.

We're not a predictor of the future.

And I think as you're seeing in welding right now, we are certainly confident in our ability to react in an effective way to whatever sort of the cards -- however the cards play out in Europe.

I think right now -- and it's certainly reflective in our Q2 results -- we're not seeing anything yet.

It's obviously very early.

I think overall I don't really see any difference between sort of the kind of contingency planning we would do around the whole Brexit situation and the other contingency planning that we would do relative to global macroeconomic conditions generally in whatever region of the world.

The -- from an M&A standpoint, I think all I would say is I'd go back to what we've talked about repeatedly which is the primary focus of the Company right now is that we've got a collection, in our view, of terrific assets.

And our primary focus is operating the assets we already have to the best of our ability.

And there's certainly more runway to go in terms of getting to our -- from where we are to what we view as our full potential.

Any M&A we're doing is really largely bolting on to one of the existing seven businesses that we have.

And as those opportunities -- should other opportunities emerge that are a good fit, we will certainly not hesitate.

But I think we are very convicted about our ability to continue to grow earnings, growing and continuing to improve the operating metrics of the businesses that we own.

Maybe one more, Scott, just because you're such a big company in Europe, has Brexit or other issues in Europe caused you as a corporation to defer or modify what otherwise investments you might have been making into Europe and/or step up PLS in some manner or restructuring?

No.

It's just way too early.

I don't think we're going to panic.

And I certainly don't think we want to try to anticipate what's going to happen because nobody knows.

But I would go back to what I said earlier.

I think our view to react effectively, quickly to whatever happens is pretty solid.

Got it.

Thank you.

Our next question is from Mr. David Raso from Evercore.

The line is open.

Hi, good morning.

I know it's a little early being July but sort of the setup into the December meeting is going to be important about accelerating the organic growth and you laid out about a year and a half ago the idea of businesses getting ready to grow.

And it seems like a fairly sizable increase in the amount of your business as you feel will be ready to grow going into next year than this year.

Can you help us point out which of the businesses do you feel are entering that phase and we should look at particularly into next year as the ones that will make that jump to being ready to grow?

Well, we're -- at the segment level within each of our segments there are businesses that are certainly there.

I'm trying to sort of figure out how to get at your question.

I think clearly based on current performance, auto is very far along.

Food equipment is very far along.

I think we're making some really strong progress in the other five segments.

And it's not a matter of flipping the switch going from not ready to ready.

It's more of an acceleration over time as more of the divisions inside each segment make that transition.

I am -- my view is that we have -- our second-quarter results certainly reflect solid progress in the right direction.

And you can -- we will -- we expect it to continue to improve quarter by quarter.

But it's not a matter of -- as I said, it's not a matter of flipping the switch and going from no focus on growth to all in with both feet.

I'm just trying to figure out, Scott, the idea of -- of course the ability to grow is trying to be characterized as not necessarily that sensitive to the end market.

Right?

It's more of a change in attitude about how you're going to push the business going forward.

But I'm just trying to package that in so which of the end markets that maybe I'm more comfortable with or less comfortable with in 2017.

So I was just trying to pinpoint where are those particular end businesses that at least you kind of see as their attitude's going to change a bit 2016 going into 2017.

It's been building towards it.

Just so I can kind of track that progression as we exit 2016 into 2017.

Are there some businesses you would at least highlight outside of auto and food right?

Those are already pretty far along.

Welding's obviously got some macro issues.

Maybe those comp [C's].

But if you can just help us a little bit to flesh it out for our own field work.

David, as Scott said, this is really a process that's being orchestrated at the divisional level.

So we have 84 divisions.

At the end of last year 60% of our revenues were in that ready to grow category.

And we look at the progress every quarter and we are on track to get to the 85% ready to grow.

So most of the Company will be in a position to accelerate organic growth going into 2017.

And it's a gradual timeline.

So every month, every quarter divisions reach that stage of being ready to grow.

And that's -- at the segment level we have different levels of progress based on when the segments really started to focus on the organic growth strategy.

