Illinois Tool Works - Q2 2023

Transcript

Operator (participant)

If you would like to withdraw your question, again, press star one. For those participating in the Q&A, you will have the opportunity to ask one question, and if needed, one follow-up question. Thank you. Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Karen Fletcher (VP of Investor Relations)

Thanks, Rob. Good morning, and welcome to ITW's second quarter 2023 conference call. I'm joined by our Chairman and CEO, Scott Santi, and Senior Vice President and Chief Financial Officer, Michael Larsen. During today's call, we'll discuss ITW's second quarter financial results and provide an update on our full year 2023 outlook. Slide two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2022 Form 10-K and subsequent reports filed with the SEC for more details 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 three, and it's now my pleasure to turn the call over to our Chairman and CEO, Scott Santi.

Scott Santi (Chairman and CEO)

Thanks, Karen. Good morning, everyone. As you saw from our earnings release this morning, the ITW team delivered another quarter of strong operational execution and financial performance. Quarterly operating income grew 9% and exceeded $1 billion for the first time in ITW's history. Operating margin expanded 170 basis points year-on-year to 24.8%, a second quarter record, with a 130 basis point contribution from enterprise initiatives. Operating margins for the company are now solidly above 2019 levels. With a normalizing price-cost environment, we are back to making progress toward our 2030 goal of 30%. With regard to revenues, organic growth was 3%.

A stable underlying demand in many of ITW's industrial end markets was partially offset by inventory reductions at our end customers and channel partners in response to stabilizing supply chain performance. We estimate that this impacted organic growth by 1 point to 1.5 points in the quarter. GAAP EPS of $2.48 was also a Q2 record for the company, and excluding one-off tax items in both years, EPS grew 9%. Looking ahead, while customer and channel inventory normalization will continue to be a factor for the next several quarters, at least, we expect stable underlying demand and continued strong margin and profitability performance through the balance of the year. As a result, we are raising our full year 2023 EPS guidance by $0.10 at the midpoint.

I'll now turn the call over to Michael to discuss our Q2 performance and full year guidance in more detail. Michael?

Michael Larsen (SVP and CFO)

Thanks, Scott. Good morning, everyone. Q2 revenue grew by 2%, with organic growth of 3%. Divestitures reduced revenue by 1%. Foreign currency translation impact was neutral and not a headwind for the first time since the third quarter of 2021. Underlying demand remains stable across the majority of our end markets, with some softness in about 25% of our portfolio. As Scott mentioned, our businesses estimate that inventory reduction efforts by our end customers and channel partners reduced organic growth by 1%-1.5% at the enterprise level. By geography, North America was flat, Europe grew 5%, Asia Pacific grew 11%, with China up 22%. On the bottom line, operating income grew 9%, exceeding $1 billion for the first time ever.

Operating margins were a real highlight this quarter, as they improved to a new Q2 record of 24.8%, with enterprise initiatives contributing 130 basis points. Price-cost margin impact contributed 260 basis points in Q2, while higher wages and benefit costs lowered margins by around 100 basis points. In addition, we continue to fund our growth investments, including headcount additions, to support our organic growth strategies and initiatives. All in, we delivered 170 basis points of margin improvement in the quarter, with margin expansion in six of our seven segments. Three of them, Welding, Food Equipment, and Construction Products, recorded all-time highs. GAAP EPS was $2.48, an increase of 5%, and excluding one-time tax items in both years, EPS grew 9%.

Our cash performance was strong as free cash flow grew 68% to $705 million, a new Q2 record. Free cash flow was 94% of net income, about 10 percentage points above our historical Q2 average, helped by an inventory reduction of 6% since year-end. Like our end customers and channel partners, our divisions are also beginning to reduce inventory levels as supply chains normalize. That being said, we added almost $1 billion of inventory over the last two years to mitigate supply chain challenges, and it would likely take us until the first half of next year to get our inventory levels from currently 3.2 months on hand back to our normal months on hand levels of about two. We expect that it will be much the same for many of our channel partners and customers.

