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Illinois Tool Works inc (NYSE:ITW)
Q2 2021 Earnings Call
Jul 30, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions]

Thank you, Karen Fletcher, Vice President of Investor Relations, you may begin your conference.

Karen Fletcher -- Vice President, Investor Relations

Thank you, Adam. Good morning, and welcome to ITW's Second Quarter 2021 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and our Vice Chairman, Chris O'Herlihy. Senior Vice President and CFO, Michael Larsen, is recovering from a sports-related injury and is not available to participate in today's call. We certainly wish Michael all the best and look forward to seeing him next week. During today's call, we will discuss ITW's second quarter financial results and update our guidance for the full year 2021.

Slide two is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2020 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release.

So please turn to Slide three, 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

Thank you, Karen, and good morning, everyone. In the second quarter, we saw continued recovery momentum across our portfolio, and we delivered strong operational execution and financial results. Revenue was up 43% with organic growth up 37%, and we saw double-digit growth in every segment and geography. Earnings per share of $2.45 was up 143%, 108% if you exclude the onetime tax benefit of $0.35 that we recorded in the quarter.

In this strong demand environment and in the face of very challenging supply conditions, our teams around the world leveraged our long-held close to the customer manufacturing and supply chain approach, and the benefits of staying fully staffed and invested through our winter recovery positioning, to continue providing world-class service levels to our customers while also continuing to execute on our long-term strategy to achieve and sustain ITW's full potential performance. We're certainly encouraged by our organic growth momentum as order intake rates remained pretty much strong across the board.

And during the second quarter, we saw multiple examples of how our ability to sustain our differentiated delivery capabilities by remaining fully invested through the pandemic resulted in incremental share gain opportunities for our businesses. While there's no doubt that the raw material supply environment is as challenging as we have experienced in a long time, maybe ever in my 38 years at ITW, we are as well positioned as we can be to continue to set ourselves apart through our ability to respond for our customers.

We've worked hard over the last nine years to position ITW to deliver differentiated performance in any environment, and I have no doubt that the ITW team will continue to execute at a high level as we move through the balance of the year and beyond. Now for some more detail on our performance in the second quarter. As I mentioned, organic growth was 37% with strong performance across our seven segments. The two segments that were hardest hit by the pandemic a year ago led the way this quarter, with Automotive OEM up 84% and Food Equipment up 46%.

By geography, North America was up 36% and international was up 38%, with Europe up 50% and Asia Pacific up 20%. GAAP EPS of $2.45 was up 143% and included a onetime tax benefit of $0.35 related to the remeasurement of net deferred tax assets in the U.K. due to a change in the statutory corporate tax rate there. Excluding this item, EPS of $2.10 grew 108%. It was a Q2 record and was 10% higher than in Q2 of 2019. Operating income increased 99% and incremental margin was 40% at the enterprise level. Operating margin of 24.3% improved 680 basis points on strong volume leverage, along with 150 basis points of benefits from our enterprise initiatives.

Year-to-date, our teams have delivered robust margin expansion, with incremental margins for our seven segments ranging from 37% to 48%, inclusive of price/cost impact. Speaking of price/cost, price/cost headwind to margin percentage in the quarter was 120 basis points. While the pace of raw material cost increases accelerated in the second quarter, our businesses have been active in implementing pricing actions in response to rising raw material costs since early in the year, consistent with our strategy to cover raw material cost inflation with price adjustments on a dollar-for-dollar basis.

In Q2, we ended up just short of that goal due to some timing lags, and as a result, net price/cost impact reduced EPS by $0.01 in the quarter. We continue to expect price/cost impact to be EPS-neutral or better for the year, and I'll come back and provide more color on the price/cost environment a little later in my remarks. In the quarter, after-tax return on invested capital was a record at 30.8%. Free cash flow was $477 million, with a conversion of 72% of net income when adjusted for the onetime tax benefit I mentioned earlier.

And that was due to the additional working capital investments necessary to support our strong organic growth. We continue to expect approximately 100% conversion for the full year. We repurchased $250 million of our shares this quarter as planned. And finally, our tax rate in the quarter was 10.1% due to the onetime tax benefit. Excluding this item, our Q2 tax rate was 23%.

Now moving to Slide four for an update on price/cost. We continue to experience raw material cost increases, particularly in categories such as steel, resins and chemicals and now project raw material cost inflation at around 7% for the full year, which is almost five percentage points higher than what we anticipated as the year began. And just for some perspective, this is roughly 2 times what we experienced in the 2018 inflation tariff cycle. We learned a lot from that experience. And as a result, the timeliness and pace of our price recovery actions are well ahead of where we were in 2018.

As I mentioned, we expect price/cost impact to be EPS-neutral or better for the full year, with pricing actions more than offsetting cost increases on a dollar-for-dollar basis. Price/cost will continue to have a negative impact on our operating margin percentage, however, in the near term, as we saw in Q2, and that impact will likely be modestly higher in Q3 versus Q2 before it starts to go the other way. For the full year, we expect price/cost impact to be dilutive to margin by about 100 basis points, which is 50 basis points higher than where we were as of the end of Q1.

That being said, margin benefits from enterprise initiatives and volume leverage will provide us with ample ability to offset the negative effect of price/cost on margin percentage and deliver strong overall margin performance for the year. And beyond the near-term price/cost impact, we remain confident that we have meaningful additional structural margin improvement potential from the ongoing execution of our enterprise initiatives.

With that, I'll turn it over to Chris for some comments on our segment performance in Q2. Chris?

