Illinois Tool Works Inc. (ITW) Q2 2026 Earnings Report, Transcript and Summary

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

Thank you, Trevor. Good morning, and welcome to ITW's Second Quarter 2026 Conference Call. I'm joined by our President and CEO, Chris O'Herlihy; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's second quarter 2026 financial results and provide an update on our outlook for full year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?

Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, the ITW team delivered strong operational and financial performance in the second quarter. Highlights include 4.5% organic growth, operating margin expansion to 26.7% and a 10% increase in GAAP EPS to $2.84. Notably, operating income reached $1.15 billion, a 7.4% increase, marking the most profitable quarter in ITW's history. Our top line momentum this quarter was propelled by significant acceleration in our CapEx-related businesses, led by organic growth of 14% in Welding, 10% in Test & Measurement and Electronics, alongside 7% in Polymers & Fluids. In addition to capitalizing on favorable market conditions, we continue to make progress on our long-term organic growth agenda, most notably through customer-back innovation or CBI, which contributed 3% to revenue growth in the first half compared to 2.4% for full year 2025. Delivering a 3% plus CBI contribution is the single biggest catalyst for achieving sustained high-quality enterprise organic growth of 4% or higher. Our first half performance offers another proof point that disciplined execution on our enterprise strategy priorities is yielding strong results and that we're firmly on track to achieve our 2030 performance goals. Operationally, the ITW team continued to execute at a high level with enterprise initiatives contributing 120 basis points to our operating margin. We also expanded free cash flow by 41% and returned over $1.2 billion to shareholders through dividends and share repurchases. Looking ahead, we are raising both top and bottom line full year guidance with all 7 segments expected to deliver both positive organic growth and expand operating margins. Full year organic growth guidance is raised by 1.5 percentage points to a new midpoint of 3.5%. GAAP EPS is raised by $0.15 to a new midpoint of $11.45, reflecting 9% year-over-year growth. This marks our second guidance increase of the year. As we've said before, ITW's unique business model, resilient portfolio and Do What We Say execution demonstrated daily by our colleagues worldwide ensure we are well positioned to deliver robust financial performance in any environment and remain invested in our long-term strategy through any business cycle. As order activity continues to strengthen across several of our end markets, our production capacity, new product pipeline and best-in-class customer-facing metrics position us to fully capitalize on these positive demand trends that we are now seeing. With that, I'll hand the call over to Michael to walk you through the segment details and updated full year outlook. Michael?

