Illinois Tool Works Inc. (ITW) Q3 2020 Earnings Call Transcript

Illinois Tool Works Inc. (NYSE: ITW) Q3 2020 earnings call dated Oct. 23, 2020

Corporate Participants:

Karen Fletcher — Vice President Investor Relations

E. Scott Santi — Chairman & Chief Executive Officer

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Analysts:

Jamie Cook — Credit Suisse — Analyst

John G. Inch — Gordon Haskett — Analyst

Julian Mitchell — Barclays — Analyst

Andrew Casey — Wells Fargo — Analyst

Andrew Kaplowitz — Citi Research — Analyst

Ann Duignan — J.P. Morgan Securities — Analyst

Scott Davis — Melius Research — Analyst

Joe Ritchie — Goldman Sachs — Analyst

Jeff Sprague — Vertical Research Partners — Analyst

Stephen Volkmann — Jefferies — Analyst

Nicole DeBlase — Deutsche Bank — Analyst

Mig Dobre — Baird — Analyst

Nigel Coe — Wolfe Research — Analyst

Presentation:

Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] For those participating in the Q&A, you’ll have an 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 — Vice President Investor Relations

Okay. Thank you, Julianne. Good morning, and welcome to ITW’s third quarter 2020 conference call. I’m joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today’s call, we will discuss ITW’s third quarter 2020 financial results and provide an update on our strategy for managing through the global pandemic.

Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company’s 2019 Form 10-K, and subsequent reports filed with the SEC for more detail about important risk that could cause actual results to differ materially from our expectations, including the ongoing effects of the COVID-19 pandemic on our business. This presentation uses certain non-GAAP measures and the reconciliation of those measures to the most 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 Chairman and CEO, Scott Santi.

E. Scott Santi — Chairman & Chief Executive Officer

Thanks Karen. Good morning, everyone. We saw a solid recovery progress in many of the end markets that we serve in the third quarter as evidenced by our revenue being up 29% sequentially versus the second quarter. In fact, demand levels returned to rates approximating year ago levels in five of our seven segments. With two of those, Construction and Polymers & Fluids, delivering meaningful growth in the third quarter. On the flip side, demand levels in our Food Equipment and Welding segments continue to be materially impacted by the effects of the pandemic, although we did see good sequential improvement in both in Q3 versus Q2.

We talk often about the flexibility and responsiveness inherent in our 80/20 front-to-back operating system, and those attributes were clearly on display in our Q3 performance. Supported by our decision early on as the pandemic unfolded, to refrain from initiating staffing reductions and to focus on positioning the company to fully participate in the recovery, our people around the world responded to a rapid acceleration in demand by leveraging the ITW business model to provide excellent service to our customers, while keeping themselves and their co-workers safe. Perhaps the most pronounced example was our Auto OEM segment where our team executed flawlessly from both of quality and delivery standpoint in responding to demand levels that essentially doubled in Q3 versus Q2 and with a demand — a very demanding customer base.

Across all seven of our segments, our teams can site numerous examples of how our ability to sustain high levels of service in the phase of rapidly accelerating demand resulted in incremental business for the company in Q3. In addition to leveraging our best-in-class delivery capabilities, our divisions remain laser focused on leveraging our strengths to capture sustainable share gain opportunities that are aligned with our long-term enterprise strategy. These efforts are just beginning to take hold and I’m confident that they will contribute meaningfully to accelerating our progress towards our long-term organic growth goals.

The operating flexibility that is core to our 80/20 front-to-back operating system also applies to our cost structure, which show through in our operating margin performance in Q3. Operating margin of 23.8% in the quarter, included meaningfully higher restructuring expenses versus a year ago in Food [Phonetic] segment specific one-time items, which Michael will provide more detail on in a few minutes. Excluding these factors, operating margin was 25.3% in Q3. The second highest in the history of the company.

Overall, the pace of recovery in the third quarter exceeded our expectations heading into the quarter, as we delivered revenue of $3.3 billion, operating income of $789 million, free cash flow of $631 million, and GAAP EPS of $1.83. In addition, after-tax return on invested capital improved to 29.6%, an all-time high for the company.

It goes without saying that I cannot be more proud of how the ITW team is managing through this challenging period. And I want to sincerely thank my 45,000 plus ITW colleagues around the world for their continued exceptional efforts and dedication in serving our customers and executing our strategy with excellence.

In the face of unprecedented challenges and circumstances, our operational and financial performance over the last few quarters supports our decision to remain fully invested. And the key initiatives supporting the execution of our long-term enterprise strategy and provides further evidence that ITW is a company that has both the enduring competitive advantages and the resilience necessary to deliver consistent upper tier performance in any economic environments.

Looking forward, we remain focused on delivering strong results, while continuing to execute on our long-term strategy to achieve and sustain ITW’s full potential performance.

I’ll now turn the call over to Michael for more detail on our Q3 performance, Michael?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Thank you, Scott, and good morning everyone. Since the beginning of the pandemic, maintaining ITW’s considerable financial strength, liquidity, and strategic optionality has been a priority. Our objective was to fully leverage the strong financial foundation and resilient profitability profile that we have built in the last seven years to position ITW for maximum participation in the recovery. And as the recovery progressed, ahead of our expectations going into the quarter, we were ready to meet customer demand and we delivered strong financial results.