Christopher A. O'Herlihy -- Vice Chairman

Thank you, Scott, and good morning, everyone. Starting on Slide five, the table on the left provides some perspectives on the growth momentum in our businesses with a look at sequential revenue from Q1 to Q2. As you would expect, the pace of recovery in our Auto OEM segment has been dampened by the well-publicized shortage of semiconductor chips despite very strong underlying demand. And for that reason, we added a row to the table to show portfolio demand trends ex Auto. Our Q2 revenue ex Auto increased 8% versus Q1. This year, Q2 had one more shipping day than Q1, so on an equal days basis, our Q2 versus Q1 revenue growth ex Auto is 6%, which is 2 times of our normal Q2 versus Q1 seasonality of plus 3%.

In addition, we added more than $200 million of backlog in Q2. Both of these factors show that demand accelerated meaningfully in Q2 across our portfolio. So let's go to a little more detail for each segment, starting with Automotive OEM. Demand recovery versus prior year was most evident in this segment with 84% organic growth. This, of course, was against easy comps versus a year ago when most of our customers in North America and Western Europe were shut down from mid-March to mid-May. North America was up 102%, Europe was up 106% and China up 20%. We estimate that the shortage of semiconductor chips negatively impacted our sales by about $60 million in the quarter.

Operating margin of 18.8% was up 26.6 percentage points on volume leverage and enterprise initiatives. Price/cost with a significant headwind of more than 200 basis points due to the longer cycle time required to implement price recovery actions in this segment. Given the ongoing semiconductor chip supply uncertainty, we now expect full year organic growth in Automotive to be approximately 10% versus our original range of 14% to 18% at the beginning of the year.

To be clear, this is not lost revenue but simply delayed into next year. Furthermore, the slower-than-expected growth in Auto is offset by strength elsewhere in the enterprise. Please turn to Slide six for Food Equipment. In Food Equipment, organic revenue rebounded 46%, with recovery taking hold across the board and the backlog that is up significantly versus prior year. North America was up 39% with equipment up 42% and service up 33%. Institutional revenue was up more than 30%, with healthcare and education growth in the low to mid-30s and lodging up in the mid-20s.

Restaurants were up about 60% with the largest year-over-year increases in full service and QSR. Retail grew in the mid-teens on continued solid demand and new product rollouts. International recovery was also robust at 58%, with Europe up 66% and Asia Pacific up 29%. Equipment sales were strong, up 66% with service growth of 39%, which continued to be impacted by extended lockdowns in Europe. Operating margin was 22% with an incremental of 46%. Test & Measurement and Electronics revenue of $606 million was a Q2 record with organic growth of 29%. Test & Measurement was up 20%, driven by solid recovery in customer capex spend and continued strength in semicon.

Electronics grew 38%, continued strength in consumer electronics and automotive applications and the added benefit in timing of some large equipment orders in electronic assembly. Operating margin of 28.1% was 240 basis points -- was up 240 basis points and a Q2 record. Moving to Slide seven. Welding growth was also strong in Q2 at 33%. Equipment revenue was up 38% and consumables growth of 25% was the first time in positive territory since 2019. Our industrial business grew 52% on increased capex spending by our customers, and the commercial business remains solid, up 26%, following 17% growth in the first quarter.

North America was up 38% and international growth was 13%, primarily driven by recovery in oil and gas. Polymers & Fluids organic growth was 28%, led by our automotive aftermarket business up 33% on robust retail sales. Polymers was up 34% with continued momentum in MRO applications and heavy industries. Fluids was up 8% with North America growth in the mid-teens and European sales up low single digits. Operating margin was an all-time record 27.3% with strong volume leverage and enterprise initiatives partly offset by price/cost.

Moving to Slide eight. Construction organic growth of 28% reflected double-digit growth and recovery in all three regions. North America was up 20%, with 16% growth in residential renovation and with 26% growth in commercial construction. Europe grew 61% with strong recovery versus easy comps in the U.K. and Continental Europe. Australia and New Zealand organic growth was 13%, with continued strength in residential and commercial. Operating margin in the segment of 27.6% was up 390 basis points and was a Q2 record.

Specialty organic revenue was up 17% with North America up 15%, Europe up 24% and Asia Pacific up 14%. Our flexible packaging business was up mid-single digits against a tougher comp than the rest of this segment. The majority of our businesses were up double digits, led by appliance up more than 50%. Consumable sales were up 19% and equipment sales up 12%.

And with that, I'll turn it back to Scott.

E. Scott Santi -- Chairman & Chief Executive Officer

Thanks, Chris. Let's move on to Slide nine for an update on our full year 2021 guidance. We now expect full year revenue to be in the range of $14.3 billion to $14.6 billion, up 15% at the midpoint versus last year, with organic growth in the range of 11% to 13% and foreign currency translation impact of plus 3%. This is an increase in organic growth of one percentage point at the midpoint versus the updated guidance that we provided at the end of Q1, driven largely by the incremental revenue impact of pricing actions implemented in Q2 in response to accelerating raw material cost increases.

While demand momentum accelerated in Q2 versus Q1, as we noted earlier in our presentation, we are admittedly being conservative in not projecting that forward in our guidance at this point in time, given the significant supply chain disruptions that continue to challenge many of our customers in Auto and otherwise. We are raising our GAAP EPS guidance by $0.35 to a range of $8.55 to $8.95 to incorporate the onetime tax benefit realized in the second quarter. The midpoint of $8.75 represents earnings growth of 32% versus last year and 13% over 2019. Factoring out the onetime Q2 tax item, the midpoint of our 2021 guidance is 10% higher than 2019.

With regard to margin percentage, as discussed earlier, the incremental cost increases that we saw in Q2 will result in full year margin dilution of 100 basis points versus the 50 basis points that we projected as of the end of Q1. And we are adjusting our margin percentage guidance accordingly to a range of 24.5% to 25.5%, which would still be an improvement of more than 200 basis points year-over-year and an all-time record for the company. And again, we expect zero EPS impact from price/cost for the full year. We expect free cash flow conversion to be approximately 100% of net income, factoring out the impact of the onetime noncash tax benefit we recorded in Q2.

