Illinois Tool Works Inc (ITW) 2001 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter earnings release. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would now extend the call over to Dr. John Brooklier. Mr. Brooklier, you may begin.

Thank you, Jodi. Good afternoon, everyone and welcome to ITW's first quarter conference call. I am John Brooklier, ITW's Vice President of Investor Relations, and we are pleased you could join us for today's call. By now, you should have received our earnings release and segment data, which summarizes our first quarter performance. As we noted at our last call in January, the North American economy and most of our end markets continue to weaken and this weakness extremely herniated our first quarter results. The good news however is that our performance by our international businesses, aided by relatively strong end markets in Europe and Australia has helped to mitigate some of our earnings decline. The agenda for today will be similar to what we have done in the past. Jon Kinney will be up shortly to give you an overview of the first quarter. I will then follow Jon to give you additional color on our performance in our five manufacturing segments. Jon will then rejoin us to give you a look at our second quarter and full year 2001 outlook. Finally, couple of housekeeping items, as I have to do. We will open the call to questions after Jon is done with the forecast. One note, since this is an open call, please note that today's focus is on our financial results for the first quarter and our forecast for the remainder of the year. Any questions not related to these topics will result in me asking the operator to move on to the next question. And we will also ask each person to ask one question and one followup question so we can accommodate everyone who has an enquiry within a reasonable period of time. Couple of other things, I would like to remind everyone that statements regarding the company's earnings estimates containing forward-looking statements within the meaning of the Private Securities Litigation Reforms Act of 1996 including without limitation statements regarding the company 2001 forecast. These statements are subject to certain risks, uncertainties, and other factors, which could cause actual results to differ materially from those anticipated. The important factors that could cause actual results to differ materially from the company's expectations are set forth on page 26 of our Annual Report. One other bit of news, the telephone replay to this conference call is here through midnight on May 3, 2001. To play it, our telephone number is 630-652-3000, pass code is 3802761. With that, the housekeeping items out of the way, I will turn over the call to Jon Kinney. Jon....

Thanks, John and good afternoon, everyone. As most of you have read already, we did not really have a very great quarter. Revenues for the quarter were about even with last year. Earnings per share were around 17% and operating margins declined 250 basis points. These results include approximately $26 million of restructuring expenses primarily related to Premark. If you excluded these costs, earnings per share would have declined 10% from those of 17% and margins would have declined 130 basis points versus the 250. In addition, if you excluded the diluted effect that acquisitions have on our margins, our base business margins were only down 50 basis points. So it is clear that we could have improved the current quarter's performance by stopping all restructuring activity and stopping our acquisition program. However, both the restructuring and acquisitions provide the basic fuel for future earnings growth and we strongly believe that these actions will pay off in the future periods. I will talk more about margins and restructuring and the benefits we are going to derive from them a little later on. But, first I would like to go back and talk a little bit about our revenue front. Our fourth quarter manufacturing trends were 0 even with last year, compared to the fourth quarter stroke of 2% and just by the components of this growth, our base business was down -6% in the first quarter compared to -4% in the fourth, and what a difference a year it makes in the first quarter of last year, we were drawing at 8%. Acquisitions were at 9% through our first quarter revenue gains, similar to the fourth quarter levels, and translation took away 3% concurred to a reduction of 5% in the fourth quarter. In summary, our base business slowed from the fourth quarter and the negative effects of translation continue albeit at a somewhat slower rate. But the positive effect of acquisitions offset these negative issues.

By geography, the base revenue growth of -6% was made up of -9% for North America, compared to -4% in the fourth quarter. And the international was even with last year compared to our +2% in the fourth quarter. In summary, both North America and the international operations experienced additional softening in their markets. John Brooklier will provide more details when he discusses our operating segments. As I previously stated, operating margins were 250 points lower than last year. Restructuring reduced those margins by 120 basis points and acquisitions reduced margins 80 basis points. Excluding these two issues, margins were only down 50 basis points. It is currently estimated that first quarter restructuring costs will save approximately 20 million over the balance of the year, or adding about $0.4 per share. Holding margins to a 50 basis point reduction on a 6% base business decline has required a lot of work by many of our operating units. The result of this work is particularly evident as you analyze our SG&A expenses. Our SG&A expenses were up 1.5% or $7.6 million for the quarter. Excluding the effects of acquisition, restructuring, and translation, SG&A expenses were down $31 million for 6.6%. Again, this reduction is mainly due to continued 80/20 efforts in our base businesses.