Q3 revenue was up 29% or almost $750 million sequentially versus Q2. And on a year-over-year basis, organic revenue declined only 4.6% compared to a 27% decline in Q2. The impact of last year’s divestitures was 1% and was essentially offset by 0.7% of favorable currency impact. Product Line Simplification was 30 basis points in the quarter. Despite the negative volume leverage and our decision to stay invested in our key strategic priorities, Q3 operating margin was 23.8%, down only 120 basis points compared to prior year. If you set aside the impact of higher restructuring expenses and two one-time segment items that I will describe in a moment, operating margin would actually have increased year-over-year to 25.3%.

Strong execution on our enterprise initiatives was a big contributor once again at 120 basis points, as all segments delivered benefits in the range of 70 basis points to 190 basis points. As expected, our decremental margins were a little higher than normal at 46% in the third quarter. Excluding the two one-time items that I just mentioned and the higher restructuring expense, our decremental margins would have been about 20%, significantly better than our historical decrementals of 35% to 40%.

Operating income was $789 million, and GAAP EPS was $1.83, with an effective tax rate of 21.3%, in line with last year’s 21.6%. Solid working capital performance contributed to free cash flow of $631 million and a conversion rate of 108% of net income. On a year-to-date basis, free cash flow was $1.9 billion, with the conversion rate of 127% compared to 105% last year. We now expect free cash flow to end the year significantly above $2 billion.

Our balance sheet remains strong. At quarter end, we had $2.2 billion of cash on hand, no commercial paper, and a $2.5 billion undrawn revolving credit facility, tier 1 credit ratings, and total liquidity of more than $4.7 billion. In terms of our debt structure, you can see an increase of $350 million in the short-term debt, which is simply a reclassification from long-term to short-term as our 2021 bonds are coming due in less than 12 months. So in summary, a very good quarter operationally and financially as the recovery progressed well ahead of our previous expectations.

Moving on to Slide 4, for a closer look at the third quarter recovery and response by each segment. You can see that every segment responded effectively to the increase in demand recovery and improved sequentially on both revenues and operating margin. I would highlight just a few things that Scott mentioned, including the fact that our Automotive OEM segment was able to essentially double their volumes in a quarter or just 90 days as operating margins went from negative to 20% plus. In addition, six of seven segments had operating margins, not segment margins, operating margins above 20%. In fact, Food Equipment was just below 20%, but we expect them to get above 20% in Q4, despite the fact that they are operating in a pretty challenging environment.

Next to Slide 5, starting with a quick look at organic revenue by geography. As you can see customer demand improved in every region. North America declined by only 5% in Q3 compared to down 26% in Q2. Europe also improved significantly down only 8%, a sequential improvement of almost 30 percentage points. Asia-Pacific turned positive this quarter, up 3% and China was the standout, up 10%, as the recovery continues to take hold. In China specifically, Automotive OEM, Polymers & Fluids, and Specialty products all grew double-digits. So in summary, broad-based geographic recovery in the quarter.

Now let’s walk through each segment, starting with the one that experienced the most pronounced recovery Automotive OEM. In a matter of weeks, our customers went from being shutdown to operating close to full capacity and the team responded by leveraging their experienced workforce, local supply chains, and flexible operating system, to quickly ramp up and meet customer demand. Overall, organic revenue was still down 5% year-over-year, with North America now 10% and Europe down 5%. China, which had already turned positive last quarter at 6% also improved sequentially and was up 15% this quarter. Lastly, as we discussed on our last call, we did initiate a few restructuring projects that were part of our 2020 plan pre-pandemic, which will lead to a reduction in operating margins of 150 basis points, to 20.8%.

Turning to Slide 6. As expected, Food Equipment was the hardest hit segment in the quarter as organic revenue declined 20%, a significant improvement though from being down 38% in Q2. North America and international organic revenue were both down about 20%. Equipment sales were down 21% and service was down 17%. Institutional demand was down about 30% and restaurants, including QSR were down a little bit more than that. On a positive note, retail, which includes grocery stores, grew more than 30% supported by the rollout of new products. Despite the significant negative volume leverage and higher restructuring expense, operating margin was still 19.6%. Excluding the higher restructuring impact, margins would have been 21.4%. And I think it’s worth noting that in this most challenging environment, the segment generated almost $19 million in operating income.

In Test & Measurement and Electronics, organic revenue declined only 2% with Test & Measurement down 6% and Electronics, up 2%. While demand for capital equipment remains soft, the segment benefited from considerable strength in a number of end markets including semiconductor, healthcare, and clean room technology. As you can see from the footnote, the reported operating margin of 23.7%, include a 350 basis points of unfavorable impact from removing a potential divestiture from assets held for sale. Excluding this impact, the operating margin would have been 27.2%, which is a much more accurate representation of the underlying profitability of the segment. Given the current environment, we simply decided to defer this divestiture for now.

Speaking of divestitures, let me make a broader comment on our portfolio management efforts and specifically the 2018 decision to divest seven businesses that we determine no longer fit our enterprise strategy framework, with revenue of approximately $1 billion. We expect that the completion of these divestitures will improve our overall organic growth rate at the enterprise level by approximately 50 basis points and increase enterprise operating margins by 100 basis points. In 2019, we made good progress completing four divestitures, with revenues of approximately $150 million and we are seeing the benefits in our financials this year including 20 basis points of operating margin impact. While the pandemic put a hold on our efforts this year, our view regarding the long-term strategy fit of the remaining divestitures has not changed. Accordingly, we will resume the sale process for these businesses when market conditions normalize.

Okay, turning to Slide 7. In Welding, demand for capital equipment was down year-over-year as organic revenue declined 10%. However, the commercial business, which accounts for about 35% of revenue and serves primarily smaller businesses and individual users, was up 11%. In Industrial, customers were holding back on capital spending and organic revenue was down more than 20% this quarter. Operating margin, though was remarkably resilient at 27.9%.