Overall, for Q2, excellent operational execution and financial performance across the board, including record operating income, operating margin, and GAAP EPS. Turning to slide four, we wanted to spend a minute on ITW's operating margin performance in Q2. Like I said, one of the highlights of the quarter. Not only did margins significantly expand year-over-year and quarter-over-quarter, but at 24.8% margins are now also solidly above pre-pandemic levels. We're back on track in terms of making progress towards our goal of 30% in 2030. Let's move to the segment results, starting with Automotive OEM, which led the segments with strong organic growth of 16% and positive growth in all regions. North America was up 3%, and Europe grew 18%. China grew 51%.

Operating margin expanded 250 basis points to 16.8%. Price-cost margin impact turned positive for the first time in more than three years as this segment continues on the margin recovery and improvement path that we laid out at our 2023 Investor Day. As a reminder, we're executing a plan to get Auto OEM margins solidly back into the 20s over the next three years. Organic growth in this segment in the second half reflects some tougher comparisons. We expect continued meaningful sequential improvement in operating margins in Q3 and Q4. Turning to slide five, Food Equipment also delivered strong organic growth of 7%, with North America up 8%. Institutional end markets were up 13%, with continued strength across the board. International revenue grew 5%, with Europe up 5% and Asia Pacific up 2%.

A real highlight was service revenue, which grew 16%, the ninth quarter in a row, with double-digit growth as we continue to support existing customers, new product installations, and gain market share. Operating margin expanded 310 basis points to 27.8%, an all-time record for the Food Equipment segment. Test & Measurement and Electronics delivered positive organic growth of 1%. The slowdown in semiconductor-related revenues, which represent about 20% of the segment, reduced the segment growth rate by 6 percentage points. Test and Measurement grew 10%, with continued strong demand for capital equipment, as evidenced, for example, by Instron, which grew 30%. Electronics declined 13% on semiconductor softness, which is, however, beginning to show some signs of bottoming out. Moving on to slide six.

Welding delivered 1% organic growth against a tough comparison of +22% in the prior year. Equipment revenue was essentially flat and consumables were up 2%. Industrial sales were really solid, with organic growth of +5% on top of 27% in the prior year, while the commercial side was down 9%, about as expected against a comparison of 19% last year. North America revenue was flat and international grew 5%. This quarter's highlight was definitely operating margin expansion of 460 basis points to 33.9%. A new record for the segment and for the company.

The fact that our highest margin segment continues to improve margins, and not just by a little bit, is a good example of the never satisfied, continuous improvement mindset that is so core to the ITW culture and mindset across the company. Polymers & Fluids, organic revenue was down 1% against a difficult comparison of +10% last year. Divestitures impacted revenue by 6%. Automotive aftermarket was up 1%, polymers down 2%, and fluids down 1%. On a geographic basis, North America grew 1% and international declined 3%. Turning to slide 7. Organic revenue in Construction Products was down 6% against a comparison of +15% last year. North America was down 3%, with U.S. residential construction down 2%, and commercial construction, which represents about 15% of the region, down 5%.

Europe was down 14%, Australia and New Zealand was down 4%. Despite some challenging end market conditions, operating margin expanded 170 basis points to 29.3%, an all-time record for the Construction Products segment. Finally, Specialty organic revenue was down 4%, which included 1 point a headwind from Product Line Simplification and an estimated 3 percentage points from end customer and channel inventory reduction efforts. North America was down 7% and international grew 4%. Equipment revenue, which represents about 20% of the segment, was up 23% and consumables were down 9%. With that, let's move to slide 8 for an update on our full year 2023 guidance.

As you saw this morning, we raised our GAAP EPS guidance by $0.10, with a new midpoint of $9.75, based on our strong first half performance, with record first half GAAP EPS of $4.81, and the expectation for stable underlying demand and continued strong margin and profitability performance through the balance of the year. Our organic growth guidance of 3%-5% includes our expectation that end customer and channel inventory normalization activities will continue to modestly impact overall demand through at least the balance of the year. Operating margin is projected to expand by more than 100 basis points at the midpoint of our range of 24.5%-25.5%, which includes a contribution of more than 100 basis points from enterprise initiatives.