In our leasing and investment segment, income was above last year by 5.6 million, mainly due to the income in sales of properties. In the non-operating area, the expenses were even with last year, something significant in that area. Before reading the income statement, I should also mention that we reduced our tax rates from 36% to 35% year on year for the first quarter. This reduction reflects the various tax planning strategies that we have been developing and employing and we expect to hold this rate for the balance of the year. This change added one cent to the quarter, but will not add anything for the year. Our overall effect of tax rate for 2000 was 35%. Turning to the balance sheet, our total invested capital was $7.4 billion; this was about $68 million higher than the end of last year. The increase was due to acquisitions, which added 36 million and translation, which added 32 million. Excluding acquisitions and translations, invested capital was even with the beginning of the year. Looking at the other measures that we track, our months on hand, we ended the quarter at 2.4 months; that is about two terms per month up what we were in the first quarter of last year. That slight increase is likely due to some softening demand and we continue to react and will be bringing those down. Receivable DSO is comparable to the end of the year of last quarter. Adjusted capital is into the quarter at 25% versus 27% in the fourth quarter, and about nonrecourse debt we are at 17% in the first quarter versus 19% in the fourth.

Our cash flow continued strong. Free cash for the quarter was $181 million, this was effectively equal to our net income for the quarter and reflects our continued strong management of our working capital and our capital expenditures. On the year to date basis, acquisitions of 36 million and dividends of 61 million were below our free cash by 84 million. This excess cash was primarily used to reduce debt. During the quarter, our depreciation was 79 million and our capital expenditures were 73 million. Finally, on the acquisition front, we acquired four companies in the fourth quarter with total revenues of 26 million. Had we closed two deals a little earlier, we would have recorded a total of six deals and 135 millions of revenues, so although it was white quarter for acquisition, it was more a matter of priming than it was actual activity. Our backlog on acquisitions continues to be very strong. Now I will turn the conference back to John, who will discuss our manufacturing segments.

Thanks, Jon. Before I give you additional color on our manufacturing segment side, I want to address a couple of macro issues, which are certainly impacting ITW and many other companies. Industrial production numbers, which were released this week had a good news and bad news flavor to them. On the good news side, industrial production for March rose 0.4%, its first gains since September of last year. And most of that growth stemmed a reborn in activity at auto factories. Now for the bad news, despite the overall gain in March, industrial production from the first quarter shrank at a 4.7% annual rate, and that is the biggest quarter we declined since the first quarter of 1991. This is according to the Federal Reserve. What are the key-manufacturing index; the manufactures alliance made by survey on the business outlook was also recently released and it showed that business activity dropped significantly from the fourth quarter level of 50 to 34 in the first quarter of 2001. At 34, the business outlook index is at a record low since it was compiled starting in 1972. Further the fall from 50 to 34 is the largest absolute one-quarter decline that was recorded since the index was first compiled on a quarterly basis starting in September 1991. Whether the first quarter number translates into actual manufacturing declines or represents a bottoming, remains to be seen. We also are interested in this industry as we progress through our second quarter.

Let us take a look at our specific segment data now. In Engineered Products - North America, total revenues were -8 for the quarter, that is -8 for the quarter, and the components consisted of -10 from base and +2 from acquisitions, again, -10 from base and +2 from acquisitions. As you know, construction and auto were the two biggest pieces of this segment. A quick snapshot for this segment is that our automative businesses continue to be very weak, while demand for our construction products declined, but not nearly at the rate of decrease for the auto. Let us take a closer look at our automative businesses. We expected auto bills to be down from 20% in the first quarter of 2001 and unfortunately, that is essentially what transpired. Auto bills for the big 3 were down 22% in Q1, and Chrysler lowered the pact down in auto bills by 30%, GM down 21%, and Ford down 17%. So these are some of the healthy bill numbers, but some of the downside is mitigated by the fact that while Chrysler's bills were down 30% from the quarter, Chrysler represents only 20% of our big 3-auto mix. Ford and GM represent the remaining 80% and there is nearly an even slip between those two unions. The other good news is that we saw auto production improve modestly in March. Most likely, the figures I gave you earlier when I talked about some of the macro trends. Much of this was due to the fact that the big 3 had brought down their inventories. For eg., GM brought inventories down from 100 to 87 at the end of 2000 to 77 to 85 at the end of March. Ford went from 86 days to 68 days and Chrysler improved from 73 days to 52 days.