On a positive note, Polymers & Fluids reported record organic growth of 6% in the quarter. The Automotive Aftermarket business benefited from strong retail sales to grow 10%, with double-digit growth in tire and engine repair products. Fluids was up 6%, strong sales into healthcare and hygiene end markets. As a result of the volume leverage and strong incremental margins of 78%, operating margin expanded by 250 basis points to a record 26.6%.

Moving to Slide 8, Construction had a remarkable quarter, benefiting from continued strong demand in the home center channel to deliver record organic growth of 8%. All geographies were positive, with North America up 12%, with double-digit growth in the residential and renovation market offset by commercial construction, down 10%; Europe was up 6%, with double-digit growth in the Nordic region; and Australia/New Zealand revenues grew 3% and were positive for the first time in more than two years. As a result of the volume leverage and strong incremental margins of 59%, operating margin expanded by 300 basis points to a record 28.1%. And some of you may remember, when we launched enterprise strategy in 2012, Construction had the lowest operating margins in the company, seemingly stuck right around 12%. Certainly, good performance in industry, but not really ITW caliber. The fact that the construction segment delivered the highest margins inside of ITW in Q3 at more than 28% is therefore pretty remarkable.

Specialty organic revenue was down 5%, with North America down 4% and international revenue down 7%. Demand for consumer packaging remains solid, but was offset by lower demand in the capital equipment businesses. Operating margin was 25.2% and included a one-time customer cost sharing settlement. Excluding the impact of this one-time item, operating margins would have been 28%.

Let’s move to Slide 9, for an updated outlook at our full-year 2020. As I mentioned earlier, the demand recovery in Q3 exceeded the high end of our expectations going into the quarter. And as a result, we’re updating our financial outlook for the year. As we sit here today, we expect organic revenue for the full year to be down 11.0% to 11.5%, operating margin to be in the range of 22.0% to 22.5% and operating income in the range of $2.7 billion to $2.8 billion. As I mentioned free cash flow performance continues to be strong and we expect to end the year well above $2 billion.

As you think about Q4, keep in mind the typical seasonality from Q3 to Q4 and that Q4 has two less shipping days. Also, please note that we expect a slightly higher tax rate in Q4 versus Q3 and our full-year tax rate is expected to be in the 22% to 23% range. With respect to our outlook for 2021, we expect to reinstate annual guidance when we release full-year 2020 results early next year.

With that, Karen, back to you.

Karen Fletcher — Vice President Investor Relations

Okay. Thanks, Michael. Julianne, let’s open up the lines for questions please.

Questions and Answers:

 

Operator

Certainly. [Operator Instructions] Your first question comes from Jamie Cook from Credit Suisse. Please go ahead, your line is open.

Jamie Cook — Credit Suisse — Analyst

Hi, good morning and nice quarter. I guess two questions sort of, one strategically, as we’re getting through COVID, can you sort of speak to where you had a good opportunity to grow faster than the market? And which markets do you see best positioned to grow faster than the market as you sort of take advantage of the opportunity right now? And update on how the M&A is trending?

And then I guess my second question, as we think about 2021, understanding you don’t want to talk about incrementals yet outside of volumes, is there anything that you can help us with headwinds versus tailwinds? I guess, you don’t have some of the salary cuts that other people will be comping or structuring. I’m just trying to think of the puts and takes in your ability to put up outsized incrementals? Thank you.

E. Scott Santi — Chairman & Chief Executive Officer

Well, I’ll — let me take the sort of strategic questions and then ask Michael to comment on your second question. What I would say overall, this is a very much a dynamic situation that’s still playing its way out. We are certainly responding from a tactical standpoint fully well at this point. Our ability to remain invested is certainly with the mission of focusing on making sure we serve our customers extremely well during this period and also we are in position to seize opportunities that come our way. We — we remain focused on that — I think at this point it’s way too early to sort out the sort of priorities or the rank order of opportunities other than — I will refer back to the comment I made in my opening remarks that every one of our segments can point to solid examples in the third quarter of their ability to have immediate availability to respond to a customer need resulted in incremental business for the company. It remains a priority, but I think the situation in the near term is just too dynamic in terms of having any real view at this point of what parts of the company have more opportunity than others, but I think the thing we want to be clear about is — is we are focused on it and expect those opportunities to continue to play out as we go forward.

From an M&A perspective, I would really say at this point is, what we said in the past is from the standpoint of the long-term strategy of the company. We remain very open to the good opportunities that come our way, but I would also marry that up with the fact that in this environment, if you can sort of the flip side of our own experience on the divestitures as this is not a particularly good time for quality business to sell. We’re not in the market for distressed assets, we’re interested in bringing quality companies into the company to ITW, but we think we can dictate our strategy and ultimately we can help even better companies. And in this kind of environment, this is not necessarily a great time to sell. So on a medium to long-term basis, as we have said repeatedly in prior forums, it remains a core part of the overall growth strategy and profile of the company but from a tactical standpoint short-term not a big — it is big focus right now.

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Alright. Thanks, Scott. And then on your second question Jamie. As we’ve talked about before the planning process inside of ITW is very much a bottoms up planning process and we simply haven’t got through that process yet with our businesses and so I can’t really comment in great detail. I will promise that when we provide guidance on our next earnings call, I’ll be able to address your specific questions in detail. I’ll just point to the obvious ones at this point that the comparisons in terms of year-over-year growth, obviously what they are which is fairly easy. And then specific to your question around incrementals, our long-term incrementals are still in that 35% to 40% range. I will say that as you saw this quarter in both polymer fluids and construction, that when we did a reasonable amount of organic growth, the incremental margins tend to be significantly higher. It’s certainly in the near term, and so you may see some of that when we give you the detail for 2021.