Thank you, Chris, and good morning, everyone. In Q2, total revenue grew 6.1%, driven by 4.5% organic growth, a 1.4% contribution from foreign currency translation and 0.2% from an acquisition. As Chris said, organic growth performance was particularly strong in our CapEx- and semiconductor-related segments as well as Polymers & Fluids. Our customer-back innovation efforts continue to gain momentum and CBI was a key top-line catalyst, contributing 3% to growth in the first half. From a regional perspective, organic growth was up 6% in both North America and Asia Pacific, 3% in China and flat in Europe. Moving to the bottom line. Operating margin expanded by 40 basis points to 26.7%, with a solid 120 basis points contribution from enterprise initiatives. In the quarter, price increases more than offset higher raw material costs in dollar terms, though timing lags between inflation and price adjustments temporarily diluted margins by 40 basis points. As demonstrated in prior cycles, we fully expect to recover this margin impact over time as evidenced by the implied incremental margin guidance for the full year of 40%. Free cash flow increased 41%, delivering a 77% conversion rate, in line with typical seasonal trends. In Q2, we opportunistically pulled forward our planned Q3 share repurchases, buying back $750 million or about 1% of ITW's outstanding shares at an average price of $255 per share. Turning to Slide 4. Our sequential trajectory from Q1 to Q2 underscores accelerating strength across every key performance metric. Sequential revenue growth was plus 7% versus our historical average of plus 2%. Operating margin expanded 130 basis points and operating income grew 12%, making Q2 the most profitable quarter in company history. Moving to the segment highlights, starting with Automotive OEM. Organic revenue was roughly flat with North America up 1%, China up 1% and Europe down 5%. We maintain our full-year expectation of outpacing global builds by 200 to 300 basis points with builds projected to be down 2%. Operating margin improved by 30 basis points to 21.6%, with enterprise Initiative gains partially offset by price/cost timing lags. Turning to Slide 5. Food Equipment organic revenue was flat overall, as service strength of plus 5% helped offset a 2% decline in equipment, a notable sequential improvement from the 6% equipment decline in Q1. Regionally, North America was down 4% despite some institutional demand improvement in areas such as health care, while international delivered strong growth, up 6% in the quarter. Looking ahead, we expect that organic revenue growth will turn positive and that margins will improve in the second half. Test & Measurement and Electronics had an outstanding quarter with 10% organic growth led by a 21% surge in Electronics, which represents about 40% of the segment. The 2 main drivers of this strong growth that we're seeing are: one, our electronic assembly businesses, which serve the printed circuit board industry; and two, our semiconductor-related businesses, which serve the chip manufacturing industry. Our businesses in these 2 sectors are able to fully capitalize on the growth opportunities ahead of them and gain market share based on their expanded capacity, the highly differentiated product portfolios and best-in-class customer-facing metrics. Operating margin expanded by 240 basis points to 25.2%, and we expect further improvement in the second half of the year. Lastly, it is worth noting that order growth continues to outpace revenue growth in this segment, which is also the case in our Welding segment. Speaking of Welding and moving on to Slide 6. Welding delivered record top-line results driven by 14% organic growth as equipment surged 19%, driven by market tailwinds and strong new product adoption. North America, which represents about 85% of the Welding segment, led the charge, up 19% with broad-based growth across both industrial and commercial markets as demand continued to strengthen in areas such as infrastructure, energy, aerospace and defense. Operating margin remained best-in-class at 32.4%. As you may have heard, a storm impacted 2 of our welding facilities in Appleton, Wisconsin yesterday, with one manufacturing facility and one warehouse building sustaining damage. First, we're grateful that all our ITW colleagues are safe and accounted for. As for the business, our teams are in the process of executing contingency plans with a focus on minimizing disruption for our customers. In terms of our guidance, we do not expect any material impact on ITW. In Polymers & Fluids, organic growth reached 7%, driven by strength across the board, including 7% growth in Automotive Aftermarket as a result of traction on new products and continued market share gains. Polymers grew 7% and Fluids rose 8%, supported by strong momentum in general industrial and biopharma markets. Operating margin expanded 160 basis points to a record 29.3%. Turning to Slide 7. In Construction Products, organic growth was positive 2%, marking the highest organic growth rate in 4 years. All regions grew with North America up 2%, Europe up 1% and Australia and New Zealand up 2%. Residential renovation in North America grew 1% and commercial construction, which represents about 15% of the region, was up 13%. Specialty Products revenue was up 3% with organic revenue up 2%. North America grew 2% and International grew 1%, with strong growth in medical, aerospace and consumer packaging, offset by product line simplification in appliance components. With that, let's turn to Slide 8 for an update on our guidance. Looking ahead, ITW is well positioned to deliver strong performance on both the top and bottom line in 2026. Starting with the top line, our organic growth projection is now 3% to 4%, up from 1% to 3%. The updated midpoint of 3.5% represents an increase of 1.5 percentage points versus prior guidance. And per our usual process, our guidance is based on current levels of demand adjusted for typical seasonality and prevailing foreign exchange rates. On the bottom line, operating margin guidance is unchanged at 26.5% to 27.5% as enterprise initiatives are expected to contribute more than 100 basis points. We are raising our GAAP EPS guidance by $0.15 to a range of $11.35 to $11.55 with a new midpoint of $11.45, representing 9% year-over-year growth. Today's guidance increase follows a $0.10 increase to guidance in Q1. The effective tax rate remains unchanged at 23% to 24%. Free cash flow conversion is projected to exceed 100% of net income with full year share repurchases of approximately $1.5 billion. Lastly, with respect to potential tariff refunds, we do not expect any material recovery and haven't included anything in our updated guidance. We enter the second half of 2026 with strong operational momentum, highlighted by organic growth of 4.5% in the second quarter. As evidenced by today's raised guidance, which implies sustained organic growth of 4.5% in the second half, our best-in-class margins and returns and our disciplined operational execution, ITW is well positioned to deliver strong financial performance in 2026 and beyond. With that, I'll turn the call over to Erin.

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

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

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

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

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

Yes, yes. Yes, 100%. I mean, look, I would say, Andy, that we are really, really encouraged by the strong momentum that we're seeing in CBI right down into our divisions, the followership, the engagement, and the progress that we're making, and we continue to see the strength in terms of our pipeline of new products that we're working on. This is one of the reasons that we're demonstrating these results. At 3%, no, it's probably a little earlier than we thought, but no surprise given the way we and our teams have embraced this. The way we approach this is very similar to how we approached 80/20 front-to-back 10, 12 years ago in terms of really investing and building capability over the last number of years in CBI. We have lots of great innovation practice throughout the company. As we've mentioned, we've codified this into a very effective and holistic innovation framework. And we launched this in the back half of 2024. Since then, we have relentlessly implemented it at a very high quality of practice, very similar to how we approached 80/20 front-to-back. And so in my mind, this innovation progress that we're seeing, a, is not a huge surprise; b, is very sustainable. And most of all, I mean, really encouraging in terms of what we see, the projects we are working on extensively throughout the company in every segment, and we will see CBI contribution increase in every segment this year and on into the future. So pretty encouraged about it.