We're also projecting strong free cash flow performance with a conversion of over 100% of net income. Finally, on the tax rate, our first half rate was 22%, and we expect our typical 24% in the second half for an expected full year rate of around 23%. In summary, a strong first half, both operationally and financially. As we head into the second half, we're in a strong position to continue to deliver differentiated performance through the balance of the year. With that, Karen, I'll turn it back to you.

Karen Fletcher (VP of Investor Relations)

All right. Thank you, Michael. Rob, can you please open up the lines for questions?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. We'll pause for just a moment to compile our Q&A roster. Our first question comes from the line of Jeffrey Sprague from Vertical Research. Your line is open.

Jeffrey Sprague (Managing Partner)

Thank you.

Michael Larsen (SVP and CFO)

Hello, Jeff?

Jeffrey Sprague (Managing Partner)

Everyone.

Michael Larsen (SVP and CFO)

Yes.

Jeffrey Sprague (Managing Partner)

Yeah, hi. Thank you. I wonder if we could address Michael, just the kind of the price-cost algorithm for the remainder of the year now. You're up to 260 basis points in, in the Q2. I know you still got some more work to do there, particularly in automotive. Maybe you could address that on a total ITW basis, and, and how do you see automotive margins progressing into the back half of the year as you shoot towards that two handle on margins there?

Michael Larsen (SVP and CFO)

Yeah, sure, Jeff. I think overall on, on price-cost, we'd say we're on track to recover the, the margin impact from a period over the last two years of unprecedented inflation, which has now stabilized. In the first quarter, price-cost was positive, 190 basis points, Q2, 260 basis points. For the balance of the year, we're looking at a more normalized 130-150 basis points range. For the full year, we should recover somewhere around 100-200 basis points at the enterprise level. I think what was encouraging is every segment is now margin positive, including Automotive OEM.

We expect that for auto, since that was your question, specifically to remain the case for the back half of the year. Combined with enterprise initiatives, we expect sequential improvement in Q3 and Q4 in the automotive segment, and we should end up somewhere in the high teens as we exit 2023. With still a long way to go over the next 2-3 years to get back to kind of the low to mid-20s, which is the path that we laid out at Investor Day.

Jeffrey Sprague (Managing Partner)

Great. Your comments about the supply chain normalization and everything were pretty clear, but I just wonder if you could give us some perspective on your backlogs, right? Typically, you don't have big backlogs, but you got the kind of 2x normal in a number of your businesses. Where are we at the ITW level and kind of getting things back to a normal run rate?

Michael Larsen (SVP and CFO)

Yeah, I think similar to what we talked about on the last call, you know, supply chains performance continues to improve. As that happen, our backlogs are also starting to come down. You know, at this point, we're still above our normal levels. If you look at the businesses where we do carry some backlog, Food Equipment, for example, we're running at 2x normal levels. The same is true in Welding. As I said, those backlogs are coming down pretty quickly as supply chain performance improves.

Jeffrey Sprague (Managing Partner)

Thank you very much.

Michael Larsen (SVP and CFO)

Sure.

Operator (participant)

Your next question comes from a line of Jamie Cook from Credit Suisse. Your line is open.

Jamie Cook (Managing Director)

Hi, good morning. two questions. follow-up on the inventory reductions from your customers and channel partners. Exactly what's embedded in the back half of the year? Is it another, is it 1-1.5 points? you know, in the guide in the back half of the year, you know, as a follow-up to that, you're maintaining your revenue guide despite this, what's doing better than expectations? Sort of my last question is, construction margins were very impressive, considering, you know, the sales decline. Any color on that? Thank you.

Michael Larsen (SVP and CFO)

Yeah, I think, the inventory reduction, impact that we saw here in Q2 is now embedded in our run rates, and therefore, embedded in our guidance, for the balance of the year. Actually, if you look at our, our Q2, it came in right in line with, run rate, except for these, the inventory impact that we estimate at, 1 point to 1.5 points. Underlying demand, as we said, is, is really stable. It's not strong in places like, auto and, Food Equipment. We, we feel really good about our assumptions here going into, into the back half of the year. You know, your question specifically on construction, you know, I agree with you.