And so it's hard to really comment at the segment and end market level beyond what we just walked you through.

Okay.

So I mean just to leave it as then bigger picture -- macro the same a year from now as it is today, the idea is with 25% more of the more of the Company ready to grow going into 2017 than you had going in 2016, the base case should be the Company should be able to accelerate as organic.

That's fair.

Right and you saw the slide -- the second slide really illustrates that point.

Right?

We look at our first half growth rate relative to last year in an environment that's pretty similar, good progress on the overall organic growth rate at the enterprise level.

And the PLS drag is less next year than this year?

That's still base case?

Yes, we have to get through the planning process here in the fall.

But I think it's reasonable to assume that PLS will be less in 2017 than in 2016.

Terrific.

Thank you very much.

I appreciate it.

Thank you.

Next question is from Nigel Coe from Morgan Stanley.

Your line is open.

Yes, thanks.

Good morning.

Just wanted to circle back to welding.

And I think, Scott, you mentioned that the comps get a lot easier in the second half of the year.

And you're assuming that the business is sequentially stable from 2Q.

We get into that mid single-digit declines.

I'm just wondering, just given the normalcy of knowing that business, do you think 2Q represents a flaw for that business or would you expect second half to be a little bit lower in line with normalcy now.

I don't think it -- I would -- given what we're seeing, I would certainly not call it a floor.

I think our expectation heading into the year was that it was going to flatten out at some point in 2016.

And clearly that's -- based on the first two quarters we're not seeing that.

So I think we've got to see what the future holds there a little bit.

But our planning assumption is I think sufficiently conservative in terms of its impact on the overall forecast for the back half of the year.

But it's still a pretty choppy environment and Michael gave you some numbers before -- down 15% year on year in industrial and oil and gas.

Six quarters in here, it's still pretty challenging.

Yes.

Understand.

And then just switching to price cost as a follow-on.

20 [bps] -- relatively modest.

Maybe can you just maybe decompose that between price and raws?

And the reason why is that obviously we've got steel inflation coming through in the next six to nine months.

And I'm wondering how we should think about that price cost gap developing.

Yes, so, Nigel, so price cost came in as expected, as you point out, and slightly favorable 20 basis points again.

And as you know, maybe different from some other companies, price cost has not been a significant margin driver over the last three years.

And I think what's going on inside the businesses is really with the support from our strategic sourcing team, the businesses are closely monitoring the material cost side and taking appropriate action on the price side.

And on both price and material costs we've not seen any significant impact or any change in terms of the results in the second quarter.

And so going forward we remain confident that we can continue to generate this type of modest price cost favorability on a go-forward basis.

Okay.

I'll leave it at that.

Thank you.

Next question is from Mr. Andrew Kaplowitz of Citigroup.

Your line is now open.

Hi, good morning, guys.

Good morning.

So test and measurements and electronics return to growth for the first time I think since mid-2014.

How much of the improvement is the markets getting better versus easier comparison versus ITW's specific focus on pivotal growth?

I know you're probably going to say all three, but if there's any additional color on what is going on there that'd be helpful.

And have you seen any increase in capital equipment spent on the test and measurements side?

And electronics at 6%, you mentioned the strength in (inaudible) does seem like a pretty strong result versus what you can see.

Yes, I think the way I would characterize it is things pretty stable on the test and measurements side but no big or even modest improvement in terms of underlying buying activity.

But certainly a solid stable performance.

And on the electronic side, as we talked about, some nice sequential improvement in the two sectors that you referenced.

I think we want to see another quarter or two before we decide that's a long-term trend.

But overall it's a nice improvement.

Okay.

That's helpful, Scott.

And maybe -- you've obviously done very well versus the enterprise strategy goal that you've set now really several years ago.

How do we think about -- it's tough organic growth environment here in 2016 again.

But the one goal that's out there you doing [200] basis points better than global industrial production still seemed a little hard to achieve if welding continues to be weak.

How do you look at that goal here over the next couple of years?