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

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

Yes. I'd say, Tami, really, I would say the big thing about Q2 is the acceleration on the top line relative to Q1. So 7% sequential growth compared to our historical 2%. It was really across the board. Every segment came in above their historical kind of typical sequential growth rate with the largest improvement in Welding and Test & Measurement as well as in Polymers & Fluids. As we went through Q2, April was off to a really good start, sustained that in May and June was even better than that. And we're off to a good start here to Q3, right in track with where we want to be and consistent with the updated guidance that we're providing today, which implies that we can sustain the growth here in the back half of the year at 4.5% organic. So I'd say that was kind of the big new news, the acceleration in demand that we also talked about on the last earnings call, it really continued throughout the second quarter and into the third quarter.

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

Well, Tami, I mean, I think in the spirit of continuous improvement, which is so embedded in our DNA here at ITW, we would expect and the segments themselves would expect that margins will continue to improve here as they move towards their full potential. And certainly, as long as the incrementals, our margins are significantly above 30%, and we're guiding to 40% for the full year. Those margins will continue to improve as the businesses grow. At the same time, obviously, we've talked about margin improvement in Automotive OEM approaching kind of the target we laid out in 2023 at Investor Day in kind of the low to mid-20s. Still a lot of runway in Test & Measurement. You saw a nice improvement this quarter, 200 basis points-plus improvement in Test & Measurement. That will continue. There's no reason why Food Equipment shouldn't be at 30% plus over time. Polymers & Fluids putting up a new record this quarter at 29% plus. And -- oh, by the way, Construction with very little help on operating leverage is putting up 30% plus. So I think really across the board, every segment will continue to improve. And as Chris said, in the second half here of the year, in the near term, we expect every segment to improve the organic growth rate and every segment to improve margins. And there's no reason to believe that, that's going to stop anytime soon. And as Chris also said, we are well on our way to our 30% plus enterprise targets by 2030 with the big driver, obviously, still the enterprise initiatives, the organic growth and the operating leverage that comes with it. And then the other big factor here is all these new products that are coming in that Chris talked about with the CBI contribution of 3% are coming in at higher margins. And so you put all of these things together and at least from our vantage point, you see a very clear path to that 30% plus that we've committed to.

Our next question comes from Scott Davis from Melius Research.

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

Sure. Yes. So the CBI number is a truly incremental number, Scott. It's basically incremental revenues from new products introduced within the last 3 years. It doesn't -- I mean, cannibalization is taken out. So it's all new -- this is all really -- these are new actual revenues. Obviously, we audit these and so on and so forth. So these are subject to a very high level of scrutiny within the company. In terms of how we incentivize, this is one of our 4 long-term metrics that we incentivize inside the company. We just introduced this as a metric actually last year when we launched the framework. So basically, everybody from the divisions on up are compensated on progress in this. But it doesn't mention -- or doesn't measure cannibalization. It nets that out and measures true new product year-over-year incremental revenues and it measures them for 3 years, at which point these roll off and you've got to have a new product coming along otherwise the CBI number falls off.

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

Yes. I would say, Scott, we haven't seen a lot of movement in terms of coming down. As we said before, I think we would characterize our approach on M&A as active but disciplined, I would say. We're sticking to our disciplined portfolio management strategy here. Obviously, we believe and we're now starting to realize this really compelling opportunity on organic growth. And so to the extent that we can find high-quality acquisitions that can extend our long-term growth potential, then we're certainly very interested. And obviously, the second aspect to that is that we've got to be able to leverage the business model to improve margins. So we review opportunities on an ongoing basis. We're pretty selective given all the organic growth potential that we have in our core businesses. As I said, active but disciplined. And when we find those opportunities and when we do those opportunities, you will hopefully appreciate that we will have subjected them to this level of screening and ensure that they will be long term -- good long-term business for ITW. Obviously, MTS is the last significant one that we did, example of an opportunity that ticked all the boxes. And 3 years in -- 3, 4 years in now, this has turned out to be a great acquisition for us. We had one bolt-on acquisition in the semi manufacturing space late last year that had all the high-quality growth attributes that we look for. And so we're very open to doing more deals like that, but we're prepared to wait for them, particularly given the compelling organic growth opportunity that we have.