Jamie Cook — Credit Suisse — Analyst

Okay, thank you. I appreciate the color.

Operator

Your next question comes from John Inch from Gordon Haskett. Please go ahead, your line is open.

John G. Inch — Gordon Haskett — Analyst

Thanks, good morning everybody. Good morning, guys. Hey, Scott. What are you and your Auto team saying towards the prospects to return to sustainable growth in North America and Europe? In other words, how much pent-up demand cyclically is creating for a runway, do you think beyond sort of a quarter or two of what the pent-up stuff for kind of backtracking? I’m just wondering if you could also think a couple of companies have commented on this and it seems intuitive, the public is avoiding mass transit in big cities and driving more as they did in China during their experience. Do you think that adds some juice to potential recovery in Auto next year?

E. Scott Santi — Chairman & Chief Executive Officer

Certainly potential, I would say our thinking on that is not yet particularly deep. We’re still in the tactical mode. I think beyond what the situation you just talked about or the shift in demand related to this COVID experience on a medium basis that might result from what you talked about there. We also are looking at dealer inventories that remain at five-year plus lows. There is certainly — I don’t know that in our own thinking, we’re sort of out — yet long term we will do some of that as part of our planning process, and as we think about how to — we want to adjust our positioning around that sort of trend long-term, but I do think that based on just the sort of more current conditions in the marketplace that certainly, but Q4 we expect to be solid and into Q1 at this point. And then we’ll have a better view when we announce our results and drive our 2022 plans — 2021 and ’22 plans baked in order to do more.

John G. Inch — Gordon Haskett — Analyst

That’s fair. I just wanted to also just follow that up and stick with auto theme, I’ve got a couple of contacts of OEs, and what they tell me is right now, there is pretty substantial problems with supplier quality and lot of it may have actually got to do with the fact that lot of workers are booking off time and they are just not coming into work and it’s creating a lot of stress in the system for requirements for OEs to work overtime and do rework and stuff like that. Is this — firstly, are you seeing quality issues with respect to your own supply chain and feed ITW’s plans? And secondly, this actually I’m wondering, creating an opportunity because you guys can leverage 80/20 to drive some incremental share just based on the fact you can book bill with quality versus perhaps what others are doing? I realize you run the business as kind of program-by-program, that’s why I’m kind of asking the question, you’re not Delphi or whenever, you just — is there something going on there.

E. Scott Santi — Chairman & Chief Executive Officer

No. This program-by-program, but we are not fully sourced in a lot of the programs that we participate in. So certainly — some of the issues being talked about, we’re absolutely present and were part of our overall results in Auto in the third quarter and we expect that to certainly continue to be an incremental opportunity. There are certainly lots of parts of the auto OE supply chain that we don’t participate in. So we’re not in — we are not going to solve the problem, but certainly in the areas that we serve our customers, we are laser focused on making sure they’re aware that we are saying that, but we remain in a very strong supply position that we are there to help them to the best of our ability, deal with some of the issues that you’ve talked about. And from — from a quality standpoint, we’ve talked in the past about the fact that this company operates with localized supply chains, strong commitments to long-term relationships with our key suppliers, and the — going back to the second quarter, our plan throughout has been to make sure that we — supply chain for us remains in positions, robust and ready to flex with us. That’s not a new thing for us that’s inherent in our business model and the way we operate. And so far, I actually should have probably also thanked our supply base in my opening comments, because they’ve been remarkable to date.

John G. Inch — Gordon Haskett — Analyst

Got it. Thanks, Scott. Appreciate it.

Operator

Your next question comes from Julian Mitchell from Barclays. Please go ahead, your line is open.

Julian Mitchell — Barclays — Analyst

Hi, good morning. Maybe a question first for Michael just around free cash flow outlook. I think you mentioned on the previous call that you should have a big step down in second half free cash $600 million or so, but in Q3 certainly that the free cash flow, looking pretty robust. So just wondered if you had any updated thoughts around sort of working capital management and what kind of pressures that could put on the cash flow? And how well you think you can manage that working capital now as the sales are starting to improve?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yeah, it is a good question Julian. I mean I think as a result of the fact that the recovery progressed ahead of our expectations into the quarter, our free cash flow performance was also significantly better than what we expected going into the quarter. And we expect something similar here in the fourth quarter. Like I said, year-to-date we are at $1.9 billion and we should end the year significantly above $2 billion. I will say this, I think the working capital performance inside the company, given the recovery here in Q3 was pretty remarkable, the teams did an excellent job focusing, particularly on the receivable side. Early on, we put some focus on our credit and collection efforts. And as a result of that, if you look at our, you can’t see that from the outside, but inside the company when you look at our past due performance we are right in line where we are historically, which given the pressures here during the pandemic is quite remarkable. So you should expect continued strong free cash flow performance and we expect to end the year well above 100% as we — if things stay the way they are here in the fourth quarter.

Julian Mitchell — Barclays — Analyst

Thanks. And then just a quick follow-up. Perhaps for Scott, you mentioned the very low inventories in the auto OEM vertical. Just wondered, looking across the disparate portfolio at ITW, how would you characterize the state of inventories at channel partners and customers? When you’re looking at the other businesses are you seeing much restocking for example in general?

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, we’ve talked about this in the past. We have very little visibility there. The auto comment I made was more around dealer inventories, which is obviously a step removed in their approaches there are certainly their own and it’s a number that is reported and it is obviously very visible. In terms of most of our other channel partners, given the — the fact that you order from us today we ship it to you tomorrow, there is very little buffer in terms of inventory. So I think from the standpoint of destock, restock, it’s not a big factor for us really ever.

