Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. [Operator Instructions] 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, 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…

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

I'd be happy to. Thank you. [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. I mean 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 -- there's a cyclicality and above that 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 great 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 lines. 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. So...

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

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

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 guide? And 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're 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, they can change a little bit, they are 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 Tami Zakaria at JPMorgan.

A medium- to 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 manufacturing overseas? So how to think about that onshoring opportunity in auto?

Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell company. And so we've 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 a producer we sell a company.

Understood. And one 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, Tami. 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 and 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 there's a lot of 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 a meaningful component of enterprise initiatives. A lot of these projects have a payback of less than a year. So we very much see 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 the trends, and -- but I guess as we're kind of thinking about 2026 and a 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've 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 per 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-backed 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 those are 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 to this year. And then as usual, like I said, we'll update you in February, which -- and 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 thinking about the right leverage for you going forward? And put that in the context of potential 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 of 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 do 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 costs? Will it be dollar for dollar or also on margin?

Yes. I think, Stephen, 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 a produce where we sell company. I think the 93% or so of the company is produced where we sell. We had a little bit of 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 are 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 be 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. So basically, Stephen, what's driving China 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 a disproportionate amount of our patent activity from China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive is what's driving our progress there. And we're basically penetrating at a level well above the market.

Yes. And maybe to put some quantification around it, if 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, Polymers & 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 out 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 one for Chris. 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 of correlation between the 2, Julian. 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 between the 2 is that they're both connected to differentiation. PLS results is as a result of where we feel we're on the same level of differentiation and we're product line pruning accordingly, whereas 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. You'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 kind of think of 2 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 we've demonstrated that we know how to do that, and we've further mitigated the risk of any tariff related specifically to China. So I think that part of the equation, we feel really good about. 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 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 main event here.

And so 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 unlock?

Yes. So I think, Joe, we think we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously going 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 parts 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 we're outgrowing the markets at the point at which the cycle turns, we'll be really well positioned. And 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 the long term where we're just going through a period 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 & Measurement and what you're seeing there. It seemed 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. 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 requiring more and more exacting -- testing equipment. And that's where we play. So again, short-term issues here around CapEx environment and so on. So a little bit of compression in Q3 relating to some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us -- 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 covered a lot of ground here. Just want to go back to the comments around strong start to the quarter and then it sort of pared out. Do you think there's any unusual behavior with distributors around price increases or tariffs. Obviously, we had the big tariff event middle of the quarter. Anything you'd call out there, number one? And then number two, restructuring actions in the first half of the year, did we see the full benefit in 3Q? Or was there still some benefits to come through in 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 misnomer. I mean these are funds that are expenses that are funding our 80/20 front-to-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 paybacks of less than a year. So it happens pretty quickly, but -- 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. That's helpful. A quick one on Welding. We've seen, I think, now 2 quarters of nice inflection in growth on Equipment, but Consumables remains sort of step down in that low single-digit decline territory. Is that primarily a price differential between Equipment and Consumables or anything else you'd call out?

Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables?

Consumables, I think, right? Is that right?

Consumables and Equipment driven up 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 2%. 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 an 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 Jaroslawicz 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. I think the -- 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 1 point or so. Certainly, we've also factored in, I should say, the lower auto build 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.

I also kind of want to go back to the PLS 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 I guess, given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty much 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 throttle 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 pruning 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 80/20, it's not 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. And I think we've demonstrated that for instance, coming out of the pandemic, we saw very healthy growth and margin expansion while over that period, we were investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it's about the quality of the organic growth, 35% incremental historically. We're now well above that, comfortably kind of into the 40s. And that's again at a time when we are very much investing in our businesses in a very focused way around innovation and strategic marketing and so on, and so for us, the math is pretty simple with margins at 26% and with growth in incremental margins at 35% plus or even 40-plus right now, it's the operating leverage that is really driving the margins forward from here. 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 the framework 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 think about 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 what -- I understand how you're thinking about it, it's tempting to say, okay, no more PLS. 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.

Ladies and gentlemen, that was the final question in our queue 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.