Looking ahead, our forecast is for 11% decline in auto bills through the second quarter. Our expectation is that production will ramp up further during the quarter now that inventories are in better balance. Beyond that, we are seeing a full year 2001 big 3-auto production rate build rate of -7 to -10%. Auto range is based on uncertainty related to consumer competence and the ability of the big 3 to sell vehicles without significant incentives. In March, the average big 3 incentive was $2100 per vehicle, which is about 10% higher than a year ago. For the full year 2001, we believe that big 3 will build about 12.3 million vehicles, again down in the 7-10% range.

Moving on to construction, still within our Engineered Products-North America segment, we experienced softness in our commercial and new housing related businesses with nearly all of these businesses showing topline decreases in the high-single digits. The commercial side of the business continues to feel the most effect of the current economic slowdown. There continues to be a downturn in the construction of low-rise industrial manufacturing buildings, especially the company's cutback on capital expenditure and brick and mortar type of investments. On the new housing side, the housing stock in the first quarter declined about 7% compared to a year ago. We expect new housing stocks to be down about 5% in the second quarter, and for the full year, we believe the impact of lower interest rates will keep new housing stocks in a relatively healthy -6 to -7 range. Like our other construction businesses, Wilsonart also experienced tougher environment in the first quarter, topline growth was off about 10%, and that is mainly due to the slowdown in the demand for laminate products in both the residential and commercial sides of the business. Key commercial end markets that were specially impacted in Q1 and were to worsen include recreation of the accounts and office furniture. Moving to Engineered Products-International, revenues were +10, again total revenues grew +10 and the components of that growth is made up of +16 from acquisitions, +2 from base businesses, and -8 from translation, again +16 from acquisitions, +2 from base businesses, and -8 from translation. You should note that the impact of the translation was less onerous at this quarter. In the fourth quarter 2000, translation impact was -18%. There is an obviously year old chance of modest improvement over the past three months. So more to North America, the two big business group contributors are construction and auto and both performed reasonably well in the first quarter.

Our construction businesses performed well both in Europe and Australia. While total construction revenues growth was up considerably, thanks to the acquisition of ____ 00:16:28 transfer last year, topline improved in the majority of our European businesses with France, UK, Belgium, Denmark, and Spain, and Portugal leading the way. Our German and Italian businesses were essentially flat year over year. While Wilsonart revenues were down modestly for the quarter, much of that relates to 80/20 activity such as product line simplification. In typical 80/20 fashion revenues declined and operating income improved considerably. Looking ahead, we believe the European market will be up 2-3% for the full year and the growth in the construction area will be equally slow between residential and commercial.

In Australia, where we had a hereto presence in the construction area with $250 million Sydney trams last year, topline growth fell off after the Sydney Olympics. We believe we are seeing some signs of recovery post Olympics and we are still predicting new housing and commercial construction to be down in the -6 to -8 range. Turning to automative, in Europe automotive continues to perform well in the first quarter. The topline grew at a healthy rate during the quarter and most of that growth coming from the penetration of a variety of OEMs, including Pusho, Reno, BMW, Jaguar, GM, Ford, and Mercedes. Auto bills were -2 to 3% for the first quarter and we expect that trend to continue on into the second quarter. While we are anticipating a -3 to 5% decline in auto bills for the full year, that is still robust given the fact that there were 17 million vehicles produced in 2000. That translates into projected build rate between 16.2 and 16.5 million units for 2001.

Moving to special assistance, on the North American side first, revenues increased in total by 3%. The components of that 3% growth include +10 from acquisitions and that was offset by -7 from the base, again +10 from acquisitions and -7 from the base. What we told you in the fourth quarter for the segment is still relevant for Q1. We continue to see consistent slowing across a broad sector of end markets for ITW businesses. Businesses in the segment tracked with capital expenditure and general industrial production, all numbers as you know, have trended down fairly significantly over the past four to five months. If you study, as we have, the key sectors which we serve in this segment, you will see that industrial equipment, basic metals, textiles, ____ 00:19:14, and paper materials all experiencing growth declines from anywhere between -2 to -14% year over year. That is a tough environment to operate. As a result, our industrial packaging, finishing, and welding buildings all had revenue declines in the low to mid teens for the quarter. Remember that these are all business that becomes part of a customer's production process, and as a result our ability to penetrate is more limited than our Engineered Products businesses.