Do you need welding to improve?

Can you do it with still weak welding if the other segments are good?

How do you look at that goal?

Well I think if welding continues to shrink 11% a quarter, it's certainly going to be a tough nut to crack.

But I -- clearly that's not our expectation.

I don't think it would be anybody's expectation.

That's a -- that whole industry is a core part of the industrial economy around the world.

We have a terrific position in it.

There's certainly sort of the double whammy right now of oil and gas and slow industrial investment.

But all that's creating a lot of pent up demand at the same time.

So as things swing around -- and our history in welding is that coming out of these sort of down cycles in the market, there is 8 to 12 quarter run of some really strong recovery.

I don't think there's anything fundamental that's changed in our view in terms of the overall attractiveness of the welding market.

And so I think in general what I would point to in terms of our -- and our conviction remains unchanged in terms of our goal.

We have worked really hard to shape this portfolio so that we are operating in spaces everywhere where the product really matters to the customer.

As long as we continue to generate solutions that will help our customers serve their customers better, then we've got plenty of room to outgrow the underlying economy.

And we're not off -- we're not stepping off of that one bit in terms of our -- both our commitment to it and all the efforts going on inside the Company to make that happen.

All right.

Thanks, Scott.

Next question is from Deane Dray from RBC.

Thank you.

Good morning, everyone.

I wanted to circle back on EF&C and some more specifics on the business now that you own it.

And, Scott, you called out some new platforms.

I'd be interested in hearing just broadly what the new platforms are or the adjacencies and then maybe where there might be overlaps?

And is this where you're going to bring in product line simplification and what percent that might be versus the revenue base today?

Not a lot of overlap -- that's one of the attractive things about it both from a product line and from a customer -- from a product line and end customer standpoint.

In terms of the complementary platforms, it probably gets a little too messy to try to get into in too much detail.

Let me just say that they are similar to the current platforms we are in and that they are highly value-added engineered solutions.

The specific OEM customer needs -- some different categories in terms of the actual functionality, but largely similar types of positions that we have in our core business.

So lots of opportunity to add those categories to the existing categories we have.

I think what I would say is we will clearly spend some time on this in December and it would be more effective for us to do so then as we've had a couple of quarters with the business under our belt.

From the standpoint of PLS, certainly my expectation is that we're going to have a fair amount of it there under our normal application of 80/20, less so related to dealing with overlap.

As I said, that's not a big issue.

But we need to -- we have some initial views based on some of our due diligence but we certainly need some time to get in there over the next couple of quarters and really look at it in a much more fulsome way.

But it will be part of the mix for a while -- part of the margin improvement agenda there.

Great.

And then what about the margin goals that you've laid out to basically double margins by year 5?

Have you thought through, can you share what that progression might be?

I would imagine the gains come more in the back half of that time frame as opposed to being linear.

No, I'd say they probably play it a little more linear in sort of our typical integration.

This is -- as we talked before, the application of 80/20 isn't a quick fix.

It's a three to five year process from go to full integration.

And I would say, again, we'll have a better view of what we'll be able to get done in 2017 on this when we are a couple of quarters down the road.

But I think, in general, I would -- I think a more appropriate planning assumption would be a couple of points a year for the next five, then a big hockey stick.

Got it.

And then just as a follow-up, one of the things within the food equipment results today, I was surprised to see service not a little bit better given the kind of focus that you've put on it there.

Is there anything in the quarter that might have been a drag there?

Should we start seeing service become a more meaningful contributor?

The answer to the second question is absolutely.

I think some of the problems with these quarterly calibrations are these are strategies that play out over the course of a year.

So you've got a lot of things bouncing around.

I don't -- sitting here right now, I can't say whether there's sort of what the [comp] profile was in service and food equipment.

But in general, we've -- as you said, we've got a lot of focus on service.

It's a great business and a great competitive advantage for us.

The other thing is that there is some PLS out of a couple of parts of that business going on right now but my assumption is -- I'd have to look at it deeper -- but my assumption is that's probably had some impact on Q2.

