Illinois Tool Works Inc (ITW) 2003 Q1 法說會逐字稿

The Illinois Tool Works conference call will begin momentarily.

Good afternoon, welcome to the ITW 2003 first quarter earnings release conference.

All participants will be able to listen only until the question and answer session.

This is being recorded.

If you have any objection, you may disconnect at this time.

I would like to introduce our moderator, Mr. John Brooklier, Vice President of Investor Relations.

You may begin when ready.

Thank you, Tom.

Good afternoon, everyone, welcome to our 2003 first quarter conference call.

As Tom noted, I'm John Brooklier, VP of Investor Relations for the company.

With me today is Jon Kinney, our CFO.

By now you should have received our first quarter earnings release.

To summarize, we're pleased with our financial performance in the 2003 first quarter, especially in light of the mixed-end markets in North America and the uncertainty associated with events in the Middle East.

In just a few moments, -- Jon will run down what I've characterized as our on-track financial performance in the first quarter.

We're also excited to be offering for the first time, a synchronized powerpoint presentation that is accompanying the webcast audio.

We hope it provides even more transparency in helping existing and potential investors to better understand the company.

Here is the agenda for today's call: Jon Kinney will be here in a few moments to give you a financial overview of our 2003 first quarter performance.

I will then review our performance for our four manufacturing segments and associated in markets.

Jon will then discuss our second quarter and full year 2003 forecast.

Then we'll open the call for your questions.

To repeat, very long-standing and consistent rules we have put in place.

Since this is an open call please note today's focus is our first quarter results and our 2000 forecast.

Any questions not related to the topics will result in me asking the operator to move onto the next question.

As usual, I'm asking each person to ask just one question and one follow-up question so we can accommodate everyone within a reasonable period of time.

Another house-keeping item, in terms of forward-looking statements, I would like to remind everyone that statements regarding the company's earnings estimates contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding the company's 2003 forecast.

These statements are subject to certain risks, uncertainties and other factors which could cause results to differ materially from those anticipated, including, without limitation, the following risks: One, a downturn in the construction, automotive, general industrial, food, service, and retail for real estate markets.

Two, deterioration in global and domestic business and economic additions, particularly in North America, the European community and Australia.

Number three, the unfavorable impact of foreign currency fluctuations.

Number four, an interruption in or reduction in introducing new products into the company's product lines, and number five, an environment for making acquisitions or dispositions, domestic and international, including adverse accounting or regulatory accountants and market values of candidates.

One final piece of business, the telephone replay for the conference call is good through midnight of April 30th, 2003.

The playback number is 402-220-6032.

No passcode necessary.

With that, I'll turn the call over to Jon Kinney.

John?

Thanks, good afternoon, everyone.

Let me start this discussion with the review of the highlights for the quarter.

Our revenues increased five percent over last year compared to a three percent increase last quarter.

Operating margins were basically flat in spite of a two percent base business decline.

Income per share from continuing operations increased three percent over last year.

Free cash flow continued strong at $177 million for the quarter and return on invested capital was 12.9 percent or 50 basis points higher than last year.

In short, I believe the first quarter represents continued solid performance in a rather soft industrial marketplace.

Now, let me turn to the details.

For those that are looking at slides on the web, let me just explain this slide briefly, because it will reappear under different topics throughout, but this is the three columns, the first represents operating revenue growth and it shows 4.9 percent at the bottom.

Operating income growth of 3.6 percent and our margin decline of 20 basis points.

The column going down the slide, starting with, it gives you the breakdown of revenue, income growth and margin impact by base business, translation, restructuring and leasing and investment.

So, it is an analysis of growth rates and margins.

We present this slide for the total company as well as for each of the business segments.

So, our five percent revenue growth, as you can see, was primarily due to three factors: First, the base business revenue declined 1.7 percent.

This performance is about 330 basis points lower than the fourth quarter.

Second, translation increased revenue growth by 4.8 percent.

This performance was 220 points higher than last quarter.

And third, acquisitions increased revenue growth by 1.9 percent, and this was 100 basis points higher than last quarter.

Overall when you put these three factors together, our revenue growth in the manufacturing business was about the same as it was in the fourth quarter.

On a total company basis, revenue growth was about 150 points -- basis points -- less than the fourth quarter.

This decline is mainly due to a fourth quarter market-to-market adjustment in our leasing investments segment.

Our 1.7 percent base business revenue decline was made up of a 3.7 percent decline in North America and a 2.9 percent increase internationally.