Our food equipment business, which we said before is a bit less cyclical than some of our capital big businesses showed -5% topline performance for the quarter. The strength of the business continues to be at food service, again that includes restaurants, and large institutional settings, which include cafeterias. The offset of the business was due to the slowing on the food retail side, which is essentially super market related. Food retail is still being impacted by consolidation. However, we believe food retail will improve in 2001 and will help the overall food equipment topline grow modestly in 2001.

To Systems International, revenues at a +7 rate and the components of that growth were +18 from acquisitions offset by -1 from base, -9 from translation, and -1 from divestitures, again it is +18 acquisitions, -1 base, -9 translation, and -1 divestitures. I know you are going to ask what did we divest, we essentially divested two small food equipment businesses in Europe during the quarter, which represents about $25 million of revenues.

Our industrial packaging, decorating, finishing, and consumer packaging businesses all demonstrated strong topline growth and many of these same businesses contributed to strong operating income growth at 15%. We continue to see relatively good end market fundamentals across Europe and Australasia. Even so, we are of the opinion that economic work was slow in Europe later in the year. Finally, on the International Systems, we are pleased to report that 80/20 is alive and well for international food equipment businesses. While revenues declined as we simplified product lines and reduced head count, the profitability from food equipment was up by nearly 10%. Operating margin improvement of food equipment to welding businesses and industrial were all positive. Finally in the consumer products, revenues declined 13% and as you know, that all relates to the base. As we said quarter after quarter, the same dynamics continue to be at work in this segment. Profitability of free core, especially exercise equipment was offset by weakness of ____ 00:22:03 tile and consumer small appliance segment of wristband. We continue to make strategic 80/20 investments that is always helps improve long term value and operating income. That concludes my remarks so let me reintroduce Jon who will walk you through our 2001 second quarter and full year forecast.

Thanks John. During our first quarter base business revenue declined in each of the three months in this quarter, and we have not been signs of a turnaround yet. We have all heard forecasts that call for economic improvements from some and from some others, we have heard of forecasts for total decline in economic activity. In thisa environment, that has alarming mixed signals coupled with our own numbers, which are yet to signal recovery, forecasting this Q2 results is not easy. In this environment, we are forecasting second quarter earnings per share could be arranged $0.76 to $0.82 per share. If we hit the midpoint of this range, earnings will be down 4%. This is soon to continued base business decline of approximately 6%. For the year, we are forecasting earnings per share to be within $3 to $3.20 per share. The functions underlying this forecast include base business revenue decline in total for the year between -1 and -3%, economic conditions improving in the second half of the year, exchange rate holding at today's levels, acquired revenues in the $500 million range, restructuring costs in the range of 60 million and tax rates at 35%. Overall, if we hit the midpoint of this range, earnings would decline 2% for the year on the basis of a revenue decline of -2%. We believe that this would be very thorough performance in our relatively challenging environment. Back to you, John...

Thanks, Jon. Okay, we will open the call to questions to now.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the 1 on your touchtone phone. You will hear an announcement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. One again, if there are any questions, please press the 1 on your touchtone phone. We have Jose Hess from Lehman Brothers, on line with a question, please state your question.

Hello.

Mr. Hess, please go ahead sir.

I do not have any questions, sorry.

Next question comes from Jung Kung Quentin___ 00:24:54 from Bear Stearns. Please state your question.

Mr. Brooklier we will move on to the next question, which comes from Gary McMadison JP Morgan. Please state your question.

Thanks. You bet I have got a question. In your press release you talked about the accelerated restructuring of the Premark businesses, does that mean you did more restructuring in the first quarter than you originally anticipated, or how should I view that?

Yes, we do. We did not anticipate quite the magnitude and particularly at Wilsonart. We had some projects online in the food equipment area and then rather late in the quarter, Wilsonart competed some of their efforts.