Through the first half, we have repurchased $500 million of our shares and expect to repurchase an additional $500 million in the second half. Finally, we expect our tax rate in the second half to be in our usual range of 23% to 24% and for a full year tax rate of around 20%. Lastly, today's guidance excludes any impact from the previously announced acquisition of the MTS Test & Simulation business, which we expect to close later this year. And once that acquisition closes, we'll provide you with an update.

And with that, I'll turn it back over to you, Karen.

Karen Fletcher -- Vice President, Investor Relations

Okay. Thank you, Scott. Adam, let's open up the line for questions, please.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Andrew Kaplowitz with Citi.

Andrew Kaplowitz -- Citi -- Analyst

Best wishes to Michael.

E. Scott Santi -- Chairman & Chief Executive Officer

Thank you. He's on short-term IR, but he'll be back next week.

Andrew Kaplowitz -- Citi -- Analyst

Excellent. So Scott or Chris, you mentioned the raw material cost inflation. We know you said inflation will be EPS-neutral or better for the year. Do you see the inflationary pressure had stabilized enough now or you can have a handle on these increases that you sort of put into the guide? So when you look at Q3 and Q4, you have confidence in your forecast? And then '22, you talked about last quarter. What's the probability that these price increases are pretty sticky so you could exceed that 35% to 40% longer-term incremental you have?

E. Scott Santi -- Chairman & Chief Executive Officer

Well, on the first question, I think we're very confident that we will cover whatever -- all the increases that have already been incurred, and anything subsequent to that. I would not be comfortable describing the environment as stabilizing at this point. But ultimately, I think we are -- have demonstrated. We look back over the last -- going back to 2017 and even in '18 and certainly this year, sort of on a quarterly basis, worst impact from price/cost and inflationary environments has been a $0.01, maybe $0.02 one quarter.

So I think we're fully comfortable that our -- that we'll be able to read and react to whatever might happen from here that the EPS impact of the company will be negligible for the full year. But I think as I said, I don't -- it's not based on an assumption that things are going to stabilize from here, for sure, yes. I don't think we're seeing -- we've seen enough evidence of that nor am I predicting things are going to continue to reach forward either. I think it's wait and see.

Christopher A. O'Herlihy -- Vice Chairman

We saw a significant pickup in the pace of inflation in Q2.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes.

Andrew Kaplowitz -- Citi -- Analyst

Guys, maybe I could just ask a question specific to Auto in the sense that you gave us the numbers, now 10% for the year. I think this quarter, you said 20 basis points of price risk cost. As you know, there's always a lag before you can catch up there. So should we assume incremental margins still getting a little worse before it gets better in that business? And how long would you surmise it takes to get on top of price risk cost in that business?

Christopher A. O'Herlihy -- Vice Chairman

Well, price versus cost in auto is always going to be challenging, given the nature of the industry. But I would say in terms of incremental in the second quarter in Auto, we had a 47% incremental, and in fact, a 47% incremental for the first half of the year. So incrementals are strong, no doubt, but there's no doubt that the structure of the industry, the structure of the pricing agreements, it does take a little longer. Hard to say how long it will take for us to catch up there, I would say.

Andrew Kaplowitz -- Citi -- Analyst

Thanks, guys.

Operator

And your next question comes from the line of Ann Duignan with JPMorgan.

Ann Duignan -- JPMorgan -- Analyst

Hi. Good morning.

Christopher A. O'Herlihy -- Vice Chairman

Good morning, Ann.

Ann Duignan -- JPMorgan -- Analyst

Could you talk a little bit more about both Construction Products and Test & Measurement where you said you delivered -- or you did deliver record Q2 operating profit percent? Can you talk about how sustainable those margins are going forward? Was there any change here to mix or anything that we should be aware of that would result in those margins diminishing from here? Or are those sustainable at these levels?

Christopher A. O'Herlihy -- Vice Chairman

Yes. So we say the construction margins are very sustainable. We've been improving margin construction for a long time now, and certainly for the last few quarters here, we've been in the mid- to high 20s in terms of margins in Construction. So despite the price/cost environment, we're seeing nice organic growth in Construction. We're getting nice price realization. And so we will start to expect the margins there to be sustainable. Certainly, in Test & Measurement, Test & Measurement margins, again, trending in the high 20s here, have been like that for a long time, a segment that we like in terms of level of differentiation. I believe it's our customer volumes. So we don't see any issue with sustaining margins in either Test & Measurement or Construction.

Ann Duignan -- JPMorgan -- Analyst

Okay, and -- go ahead.

E. Scott Santi -- Chairman & Chief Executive Officer

I'm sorry. I was going to add some color commentary that I think -- I was adding up the time when Chris was reading the comments, but I think we said all-time record margins for Q2 and three of our seven segments despite the price/cost environment. And I'll just circle back to a comment I made, which is that there's still room to run in terms of structural margin improvement across the company. We've got 150 basis points of enterprise initiative benefit in this quarter, so there's -- these are certainly sustainable improvements in performance, and we expect to continue to do better as we go forward.

Ann Duignan -- JPMorgan -- Analyst

Okay. I'll leave it there in the interest of time. I appreciate it. Thank you.

Operator

And your next question comes from the line of Stephen Volkmann with Jefferies.

Stephen Volkmann -- Jefferies -- Analyst

Hi. Good morning, guys. Maybe just following up on the comment about enterprise initiatives. You're talking about, I think, 100 basis points for the year, but you did 150 this quarter, I think, 120, if I have my numbers right last quarter. You've been overachieving. Did those slow down for some reason, or is there a chance that you do better than 100 this year?