In North America the 3.7 percent decline represents a 430 basis point decline over the last quarter.

Internationally, the 2.9 percent growth represents a 40 basis point decline over last quarter.

In short, both North America and international base business revenues experience a quarter-to-quarter decline.

After four quarters of improving conditions this decline was disappointing, but it certainly wasn't completely unexpected.

John Brooklier will provide more details as he discusses our operating segments.

Turning to operating margins, we experienced the 20 basis point decline in the first quarter compared to last year.

The major cause of this decline was the effect of base business revenue declines.

However, non-revenue or non volume-related improvements, such as cost reductions, pricing, etcetera, increased income three percent and came close to offsetting the negative operating leverage.

These improvements were made in spite of higher pension costs of $12 million, higher impairment charges of $5 million and higher costs associated with restricted shares issued in the first quarter of $4 1/2 million.

These higher costs represent 90 basis points of margin.

Year-over-year comparisons for pension costs will improve, primarily because we've made changes in our pension assumptions as the year progressed in 2002.

So, those comparisons will improve and we should experience and no further impairment charges for the balance of the year.

In a flat revenue environment we should see margin gains in the 40 to 50 basis point range for the full year.

Before I leave margins, let me update you on Primark's process.

As you recall, margins were nine percent when we acquired them at the end of 1999.

We set our target to improve margins to 18 percent by 2005.

We ended 2002 with margins of 13 percent.

Our plans for 2003 call for margins of 15.7 percent with sales seven percent below 1999 levels.

And, if we operated at 1999 sales levels in today's cost structure, we believe our margins would be closer to 17 percent in 2003.

Although the first quarter revenues and income were slightly below plan, we believe we will make solid progress towards our goal for Primark in 2003.

In our leasing and investment segment, first quarter income was relatively flat compared to last year.

This was the net result of two issues: First, income increased mainly due to last year's investment and some leverage leases, and second, income decreased in our commercial mortgage investment as a result of lower interest rates.

As you may recall, we did a market-to-market adjustment in the fourth quarter for those reduced rates and we also had a much more modest in the neighborhood of $3 million or so market-to-market adjustment for continued lower rates in the first quarter.

In the non-operating area, things were rather quiet.

Interest expense and other operating income were relatively flat.

And our tax rate for the quarter was 35 percent.

Turning to our invested capital, our months on hand continued at two months and our DSO was 61 days and our overall working capital as a percent to help the last four quarters revenues ended the period at 16 percent.

The majority of increases in receivables and inventory from the beginning of the year were due to translations, translation and acquisitions.

In short, we continued our tight control in our working capital area in the first quarter.

Turning to debt and equity, we slightly reduced our debt and increased our cash position.

Our debt to total capital ratio continued its decline to 18 percent and excluding the leasing and investment non-recourse debt, the ratio declined to ten percent.

Our cash position grew merely because the strong free cash from operations exceeded our acquisition and investment activity.

Free cash for the quarter was $177 million.

During the quarter we spent $15 million on acquisitions, $33 million on debt reduction, and $71 million on dividends.

Free cash from operations exceeded these expenditures and our cash position increased by $68 million for the quarter.

Capital expenditures for the quarter were $56 million and depreciation expense was -- yeah, capital expenditures were $56 million and depreciation expense was $68 million.

Our first quarter return on invested capital improved by approximately 50 basis points at 12.9 percent.

It should be remembered that the first quarter is our seasonal low point of the year.

Our total returns on invested capital was 15 percent in 2002 and we expect to exceed that amount in 2003.

Finally, on the acquisition front we acquired eight companies in the fourth quarter with total revenues of $49 million at a purchase price of $44 million.

You may recall that when I talked to -- on our cash flow we said our expenditures for acquisitions were $15 million -- it's quite a bit less than the $44 million I'm saying here.

Part of that is due -- when we report acquisitions we're talking about the calendar quarter.

What was accomplished and what was spent.

Many of you know our international entities are reported on a one-month lag, so quite a few of these acquisitions occurred in the month of March and quite a few of these acquisitions were international in nature, so we have a little disparity here.

The balance of the $44 million will be reported next quarter in our cash flow.

Our current acquisition backlog continues relatively strong.

I believe coupled with our first quarter activity, should allow us to achieve our minimum acquisition of forecast of $200 million for the full year.

And we'll probably exceed that.

By segment, the number of acquisitions was as follows: Our engineered products, we had one in North America, none in our engineering internationally and speciality systems international had seven, bringing us to a total of eight.