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

We appreciate that. Thanks, Scott. Thank you.

Thank you.

Our next question comes from Joe Ritchie from Goldman Sachs.

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

Yes. So Joe, that's a natural outcome of how we do 80/20 is we use it to balance and match capacity. We never allow ourselves to get in a situation where we run over capacity. We're very proactive in ensuring that we add capacity in advance of growth. And effectively, that's what we've been doing for the last number of years. If I cite semi and electronics specifically, obviously, there's been a bit of a down cycle in the last couple of years. But given our belief in the business and our differentiation in that space, we continue to invest meaningfully over the last couple of years. And that's really helping us as the semi industry particularly starts and has been ramping for the last 6 months, we are really well positioned to capitalize on that growth. But that's an approach we take in all of our businesses. It's a natural outcome of how we do 80/20 in terms of ensuring that we balance capacity and that we invest proactively so that we don't get caught in a situation where we have growth, but we can't basically satisfy the growth because we don't have enough capacity.

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

Yes. I'd say, Joe, we definitely expect further margin improvement in the Welding segment. And I'll go back to -- we had a little bit of near-term headwind from a raw material cost inflation standpoint and the lag between the price to offset those costs. And so once we get through that, our incrementals will return to kind of our typical 40% plus. And as we grow, margins will improve from there. So that's really the big driver here there. When I look at the margin walk for that -- for the Welding segment, the operating leverage is really good. The enterprise initiatives are really good, a little bit of pressure on price/cost. And then obviously, when you're growing at 14% organic, you are going to be paying out slightly higher commissions to your partners that help you achieve those growth rates. So that's really what we're talking about here. But like we said, in the second half of the year, margins, we would expect them to improve as well into the future into next year and beyond. So...

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

Congrats on a nice quarter. I guess just 2 questions. One, Michael, just on the guide, just given the increase in organic growth, I'm surprised we didn't raise our margins. And I know you're implying a 40% incremental margin, typically, I mean that's nothing -- I mean, that's a high-quality incremental margin. But like I'm just wondering if there's upside to that 40% or what's limiting that and why we didn't increase our margins on the increased organic growth? And then my second question, sort of similar to the last one, but just on Specialty, the organic growth was up. I think margins were down 110 bps. Any color behind which product line was driving that?

Yes, Jamie. So I think on the incremental margins would have been 40% in Q2 if it wasn't for the headwind on the price/cost timing lag that we just talked about. Margins instead of being up 40 basis points year-over-year would have been up 80 basis points. And we do expect this lag will probably be with us a little bit into Q3, certainly some progress on price/cost. And then in Q4, there will be further improvement on price/cost. And what -- and the guidance and what I'm talking about is based on all the known price and material cost increases as we sit here today. Obviously, as we just saw in Q2, it can be a pretty volatile environment. And particularly what we saw in Q2, to be a little more specific, was some of the crude oil derivatives like our resin purchases in Automotive and in Specialty coming through and the price -- associated price increases lagging a little bit. Now the good news is those resin and crude oil prices are trending downwards in Q3 and the price increases are coming through. And that's exactly to your question on Specialty, what you're seeing in Specialty. And so I think reasonable growth and operating leverage, good progress on the enterprise initiatives and then headwind -- actually, the segment with the highest headwind on price/cost in the second quarter was Specialty. And so it just takes a little bit longer to get those price increases through in Specialty and in Automotive to some extent, but they are coming. And the other thing that's happening is, like we said earlier, all these new products with the progress on CBI are coming through at higher margins. And so you'll continue to see Specialty margins improve in the second half and into next year.

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

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

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

I appreciate it. Congrats.

