The conference call for ITW's third quarter earnings has begun, with Karen Fletcher, Vice President of Investor Relations, introducing the company's CEO, Scott Santi, and other executives. Santi announces that he will be stepping down as CEO at the end of the year and will be succeeded by Chris O'Herlihy, who has been working closely with Santi for the past 11 years and is well-prepared for the role.

In the past 11 years, the company has focused on leveraging its unique capabilities and practices to position itself for long-term success. The next phase is expected to bring even more competitive advantage and performance, despite increasing volatility in the world. The outgoing CEO expresses gratitude to his colleagues and confidence in the new CEO, who is humbled by the opportunity to lead the company and its talented team.

The company's strong performance in executing its enterprise strategy has resulted in its best performance to date. The focus for the next phase is to prioritize organic growth and customer innovation on par with operational capabilities. In the third quarter, the company saw a 2% organic growth on an equal days basis, with strong margins and income. The company has narrowed its EPS guidance for the year and remains well positioned for continued success.

In the third quarter, the company saw a 0.5% increase in revenue, with favorable foreign currency translation and divestitures offsetting each other. Operating margin increased by 200 basis points and GAAP EPS was up 9%. Free cash flow grew by 40% and the company repurchased $375 million of its shares. North America saw a 2% decrease in organic revenue, Europe was flat, and Asia Pacific was up 6%, with China driving the growth. The Automotive OEM segment saw 4% organic growth, with North America down 5%, Europe up 5%, and China up 18%. The auto strike did not have a significant impact on the segment's revenues in Q3, but it will in Q4. North American Automotive OEM business represents approximately 40% of total segment revenues.

The company's annual sales are largely reliant on D3 automotive customers, and the recent auto strike is expected to reduce Q4 earnings by $0.12 per share. Food Equipment saw solid organic growth, with North America leading the way and Europe remaining flat. Test & Measurement and Electronics experienced a decline in organic revenue, largely due to decreased demand for semiconductor-related products. Welding also saw a decline in organic revenue, driven by softer demand for CapEx. Polymers & Fluids saw growth in the automotive aftermarket, while Construction saw a slight decline in organic revenue.

The international markets were down, with Europe and Australia and New Zealand experiencing significant declines. However, operating margins improved due to enterprise initiatives and price cost. In the Specialty Products segment, organic revenue was down, with North America experiencing a larger decline than international markets. The company has updated its full year 2023 guidance, narrowing the range of its GAAP EPS and projecting organic growth of 2% to 3%. Operating margins are expected to improve, and free cash flow conversion is projected to be more than 100% of net income. The company remains focused on leveraging its strengths to deliver long-term performance.

Scott Davis asks about the company's price/cost ratio and if the improvement is due to higher prices or lower costs. Michael Larsen explains that they are on track to recover from the past two years of inflation and are expecting a 200 basis points recovery for the full year. He also mentions that they are seeing some deflation on the commodity side. Scott then asks about the focus of the company in the first 90 days under new leadership, and Christopher O'Herlihy says it is still early but they plan to drive higher growth rates and focus on the portfolio.

The speaker, Scott Santi, outlines the company's plan for the next 90 days and emphasizes their commitment to strengthening their business model and building organic growth. He also mentions the strong performance of their Enterprise Industries and the 200 basis points operating margin expansion, with 140 points coming from enterprise initiatives and 210 points from price/cost. There may have been a drag on the margin from investments in labor and compensation, but the company expects this to taper off in 2024.

The speaker discusses the company's strong performance in the past 2.5 years despite facing headwinds from investments in growth initiatives and wage and benefit inflation. They mention a 200 basis points margin improvement in the third quarter and a potential 150 basis points headwind in the future. They also mention a $0.12 headwind from the ongoing auto strike and the uncertainty surrounding it. The company has taken a cautious approach in their projections due to the strike and potential further deterioration.

The company's quarter-to-date impact is expected to be a $0.12 EPS adjustment. If the strike continues through year-end, the company will do well. The company is uncertain about future revenue and has seen some markets slow down, but others have improved. Electronics and semi are still weak, especially consumer electronics.

The company is expecting a reacceleration of demand in the semiconductor industry in the second half of the year, but it has been deferred until next year. The company remains committed to this business and continues to invest for future growth opportunities. In Construction Products and Polymers & Fluids, the company has seen material benefits to margin due to enterprise initiatives and favorable price/cost impact. There is potential for even more margin improvement once volume leverage returns.

During a conference call, Steven Fisher from UBS asked about the performance of the Welding segment. Michael Larsen explained that the year-over-year comparison was not a good indicator due to the dynamic nature of the industry. However, there was a slight slowdown in demand for equipment and backlogs have normalized. The company is also seeing a decrease in inventory levels from customers and channel partners. This had a negative impact on organic growth in the third quarter. Overall, the welding activity has slowed down, but it is difficult to predict if this trend will continue.

The speaker discusses the progress of the company's Test & Measurement and Electronics segment, including the integration of an acquisition and the performance of the base business. They mention that the market has been mixed for various peers in this industry.

The company does not give quarterly guidance, but historically there is a ramp-up in Test & Measurement and Electronics in Q4. The consumer electronics end market remains soft, with a 20-25% decline in semi sales. The company does not expect a recovery in Q4 and is focused on implementing their business model for MTS, which has been performing well since its acquisition 2 years ago. The Board of Directors will visit MTS to witness the progress of integration.

The speaker believes that the company has great potential for growth in the long term due to its strong leadership, brand, technology, and business model. In the short term, the company has already shown double-digit growth and is on track to meet its goals. The speaker also disagrees with the idea that the company is not gaining market share, and believes that each of its divisions has a clear understanding of their market growth and competition.

The company is gaining market share and performing well in terms of margins compared to competitors. The quality of their portfolio, investments in sales and innovation, and focus on customer-back innovation are contributing to this success. The construction sector, specifically the residential renovation channel, has been performing well, potentially due to new products or other factors.

Michael Larsen, a representative from a company, is discussing the surprising growth in the residential renovation and remodel market, which is up 7% year-over-year despite low interest rates. This growth is largely due to market share gains through big box retailers. Larsen believes that this growth will continue, as overall construction in North America remains stable. In terms of the Food Equipment segment, Larsen is asked about the supply chain and lead times. He mentions that the segment has various verticals and a strong backlog, and there is no significant impact from destocking in the market.

Michael Larsen, speaking on behalf of the company, states that their business model leads to best-in-class lead times and customer-facing performance. They have returned to pre-pandemic levels in their ability to supply customers, but there is still some inventory in the channel. This inventory is expected to decrease over the next few quarters. The backlog is back to normal levels, which is two to three weeks given their delivery performance. The company expects the normalization of channel inventory to continue as previously anticipated, with a drag on organic growth for the next few quarters.

The speaker discusses the company's inventory levels, which are currently higher than usual due to supply chain disruptions. They estimate it will take until next year to return to normal levels. The current demand environment is uncertain, with factors such as interest rates and cautious customers affecting CapEx. The company remains focused on delivering long-term performance.

The operator thanks everyone for joining the conference call and informs them that they can now disconnect. They wish everyone a wonderful day.

This summary was generated with AI and may contain some inaccuracies.