Got it.

Thank you.

Next question is from Mr. Mig Dobre from Baird.

Your line is now open.

Good morning, everyone.

If I may just going back to the broader organic growth question from -- questions from earlier, just kind of looking at the quarter here EMEA certainly ended up outgrowing all the regions -- 3% versus everywhere else growth at 1% or below.

And I'm just wondering, from your perspective looking into the back half of the year, do you still expect this kind of leadership from EMEA or are you thinking that we're going to see acceleration from North America deliver those organic growth goals of yours?

I think, Mig, if you look at the first half growth rates on both international and North America kind of in the low single digits, that's probably a good way to think about the back half of the year.

So we certainly don't expect any acceleration on a regional basis.

And as you know, we don't run the Company that way.

Okay.

And then maybe, again, going back to food equipment, can you provide any commentary in terms of what's been driving the growth in equipment?

I'm wondering if there's anything to differentiate in terms of ware washing versus cooking, refrigeration -- any color there would be helpful.

Mig, I made some comments earlier really that this was broad-based strength in terms of the product lines with refrigeration, ware wash cooking, the retail side with scales -- overall really strong performance across the board with, as you heard, equipment up 9% in North America.

And I would characterize it as much more of a function of a significant part of our food equipment business reaching that ready to grow stage.

It's been there for the last year or so and just being in a position to be much more aggressive in terms of attacking our growth opportunities.

The innovation pipeline there is terrific.

That certainly is contributing.

But it's more of an end product of all the work that we've done to get the portfolio right, get the business simplified and get it focused on its best growth opportunities.

Right.

And I appreciate that, but obviously the drivers are, I presume, a little bit different, ware washing versus [hot side] cooking.

Right?

I don't think -- I wouldn't say they're a lot different based on what I just said.

We've got a highly competitive, highly differentiated product line with great opportunity to grow and are now in a position to really focus on attacking that.

All right.

Thanks for your comment.

Next question is from Andy Casey.

Your line is now open -- from Wells Fargo.

Thanks a lot.

Good morning, everybody.

Good morning.

A question kind of going back to pricing.

I know, as you just said, Scott, the Company focuses on differentiated product and that kind of shields ITW from price competition.

But we are seeing some evidence of competitive pricing in some of the markets that you really don't participate in directly.

Did any of the segments realize negative pricing or see competitors resort to price actions to try to drive their volume?

Yes, I think, Andy, this was a Q2 that this year that looked a lot like Q1 and a lot like Q2 last year.

So we would say at the enterprise level and even at the segment level, no significant changes on the pricing side.

Okay.

That's good news.

And then on the EF&C acquisition, the accounting impact, do you expect to realize all that in Q3 or is that going to be kind of carryover into Q4?

Yes, I really don't want to get into too much detail here but in terms of Q3 versus Q4, we're just getting going here, Andy.

What I can tell you is for the second half, based on what we know today, we expect it to be neutral.

And I don't think it will be a big swing on a quarterly basis but I don't know that for sure yet.

Okay.

Thanks a lot, Michael.

Next question is from Ann Duignan from JBMC.

Your line is open.

Hi, good morning, I'm still with JPMorgan.

Thank you.

Good to hear.

(laughter)

At least I think I am.

A lot of my questions have been answered but maybe you could give us a little bit more color on China in general and how the various businesses progressed during the quarter in China.

Yes.

So I think China overall was flat with strong performance in automotive -- auto up 13%.

Test and measurement fairly solid, low single-digit growth.

Some challenges you'd expect on the welding side and food down slightly, but I wouldn't read too much into that.

So overall a good quarter in China.

Okay.

Thank you.

And then just back to -- overall, we've heard from some other suppliers that there are several OEMs who are shutting down production in Q3 for extended periods.

I think you kind of alluded to that perhaps in the welding business but are any of your other businesses seeing any extended shutdowns from the customers?

Not that I'm aware of.

Okay.

Thank you.

I'll leave it there.