Christopher A. O'Herlihy -- Vice Chairman

Yes. I mean, I think we're saying 100-plus, so we will do better than 100 this year. And there's still a lot of impetus on enterprise initiatives on sourcing and 80/20. These are all initiatives and activities that are very granular within our segments. Within each division, there's a host of activities they are working on and actually have been working on not just this year but even starting last year. So we entered the year with a fair bit of tailwind in terms of enterprise initiatives. So we would expect to do 100-plus, for sure.

E. Scott Santi -- Chairman & Chief Executive Officer

We're not slacking off.

Stephen Volkmann -- Jefferies -- Analyst

And then maybe just following up on this price/cost kind of question. Just curious about how you think about the policy here. I mean, it doesn't feel like there's a lot of pushback on pricing in any of the kind of verticals that we touch. Why not price for dollars plus margin? Why kind of create that headwind?

E. Scott Santi -- Chairman & Chief Executive Officer

Well, I don't know -- the headwind, from my perspective, is a percentage headwind, it's not an earnings headwind. The overall position that we want is, look, we've created an incredibly profitable economic engine and the most important job we have is to grow it organically. And so from the standpoint of -- to the extent we don't have to go up as high as other people do, we're leveraging that strong position and we can translate that into incremental share. That's the preferred option. We don't want -- I don't want our people fighting over the next increment. We got to get the cost back, for sure. But then let's get on to talking to our customers about how we can help them improve their businesses operationally, technically from a sales standpoint. And so that's basically as we can -- we can certainly do more to get all distracted and try to price optimize in the short term, but I don't think that serves our long-term interest very well. We make plenty of money That -- its not a...

Stephen Volkmann -- Jefferies -- Analyst

Fair point. Thank you.

Operator

And your next question comes from the line of Jeff Sprague with Vertical Research.

Jeff Sprague -- Vertical Research -- Analyst

Hey, thanks. Good morning, everyone.

E. Scott Santi -- Chairman & Chief Executive Officer

Good morning, Jeff.

Jeff Sprague -- Vertical Research -- Analyst

Good morning. Could we just drill a little bit into kind of the whole availability issue? We talked about price/cost and, obviously, it's tied to the availability of supply. But outside of Auto, which is very visible and obvious, are there clear places in your portfolio where either you're struggling to meet demand because of availability in your supply chain or you're feeling, on the customer side, perhaps you can deliver but they don't want it because they've got problems elsewhere down the line? I just wonder if you could give us some perspective on that. And any color on to what degree, if any, it may have been limiting the top line here in the quarter or into the balance of the year.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes. I'll give you some overall color and then certainly let Chris give you some segment-level -- business-level specifics if some things come to mind for him on this. I would say in terms of overall color, as we talk to our businesses around the world, there's no question that it is a daily battle that -- to maintain supply position necessary to service our customers. I would absolutely contend that we are doing better than most for a couple of reasons. One is the fact that we have long-head localized supply relationships with local manufacturing facilities serving our customers locally.

We have -- and then the other factor is what we talked about in our remarks, the fact that we kept all our people through the pandemic. We have not had to scramble to bring people back. So normally, our supply chain and our manufacturing operations function in a very simple automated way. It's definitely taking a lot more, let's call it, boot force for now. But I think that we're not hearing any big issues from the standpoint of our own ability to supply our customers. It doesn't mean that there's not an occasional $2 bracket that shows up late in the -- there's a couple of welding machines that can't go. I'm just making that up, but that's -- I'm sure that's the case.

But ultimately, given the service levels that we're monitoring as a standard part of our operating practices, I would say that I'm very comfortable saying that we're working a lot harder than we normally have to but ultimately performing pretty well. I would say that the supply chain area beyond Auto is much more of an issue for us on the demand side than the supply side. And I'd point to a couple of things. We are seeing a lot of sort of timing changes in terms of orders and requirements, not because we can't deliver something but because another supplier can't deliver something to a customer.

And I'd also point to the $200 million of backlog, and we've talked about this before. We ship basically today what our customers ordered yesterday, and so we operate with very little backlog. And the fact that we built a couple of hundred million dollars of backlog, I can't analyze every dollar of it, but my contention would be that, that's a lot more due to sort of customer delays than it is our own ability to supply. And look, that was -- the $60 million in Auto plus the $200 million in backlog, that's another 10 percentage points of organic growth in the second quarter. Again, I'm not necessarily contending that all of it could have gone but my bet would be most of it. I don't know if you have anything you want to add.

Christopher A. O'Herlihy -- Vice Chairman

Yes, the other thing I would say, in addition to what -- to Scott's comments, I think our overall kind of 80/20 focus here really creates a lot of advantages for us in terms of much more simplifying and streamlining product offerings, obviously results in simplification of raw materials and components. And that simplification of focus also extends to our suppliers. A key part of our strategy, and it's working very well for us for many years, is to have these very strong and long-lasting supplier partnerships. And we're a key customer for most of our raw material suppliers. This becomes really, really important when supply chains become constrained. And we've really seen that work to our benefit here in the last 12 months.

Jeff Sprague -- Vertical Research -- Analyst

Great. And just a second question. Just on the M&A pipeline. Obviously, you don't have a deal until you've got something to announce. But can you give us a sense of how active your pipeline is? Have you been able to cultivate things, maybe handicap the odds of some other things kind of coming into your strike zone?