You said $26 million restructuring, does that mean, do you have a table in previous quarters talking about restructuring from Premark and in the accretion, is that a net of those numbers or is that is just a gross number for restructuring?

Gross number for restructuring.

What was the Premark accretion?

No Premark was accreted this quarter. Their margins were off about 30 basis points and that is on a 9% revenue decline worldwide. It is clear from fact of performance that we have in the neighborhood of $20 million in the quarter a part savings that carried over from last year and some from this year also.

Do you still assume to have some accretion from Premark in 2001 now we need $0.15 for the remaining ....?

We feel that we are giving the cost savings on Premark, but they are being eroded by revenue declines, but we stay well in the first quarter.

So that means no?

That means our cost savings is offsetting a portion of our revenue decline.

Okay, I will see you.

John Inch from Bear Stearns is online with a question. Please state your question.

Thank you. Hey John and Jon, you could may be, this call is really hard to hear if you could may be sit closer to the phone or something. I think Gary is fine but you guys real, but you guys have full blast and it is very tough to hear.

We are having trouble hearing you, John, and we are talking right into the speaker here.

Let me pick up a handset, is that better?

That is better. Can you hear us now?

Yeah, it is not much better. I want to ask you about your consumer businesses. The businesses were up obviously a lot not only you guys you have talked in the past about respectively once the polling restrictions come off possibly selling those businesses I am just wondering what the thought process is there, if it is changed and would not you want to wait for those businesses to turn up so that you could sell them for a higher price?

Those are all factors that we are considering up as we look at these businesses. Even though we are making progress here in the consumer area. Our revenues are up 13% but our base margins were up 2 points. Albeit, there are still low, but we have about ____ 00:28:29 operation, 2.4 those margin losses were as a result of restructuring activity. So we are actively working on getting more businesses in better shape and are still exploring our options.

Okay, could it mean that exploring them now that is something that you are going to deal with later in the year?

We do not have any one involved now nor are we actively selling these businesses at this point.

Okay, then my followup question was I know you guys bought a company or proposed by a company called Fuel Mark. I think you were paying 79% price premium for it. I was wondering if you give us a little bit of color as to what this business is what it does how big it is and then why are you paying so much of a price premium for it?

We announced in the last week and it was just about $60 billion of revenue and we made the analysis in terms of, we are basically paying about one time sales for the deal, we would argue that in terms of any premium that they were certainly undervalued in terms of their current fact price. The Fuel Mark business really helps us build our presence in the holographic piece of the decorating area. That is what they really bring to the table, John, and while we have a small presence there right now, we believe that we will able to add these revenues on top of some other things we are doing we get a much bigger presence.

I am sorry John, what did you say what piece of the decorating area?

With reference to the film foil piece of decorating. And we have holographic pieces of 74 is the technology that we only have a very small presence in this point in time. So, these revenues are really going to build our presence in holographic, holographic is the thing you see on our credit card, drivers license, security kinds of products, and we believe that this will give us the real light up in this area and help us provide additional product capable, and additional technology within the decorating area.

Right, thank you.

Our next question comes from Jose Bryson of Salomon Smith Barney. Please state your question.

Hi, good afternoon. Can you hear me?

I can hear you. I thought it is John.

Hi, I was wondering if also, if you could, if you could comment on the extent that you have visibility on customer inventories. You were able to comment on the auto days inventory outstanding at the customer level, but some of the other businesses where you are hitting big negative base sales numbers in the quarter. Can you compare and contrast kind of, what you thing sales through might have been in some of those markets relative to that inventory reductions to customers?

No, I don't have visibility on that. When we will we look at some of the activity, the economic measures, reduction of production type investments, some of them full forth, we will see demand driven more volumes as on our volumes are going down. How much of that is inventory reduction at higher cost, got a handle on that. A good half of our business is going through distributors, and no, I do not.

And just on the food service side in North America, just to clarify was the comment that total food service was down five and that was driven by food retailing being done much more sharply than that?

Yeah, its total was down about five and it included retailers down a little bit more than that, that is correct.

But.

Total number for suite service and retail together is minus five.

Okay and, I know you did not own the business in the last recession, but do you have any feeling on how it is kind of holding up in this environment relative to what it has done historically?