Thank you.

Next question is from Joel Tiss from BMO.

Your line is open.

Yes.

Almost everything's been answered already.

Thank you guys for taking the time.

I just wondered generally acquisition prices, are they reasonable?

Because you guys are a little different than everyone else.

You're very zeroed in on specific areas or you see a little inflation out there and it's tough to find things.

Well we did one deal.

So I'm not sure that we're a market maker or can give you good feedback overall.

It's not something where I think we have enough of an active effort on to be -- to give you any good insight or input on acquisition prices generally.

All right.

Well, that was it.

Thank you very much.

Thank you.

Next question is from Stephen Volkmann from Jefferies.

Your line is open.

Hi, good morning.

My follow-up first maybe this time.

You made a comment earlier about PLS being less in 2017, but I guess that means it's not going to go away.

Does it ever go away?

Is it -- does go to a normal level?

I mean how do we just think of the cadence of PLS longer term?

Yes, I think eventually it goes down to a level where it's what I would describe as normal maintenance, probably less than a half a percent a year.

I think -- I don't want to get too specific here because, as Michael said, we still have to go through the planning cycle.

But the big load of activity on this for the Company over the last three years-plus has really been around the portfolio strategy execution.

Once we get it to where we want it, it certainly becomes something that we do some minor pruning on an annual basis.

But it's not something we'd even talk about anymore at that point and maybe that's a couple years out from here.

Okay.

Great.

That's helpful.

And then just on restructuring, I wonder do you have additional restructuring in your plans for 3Q, 4Q?

And maybe if you could just touch on sort of what you're doing there and how we should think about that impact in 2017.

Yes.

So, Steve, our restructuring assumption for the year in that $60 million to $70 million range is unchanged.

And we don't expect any significant changes to that as we go through the Q3 and Q4.

Given current levels of demand, we're at $60 million to $70 million and don't see anything right now that would take it outside of that range.

Great.

Thank you.

Next question is from Jamie Cook from Credit Suisse.

Your line is open.

Hi.

Good morning.

Just two quick follow-ups.

One, I know you don't want to comment on the auto acquisition.

But I guess on your other businesses as we exit 2016, how should we think about amortization expense from acquisitions?

Because I would assume that's another tailwind as we think about 2017 versus 2016.

And then another clarification just on FX impact to EPS.

I think last quarter you guided to $0.20.

Did you change that number with the pound?

That's all I have.

Yes, let me start with the last one.

I think the $0.20 you're referring to was way back when at the beginning of the year.

There's a lot of volatility, as you know, on the currency side of things.

And so while at current rates we'd expect it to be less than $0.20, it's really hard to put a hard and fast number out there given all the volatility.

On the intangible amortization, we expect that to continue to go down.

The two segments where we talk about this test and measurements and polymers and fluids it's maybe something like 30 to 50 basis points of favorability on an annual basis in those two segments.

Okay.

Great.

I'll get back in queue.

Next question is from Steven Fisher from UBS.

Your line is now open.

Thanks.

Good morning.

Good morning.

The Q3 margin guidance implies a moderating of the year-over-year improvements in margins, even if you adjust for the 50 basis points of EF&C.

It doesn't sound like there's a lot more restructuring there.

Are we just sort of getting to the maturity point of the margin improvement or is there perhaps some conservatism there?

It's certainly not that we're getting to a level of maturity here.

So, as you know, we have guided to 100 basis points of margin expansion this year and in 2017 independent of volume.

And Scott talked a little bit about how much more potential we still have inside the Company.

Really the -- last year, if you recall, margins were up 180 basis points.

We had a really strong third quarter last year.

So it's really more of a comp issue than anything else.

Okay.

That's helpful.

And then how have your expectations changed for the industrial-facing businesses year-over-year?

Last quarter I think you said there was maybe a chance that you could get to neutral exiting the year.

Has welding now taken a step backwards there or how are you thinking about that consumer versus industrial by kind of exiting the year?

Well I think I'd just go back to what I said earlier.