E. Scott Santi -- Chairman & Chief Executive Officer

Well, I would tell you that we are excited about MTS. We are working hard to get that one finished off. That is about $650 million of annualized revenue, so that's certainly enough work to do for a little while anyway. I don't want to necessarily comment on the pipeline as much as to say we remain and will remain very interested in adding high-quality businesses to the company. But sort of the timing of all that is always the subject of the quality of what opportunities present themselves. So there's always stuff going on, but it's not a matter of how big or small the pipeline is. It's more we're looking for a much narrower set of criteria than I think -- so it's more a function of the quality of what's there than the quantity.

Jeff Sprague -- Vertical Research -- Analyst

Okay, understood. Thanks. I'll pass it on.

Operator

And your next question comes from the line of Joe Ritchie from Goldman Sachs.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone.

E. Scott Santi -- Chairman & Chief Executive Officer

Good morning, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

So I know that -- I know you guys guide to organic growth trends really not improving or declining, and that's just kind of how -- that's just in your policy going forward. I guess when I think about each of the different segments and how you're thinking about the sequentials from here, I don't really think about a lot of seasonality in your business but maybe perhaps the Construction business, right, being a little bit seasonally weaker in the fourth quarter. How are you thinking about sequential revenue for the segment throughout the rest of the year with the -- obviously, you've given us the Auto guide, but really the other segments?

E. Scott Santi -- Chairman & Chief Executive Officer

Yes. I covered that, I think, overall in my comments, but we have sort of temped down the run rate in terms of the guidance relative to run rate. Chris talked to you about the fact that in the second quarter, we saw organic growth rates accelerate by a net three percentage points beyond seasonality. And we basically didn't project that same momentum forward through the balance of the year because of the supply risk involved, the supply chain risk to our customers. So we're playing that pretty conservative. And I think that ultimately is going to have more to do with the pace of the organic from here than trends of demand. There's plenty of demand out there. It's a matter of can our customers get enough raw material to support it.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. And then maybe, Scott, just following on that, like there -- you mentioned the backlog in the Food Equipment business. Like were you building backlog right now? Is that -- are you seeing that as more kind of like a 2022 opportunity, just given what you're seeing from a supply chain standpoint? Or does -- do you expect some of that to convert in the second half?

E. Scott Santi -- Chairman & Chief Executive Officer

I'd say some of it converts. I think the only one that's probably, definitely, into 2022 is the one that Chris mentioned in Auto where the streets sort of doesn't look it's going to get resolved anytime soon. But I'd say most of -- the rest of that backlog, that $200 million, I would expect to -- given our customers can take it because they can get the other components or things they need, that can certainly convert in the back half. I think it just doesn't make sense to up the revenue guide when everyone is still supply constrained right now. That's -- I can't say it any more simply than that. And until we see how things play out, it just didn't make sense to take things too far from where they are now in terms of run rate until we see how that all -- how the supply issues play out in affecting our customers' willingness to -- ability to take what they've ordered from us and order more. But I would say there's definitely, from a standpoint of order rates and the overall demand, there's definitely enough there to do well better than what's in our guidance if the supply chain situation gets significantly better from here forward.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. Yes, that's helpful. I guess maybe one follow-up on price/cost. I know we've talked about it a little bit. You did mention that 3Q is expected to get a little bit worse from Q2, but that you put through some pricing actions in 2Q. So I'm just -- I guess, I'm just wondering, does it take a little bit of time for some of those pricing actions to take hold? Or why would the headwind get worse in 3Q?

Christopher A. O'Herlihy -- Vice Chairman

Yes, Joe. I mean, the real reason it's getting worse in Q3 is because of the pace of inflation in Q2, and we saw a significant pickup in pace in Q2. And obviously, there's a little bit of a lag. So we see a little bit of a worsening in Q3. Based on what we know today, based on the cost increases we see and the normal price increases, we see a little worsening in Q3 from Q2, really on the base of the pace of inflation in Q2.

Joe Ritchie -- Goldman Sachs -- Analyst

Got it. Okay, great. Thank you both.

Operator

And your next question comes from the line of Jamie Cook with Credit Suisse.

Jamie Cook -- Credit Suisse -- Analyst

Hey, I guess just two questions, one following up on the revenue outlook. Understanding why you guide sort of conservatively, but is there any way you can help us understand just what you're seeing in terms of percentage increases on the order intake rate, like by segment just to help us sort of understand what's out there? And to what degree are you concerned? Is there any sort of double ordering that's happening as customers are worried they can't get stuff? And then I guess my follow-up question. Obviously, the organic growth has performed very strong. Are there particular segments or customers where you are more sort of confident that some of this organic growth is associated with market share wins that are actually sort of sustainable from here on?

Christopher A. O'Herlihy -- Vice Chairman

So in terms of acceleration of organic growth, we're seeing it. Obviously, we talked about where it's going in a different way. But certainly, in Food Equipment, Test & Measurement and Electronics and Welding are certainly growing faster than we expected earlier in the year, so we see nice acceleration there. We have no reason to believe that it's not sustainable based on our conversations with our customers, the order patterns and so on. And, obviously, as we walked and talked about the fact we've been very busy here in terms of this winter recovery initiative over the last 12 months.

And well, is it still kind of early to quantify this? We're feeling pretty good about how we're positioned. And we -- as you know, we very intentionally remain fully staffed to serve our customers, protect investments in people and initiatives, our customer-back innovation and so just sales excellence. And we certainly have anecdotal evidence out there that would say that, that is turning into real share gains. And if I just maybe highlight some sort of examples in like Food Equipment, where high levels of product availability, maintaining service-level excellence, as Scott talked about, and being able to respond and supply where our competitor could not is enabling several share gain and incremental wins from competition in large chains, both in foodservice and food retail.