Before leaving acquisition, let me update you on our divestitures of our consumer segment.

Florida Tile is the last company to be sold and it's continued in the final stages of retaining a financing for the activity.

We hope to close this deal in 2003.

We are currently estimating no significant gain or loss on the sale of the consumer segment.

Now, John Brooklier will finish our review of the quarter with a discussion of our manufacturing segments.

Thank you.

Before I give you additional color on the manufacturing segments I want to update you on some key economic data we focus on at the company and we tend to give you on a quarter to quarter basis.

We believe this data serves as the proxy for the health of many of our diversified-end markets.

First of all, institute for supply management, ISM number declined for the month of March.

The ISM index was at 46.2 percent in March.

Its first under 50 showing since November of last year.

You'll remember the 50 is the line of demarcation for growth, no growth.

ISM's weak March chilling underscores the mixed end markets in North America, systematic as a one step foreward, one step back type of economy.

Another way, any time we see any kind of monthly improvement in the end markets, it proves to be unsustainable.

Secondly, U.S. industrial production data, excluding technology, continued to bounce along the bottom for March.

Industrial production was at minus 0.6 percent, a modest decline from the minus 0.1 percent in February.

Industrial production in other words came in at minus 1.2 percent in full year 2002 and minus 4.9 percent in 2001.

Internationally, while the Euro's purchasing manager's index came in at 48.4 percent in March versus 50.1 percent in February, the rest of the specific country data was a bit more promising.

The most recent industrial production numbers for the UK, Germany, and France all showed improvement from the prior month.

More specifically, UK was at minus 0.7 percent in January versus minus 1.4 percent for December.

Germany was at minus .2 percent in January.

France was at plus one percent in January versus minus 0.1 percent in December.

Now, let's move on to our four manufacturing segments.

For North America Engineered Products in the first quarter segment revenues grew 1.7 percent and operating income decreased 10.9 percent.

Operating margins declined 210 basis points to 14.8 percent due to the mentioned slower income base growth John talked about, as well as costs associated with higher pension and restructuring expenses.

The line share of restructuring took place in this particular segment.

Looking more closely at revenues, the 1.7 percent growth in top line consisted of the following components: 3.4 percent came from acquisitions, offset by a 1.7 percent decline in base revenues.

Both 3.4 percent growth from acquisitions, offset by a 1.7 percent decline in base revenues.

Construction is the biggest part of this segment and its performance was mixed in the quarter.

Looking at construction as a total group, the five percent decline at base revenues was made up of a five percent to ten percent decline in commercial construction, a two percent decrease for new housing and ten percent growth for renovation, rehab-related businesses.

Let's look closer at these pieces.

Our commercial construction businesses continued to be hamstrung by weak-end markets.

The good news is while commercial construction revenues were down some five to ten percent in the first quarter, the performance has not gotten any worse.

We are hopeful that commercial construction is bottomed, however we don't expect commercial construction end markets to get much better throughout the remainder of the year.

Moving to new housing, we saw our base revenues turn slightly negative in the first quarter.

This was consistent with our prediction for new housing build, which we expected to be down some three to four percent in 2003.

Even so, this would be a healthy level of build for the new housing market and we believe this is achievable given the current and anticipated level of interest rates in 2003.

I would note a bit of information that came out to that new housing start numbers was up 8.3 percent in March, so coming back from a fairly weak February number.

Finally, the last piece of our construction story, North American renovation-rehab, our ITW brands business generated strong base business revenue growth in Q1 thanks to product demand from hardware chains and box stores.

We believe our success in this category in '03 will be predicated on our ability to maintain our presence at Home Depot and grow the product offerings that are rapidly expanding and improving Lowe's.

Moving to automotive, first quarter base revenues grew three percent.

Our North American automotive businesses benefited from a relatively strong Q1 build rate of plus 1.

While that auto production number was weaker than the six percent build rate a year ago, first quarter build actually came in at a level that was higher than many industry observers initially expected.

Here are the details, While overall first quarter builds were up one percent as I said, GM was the strongest producer of the big three at plus six in Q1.

Ford came in at minus three percent and Chrysler was minus five percent.

Looking ahead to the second quarter we expect builds to decline 11 percent, that would set up a full-year production number for the big three that would essentially agree with our build rate scenario of about minus seven for full-year 2003.

The good news thus far in the second quarter is the light vehicle inventories for the big three came in at 81 days for March.