I think welding, given the performance in the first two quarters, the contraction is certainly continuing on longer than -- expectation is kind of a funny word because we tend to just react to the conditions that we're seeing.

But I think ultimately, heading into the year, given the kind of decline we saw last year, I think we were hopeful that things were going to flatten out by the back half.

Clearly, given the first quarter, that's not the case but at some point it's going to happen.

And I think what we're doing in the short run is managing the cost structure with some restructuring actions and other things we're doing to do what we should be doing in the short-term while preserving our position in our markets and certainly being ready to participate fully as things turn around up there.

So I don't -- by the same token, we're performing better on margining.

We're certainly offsetting -- more than offsetting the impact that welding is having on the short-term.

And that's one of the values of a portfolio of seven really strong businesses is we're never probably going to have all seven going 100% in the right direction all at the same time.

But we're going to have enough of them around that the overall enterprise performance in whatever environment is going to be pretty darn good.

Okay.

Thanks a lot.

Next question is from Walter Liptak from Seaport Global.

Your line is open.

Thanks.

Good morning, guys.

Good morning.

I wanted to ask about the food equipment business and the 300 basis points of margin improvement and if there's a way of measuring how much of that was 80/20 enterprise initiatives and how much was volume related.

Yes, the best detail and the most detail that we give you, Walter, is in the appendix in the press release.

So if you look at food, total margin expansion 300 basis points, 110 of that was from operating leverage.

Similar to what you saw in Q1, as these businesses begin to accelerate growth, you see really nice improvement on the margin side as a result.

And then in addition, approximately 80 basis points of enterprise initiative and other margin expansion and then restructuring was slightly lower this year versus the second quarter last year.

And so we break that out in the press release by segment and total ITW.

Okay.

Got it.

Great.

Okay.

And just as a follow-up on the EF&C business, the doubling in margin -- and it's been a while since you guys have done an acquisition like this.

I wonder how much of this is new programs related to the business management system and if at all you're thinking this is sort of like a new -- like a test case for future acquisitions?

I wouldn't characterize it as a test case.

I think our track record, even though it has been a while, I don't think we've forgotten how to do this.

We have, in many ways, been doing this -- everything we're going to do at EF&C at all 84 of our other divisions over the last couple of years which is front to back reapplying our 80/20 management system.

So I think our methodology is -- inside the Company is extremely well defined, extremely well proven.

We have a parallel business running at mid-20's EBIT margins that we're adding this to.

So I don't think there's any sort of mystery about what we need to do and the process we're going to use to make it happen.

Okay.

Great.

Okay.

Thank you.

Last question in the queue is from Eli Lustgarten from Longbow Securities.

Your line is open.

Thank you.

Good morning.

Most of the stuff has been answered.

Just a clarification.

You said restructuring is going to be about the same as planned before but you had 140 basis point impact on welding and [7] basis point in polymers and fluids.

What kind of an impact from restructuring should we expect on margins in the second half of the year from the ongoing restructuring?

Very similar to the first half.

So the way we planned this is at a very measured pace.

If you go back and look at our restructuring spend on a quarterly basis, it's very consistent in that $16 million to $17 million range.

And so that takes us to $60 million to 70 million for the year.

And obviously that is included in our guidance.

So we're not adding anything back here.

Okay.

And secondly, I think you said the $2 billion share repurchase -- $1.2 billion is coming from overseas?

So if you recall in the back end of first quarter earlier this year, we were able to access a little over $1 billion -- $1.2 billion of overseas funds that were -- that we have allocated to the share buyback program.

And so that portion is done.

And the comment was that the $800 million, the balance takes us to $2 billion, that's really more of a -- think of that as a more normal run rate for the Company.

And so that's our -- kind of our typical surplus cash flow that this year is being allocated to the share buyback program.

All right.

Thank you very much.

All right.

I think that brings us to the top of the hour.

Thank you, everyone, for your time today.

That concludes today's conference.

You may now disconnect at this time.

Thank you for your participation.