That's some pretty impressive performance given the challenging end markets, particularly if you look at, at Europe. The big drivers here continue to be enterprise initiatives, which is, you know, it's been called the gift that keeps on giving.

Scott Santi (Chairman and CEO)

By you.

Michael Larsen (SVP and CFO)

By me?

Scott Santi (Chairman and CEO)

Yes.

Michael Larsen (SVP and CFO)

Yes, if I may say so. I think, you know, total company, the enterprise initiatives impact ranged from 70 to 200 basis points by segment, with Construction Products at the very high end of that, at about 200 basis points impact. Then certainly there's still some catch up on price-cost. Construction Products was a segment that was hit harder than the average in 2021 and 2022. Price-cost did contribute in a meaningful way. We do expect that, just like we do for the rest of the enterprise, to begin to normalize here in the back half, like I, like I said in response to Jeff's question. We're still gonna see positive price-cost impact, including Construction Products in the second half.

Jamie Cook (Managing Director)

Thank you.

Michael Larsen (SVP and CFO)

Sure.

Operator (participant)

Your next question comes from the line of Joe O'Dea from Wells Fargo. Your line is open.

Joe O'Dea (Managing Director)

Hi, good morning.

Michael Larsen (SVP and CFO)

Morning.

Joe O'Dea (Managing Director)

I guess I wanted to sort of extend that a little bit in terms of, you know, the comment around underlying demand being sort of stable to strong and, and sort of calling out auto and Food Equipment. Anything from sort of a, a regional or end market perspective that you're watching most closely on end market demand and sort of considerations on kind of prospects for slowing anymore?

Michael Larsen (SVP and CFO)

I think overall it's been remarkably stable to, you know, if anything, we saw some firming up in the second quarter based on some, you know, some trends in the first quarter that we talked about relative to 25% of our portfolio. I think the one place we saw things to continue to weaken was in Europe on construction between Q1 and Q2, but for the rest of the portfolio, I think at this point, the best description is pretty firm.

Joe O'Dea (Managing Director)

Got it. Then also, just the margin strength in the quarter and thinking about the back half of this year, I think the midpoint for the full year would suggest something like a 25.5% margin in the back half. I think you've talked about sort of continued progress on auto. Just anything else that you think to be, you know, the more notable contributors to that sequential improvement?

Michael Larsen (SVP and CFO)

Yeah, I mean, the big driver continues to be the Enterprise Initiatives, the work around 80/20 front to back, and Strategic Sourcing efforts. You know, we expect at least 100 basis points of contribution there in the second half. You know, price-cost, we still expect a meaningful contribution as we talked about a few minutes ago. All of that means that as we look at kind of the second half, we expect margins to continue to improve sequentially from Q2 to Q3 and from Q3 to Q4, maybe somewhere around 50-60 basis points each quarter of sequential improvement. I think we talked in the past about 100 basis points of improvement year-over-year. That's still looking very good.

Like I said, in the prepared remarks, we're really well positioned here, in terms of our, you know, margin and, you know, profitability performance, through the balance of the year, and frankly, into next year. I'll leave it at that.

Joe O'Dea (Managing Director)

Thank you.

Operator (participant)

Your next question comes from a line of Tami Zakaria from JPMorgan. Your line is open.

Tami Zakaria (Executive Director)

Hi, good morning. Thank you so much.

Michael Larsen (SVP and CFO)

Morning.

Tami Zakaria (Executive Director)

For taking my question. My first question is on Food Equipment. I think I saw on your slide it grew 3%, while services were up 15. For the equipment portion, is that entirely pricing driven? Was there any volume growth in the quarter on the equipment side?

Michael Larsen (SVP and CFO)

I think you know this, Tami, we, we don't break out price and volume. I'd say both, both elements contributed. It's a little different, equipment versus service, but certainly some really strong activity. You know, North America, I think we said up 8%. That, that has equipment up 5%, services up 15%, by end market, institutional is up 13%, you know, healthcare up 18%. You know, restaurants, still really strong performance there. Retail, a little softer, that can be a little lumpy. International side, up 5%. I think really strong quarter by Food Equipment, and actually looking really good for Q3. I think that they should be putting up another really strong quarter. There might be a little bit of.