That's the lowest inventory level number since November, '02 and certainly better than the 97-day inventory level in January of this year.

In our industrial products category businesses, we experienced mixed results in the first quarter.

Base revenues were down one percent in the quarter, largely a result of top-line weakness in our businesses serving appliance and electronics component packaging customers.

Many of you are aware of the recent weakness of the white goods producer such as Maytag and Whirlpool.

We certainly feel their pain.

The shining star in the group is minigrip Zip-Pak, featuring resealable closures for consumer packaging projects.

Many of these propelled base revenue growth more than 20 percent in the quarter.

The second segment, International Engineered Products.

For the first quarter segment revenues grew 22.1 percent and operating income increased 50 percent.

As a result, operating margins improved 190 basis points, that's 190 basis points to 10.4 percent.

Taking a closer look at the components of top-line growth, the 22.1 percent growth in revenues con assisted of the following plus 5.2 percent from base revenues, plus 1.7 percent from acquisitions, and plus 15.2 percent from currency translation.

Again, that 22.1 consists of the following, plus 5.2 percent from base, 1.7 percent from acquisitions, plus 15.2 percent from currency.

Similar to North America, the principle business groupings in the segment are construction, automotive and industrial based and similar to the fourth quarter results from this segment, we experienced across the board positive base revenue contributions from these businesses.

In construction, first quarter base revenues were up three percent with growth emanating from geographies.

More specifically Europe at two percent growth and Australia at three percent growth.

Most of the growth in Europe, which has a bigger commercial construction flavor to it than North America, came from France and the UK.

In addition, southern European countries such as Italy and Spain also continued stronger end-market conditions as the countries benefit from inflows of EU dollars.

The good news continued to eminate from Australia was centered on reasonably strong new housing activity and end roads for many of the ramps and businesses, the kind of progress they've made since the acquisition some three years ago.

It's helped both top-line and bottom-line results there.

Finally, our Wilson Art International business had their best quarter in a while as construction activity helped grow the top line seven percent.

Our automotive business in Europe posted four percent growth in the first quarter.

Our plastic component metal fastener businesses benefited from good product penetration amid a two percent decline in first quarter build for European OEM's.

First quarter bills were led by GM at plus six percent and Ford at plus four percent.

BMW, Renault and VW were slightly negative.

We're expecting European automotive bills to be in the zero to plus two percent range for full year 2003.

The other contributor to this segment was the industrial-based business units, similar to the North American description I gave you a few seconds ago, these businesses serve a wide array of in-markets, customers with electronic packaging, as well as polymers and MRO products.

Collectively, they total 90 percent growth in the first quarter with gains principlely coming from the plastics, fluid products and Polymers businesses.

Moving onto the North American speciality systems segment, the time products we have.

For the first quarter segment revenues declined five percent and operating income was essentially flat.

Operating margins improved 80 basis points to 14.2 percent during the quarter.

Focusing on the top line: I've already mentioned there was a five percent decline in revenues and that consisted of the following: Minus 6.1 percent of base business revenues and 1.1 percent growth from acquisitions.

The 6.1 percent -- I should say the five percent decline and 6.1 percent decline from base, 1.1 percent growth from acquisitions.

It continues to be very clear to us that we have -- we haven't experienced any significant rebound for the business in the segment, which rely to a great extent on Cap Ex investments for the companies that turn out to be our customers.

A good example of a lack of capital spending in the first quarter was the performance of our food equipment business.

Base revenues were down 12 percent in the quarter and this decline was tied directly to continued weakness in the two European markets, food service, which is the restaurant institutional side of the business and food retail, the supermarket side of the business.

Food service, which accounts for roughly 50 percent of sales, continued to experience weakness in upper tier restaurants that are still hurt by less travel, fewer customers and the like.

Food retail, roughly 25 percent of the business, is still feeling the effects of industry consolidation and is awaiting a rebound of capital expansion, and retro fit investments from large supermarket chains.

Good news with the business is even with top line results, food equipment, base income and revenue margins were up significantly compared to a year ago. [ inaudible ] In industrial packaging, our SIGnote business performance generally mirrored the overall production numbers for North America.

SIGnote continued to be led by a slight pickup in consumeables, both plastic conceal strap, which helped the machinery side of what they do.

Moving onto other businesses, our welding business was down five percent in the quarter.

Part of that performance was due to customer demand in the quarter and stronger comps they faced from a year ago when oil, pipeline and ship-building customers helped grow welding's top line.