Julian Mitchell — Barclays — Analyst

Great. Thank you.

Operator

Your next question comes from Andy Casey from Wells Fargo. Please go ahead, your line is open.

Andrew Casey — Wells Fargo — Analyst

Thanks a lot. Good morning, everyone. A question on the outlook. As I take the midpoint of the numbers that you provide, it seems to imply Q4 revenue kind of flattish with both Q3 and last year, but the margins are expected, if I’m doing the math right, to decline to about 22% to 23% from Q3 adjusted 25.3% and then last year’s 23.8%. Is that entirely mix or should we consider something else?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yeah, I mean the major driver of the guidance we are providing or the framework we are providing for Q4 is really the fact that if you go back and look historically Q4 tends to be lower than Q3 from a revenue and margin standpoint, really primarily as a result of the fact that there are two less shipping days in the fourth quarter. What I can tell you in terms of the underlying sales trends that we obviously significant sequential improvement here in as we went through the third quarter, those have remained on trend as we sit here in October. So that’s certainly encouraging. And then the margin performance, again it is you should — there is nothing unusual here in the fourth quarter. I will say that I pointed to some one-time items here in the third quarter. Obviously, we don’t expect those to repeat in the fourth quarter. So hopefully we provided enough information here for you to put together your own view of what the fourth quarter might look like with your own assumptions, but what’s reflected on the — on the page in the deck is really our current view as we sit here today for the — for the full year.

Andrew Casey — Wells Fargo — Analyst

Okay. Thanks, Michael. And then if I may, last quarter you gave us some information about market share win benefit to annualized revenue. Would you be willing to share where the company stands on that metric? Meaning did it increase this past quarter, and if so, by magnitude, about how much?

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, I think what we gave you last quarter was just a couple of two or three real examples that had already started to play out as we were reporting our results. This is not a list that we are keeping inside the company, this is certainly a major focus across all seven of our segments. I guarantee you that our segments are tracking it very diligently. But at this point, I would assume it’s certainly continue to broaden out and it would be just be impossible given the thousands and thousands of customers that we have. If we were keeping our running tab of all the stuff in reporting on it, it just wouldn’t — it wouldn’t be practical nor will it be accurate, probably.

Andrew Casey — Wells Fargo — Analyst

Okay. I’ll pass it along. Thank you.

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Thank you.

Operator

Your next question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open.

Andrew Kaplowitz — Citi Research — Analyst

Good morning, guys. Nice quarter.

E. Scott Santi — Chairman & Chief Executive Officer

Good morning.

Andrew Kaplowitz — Citi Research — Analyst

Scott or Michael, if you look at a couple of your segments in the quarter, such as Construction or Polymers & Fluids, this growth rates we rarely ever see in these segments, we know much of the growth is coming from your strength for instance in construction and renovation or auto aftermarket, but you’ve also done a lot of PLS in segments, which you mentioned are helping the margin side. So we also seen the fruits of the labor on the revenue side too or is it just pandemic related recovery and what could that mean for the sustainability of growth in these particular segments in 2021?

E. Scott Santi — Chairman & Chief Executive Officer

My answer to that Andy, is that some of both. There are certainly certain market sectors or product categories within both of those segments that are benefiting from pandemic related demand. We actually talked about that very question with the leaders of both of those businesses. And beyond those sort of pandemic related benefits in the near term, both of their results also reflect a solid progress in terms of improving the overall growth posture and profile in those two segments.

Andrew Kaplowitz — Citi Research — Analyst

Scott, that’s helpful. And then maybe about Food Equipment, could you give us more color and a sense, you mentioned institutional was up — was down 30%, with restaurant down a little more than that but grocery stores were up 30%. As you look out over the next few quarters, do you see continued recovery in institutional and sustained strength in grocery? And can you see your Food Equipment sales continue to recover, if the restaurant facing portion of the business stays weak?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yeah, and so we think that the recovery will probably be on the slow side of things, it will take a while — as you look across the portfolio Food Equipment is probably the segment where the recovery, for obvious reasons, will take a little bit longer. Yeah, I can give you a bit of detail maybe on in terms of the end markets, the institutional side down about 30%, which was the same as in the second quarter. Within that healthcare is doing slightly better and the drag really is on the lodging side, as you might expect. Restaurants, QSR, did improve sequentially versus the second quarter and then obviously a big improvement here on the retail side supported part of that was market. And part of it was new product rollout share gain. And so that’s why that business was up almost 40% on the retail side. But to answer your question, this will be — as we sit here today, we think this will be a fairly slow recovery in food equipment in the near term. I think in the long-term, our view hasn’t changed in terms of how attractive this business is both in terms of our ability to grow above market and our ability to do so at a very attractive margins. And I think you saw in the quarter here for this business to already be back at 20% operating margin and generating $90 million of income given the environment that we’re dealing with is a pretty remarkable accomplishment. So near term slow, but long term, we are very bullish on this business.

Andrew Kaplowitz — Citi Research — Analyst

Helpful, Michael. Thank you.

Operator

Your next question comes from Ann Duignan from J.P. Morgan. Please go ahead, your line is open.

Ann Duignan — J.P. Morgan Securities — Analyst

Yeah, good morning. Thank you. Most of the short-term questions have been answered at this point. I thought maybe I could ask about the automotive business, in terms of what you’re seeing out there for future programs. I know you bid on platforms, many years in advance. And are you beginning to see more RFQs or RFPs coming out for electric vehicles and electric platforms? And how does that change the dynamics within the team, especially maybe in Europe ahead of the US? Thanks.