Another example might be in Polymers & Fluids, automotive aftermarket. Staying invested here, we're able to sustain sales. And our sales and innovation focus, coupled with high service levels means we grew, as I mentioned in the commentary, automotive aftermarket grew by 33% in the quarter. And this is well above customer point sales growth, indicating that we are getting share in a meaningful way. And even on residential construction in our roofing businesses -- a business which is up 45% in the quarter, again, we see very clearly we're gaining share there on competition who have certainly been supply chain and operationally constrained, extending delivery times and so on, and we continue to maintain differentiated service levels.

So again, somewhat anecdotal, somewhat early in the winter recovery strategy, but certainly ample evidence that we seem to be gaining share. And these are just a small selection of illustrative examples of the type of products that we're making across our seven segments.

Jamie Cook -- Credit Suisse -- Analyst

Okay. And then anything on the order rate intake, if you can share with us just what you're seeing that you saw that by segment?

Christopher A. O'Herlihy -- Vice Chairman

Like I said, we saw an acceleration of the three segments that I mentioned in --

E. Scott Santi -- Chairman & Chief Executive Officer

Those are certainly --

Jamie Cook -- Credit Suisse -- Analyst

I'm just trying to get numbers. You know what I mean, if you can't, that's fine.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes. Orders pretty much equalized shipments for us because of what I said, what we -- our customers order, we ship the next day. I would say that also your question about, I think you used the term double-dip ordering in terms of customers trying to hedge, order more because they can't get supply, I would -- I absolutely can't say that we're not seeing any of that. But I would say that it would be much lower for us because of the fact that our service levels are so good. Our customers understand in terms of order to ship. So some may be certainly ordering more than they would normally because they're concerned about things. But I would think that in terms of our service levels, we wouldn't -- there wouldn't be anything -- that wouldn't be a significant part of the overall demand picture for us.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

And your next question comes from the line of Nigel Coe with Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning and best wishes to Mike. Hope he makes a speedy recovery.

E. Scott Santi -- Chairman & Chief Executive Officer

Thanks, Nigel.

Nigel Coe -- Wolfe Research -- Analyst

I wanted to go back to the supply constraints. Where are you kind of most -- outside of Automotive, which was predictable, but where are you most concerned? I'm thinking about maybe electronics, perhaps, tools would be barriers. So what are you monitoring most closely in terms of not just for Illinois Tool Work but for your suppliers? Which businesses or geographies are you most concerned?

Christopher A. O'Herlihy -- Vice Chairman

Yes. I would say electronics, in general, have been fairly constrained. To that impact, segments like Welding, Food Equipment, Test & Measurement and Electronics, would be one that I would call out. The inflation environment, obviously, has been across the board in terms of steel, resins, chemicals and electronics. But in terms of supply chain constraints, electronics, and to a certain sense, steel-related businesses.

E. Scott Santi -- Chairman & Chief Executive Officer

But beyond that, I don't think there's anything that really concentrates up. I think again, the color from our businesses, it's something different every day. But it's not a -- it takes a lot more work and it's not even the big dollar stuff. It's the, again, the $2 bracket. But it is a real -- it takes a real effort right now, significantly more than normal.

Christopher A. O'Herlihy -- Vice Chairman

Demand tends to excel.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes.

Nigel Coe -- Wolfe Research -- Analyst

Yes. And then some companies have talked about box purchases because of the higher volumes service plan. I wouldn't think I suppose, freight is a big issue for you, but maybe address those two points. And -- because that theoretically could change very quickly, so I'm just wondering what impact from spot purchases and bigger spending.

E. Scott Santi -- Chairman & Chief Executive Officer

Spot purchases. Can you explain that a little more?

Nigel Coe -- Wolfe Research -- Analyst

I think you and another company would purchase [Indecipherable] some hedges.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes, we don't hedge, we don't forward back. So everything -- current costs are flushing through right now, yes.

Christopher A. O'Herlihy -- Vice Chairman

And the second part of your question there, I think, related to freight and logistics, is that correct? And so with freight and logistics, I mean, obviously, there's an impact for us, but I would say less of an impact than some of our peers maybe on the basis that the producer where we sell -- producer and source where we sell, philosophy that we've long had has certainly mitigated the impact of freight and logistics on our cost structure and availability.

Nigel Coe -- Wolfe Research -- Analyst

Great. Thanks, guys.

Operator

And your next question comes from the line of Scott Davis with Melius Research.

Scott Davis -- Melius Research -- Analyst

Hey, good morning, guys.

Christopher A. O'Herlihy -- Vice Chairman

Good morning.

E. Scott Santi -- Chairman & Chief Executive Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

Hope Mike feels better. Must be a good story -- back story to the sports injury.

E. Scott Santi -- Chairman & Chief Executive Officer

It's his to tell.

Scott Davis -- Melius Research -- Analyst

Hopefully, he didn't join some sort of football team or something, the over-50 football team. Anyways, I only have one question. It's just on MTS. When you bring in MTS, how do you cadence 80/20? I mean how do you bring in a deal of this size, kind of bring 80/20 in without really disrupting it? Is there kind of a playbook there you guys can walk through and help us understand?

Christopher A. O'Herlihy -- Vice Chairman

Yes, absolutely, Scott. So obviously, we've completely reinvigorated 80/20 over the last few years with this front-to-back process. And effectively, the process that we will employ on MTS is exactly the same process that we have employed on our 84 divisions across the company. So we have clear insight on what to do, we have clear insight on how to do it. And we have clear insight on what the outcome should be when we get it done properly, coupled with the fact that we've built a tremendous amount of capability in the company of folks who can go in and help guide MTS on the 80/20 journey. So we feel very confident in the playbook. We feel very confident in our capability. We think the raw materials in MTS are fantastic with respect to 80/20 opportunity. That's one of the key attractions for us when we bought it. The other thing I'd say to you is that we've got a very similar business in our portfolio in Test & Measurement and Instron, where we've done this successfully before. So very confident that we can do this and do this successfully.