Finally, the paint spray business was flat in the first quarter.

Any growth the finishing business had experienced over the last few months in the automotive area's been offset by continued weakness in the industry -- industrial-based applications.

Moving to the last segment, international speciality systems.

For the first quarter, segment revenues and operating income grew 16.4 percent and 33.8 percent respectively.

As a result, operating margins improved 120 basis points to 9.1 percent.

Taking a closer look at the top line, 16.4 percent revenue increase con assisted of the following: 0.6 percent growth from base, 0.2 percent from acquisitions, and 15.6 percent contribution from currency.

Again, those components are 0.6 percent from base, 0.2 percent from acquisitions, 15.6 percent from currency.

Similar to Engineered Products International, a big top-line impact, which is the translation you can obviously see.

In our packaging category, base revenues were up two percent among all the businesses in the categories, SIGnote led the way in up -- Europe with ten percent growth in Asia Pacific.

And like North America, growth in Europe and Asia Pacific was tied to a modest pickup in demand nor consumable, rather than capital machinery.

In food equipment, Internationally, base revenues were flat in the first quarter.

This is actually good performance for the business which registered at a six percent decline in base revenues for full year 2002.

The better news is operating income in margin performance continue to improve thanks to 80/20 programs.

As a result, operating income and margins were up dramatically in the quarter.

Finally, our finishing business produced base revenues of plus two for the quarter, finishing businesses generally serve the automotive furniture, industrial sectors, similar to North America.

An increase in automotive orders helped revenues grow modestly in the quarter.

This concludes my formal remarks.

Let's reintroduce Jon Kinney, who will detail the 2003 second quarter and full-year forecast.

Thanks, John.

Last quarter I started my discussion of the forecast with an expression of our concern regarding the strength and sustainability of a potential recovery.

Our first quarter decline in base business activity has reinforced these concerns.

Incorporating this down-side for these concerns into our forecast, as we did at the end of last quarter, we are forecasting second quarter income per share from continuing operations to be within the range of $.83 to $.93 cents per share.

The low end of this range assumes a minus five percent decline in base revenue and the high end reflects a minus one decline.

If we hit the mid-point of the range at 88 cents per share, we will be two percent higher than last year's per share numbers.

For the total year we continue to forecast a range of $3.02 to $3.42 a share.

The forecast is expected to be within a range of minus three to plus one.

Other summations included in the forecast are exchange rates, at March 31st levels for the balance of the year.

Acquired revenues of $200 to $600 million will be made during the year.

A restructuring cost of $55 to $60 million and no further good will or intangible impairment costs for the balance of the year, then lastly holding the tax rate at 35 percent.

Overall, if we hit the mid-point of this range, full-year income for continuing operations of $3.22 per share would be seven percent higher than last year.

We believe this would be solid performance with a minus one in our base business revenues.

If the economy continues its slow improvement, income per share could be up 13 percent, which is at the high end of our range.

If the economy declines further, we believe we can hold earnings close to 2002 levels.

Okay.

Thank you.

Let's now open the call to questions.

Thank you, now ready for the question and answer portion of the call.

If you would like to ask a question, press star 1 at this time.

You will then be announced prior to asking your question.

And our first question comes from Gary McManus.

Hi John and John.

I think in your full year you previously were saying base sale -- the $3.02 to $3.42 was plus or minus two percent base growth, then you went to minus three to plus one.

So I assume you're anticipating better margin, just kinda tell me how you can change the base revenue numbers without changing the earnings guidance?

It's primarily translation.

The base revenue decline takes out approximately $.09 cents a share and what we've seen on the translation front has about $.09 cents per share for the year.

What was the positive currency impact on earnings per share in the first quarter?

In the first quarter it was about -- I want to say $5 million. $5 million after tax?

No, no -- hold on a minute.

Let me just take a look here.

It was $12 million.

So, it would be about two, three cents a share.

In that range.

Okay, and finally, your base revenues were down two percent in the first quarter and the mid-point for your second quarter's down three percent, so it's like say 2 1/2 percent in the first half and the mid-point for the full year is down one.

So embedded in the mid-point of your guidance is some base revenue growth in the second half.

I assume that's correct.

If that's correct, is that just easier comps or are you expecting a better economy or what's embedded in that?

We're expecting a slightly improving economy.

We've got -- like we said, a minus two, minus three for the first and second quarter, the balances of the year are still minuses, but they're kind of at the minus one percent.