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, I’d say a couple of things in terms of new program activity, generally things certainly got pushed out as the — just based on the pandemic impact and so a lot of that activity in the second quarter pretty much disappeared as you would expect, but in the third quarter has picked up nicely, in terms of our engagement with our customers around their future platforms and areas of opportunity for us to participate. And we talked about the — on the EV question, we’ve talked about that a lot. We remain pretty agnostic from the standpoint of internal combustion versus EV from the standpoint of the overall opportunity profile for ITW in terms of the types of solutions where we can add value. In fact, it is still slightly higher on EV on a per vehicle basis. And as you would expect on — on a relative basis, it’s not as big as the volume of projects on the internal combustion side at this point, but certainly from the standpoint of the growth and the number of projects that we’re engaging on in EV for all the reasons you’d expect that is certainly coming up the curve fast.

Ann Duignan — J.P. Morgan Securities — Analyst

Okay. That’s helpful color. Thank you, I appreciate that. And then could you talk about China and what you’re seeing there beyond just Automotive. We read a lot about what’s going on in Automotive in China, but maybe you could talk us through what you’re seeing in the other segments in China, specifically? Thank you.

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, so maybe just to take a step back. So if you go back to the first quarter, our sales in China were down 24%. In the second quarter of the year, flat positive 1% and then in Q3 as the recovery continue to take hold and that business actually grew 10% year-over-year. Auto is actually not the fastest growing business in China, but auto was up 15% and so as was specialty and then our Polymers & Fluids business was up 30% here in the third quarter in China. And as you would expect there’s still slower recovery of the Food Equipment side down kind of in the — in the mid-single digit range. So, but certainly encouraging trends and as the recovery continues to take hold in China.

Ann Duignan — J.P. Morgan Securities — Analyst

Okay. I appreciate that. I’ll leave it there and turn it over, thank you.

E. Scott Santi — Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from Scott Davis from Melius Research. Please go ahead, your line is open.

Scott Davis — Melius Research — Analyst

Hey, good morning, guys.

E. Scott Santi — Chairman & Chief Executive Officer

Hi, Scott.

Scott Davis — Melius Research — Analyst

The results of construction were really amazing overall. And can you give some of the color on, whether you put up those numbers despite maybe some product shortages, where there product shortages? And I guess kind of a natural follow up is that what role did price play in the strong results? I assume you might have been able to get a little bit of price given the supply demand environment.

E. Scott Santi — Chairman & Chief Executive Officer

The result in construction were driven by our ability to supply some of the most demanding customers that we deal with. So there were no shortages. And as Scott said earlier, I mean I think lot of credit to the operating team and a lot of credit to our own supply chain, our local supply chains and their ability to respond. And meet some really strong activity at in the home centers. If you look at the residential renovation business was up almost 20% in Q3 after a strong Q2 and so — but like I said this was it goes all the way back to our decision I think to not initiate aggressive headcount reductions in Q2 and focus instead on winning the recovery and that’s what you’re seeing here in construction. Our ability to supply and take care customers and do so at record margins, which by the way are not driven by price, they are driven by a range of things in this quarter, and particularly the volume leverage was certainly helpful. The enterprise initiatives continue to contribute in a big way and price was really not a factor in this.

Scott Davis — Melius Research — Analyst

Is price something that you generally but through towards kind of the end of the year, regular cycle on price or is it more opportunistic?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

It’s more a planned process. It’s an annual cycle. Yeah, it’s certainly not something that you — that we are in the position to be very tactical about.

E. Scott Santi — Chairman & Chief Executive Officer

The goal is to, Scott offset any raw material cost inflation and there is very little of that in the current environment. And so price was really not, in terms your question significant factor here.

Scott Davis — Melius Research — Analyst

Okay. Okay, well that’s good. I’ll pass it on. Good luck, guys. Thank you.

E. Scott Santi — Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from Joe Ritchie from Goldman Sachs. Please go ahead, your line is open.

Joe Ritchie — Goldman Sachs — Analyst

Thanks, good morning everyone.

E. Scott Santi — Chairman & Chief Executive Officer

Hey, Joe.

Joe Ritchie — Goldman Sachs — Analyst

Maybe just starting off just on kind of the near-term and thinking about that 4Q implied growth number. Michael, I think you mentioned in your prepared comments that there is going to be two less shipping days. I just want to be clear, the two shipping days, is that on a year-over-year basis or is that versus 3Q? And does that account really for the deceleration?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yes, it’s versus the third quarter. I think there is — there is 64 days in Q3, there is 62 in Q4 and that is exactly the same set up as last year. So on a year-over-year basis there is no –.

E. Scott Santi — Chairman & Chief Executive Officer

And I would add and it’s very technical, but some of the shipping days between Christmas and the New Year holiday are typically sustained, not very robust, more than two.

Michael M. Larsen — Senior Vice President & Chief Financial Officer

And I think maybe, Joe, what you are really asking is, are you seeing — are you implying that things are decelerating? And I think that’s certainly not the case. I think we have not seen anything to suggest that things are slowing here in the, in the fourth quarter.

Joe Ritchie — Goldman Sachs — Analyst

Got it. Okay, that’s helpful. And then I wanted to dig into the Food Equipment segment for a second, you mentioned the retail part of your business was up 30% and some of that was driven by product rollouts, I’d love a little bit more color on what you’re doing there specifically and whether there is any benefit that you saw from just pent-up demand for not being able to potentially shift in 2Q. I’m just trying to trying to understand that 30% number in Food Equipment?