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

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

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

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

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

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

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

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

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

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

Well, I think just to start with China, I mean, I think what's driving and has been driving the growth there for a long period of time has been our penetration with local Chinese EV manufacturers. And if you look at EV production in the quarter, we're still up in the mid- to high teens globally and EVs are now almost 20% of global production. And so that favorable dynamic will continue to benefit our Chinese business. Surprisingly, a little bit of a mixed bag here in North America. If you look at it by OEM, some of our customers had a strong quarters. Others had a little bit more challenging from a production standpoint. So North America was up 1%. Builds about flat here in North America. Europe, a fair bit of PLS in our European business, Europe down 5%. And then we don't talk about it much because it's still fairly small, but there's a lot of strength in our India business, which hopefully we'll be able to talk about that the way we talk about our Chinese business at some point in the future. So overall, certainly, from a production unit standpoint, we are not expecting a lot of growth. This year, we said down 2%. We're not expecting a lot of growth either next year, but we are fully expecting that we'll continue to outgrow the underlying production numbers by 200 to 300 basis points, which is what we've done historically and which is how we're running the business and incentivizing the team is all about how do we grow our content with our -- with existing and potentially new customers. So that's kind of where -- how we would position the Automotive business. I will say this, we expect continued margin improvement. We've seen some nice progress over the last few years with more to come. And I think, again, a little bit of near-term headwind on price/cost, which we'll work through. But all these new products, all this new content that we're talking about is coming in at meaningfully higher margins because they're solving real problems for our customers. And so that's what's really encouraging in the Automotive segment.

Sounds good. Congrats.

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

Mig, are you there?

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

Yes, Andrew, we can hear you.

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

Well, I mean, it's certainly true that we are seeing meaningful inflation this year. The kind of the Q2 impact was primarily from crude oil derivatives. So we were talking resin and chemicals. I'll also add to -- and logistics, transportation, freight costs. Electronic components continue to be fairly inflationary. And so the biggest lever we have is obviously the price lever that we talked a fair bit about, but it's also driving productivity across our businesses and our strategic sourcing efforts, which are part of that enterprise initiative number that we report on a quarterly basis. So those are kind of the big levers that we're working. I'd say inflation is, for ITW, very manageable. Everything we know about is included in our guidance. We have this unique ability given how we're organized in this highly decentralized environment. Our divisions are so good at reading and reacting to what they're seeing from an inflationary standpoint. So we're highly confident that we'll be able to manage our way through this with some of the levers that I just described as kind of the more obvious ones.

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

Yes. So we weren't surprised. We saw this happen. It really started building in Q1, even late Q4 last year, I would say. So it wasn't a huge surprise to us. As Michael indicated, growth of 14%, order intake was higher than that. I would say the growth was pretty broad-based, not just in our industrial markets, like energy, infrastructure, aerospace, construction, fabrication related to some data center construction. But also what was particularly encouraging was also we saw growth in our commercial platform, so areas like small fabrication. So really, it was a factor of the markets we are in are seeing some nice demand trends. And again, I would continue to underscore the importance of innovation here. We've seen real nice progress on innovation in Welding over the last number of years, and we saw a lot of that momentum come through here in Q2 and throughout the first half of the year. So I think it's a combination of market and some great new products that we've launched in the last 12 months, and we'll continue to launch through the back of this year.

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

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

Yes. Sure, David. As we said, 40 basis points here in Q2, some improvement in Q3, call it, maybe 30 basis points and further improvement in Q4, approaching maybe the 20 basis points. And so for the full year, maybe that's what it all averages out to, so about 20 basis points of headwind, kind of our historical normal price/cost contribution from a margin standpoint is kind of plus 10 to 20 basis points. And so again, that's based on historical. We'll see when we roll up the numbers as part of annual plan, but maybe that's a good way to think about it. And so what you'll see is still a little bit of headwind here on margins and incrementals in Q3, closer to kind of a more normal margin and incremental performance in Q4 and certainly margin improvement sequentially from Q3 into Q4. And hopefully, as we go into next year, exiting Q4, we'll be back to kind of a normal price/cost dynamic. Certainly nothing material that will prevent us from improving margins even further in 2027 as we head towards our 30%-plus target by 2030.

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

Well, I mean, you make it sound like we have this very sophisticated pricing model at corporate. The reality is that there are thousands of pricing decisions made at ITW every day in our divisions, and none of them are waiting for direction from the team here in Glenview. But what we have done historically, maybe that's the best way to answer your question is we have seen a historical margin improvement from price/cost in that 10 to 20 basis points improvement, and that's probably what we would expect as we roll out the plans for next year. If we see something very different, we'll certainly let you know when we provide guidance and explain -- provide a little bit of context in terms of why it would be different. But I think that's a pretty good base case assumption as you think about modeling 2027. The big drivers from a margin improvement standpoint will continue to be the enterprise initiatives, the new products coming in at higher margins. And so like I said earlier, we would be surprised if we don't have incremental margins in that 40%, 45% range as we go into 2027. And again, what Chris said, a lot of that is because we've worked so hard on pruning the portfolio and making sure we're only in areas with high levels of sustainable differentiation where these pricing and buying decisions are not made purely based on price. They're made based on the value that our products and solutions and services can provide.

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

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

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