So, modest improvement, very modest improvement in the second half.

Okay, thanks.

A point or so.

Okay, thanks.

John Inch.

Can you hear me?

Hi.

Hi, John.

SG& A -- and I apologize if you had gone over this before, but it looked like the number in the quarter was both sequentially year-over-year seemed to be a high number.

Can you talk about maybe, was there restructuring there that was incremental or why was that line higher?

SG&A is up about $54 million.

We believe about $22 million was due to translation, $12 million with pension costs, $5 million with the restricted shares, and about $9 million in SG&A from acquisitions.

So, SG& A is basically flat other than those issues.

The run rate, John, would be to strip those out?

Well, the translation's gonna continue, we believe -- maybe not quite as high as it's been.

Translation affected our international occurrences about 15 percent this quarter, but the pension side should clearly diminish.

I mentioned earlier that as we went through last year and tried to get a handle on our assumptions, we made a few adjustments to our pension assumptions, driving up pension expense, but nothing happened in the first quarter of last year.

Then the second quarter we added -- took our pension assumptions down a point and then took them down another point or so in the balance of the year.

So that pension comparison is gonna get much easier.

In fact, in the fourth quarter I think it will probably be a little bit positive.

And the restricted shares are gonna stay in there too.

That's $4 1/2 million a quarter.

So, the run rate is maybe a little lower than what we have now because of the pension issue, but translation and acquisitions are gonna continue at that rate.

Okay, just as a follow-up, your income tax liability seemed to jump a fair amount to 178.

Was that because of the international mix or --

No, it was purely payment.

Timing of our North American payment.

Okay, so that number reversed too?

Yeah, right.

Thank you.

Thank you.

The next question is from Dean Draye.

Good afternoon, John and John.

Good afternoon, Dean Draye.

For Engineered Products North America, can you size the margin hit that you took?

How does that split between the factors that you said -- the pension, the restructuring activity that you took, and then the base business?

Yeah, the... we've got a 2.1 decline in margins in North America. 50 basis points of that came just from operating leverage.

Lower volumes?

Lower volumes.

Good.

80 basis points came from higher restructuring costs.

And 40 basis points came from acquisition dilution.

Our acquisitions were not earning as much as the base.

And 40 basis points came from everything else, which is for us, really falls into cost improvement, product mix, and pricing.

While we know we're not getting much in the way of pricing either way, product mix has been relatively stable, so we believe most of it is cost.

So we lost 40 basis points on cost.

Pension and restricted shares was 84 basis points, minus eight, so our 40 basis-point decline due to cost is made of a plus and minus, 80 basis points came from pension and restructuring and on a negative side and 40 basis points improvement on the cost side from our operations.

As you said that pension hit is going to be more of a one-quarter phenomenon?

The first quarter is clearly the biggest quarter, and if -- let me just grab a -- we had a 90 basis point hit in the first quarter and the second quarter will be 40 and for the year it will be 30.

The second half?

The second half should be -- should average 10, 20 in the third and 0 in the fourth.

Good.

Then, just a follow-up on your assumption regarding restructuring activities for the balance of the year.

How much of that are you expecting to see in the second quarter?

You said between 55 and 60 million, -- how much of that --

We had 20 in this quarter, which is about the same we had in the first quarter of last year.

I think we've got it in the numbers, in the neighborhood of $14 million or $15 million for the second quarter.

That's not fully buttoned up yet, I mean, we get projects in, right?

So, it's not a precise deal, but we've been running at the rate of you know, $15 million a quarter.

Okay.

Sometimes a little lower, sometimes a little higher.

Thank you.

David Rasup.

Quick question on the Engineered Products North America again.

Looking at the sales just base, the 1.7 percent decline, and then you look at a 16.4 percent margin, you know, the 50 basis points you just mentioned.

That was simply volume-related?

Yes.

It still suggests on a decremental margin, looking at basically you went down from $125 million a profit in the fourth quarter down to $119 million then, around those numbers?

So you lost $6 million of profit out of $2 million sales decline sequentially.

Given auto's going to get more challenging in the next three months, what should we be thinking sequentially on the margins -- or however you want to describe -- how do you absorb the auto impact and still put up the typical 200-300 basis point improvement in margins first quarter to second quarter?

Well, if automotive continues to --

Let's use the 11 percent decline that you're studying for the second quarter.

I'm looking for guidance on the margin and how realistic it is in the second quarter versus what we just saw?