E. Scott Santi -- Chairman & Chief Executive Officer

The small plan -- it's probably a three- to five-year process. The next part, and part of that is not disrupting the business.

Christopher A. O'Herlihy -- Vice Chairman

It's always the peers that make sense. We're in no rush here.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes.

Scott Davis -- Melius Research -- Analyst

Okay, super helpful. Good luck. Thank you.

E. Scott Santi -- Chairman & Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Mig Dobre with Baird.

Mig Dobre -- Baird -- Analyst

Thank you. Good morning, everyone. Going back to your comments on pricing, obviously, a lot changed over the past three months. And can you maybe clarify for us what impact pricing had to your adjustment to the overall organic growth guidance?

E. Scott Santi -- Chairman & Chief Executive Officer

For the year?

Mig Dobre -- Baird -- Analyst

Yes, please.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes. Yes, it's 1%.

Mig Dobre -- Baird -- Analyst

Okay. I'm presuming then that...

E. Scott Santi -- Chairman & Chief Executive Officer

That was the 1% we added toward the end.

Mig Dobre -- Baird -- Analyst

Okay. That's kind of what I figured, but I just wanted to confirm. So if this is impacting the back half of the year primarily, then at least presumably, you have a couple of points of growth just from pricing in the back half. If I look at the implied guidance, right, at the high end, we're talking about growing something like 7% organically. A couple of points of that is, is there incremental price? And I mean look, Scott, you were talking earlier saying, "Hey, I'm trying to take a conservative approach here."

But at least to me, when I'm adjusting out for this pricing element and I think about the comparisons that are still fairly easy, relative to the prior year, it just strikes me that you really are being conservative here in terms of how you're thinking about your business progression on a fixed price, call it, core basis. So just to kind of clarify this, is it that there is some lack of clarity as to where maybe demand is going to be because of what's happening with the supply chain? Or is it that you're having some second thoughts with regards to how you're going to be able to convert revenue, given your -- some of the disruptions that you're having to deal with?

E. Scott Santi -- Chairman & Chief Executive Officer

It's the former, not the latter, if I understood you correctly. Bigger risk for us, by far, is customer supply chain and what that does to their demand patterns from here on out. It is -- as I said before, it's about as volatile of a situation as I've seen in my career at ITW. And so I don't -- I'm not trying to be mysterious about it. I think until we see that starts to stabilize, it's just really hard to be comfortable sort of raising -- I know we're serving the demand we have today really well and the sort of run rate from the standpoint that our customers are able to sustain. And I think we're comfortable to continue to -- our ability to do that will continue on for the back half.

There's a lot more orders and a lot more demand than -- that's, again, why we built backlog that's -- there's not a demand question. If we had our customers had sort of unimpaired supply chains right now, we'd probably had 10 more points in the second quarter. And this is -- it's not a fact, that's just my opinion, but just looking at the backlog. And so I think demand is certainly much stronger right now. Given the pace of the recovery, it's just a matter of, from the standpoint of all the supply chain issues and risks for our customers, their pace of being able to -- what they're ultimately going to need from us, as I said, it's just hard to justify going up with a lot of confidence from here, but it's more their supply side than their demand side, if that makes sense.

Mig Dobre -- Baird -- Analyst

Yes. I think it does. And the follow-up to all of this is as we're starting to think about 2022 and if we're using your framework for the back half of '21 as the starting point in thinking about 2022, I think the question is how -- what growth is likely to look like next year, right? Because meat and dairy pricing normalizes next year, so you won't have the kind of tailwinds you have this year on that -- in that part.

E. Scott Santi -- Chairman & Chief Executive Officer

Look, my -- we're not thinking about '22 much yet, but I would just say, as a general rule, a lot of the supply chain disruption, I think, just pushes -- adds to the duration of the recovery. I think there's plenty of business now. And because all of it can't be satisfied, the point of demand now, and Chris posted the example of Auto, this $60 million we couldn't ship in Auto in the second quarter, that's not going away. That's just getting pushed out. We've got deals -- the dealer inventories at all-time lows. I forgot what it was, less than a month, maybe less than a month, I think I saw. And so to the extent -- I don't think it's necessarily the worst thing in the world that all the demand that's there right now can't be fully served because it's going to allow us to -- again, this recovery duration gets extended by another two to four quarters maybe. And we'll think harder about that as we get to the back part of the year.

Mig Dobre -- Baird -- Analyst

Okay, that's helpful. Lastly for me. On the topic of M&A, you talked about portions of your business that you consider for divestiture before you've taken a step back on that this year. I'm sort of curious, as activity has picked up, multiples are pretty good, will you reconsider this at a point in time down the line, maybe 2022?

E. Scott Santi -- Chairman & Chief Executive Officer

Yes.

Mig Dobre -- Baird -- Analyst

Okay. Thank you.

Operator

And your next question comes from the line of Julian Mitchell with Barclays.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. Maybe just a first question around the free cash flow. I don't think that's been touched on yet. Your inventories and receivables are up each sort of $100 million-plus sequentially. Just wondered how you see working capital playing out in the second half and what we should think about that as a sort of cash flow item for the year as a whole. And also sort of more broadly, on the capex side of things, how much is your capex coming up this year? And have you revised at all your sort of medium-term capex planning assumptions because of these constraints?

E. Scott Santi -- Chairman & Chief Executive Officer

I think the best way to model our working capital requirements is our months on hand and days sales outstanding, sort of we manage the metrics on those. Generally speaking, months on hand runs roughly 2.5 months. DSO, I can't remember off the top of my head, but whatever the average is, 60-ish maybe. So that's where working capital is going to go. Sales go up, months on hand is not going to go up, but the dollars invested, if today is to stay at that month on hand, going to go up, same with receivables in terms of DSO.