Well, I was talking to our food equipment here on the other day and asking that question, and they said that in a slowing economy, you can expect their topline to grow, to being flat to modestly up. So, I think that it is what we are seeing right now. I don't have any exact figure or data for year 1991, Jose. I can go back and try to find it for you.

No, but it is not flat to modestly up. It is down 5, right?

Correct. So, but what we saying is that for full year we expect with retail coming back, we expect food equipment to be sort of in that range.

Okay, thanks.

Matt Howell from ____ 00:33:45 is online with a question. Please state your question.

Good morning John. My question is with regard to the replacement market. Traditionally the company has felt that it has some recession resistance due to the large sales in that replacement end and made it on side of the business. Do you think that will hold true in this downturn. Did not seem to pick up, come up very well in the first quarter but I know that is just one quarter?

I think we have got a number of businesses that has held up reasonably well in this first quarter with the Hold or parcel service businesses and food equipment and with Signal packaging and so on and so forth. Our MRO-type, I expect when I was just looking at here and I believe that it held up pretty well..

But Jon looks that up, I will tell you that our welding businesses, while welding was down the best performing part of welding was their parking service business. So there tends to be a little bit of an offset, a little bit of help but obviously when the economy is in a bit of a free fall, you are going to see some numbers that are fairly negative.

Our food products and internal polymer businesses did hold up pretty well in this quarter, but they are very nice probably business because but they are small relative to some of our other markets.

What is your number, you can use today for how much of your business is not original equipment sale are not sales of new equipment?

We expect about 10-15%.

Okay, good, thanks a lot.

Walter ____ 00:36:16 of McDonald Investments is online with a question. Please state your question.

Yes, good afternoon

Hello, who is this, Walter?

Yes.

Hi, Walter.

Hi, can you give us capital expenditure estimate for 2001 has it been revised at all?

I think the number we have given is 315-320 in that range which is basically flat year-over-year with 2000.

Okay.

I don't think and the second part I don't think the number has been revised at this point.

Okay, another question on cash flow, there was a accrued expense account in the cash flow statement that our cash outflow by $95 million what was that related to?

Customer rebates and some of compensation.

Okay and then one last question guys. How is the visibility, I guess, what kind of charges do you expect in second quarter and second half for Premark and I guess throughout the business?

We are estimating at this point $10 million a quarter about $60 million for the year.

So, $10 million for Premark?

No $10 million in total for everybody.

Okay and how much of that would be for Premark?

Probably more than a half, I would think, that is the way it has been running, but we don't have the list of projects, that support that at this point, but that is the rate we think it is going to be running up.

Okay, thank you.

Ron Fischer from Santro 00:37:51 is online with a question. Please state your question.

Hi, guys. In the world of auto your forecast on demand or auto build is that based upon what the car companies have told you specifically - what you heard publically, you know general feeling. How do you come to those numbers?

We do it in a variety of ways. We have our auto guys who have been at this for a long time, have multiple sources within the auto industry, so we are obviously getting information from Detroit in terms of what the production schedules look like what they think they feel like. We also look at inventories. We try to figure out how that will impact production and impact bills. We also use market research data from Lords and other sources to try a fact check what we are doing and then we you know sort of if you look at that when we come up the numbers that we think is reasonable given all the various sources of information we have. Obviously it has been a very difficult process for the last three to four months to get a totally reliable number, but we got to a point where a couple of months ago, we said fields are going to be down 20% in first quarter and they were down just about 20%. We think that our numbers looking forward are probably we have a bit more reliability than now than we are going to get in three months ago.

And when you look at bills are being down, you guys always talk about having increased penetration and new products and so forth, so when you see the bills are going to be down, you said about 7-10 for the year, your pace of business should be down less than that?

Well, we said we get about 7% penetration based on our ability to put multiple products on cars. So we will be able to offset some or all of that we would probably in that kind of environment we probably would have a flat top line.

The effects of our penetration too generally come mid year as we through model changes.

All right, thank you.

Andy Kay from Prudential Securities is on line with a question. Please state your question.

Hi, good afternoon.

Good afternoon.

It is actually a followup to the question just asked. Within auto in the first quarter, when we talked about the chopping as we dealt impacting negatively, our ability to penetrate. Looking forward into this quarter now underway, has the chopping has kind of gotten out of the build, or the very ability of the plant billed gotten out of the build, and are you seeing the penetration abilities start to come back.