E. Scott Santi — Chairman & Chief Executive Officer

Yeah [Indecipherable] some of that. I think in Q2 it was a little difficult to get in there with the product rollouts, but this is part of the annual cycle in Food Equipment where we rollout out new products with added features. And so maybe I also think it’s — if you were to ask our team they would certainly suggest that there were some pretty significant share gains here in the third quarter as a result of these new products being rolled out. So hopefully that answers your question.

Joe Ritchie — Goldman Sachs — Analyst

Yeah, that’s — that’s helpful. Thanks guys. I’ll get back in queue.

Operator

Your next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open.

Jeff Sprague — Vertical Research Partners — Analyst

Thank you. Good morning, everyone. Maybe just one more around the kind of short term tempo. So it looks like you didn’t really see any like inventory whipsaw effect. And Scott, you explained quite clearly how your business operates. But did you get a sense that everybody was caught off guard here in Q3, and there’s just a fair amount of catch-up from Q2 and Q3? So it may not be an inventory effect per se, but it’s just kind of a snapback that does, in fact, create somewhat down as we move into Q4. It sounds like you’re not seeing that yet, but just wondering your kind of antenna on the ground, is there any sense that there’s that kind of dynamic that play here?

E. Scott Santi — Chairman & Chief Executive Officer

This is not going to be a helpful answer, but it’s really hard to tell, Jeff. I think at this point, this is obviously a fairly unprecedented situation on so many respects. All we can do is stay in position — somebody [Indecipherable] the dog. That’s not here. But some of it may very well be a factor. It’s just impossible to tell. All we can do is what’s within our control, which is to stay in position to serve our customers we’re — third quarter was certainly the first part of the recovery from a completely unprecedented complete shutdown of wide swaths of our customer base and the economy. And so I wouldn’t certainly rule out any — not all of the above in terms of impacting the conditions right now and we’ll see how they play out from here. But all we can tell you is what — I back to what Michael said earlier, is at least through — obviously, through the third quarter and through October, we’ve seen no pulling back.

Jeff Sprague — Vertical Research Partners — Analyst

Yes, I’m doing my part here to help the economy, you’ve got a construction guy showing up and dog is barking at him. So can you also just give us an update on your thinking on share repurchase here? It sounds like M&A is probably sliding to the right. The cash is obviously gushing. It doesn’t look like you did anything in the quarter, maybe I’m wrong, but what’s your current thinking? Thanks.

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, so at this point our primary focus is really on running the business and getting our plans together for next year. And so we suspended the buyback back in Q1. We’ve done — we spent $706 million, somewhere around $167 a share. And we’re essentially done for the year. And our focus really is on running the business and getting our plans together. And then when we kind of give you our thoughts on what 2021 might look like, we’ll give you an update at that point also on share repurchases.

Jeff Sprague — Vertical Research Partners — Analyst

Great, thanks for the color.

Operator

Your next question comes from Stephen Volkmann from Jefferies. Please go ahead, your line is open.

Stephen Volkmann — Jefferies — Analyst

Hi, good morning gentlemen. Karen.

E. Scott Santi — Chairman & Chief Executive Officer

Good morning.

Stephen Volkmann — Jefferies — Analyst

Just a couple of quick follow-ups, if I could. In terms of the strategy to sort of win the recovery, it seems like maybe automotive might be amongst the most fertile ground as you’re able to fill orders that maybe competitors can’t. And I’m just curious — maybe it’s way too early for this, but is it potentially possible to think about your historical wins relative to the auto build increasing? Is it too early to think about that?

E. Scott Santi — Chairman & Chief Executive Officer

Well, I think it would be — I think what I would say Jeff is this gives us an opportunity to demonstrate to our customers the value equation — I’m sorry, Steve, Jeff was the last one here. Sorry, Steve. The dog is still following me. My apologies. The — what I was saying is I think this is a phenomenal opportunity for us to demonstrate the value equation around ITW’s role in the auto OEM supply chain from the standpoint of a comprehensive — our ability to serve you through thick and through thin. And so I would expect that our customers experience with us through this particular period will certainly be contributing to our ability to — as we go forward to secure more business based on the sort of full range of the value-add that we can bring, including our ability to supply when things are dicey.

Stephen Volkmann — Jefferies — Analyst

Okay, alright. Fair enough. And then just quickly on Specialty Product. I think, Michael, you mentioned something about cost sharing. I’m just curious if there’s any detail there, anything we should be thinking about going forward?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

This is a one-time item, and it relates to an agreement with a customer that for obvious reasons I can’t give you a ton of detail on. I think the important thing, this was a one-time item, and you’re not going to see it again.

Stephen Volkmann — Jefferies — Analyst

Got it. Thank you guys.

E. Scott Santi — Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead, your line is open.

Nicole DeBlase — Deutsche Bank — Analyst

Yeah, thanks for the question. Good morning guys.

E. Scott Santi — Chairman & Chief Executive Officer

Hi Nicole.

Nicole DeBlase — Deutsche Bank — Analyst

Hi there. So maybe we can start with just the cadence of the quarter. Did you see continued improvement throughout the quarter? Or was the organic growth kind of similar across each month?

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, I think the sales trends in Q3 were pretty strong right out of the gate in July. I think we talked about that on our last earnings call. And really remained that way through August, September. And so far, what we’ve seen of October.