If you go back and look, the comparisons are a little bit challenging, on a year-over-year basis. Overall, the underlying demand in Food Equipment remains really healthy and, really well positioned again for the, for the second half.

Tami Zakaria (Executive Director)

Got it. That's very helpful color. If I can ask a follow-up about your Welding segment. I thought the results there were very interesting. Operating margin was up 460 basis points even though organic growth was about 1%. What's driving this very strong operating margin leverage? Is it purely price-cost, or is there something else going on in there?

Michael Larsen (SVP and CFO)

There is something else going on in there, Tami. It's a, it's a similar answer to what I said for construction. I mean, I think, there's a healthy dose of enterprise initiatives, and then we're still recovering, the margin impact on price-cost. Those are the main drivers here. Like I said, I mean, price-cost, we expect that to normalize in the second half, but the enterprise initiatives, we expect that to continue into the, you know, through the balance of the year and into next year.

Tami Zakaria (Executive Director)

Perfect. Thank you.

Operator (participant)

Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.

Andy Kaplowitz (Managing Director)

Hey, good morning, everyone.

Michael Larsen (SVP and CFO)

Morning.

Andy Kaplowitz (Managing Director)

You mentioned you thought electronics-related markets look like they may be bottoming out. Could you give us more color into what you're seeing there that prompted you to say that? Then stepping back and focusing on the 25% of the business, including electronics, that has been weak, would you say that, like, electronics, you are seeing a bottoming in, you know, many of these markets, you know, maybe outside of European construction, which you already mentioned, or was that statement really just focused on electronics?

Michael Larsen (SVP and CFO)

Let me do the semi portion first. I mean, I think there has been this view that the second half would be a step up from the first half. Really, we talked about this going into the year.

Scott Santi (Chairman and CEO)

Mostly from what we're hearing from our customers.

Michael Larsen (SVP and CFO)

I was gonna say, you know, the customer feedback has now become even more supportive of that view along the lines of, get ready for orders to come back here in the second half and make sure you have the capacity to support us, which, of course, we do. That's kind of the color commentary around semi. Similar to what you're hearing from other com-.

Scott Santi (Chairman and CEO)

Let me back this question.

Michael Larsen (SVP and CFO)

Yeah.

Scott Santi (Chairman and CEO)

We're not baking any of that into our back end.

Michael Larsen (SVP and CFO)

That's a good point. None of that is baked in. I think that's.

Scott Santi (Chairman and CEO)

We'll bake it in when we see it.

Michael Larsen (SVP and CFO)

Exactly. Like we normally do. None of that would be in our run rates, obviously. You know, we'd be happy to see that here, late Q3, Q4, if we get those if that really comes to fruition. On the 25% of the portfolio, I think, maybe to give you a little bit more detail, I think, what was really encouraging, this quarter is, if you look at the performance of those businesses, and there are some puts and takes. You know, there are some businesses, that are no longer slowing, that have moved out, and, you know, we, you know, others, you know, I think Construction Europe was an example that maybe have moved in. It's still about 25% of the company.

Those businesses were down 7% year over year in the first quarter, and they were only down 3% in the second quarter. Actually, if you look at it sequentially, the businesses, as a group, improved 2% sequentially. That includes, in that 25%, is also at least a portion of our semi revenues. I think that's certainly encouraging as we look to the back half of the year.

Andy Kaplowitz (Managing Director)

Michael, that's really helpful. I just wanted to go back to your commentary on regional demand. You mentioned China was up 22% a quarter, which I think you expected, but obviously several of your peers have talked about seeing some incremental weakness in China moving forward. Do you still feel well-positioned there? You know, maybe given your China auto exposure, you're still expecting China Food Equipment markets to, you know, improve. Any, any color would be helpful.

