Illinois Tool Works Inc (ITW) 2003 Q4 法說會逐字稿

Good afternoon.

Welcome to the ITW 2003 fourth quarter and full year earnings release conference call.

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

At that time if you would like to ask a question, please press star one on your touchtone phone.

Today's call is being recorded.

If you have any objections you may disconnect at this time.

I will now turn the call over to Mr. John Brooklier, Vice President of Investor Relations.

Mr. Brooklier, you may begin.

Thank you, Josh.

Good afternoon, everybody and welcome to ITW's 2003 fourth quarter conference call.

As noted I'm John Brooklier, ITW's Vice President of Investor Relations.

With me today is Jon Kinney, our CFO.

Whether you are with us via our webcast, PowerPoint link or by telephone, thanks for joining us today where in Chicago, it's a balmy 5 degrees.

By now you should have received our fourth quarter 2003 earnings release.

To quickly summarize we're very pleased with our fourth quarter performance which breaks down as follows: Income from continuing operations increased 26%.

Revenues grew 8% and operating income increased 17%.

As impressive, our fourth quarter operating margins of 16.4% were 120 basis points higher than in the prior year fourth quarter.

We were helped in the quarter by a modest base business improvement from our businesses and the respective end markets, particularly those in North America.

In just a few moments Jon Kinney will give you a fully detailed picture of our performance for the fourth quarter.

Here is the traditional agenda for today's call.

Jon Kinney will give you a financial overview of our 2003 fourth quarter performance.

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

Jon will then come back and talk to our first quarter and full year 2004 earnings forecast.

Finally, we will open the call to your questions, one, a long standing request, as I have asked before, I'm asking each person to ask questions only related to the fourth quarter earnings and such person to ask just one question and one followup question so we can accommodate everyone who has a question within a reason reasonable period of time.

Please note that I will strictly enforce this policy for today's call.

Another housekeeping item.

I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding end market conditions and base business expectations for full year 2004 and the company's related earnings forecasts.

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

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

Three, the favorable or unfavorable impact of foreign currency fluctuations.

Four, an interruption and reduction in introducing new products into the company's product lines.

And five, a continuing unfavorable environment for making acquisitions or dispositions both domestic and international,including adverse accounting or regulatory requirements and market values of candidates.

One last piece of business, the telephone replay for this conference call is 402-220-9672.

This playback number will be available until 12 midnight on February 12th.

No pass code is necessary.

Interested parties also can access our webcast PowerPoint presentation on our ITW.com website.

It can be found in the investor information section of our website via the earnings presentation tab.

Now I will turn the call over to Jon Kinney.

Good afternoon, everyone.

Let's start with a review of our fourth quarter results.

First, as John mentioned, our revenues increased 8% over last year and that's compared to a 5% increase we had last quarter.

Operating income was up 17% and margins increased 120 basis points in spite of flat base revenues.

Income per share from continuing operations increased 26% over last year, and precash flow continued strong at $426 million for the quarter.

Return on invested capital was 17% for the quarter which was 250 basis points higher than last year.

In short, the fourth quarter continues our improving trend and represents solid performance in spite of flat-based revenues.

Let's get into the details.

Our 8% revenue growth was primarily due to four factors first, base business revenues increased 40 basis points.

This performance was 330 basis points stronger than last quarter.

In addition, this is the second time in 13 quarters that we have experienced a growth.

It's been a long recession and we're looking forward to some more positives for the following year and we'll get into that later.

Second, translation increase revenue growth by 590 basis points, this increase was 100 basis points higher than last quarter.

Third, acquisitions increased revenues 390 basis points.

This performance was also a bit higher, about 40 basis points higher than last quarter.

And finally, leasing and investment revenues declined 190 basis points, mainly due to an unusually high revenues in the fourth quarter of last year.

Later, as I talk to that segment, I will provide more details.

Overall, our 8% revenue growth was a result of positive currency translation, acquisitions, improvements in the base manufacturing revenues.