Nicole DeBlase — Deutsche Bank — Analyst

Okay. Okay. Got it. And then just an update on the restructuring. I know that on the last call, you guys kind of noted that you expected to spend around $60 million in the back half. But given that topline is kind of coming in probably better than you would have expected, is $60 million still the plan for the second half? And if so, can you maybe parse out what was done in 3Q and what you expect to do in the fourth quarter?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yeah, you’re right Nicole. It’s — we now expect it to be a little bit lower than the $60 million that we talked about on the last call. Let me just say first that, just a reminder that the projects that we’re doing this year are essentially the projects that were in the pre-pandemic plan, if you like. And there’s very little specific tied to the pandemic from a restructuring standpoint. And part of the reason for that is, obviously, the recovery is now progressing at least in the third quarter at a pace that exceeded our expectations. So we have done $37 million year-to-date and we expect to end up somewhere around $50 million for the full year.

Nicole DeBlase — Deutsche Bank — Analyst

Okay. And that probably means then that you guys were kind of expecting 1 to 1 payback as we think about the impact to 2021. So I also suspect then that the stock is more like $50 million for next year. Is that fair?

E. Scott Santi — Chairman & Chief Executive Officer

Yeah, I mean — yeah, I think the payback, as we’ve talked about before on these projects, and these are really the projects that are coming out of our front-to-back process are typically less than 12 months. So that would be a reasonable assumption.

Nicole DeBlase — Deutsche Bank — Analyst

Okay, got it. Thanks, I will pass it on.

Operator

Your next question comes from Mig Dobre from Baird. Please go ahead, your line is open.

Mig Dobre — Baird — Analyst

Hey, great. Thanks for squeezing me in. Good morning everyone. Just a quick question on margin here, especially sort of the margin algorithm going forward. As I’m looking at gross margins, it was very nice to see them above 42% again. And I’m wondering here, just conceptually, as volumes, we get back to volume growth at a point in time, do you see opportunity to continue to expand to drive gross margin? Or is this mostly exercise of leverage on SG&A in terms of driving incremental margin?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Well, I think we’ve demonstrated over the last seven years that we have a pretty good track record in terms of continuing to drive improvement in our cost structure, both on the variable side as well as on the SG&A side. So we would expect both. And I should have said this upfront, as we begin to think about 2021, I mean — and that is — and the enterprise initiative specifically, they didn’t — we didn’t talk a lot about that, but they contributed 120 basis points of margin expansion here in the third quarter. Year-to-date, we’re above 100 basis points, and we’re seven years into this. And so I think it’s certainly a lot of positive momentum going into not just fourth quarter but also into next year, as these enterprise initiatives continue to contribute to our margin improvement in a meaningful way, both variable and on the SG&A side — on the fixed cost side.

Mig Dobre — Baird — Analyst

Got it. Okay. And then my follow-up, going back to Welding, and I appreciate the color that you guys gave there. I’m wondering if you can provide a little bit more in terms of kind of what you’re seeing going forward. Arguably speaking, some of your customers in areas like heavy equipment and such might be seeing some of these production schedules bottom out. Do you have any sense for how demand might progress here? And at what point in time we could be seeing this segment return back to growth?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Well, I think, Mig, as you look at Q4, I think Q4 will — if that’s your question, will look a lot like Q3, probably. I think we haven’t done the plans yet for next year. And when we get together, next year, we’ll give you a little more color by segment, including Welding. But it’s really a little too early to tell at this point. So I mean, as I said upfront, the comparisons year-over-year are going to be relatively easy. So just on that basis, that’s certainly helpful as we think about next year. But we’ll give you a better answer, Mig, when we provide guidance for 2021, okay.

Mig Dobre — Baird — Analyst

Appreciate it. Good luck.

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Thank you.

Operator

Your last question comes from Nigel Coe from Wolfe Research. Please go ahead, your line is open.

Nigel Coe — Wolfe Research — Analyst

Thanks, good morning everyone. Hi guys. Obviously, you’ve covered a lot of ground here. I did want to go back to restructuring. That $50 million this year, does that support the 100 basis points for next year? Or does that provide some upside potential to that number?

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Well, I — I’m not going to let you pin me down on the number yet for next year because we haven’t gone through the specific projects and activities that support that number for next year. But I think it’s reasonable to assume a meaningful contribution again next year from our enterprise initiatives, which includes 80/20 work as well as the work that’s being done on the strategic sourcing side. So that’s probably the best I can do right now is expect another meaningful contribution from the enterprise initiatives next year.

Nigel Coe — Wolfe Research — Analyst

Okay, that’s fair. And then a quick one on tools. Obviously, very impressive performance. And I was surprised because I think I’m right in saying that you have exclusively a pro channel that’s very limited to DIY exposure there. So it seems like this is all driven by new residential construction, renovation would have been — seems still quite anemic. Is that the case? And what are you seeing in terms of new build versus renovation trends?

E. Scott Santi — Chairman & Chief Executive Officer

I think your view let’s change your assumptions. So renovation, we’ve got a lot of exposure. And so our residential construction exposure is bolt-on new and remodel, and the remodel is really where the strength — a lot of the strength was in Q3.

Michael M. Larsen — Senior Vice President & Chief Financial Officer

Yeah, that’s exactly right. Just to add maybe a little more color, Nigel, since you had to wait until the end to get your question in. We did see some builder activity also picking up in other parts of the business. So hopefully, that’s helpful.

Nigel Coe — Wolfe Research — Analyst

Oh, it is. [Indecipherable] so I was little bit surprised. But that’s helpful. Thank you very much.

Operator

I would now like to turn the call back over to Ms. Karen Fletcher for any closing remarks.

Karen Fletcher — Vice President Investor Relations

Okay. Thanks, Julienne. Thank you, everybody, for joining us this morning. Have a great day.

Operator

[Operator Closing Remarks]