Right, yeah, overall for the engineering products -- and that's got construction in it also in our industrial businesses, we're not gonna see 11 percent decline.

We had a base decline of 1 1/2 percent in Q1.

Does that go to three or four percent in Q2, maybe a little bit more?

If that's the case, we will have a margin decline more than likely in the quarter, but not nearly the magnitude of what volume would drive, just like we did in this quarter.

This quarter we albeit didn't have a horribly robust cost improvement as we had in some other areas, we still had cost improvement of 40 basis points, offsetting some costs such as pension and restricted shares.

We also are doing, I believe, our restructuring costs in this quarter was in the neighborhood of $6 million increase over last year.

So, that's gonna bring benefits also in the second quarter to help soften the blow of volume reduction.

Remember more than 30 percent of the decline in margin -- almost 40 percent of the decline in margin is due to restructuring.

Sure, I'm trying strip out all that noise and look at again, decremental margins in the fourth quarter and just -- so, the $6 million in restructuring in the first quarter may give benefits in the second quarter, but are there further restructuring to be laid on top of the second quarter?

No.

There could be some, but I don't know of any big ones, like we had this quarter.

And a quick follow-up.

Wilson Art, it was good to hear they turned things around for the quarter.

What was driving that?

I think you're talking about Wilson Art International.

Yeah, we talked principly they got a boost increase laminate sale in China, due to the business and have done a better job through the 80/20 stuff in the programs we've put in place and taking stuff out.

A lot of good block in tackling in terms of the 80/20 effort.

Given Wilson Art's larger in North America than International, any cover on how they're reacting?

Commercial continues to be a weight on them, I mean, they are disproportionally larger commercial-based business, certainly more in the roughly 55 percent of their business is commercial and they're still feeling the affects of that -- that's 55 percent.

They have a variety of programs in place to try to, you know, take cost out of the business and other kinds of programs to try to help with better distribution and just ,you know, a more efficient running of the operation.

A big part of that restructuring you saw in the first quarter came out of Wilson Art, it was associated with Wilson Art.

So we're continuing to invest in the business in order to improve profitability of it.

Thank you very much.

Thanks.

Next question is from Robert McCarthy.

Hello, Robert.

Hello John and John.

In terms of reduction and outlook, if you look at some of the individual sectors where you do have very specific forecasts, things like housing starts and auto build, even North American auto for example, down seven.

I think you've been more like down eight to nine before, so I wondered if you could talk about and identify some areas where you believe things have incrementally weakened from what you outlook was a quarter ago that would be then contributing to you know that, 1-point shift down in the overall outlook for base revenue growth.

I would say the overview answer to that is that the assumptions we had is that some of the industrial-based businesses, more Cap Ex related, would get better a little sooner than we thought.

So not appliance, but welding --

Yeah, welding, finishing, food equipment.

Clearly food equipment has been weaker on the top line than we had expected.

It's really in the first quarter.

So that's had an impact on us and to the extent we thought we were gonna see better recovery in the businesses we already talked about -- welding, finishing, some of the industrial packaging businesses.

It hasn't come through as quickly as we thought.

We're not talking huge improvement, but we haven't seen you know, directionally, the kind of improvement to lead us to believe things will get incrementally better.

And can you -- Mr. Kinney, talk a little bit about -- I call it the overall acquisition landscape, you know, talk about your pipeline, do you have anything in it that's a little bit bigger than -- I mean, what did we do, eight adding -- averaging about $6 million in revenue each?

Yep.

Yeah, we have at least one in there in excess of $100 million.

But the rest are typical, you know, $5 to $30 $40 million-type acquisitions.

Some have been on there for a while.

We continued negotiations.

I think what I'm hearing at least, people are getting more realistic on pricing.

We've had some folks that we've talked to earlier on that have come back to us and said -- if you closed them all, where would it put you within your 200 to 600 targeted range?

Above $200 million, maybe closer to $400 if we closed them all.

All right, thank you.

Andrew Casey.

Andy?

Good afternoon.

Just a question within Engineer Products North America in terms of the flows of product.

Did you start to see the auto downturn for new -- your numbers at the end of March?

And second, in terms of kind of piggy-backing on Rob's question, have you seen improvement in any market in April, even though that would be early?

I'll answer the second question first.

We have -- I mean, still too early certainly in North America to get any sense of what's happening.

I haven't even -- I don't think we've heard anything, so don't really have any color on that.

We clearly started to see on the auto side -- and we fully expected auto bills were going to decline first quarter to second quarter.