So it's not a -- it's something that happens automatically. We don't have to sort of force that to happen. But if sales go up, inventory is going to go up. That's months on hand is a function of, that's how 80/20 works. There's some elements of it that give us -- we want x amount of inventory to be able to provide the ability to react and respond to our customers, that order today, ship tomorrow kind of system.

So I think that's the best guide I can give you on working capital, is just model that through and whether that's cash flow. It's not going to be -- when you're jumping up as much as we did in Q2 versus Q1, it's going to obviously require some incremental working capital. And then the other question -- I'm sorry, I'm trying to do my best Michael impersonation here, so I'm trying to think prior to that.

Julian Mitchell -- Barclays -- Analyst

Then it was just around capital spending and sort of...

E. Scott Santi -- Chairman & Chief Executive Officer

Capital spend, yes. So capex, I think the plan for the year was up like $300 million or so.

Karen Fletcher -- Vice President, Investor Relations

$300 million is our target.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes, for the year. Yes, not up. So there's no incremental capex. We did defer some incremental capacity investments last year. Because of the pandemic, we didn't need them. Those are certainly all coming back on, but those are -- we operate with another element of 80/20 as we want to be front-end loaded on capacity because that's how we serve our customers. So as business continues to go forward, we'll continue to invest in staying at sort of an increment -- meaningful increment ahead of current demand, but that wouldn't be, again, something out of the norm of what we always do, and it wouldn't be something sort of a lot coming through.

Julian Mitchell -- Barclays -- Analyst

That's clear. And then just a quick follow-up on the Auto OEM margins. Is the point that after that step-down sequentially in Q2, the sort of 19 percentage level is a good baseline or floor in the current sort of demand and cost environment? And so from here, they move up sort of slowly given what's going on, that 19% is where they should have bottomed out for now?

Christopher A. O'Herlihy -- Vice Chairman

Yes, I'd say it's a fair assumption. We're seeing a bottom low here, and I think it will be slower recovery. Based on what we see today, a slow recovery from here on out.

E. Scott Santi -- Chairman & Chief Executive Officer

Remember, it's prior margins in Auto, Chris, was probably 23% maybe. And so there's still a lot of volume recovery to go in Auto from where we were then. And so I'd say low to mid-20s is certainly achievable over time.

Julian Mitchell -- Barclays -- Analyst

Thank you very much.

E. Scott Santi -- Chairman & Chief Executive Officer

Sure.

Operator

And your final question comes from the line of Joel Tiss with BMO.

Joel Tiss -- BMO -- Analyst

Scott, you shouldn't be so hard on yourself. I think you guys sound a little less annoyed by how dumb all our questions are than usual.

E. Scott Santi -- Chairman & Chief Executive Officer

Well, now you know who the Gloomy Gus of the group is, right?

Joel Tiss -- BMO -- Analyst

So I have like one topic and just two different angles on it. One, can you give us any sense if you think the food industry is kind of distracted with all the consolidation that's going on? And then can we have a little more color on kind of what customers are back? Are large pieces of your end markets still not really there? I'm thinking like airports and cafeterias and things like that. Can you just give us a little more detail around sort of the share gains and where the customers are?

Christopher A. O'Herlihy -- Vice Chairman

Yes. So I don't know about this distraction from consolidation. I can tell you, we're not distracted. We're basically focused on trying to win the recovery here, serve the needs of our customers, even new products and so on. So generally, I think we're seeing some real nice recovery in food faster than actually than we thought at the beginning of the year. We're certainly seeing the benefit of staying invested in food. A little bit of price/cost impact in food, certainly, but then, obviously, that's -- some of that relates to the fact that the price/cost environment, some additional pricing actions here in the second half.

But in terms of the end markets, I mean, basically with food, we're back to about -- by the end of this year, we expected back over 90% of the 2019 number so faster than we thought. And in terms of end markets, we're seeing nice pickup in institutional, restaurants going back. We mentioned restaurants being up 60%. In terms of stuff that's coming back a little slower, I would say service. If we point to service in Europe, as an example, obviously with the significant lockdowns we're still dealing with over there, we'll probably come back a little slower there, at least through the first half. We expect to see that pick up here in the second half. But generally, most end markets are coming back. Lodging is a little slower, I would say.

E. Scott Santi -- Chairman & Chief Executive Officer

Yes, and transportation.

Christopher A. O'Herlihy -- Vice Chairman

And transportation, right.

E. Scott Santi -- Chairman & Chief Executive Officer

And airlines and catering.

Christopher A. O'Herlihy -- Vice Chairman

Airlines and catering, right.

E. Scott Santi -- Chairman & Chief Executive Officer

For sure.

Joel Tiss -- BMO -- Analyst

Great. Thank you very much.

Operator

And there are no further questions at this time. I'll now turn it back over to Karen.

Karen Fletcher -- Vice President, Investor Relations

Okay. Thanks, Adam. We appreciate you joining us this morning. And if you have any follow-up questions, please let me know. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Karen Fletcher -- Vice President, Investor Relations

E. Scott Santi -- Chairman & Chief Executive Officer

Christopher A. O'Herlihy -- Vice Chairman

Andrew Kaplowitz -- Citi -- Analyst

Ann Duignan -- JPMorgan -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Jeff Sprague -- Vertical Research -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Scott Davis -- Melius Research -- Analyst

Mig Dobre -- Baird -- Analyst

Julian Mitchell -- Barclays -- Analyst

Joel Tiss -- BMO -- Analyst

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