I think the simple answer to that is that we are seeing a bit more stability in the second quarter as relates to the auto. We have a better fix on, you know the various platforms and related penetration. So, the answer is yes, we have a higher degree of confidence, but that is all with the carryout. If the inventories start to creep up again based on pulling the selling down and not selling enough cars that it could impact production numbers again.

Okay, and then I guess, kind of open around the construction and some of your consumable and construction equipment products. There is a lot of mixed signal out there in terms of increase in inventory stocking and I know that somebody already asked this question, but let me ask it in a different way. Are you guys starting to see improved shipping into either the distribution or the retail channel?

Probably I would take anywhere from flat to maybe a little bit of improvement. Nothing significant.

Okay, thanks a lot.

And now Kenneth Morrison of ____ 00:42:11 Investment Management. Please state your question.

Hi, guys. A quick question on the acquisition front again, John, either Johns. In your outlook, you said acquired revenues this year of 500 million. I am a little lost with that one because by my calculations, you guys should be carrying over like 300-350 from last year. All that you are saying is that you are only going to do, if I take an average you know 150 additional which means only 3 million of acquired sales this year on acquisitions, I mean, if you use $0.70 on the dollar which is kind of what we normally use, you are running, you know, like 220-230 millions spent in acquisitions. So that is far, far lower than the normal run rate that you guys have been spending out of the percentage of your free cash flow in the past couple of years. So, what is going on here or am I just doing my Math wrong?

No, you are doing your Math right. We talked about the acquisitions and we talked about how much revenues we acquire, not saying what the impact is on the income statement. We have running at a rate of acquiring $800 million to a billion dollars worth of revenues a year. That is from our run rate for last three years. So, how do you forecast an acquisition? If we don't have them in our backlog at this point, we are not forecasting. That number puts it back a higher. We are pretty comfortable that we know that we are going to acquire 120 million that is what we did in the quarter. We know we got a backlog that would support getting to the 5 billion mark and that is what we focussed our forecast..

And the backlog it takes how long, Jon?

Takes about you know, five, six months.

Okay, so you are saying what you are given me in the 500 million right now, just so that I get this right, it is 350 carry over plus

That 500 has nothing to do with carry over. Carry overs have nothing with that.

Okay, so what you are telling me is I got a carry over of 350. Let us assume that you have 500 evenly spread over the year, you get another 250 taken in for acquisition in the income statement. And you are saying, the backlog in six months, so all right, I got you.

The cash visibility.

No, I got you, I got you. That is the visibility, so on a rolling basis, you know, you might land up doing your 800 again, so as to speak. Okay, now the four companies that you acquired, this quarter that actually closed and I know you bought some stuff till over after the quarter closed, 26 million bucks of acquired revenue and then you paid 36 for is that what you told me.

Yes, a little deceiving, we did have a purchase of the remaining interest in the company, we acquired 80% of what we before acquired, the remaining 20% and that is in the neighborhood of $8 or $9 million that we spent for that and you know there is no additional revenues associated with that purchase. Within that acquisition number, but it is not in the revenue numbers.

Okay, so it is one for one of the busters $0.70 and the dollar story.

Yeah. Got it. Right.

All right. Thank you.

: Peter Wassel from Salomon Smith Barney is online with a question. Please state your question.

Hi Jon, hi, John. A quick question, first on food and then on the strapping business. On the food business, you mentioned on the retail end, and you feel that things will take up as the year goes on, can you give us a little color as to why you think that is and also I remember Jim in the past was mentioning the idea of breaking out a separate P&L for the service business. I am just curious to know, how those margins looking at now that Premark is now rolled up and we are going to try and start the same thing. Can you see let us know what the margins are?

I don't think that we have got into that point yet. We are segregating the actual service part out of food equipment and we are moving in that direction, but it certainly doesn't have a separate P&L right now.

Okay.

Okay and your question was related to food equipment. I'm sorry., what was it.

Retail, the retail business. You mentioned the idea it is weaker now, and its supermarkets have pulled back on the capital expenditure. What communication in the second half picked up in the second quarter?