It started happening in February.

If you recall by the middle -- early to mid-February people were thinking builds would be up four percent or five percent and they ended off only one percent.

So there's some decline in the second half of the first quarter and clearly numbers are headed to be more negative than that going into the second quarter.

It will be interesting to see what effect the GM program is gonna have on sales and the resulting impact on production.

I'm not predicting anything, but we're certainly keeping an eye out for that.

But we are expecting you know, we're looking for down 11, if it was better than that, we would certainly be pleased.

So, were you getting your cost structure right in the first quarter in preparation for the second quarter?

Well, Andy, these guys who run the auto businesses -- these are not hugely staffed businesses where, you know, a lot of people run in and out.

I mean, they can take cost out, but I think that, you know, they've done a very, very good job of taking cost out of the business and I don't think they've taken any big measures at this point in time to try to respond to any you know, huge cost take out.

They continue to trim cost and continue to react, but I don't think there's been any big programs underway or implemented.

Okay, thanks.

Walt Liptak.

Good afternoon.

Just talking a little more about the auto.

You're expecting 11 percent production and it looks like during the current quarter you had penetration gains of two percent.

Is that what we should expect through the rest of the year or will we see better penetration than that?

Well, you know, typically the number we've had has been higher than that.

I can't give you a precise number for second quarter.

We historically run about six percent to severn percent on penetration.

Okay.

And then in terms of the margins for the operating margins for the auto business, trying to get more color on this.

A year ago, I think the margins were running closer to 18 or 19 percent.

In the second quarter are we gonna be more in the low double-digit rate, kind of where we are now for the auto business with the 11 percent decline in production?

I'm sorry, Walter, I didn't hear the first part.

I did.

Our engineered products -- and I'm not talking automotive, but our engineered products, it is at a seasonal low at 14.8 percent.

So, we do have an up-tick in the second quarter, probably closer to 17 1/2 to 18 percent, depending on volume.

Okay, would automotive, even with the declines in productions, still be in that range?

Yes.

Remember, we gave you guys a number of minus seven for the full year that, was built into our plan for full year.

So, you know, we're at where we thought we were going to be, subject to, you know, any changes you might see up or down, but minus seven right now, that's -- that's what we planned, of what we think we're going to see.

We've built it into the four-year plan.

Thanks.

And then just a clarification, the $3.3 million in the income statement, can you break that out or mention what it was regarding?

Primarily higher interest income on our stronger cash balances.

Okay.

Thank you.

Robert McCarthy.

John, you did a great job dissecting the contributions to the changes in margin in that segment during the quarter in the base business.

You know, the discussion of pension and restructuring and what volume did and the cost improvement then being at about 40 bits.

Can you tell us what the overall number would have been for -- well, the whole company, but also specifically I'm interested in North America versus International.

I can tell you the total company -- I can't easily tell you off the top the North American International split --

If you could tell us the other three segments, I'm sure we could all do the math.

Sure.

Let me tell you on the total company first, it's -- volume margin points took down 50 basis points.

Non-volume related picked up 40 basis points, and that plus 40 basis points includes the 90 basis-point reduction for pensions and restricted shares and costs.

Right.

So we net out at the minus ten basis points.

I've already told you the Engineered Products North America, Engineered Products International, we had 140 basis points from volume -- 140 basis points from volume and plus 80 basis points for the non-volume and the plus 80 includes a negative 70 basis points for pension and restricted shares.

The Speciality Systems North America, we have a negative 170 basis points on leverage and a plus 110 basis points on the non-volume-related and 110 basis points non-volume related includes 110 basis points reduction for pension restricted shares and the lion's share of the impairment was in Speciality Systems North America.

So, that's in there.

Then lastly, on the international side we have 10 basis points for volume plus 10 basis points for volume, and non-volume is 110 basis points plus -- which includes the negative 70 basis points for pension and restricted shares.

Okay.

And how are you -- I mean, is there something unusual about the quarter?

These are pretty impressive numbers.

Do we think that in general order of magnitude they can be sustained through the year?

We are -- as I said earlier, I think overall for the year, we're gonna see a margin improvement at our mid-point and I said 40 to 50 basis points.

Clearly if we got more volume it would be well above that.

Sure.

And so that's kind of the magnitude of it.

Okay, I can work with that.

Thanks, John.

No further questions.

Okay, well thank you for listening in and we look forward to talking to everybody again.

Have a good day.

Thank you.

Thank you, that concludes today's call.

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