Michael Larsen (SVP and CFO)

Yeah, I think, Andy, you know, the big driver for us in China is auto, and that's our largest businesses. We talked about this on the last call. We expected a strong Q2 in China, based on some of the COVID-related slowing in the first quarter. We bounced back in the second quarter with auto up more than 50% in Q2, and all of China up 22%. I think a better way to look at China is maybe if you look at the first half, our China business was up 7% on a year-over-year basis, and that's maybe a more accurate representation of kind of the underlying levels of demand. For the second half, we'd expect something kind of in the, in the mid-single digits out of that region.

Again, it's all driven by the auto business that's doing a phenomenal job, frankly, gaining share and launching new products, particularly on the EV side with the domestic, local Chinese OEMs that are winning big time, as we talked about at Investor Day. Really well positioned, not just for the second half, but for many, many years to come here in our, in our China business and in auto, particularly.

Andy Kaplowitz (Managing Director)

Appreciate all the color.

Michael Larsen (SVP and CFO)

Sure.

Operator (participant)

Your next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open.

Joe Ritchie (Managing Director)

Hey, guys. Good morning.

Michael Larsen (SVP and CFO)

Morning.

Joe Ritchie (Managing Director)

Hey, can we, maybe just double-click a little bit on the longer-term service opportunity in, in Food Equipment? Clearly, you know, 16% growth in that business, very robust and I'm sure carries a pretty good margin for you guys as well. Can you just maybe kind of talk a little bit about, you know, how you're increasing the growth rate today and, and what the expectations are going forward?

Michael Larsen (SVP and CFO)

Yeah, I mean, I think the service business, we've talked about this for a long time now, in terms of, long-term organic growth potential. It is a huge differentiator with us, for us in the market. We are the only, OEM that has, service capabilities, and it gives us all kinds of advantages, in terms of our ability to do, install, service, maintain, and then capture, replacement down the line. We think there's a lot more to come on the, on the service side. We're obviously still, to some extent, recovering, you know, from COVID. If you actually look at it, the equipment side is now fully recovered to 2019 levels. The service side is still catching up.

We expect that there's still a lot of runway, particularly with our installed base.

Scott Santi (Chairman and CEO)

I was just gonna say that.

Michael Larsen (SVP and CFO)

Yeah.

Scott Santi (Chairman and CEO)

You know, I'm not current on the exact, you know, what our business has estimated as our share of our install base, but it's. Last time I had the conversation, I think it was, you know, sort of well into the low 20s at best, maybe. I, and don't sort of take that as gospel, but the point is that we have a lot of room to grow with just getting more penetration with our customers. current install base globally.

Joe Ritchie (Managing Director)

Got it. That's helpful. Maybe, I don't know if there, there's an opportunity to, to elaborate on that point, Scott. You know, I think you guys called out the service business being roughly, what, 30% of the Food Equipment segment. Do you have to invest more in your, in your service capabilities or getting feet on the street to, to improve the penetration there?

Scott Santi (Chairman and CEO)

Yeah. That's been an active strategy for the last, you know, really coming out, really from before COVID. Some of it is coverage, some of it is programming. You know, when you actually service the equipment you sell, we have lots of opportunity to integrate service offerings at the point we sell the equipment, which is part of the, why we think this is a big competitive advantage for us. It's, it's essentially all of the above, but there's no way to do service remotely. We got to have, you know, service techs on the street. We've got, I think, north of 1,500 in North America and the same in Europe. Given the profitability of the business and how much runway we have, we'll certainly continue to invest.

That's part of what Michael talked about, continue to invest in our organic growth strategies. That's certainly a good example.

Joe Ritchie (Managing Director)

Yeah. Okay. No, great. Then maybe one last last question, just on M&A. Just any, any comments around the pipeline today, what you're seeing, and whether there's been any movement since since you last updated at Investor Day?

Michael Larsen (SVP and CFO)

Yeah, I'd, I'd say that there's been no change. We continue to get sort of ample flow in terms of people wanting us to take a look at things. As we've talked about for a long time, and certainly updated at our Investor Day, you know, the, the aperture through which, you know, we will strike on those opportunities is pretty narrow, given all the potential in our core business. We, you know, we've done MTS in recently, and we, we will continue to opportunistically be aggressive. From the standpoint of overall flow, is it up or down? I'd say it's been pretty stable.