Again, based on conversations with our retail people, who have been talking about the sort of impact of consolidation and based on the people they are talking to is that consolidation is starting to sort of fade away as a bit of an issue. This should be a little bit more capital expenditure building, more stores to be built and that would help and also retro effect in terms of the consolidation fees that has really impeded the retail side right now. So now, we are down to six or seven major fliers in the industry, a couple of the those big ones have been waiting to retrospect a numbers of stores that they had acquired from other supermarkets and the deal with our retail people is that this is more likely to happen in the second half of the year instead of the first half of the year.

The last question, your big strapping business, was this business supposed to be good for your best early economic indicative business. What is these indicate, is it the only business you really have a big business that is more in financial than in North America? What is especially in Europe, fair value business outlook?

Well, I think when you look at the business right now, we know that international is about 55% of the business and 45% domestic. We know that the international industrial packaging side of the business is certainly stronger in Europe right now than it is in North America. Okay? And that it is stronger in Australia than it is in North America right now. You remember, when I gave you, I broadcast the key market in terms of the paper, metal products and with the declines ranging from -14 to -2%, those were there principal in markets, Peter. So they are really trying to fight the declines in those European markets, which have been pretty precipitous for the last quarter or two. So there is no question, it is much more difficult environment pull down in North America. I don't think we have any in terms of any forecast, I don't think we have any real clear visibility, as things are going to get better. That is basically roughly the remarks when I talked to him, a couple of days ago.

Okay, I appreciate that. Thank you.

Art Chamber from ____ 00:49:13 . Please state your question.

Actually this is Tim Keller. The question is towards your margins. It may be, but I would like to understand, but the margin fall seems to be pretty severe, and I was just wondering, did you attribute all of those to restructuring and acquisition related issues. I was just wondering if prior to that is that when the base business falls off as it has, that the restructuring related issues are dressed become more outsized and there is a followup question. I just wanted to be clear on something that in your forecast for the year, and did you talked about an expectation down 1.3% from the base business and it is running now down to around 6, but presuming improvement I think it is embedded in your yearly guidance, seems a little bit at odds with the press release when you say specifically you don't anticipate any appreciable improvement in any of the various markets until much later in the year. So, it kind of sounds a little bit contradictory, can you clarify that?

I think, you correct me if I am wrong, that you were saying that the soft business has driven to the restructuring activity that is the end of the fourth quarter conference call that I thought this type of environment would encourage us to get on with projects and I think there is probably some truth in that, probably a lot more pressure, probably a little bit more time to work on this said activity if the business goes down. But on the other hand, this restructuring activity is not in any way associated with cutting back on our production rate, it is not a borrowing driven thing. This has overhead reductions that have been driven by fresh looks of the business and relative to the product market structure and the processes so it is, we believe pretty permanent reduction. I do not know if that answers your question.

Have there been any what you have described as price pressure in the business is always with negative operating levels combined with ongoing restructuring activity that places the margins down to 250 basis points.

The 250 basis points, as I indicated before, we got our 9% revenue growth has come from acquisitions. Those acquisitions are significantly below our current margin levels and that was 80 basis points reduction. Restructuring costs was a 120 basis point reduction and 50 basis point reduction on the base business is the result of primarily sales driven negative leverage on our overhead structure are offset to a great degree by SG&A and manufacturing credit cost reduction. I have given our cost structure with a 50% decline of our base business bottom line should be off 200 basis points and we are off 50 basis points with difference between the 250 is cost reduction activity.

Okay.

The second question you asked about the Jim's quote?

Yeah, it shows that he is forecasting a much gloomier second half in this quote than you are in the implicit guidance that you had given us.

I didn't think he was in a bad mood that day. I think what we are trying to communicate is we are saying we don't see any appreciable improvement and by that we mean going back in the sort of positive base numbers until later, you know, later in the year. Obviously the numbers if you run the numbers at -6 and by chance if it is -6 again we have to be at -2 and 0 to get us back in that sort of 3 (-3) range for the full year. That is the sort of the scenario we are looking at, that is all the improvement, but that is not appreciable improvement by ITW standards.

Okay, thanks.

Once again, if there are any questions, please press the #1 on your touchtone phone. Gentlemen, we have no further questions at this time.

Okay, I thank everyone for joining us and we look forward to talking with you again. Thank you. Have a good day.

This concludes today's teleconference. You may all disconnect.