Joe Ritchie (Managing Director)

Okay, great. Thank you.

Operator (participant)

Your final question comes from a line of Julian Mitchell from Barclays. Your line is open.

Julian Mitchell (Equity Research Analyst)

Thanks. Good, good morning. Maybe a question, first off, just around the cadence of sort of Q3 versus Q4. Anything to call out there when you're thinking about margins or, or the top line, particularly in the context of that destocking that you'd mentioned? Thank you.

Michael Larsen (SVP and CFO)

I think Julian, I think I said this earlier, we do expect, as we typically do, if you look at our historical sequentials, a lift from Q2 to Q3 of about 1%. The thing to keep in mind is that Q3 has one less shipping day relative to prior year and relative to Q2. That is gonna have a little bit of an impact. Don't expect a big jump here in, in Q3, but certainly based on current run rates, some, some progress on the top line, progress on the bottom line with margin expansion. I think we talked about that somewhere along the lines of 50+ basis points from Q2 to Q3.

I might just add that in terms of our typical cadence, kind of first half, second half, if you look at our full year EPS, we're typically 49%-51%, and we are, as we sit here today, right in line with that. You know, based on our. If you look at our $4.81 GAAP EPS for the first half, the midpoint of our guidance of $9.75, you can calculate what's left to go, and you'll see it's a lift from the first half to the second half that's right in line with our historical averages, which gives us a lot of confidence as we head into the second half here.

Julian Mitchell (Equity Research Analyst)

Thanks very much, Michael. Maybe just my second question or follow-up would just be around, you know, when you're thinking about the sort of market share gain efforts across the company, you know, volume growth year to date, very muted or, or negative. Do you still think you're, you're getting some share, or was the sort of the share gain maximized really two, three years ago when competitors were supply constrained, and now we're in a normal supply chain environment, the sort of share gains have dried up largely? Thank you.

Michael Larsen (SVP and CFO)

Well, Julian, I wouldn't agree with how you characterize this in terms of no volume gains and year to date. I think we have a lot of confidence that we continue to take market share, not just as we talked about through the pandemic, but on an ongoing basis. I mean, I think if you look at our, our organic growth rates relative to peers, in these, in some of these segments, you've got some good comps. You can certainly take a look at that. I think we're continuing to invest here in all of our organic growth strategies and efforts, including headcount, to continue to take market share. We have a high degree of confidence that we continue to take share.

Scott Santi (Chairman and CEO)

It's not something you measure in a quarter or two.

Michael Larsen (SVP and CFO)

No, I think these.

Scott Santi (Chairman and CEO)

We take the long view. You know, we've committed to organic growth in our, in our organic growth goals in our, in the Investor Day we just did, and those are organic growth goals that are gonna be well above underlying market growth.

Michael Larsen (SVP and CFO)

Yeah.

Scott Santi (Chairman and CEO)

At 4 to 5, and in that case, by definition, we will continue to take share.

Michael Larsen (SVP and CFO)

Yeah, I think the other thing, I mean, the biggest driver, as we talked about at Investor Day, Julian, I think you were there, is gonna be our Customer-Back Innovation efforts. You know, we're shining a bright light on our CBI efforts, and we're the whole company is focused on continuing to drive up the contribution to organic growth from our innovation efforts. You put all of that together, we're highly confident we can deliver our long-term kind of 4%+ organic, which is, you know, given our high levels of profitability, that's all we need to grow EPS, kinda high single digit, low double digit. You add an attractive dividend yield on top of that, and you're getting that 11-13 TSR over the long term. Not every year.

This year, yes, but not every year. That's what you should expect from ITW, and it's much more about that than it is a quarterly market share number, which is I think what you're asking about.

Julian Mitchell (Equity Research Analyst)

That's very helpful. Thank you.

Michael Larsen (SVP and CFO)

Sure. You're welcome.

Operator (participant)

Thank you for participating in today's conference call. All lines may now disconnect at this time.