These positives were reduced by lower revenues in our leasing and investment segment.

Our 40 basis point improvement in base revenue growth was made up of 150 basis point increase in North America and 150 basis point decline internationally.

In North America, the 150 basis point increase was 470 basis points improvement over last quarter.

We really did see a nice pickup.

Internationally the 150 basis points decline was 74 basis points stronger than last quarter.

In short, North America experienced strong improvement and moved into positive territory on the growth curve for the first time this year.

International improvement was modest and revenues remained in negative territory.

John Brooklier will provide more details on this as he talks to our operating segments.

Our 17% growth in operating income was also a function of four factors.

First, base earnings increased 7%, mainly due to cost reduction.

Second, translation added 6%, mainly as a result of the strong Euro.

Third, lower restructuring costs in the quarter increased income 3%.

And finally, acquisitions added 2% to operating income.

Turning to operating margins, we experienced 120 basis point increase in the fourth quarter compared to last year.

On the positive side operating leverage increased margins 10 basis points.

In addition non volume related improvements such as cost reduction, pricing, product mix increased margins 90 basis points.

This improvement continues to be driven by our 80/20 efforts and related restructuring activities.

Finally, lower restructuring costs increased margins 40 basis points.

On the negative side acquisitions diluted margins 30 basis points.

Excluding restructuring expense and acquisition dilution, margins would have been 17.2% for the quarter.

Before I leave margins let me update you on our Premark progress.

If you recall, Premark's margins were 9% when we acquired them at the end of 1999.

We set our target to improve margins to 18% by the end of this year.

We ended 2002 with margins of 13%.

And we ended 2003 with margins of 16.

Our plans for 2004 calls for margins to be 17%.

If revenues were at 1999 levels for Premark, margins would be at 18% for 2004.

In short, we may miss our acquisition target in 2004 by one point out of nine points of targeted improvement.

However, with an an improving economy this shortfall should be eliminated fairly quickly.

And we continue, and I really want to emphasize, we continue to know that there's projects out there, and many of which we're working on, that will improve productivity further in this operation.

Now, leasing and investment segment.

Income was 3 million lower than last year, mainly due to unusually high income in the fourth quarter of 2002.

You may recall that last year's fourth quarter included a positive mark-to-market adjustment on our commercial mortgage assets and gains from sales of certain properties.

These gains were reduced by write-downs of two commercial aircraft investments.

In short, nothing unusual happened in leasing and investment this quarter.

We just had a very tough comparative period to measure against.

In the non-operating area, other income and expense was favorable to last year by $4.8 million.

This was mainly due to lower losses on the sale of assets, approximately 3 million, and higher interest income also on the range of 3 million.

In the income tax area, our effective tax rate for the quarter declined from 35 to 31%.

This added approximately 5 cents income per share to the quarter and year.

The effective tax rate for the year was 34%.

Turning to our invested capital, inventory months on hand was 1.7 months and our DSO was 59 days.

The increase in receivables and inventory from last quarter was due to translation and acquisitions.

Excluding acquisitions and translation, our inventories and receivables are down 87 million from last quarter.

In short, we continue our tight control and improvement in our working capital.

Our capital expenditures for the quarter were 79 million and our depreciation expense was 74 million.

On the financing side, we reduced our debt 20 million from last quarter.

Debt reduction from last year end was 606 million, and was mainly due to the deconsolidation of the commercial mortgage subsidiaries in connection with the adoption of FIN 46 in our third quarter.

Our debt-to-total cap ratio held at 11% on a consistent reporting basis.

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

Free cash for the quarter was 426 million.

During the quarter we spent $56 million on acquisition, $74 million on dividends and $25 million on investments and $34 million on debt reduction.

Free cash exceeded these expenditures and our cash position increased 312 million for the quarter.

Our fourth quarter return on invested capital improved approximately 250 basis points or 17.3%.

On a year-to-date basis, our returns are 16.1%, or 110 basis points higher than last year.

Improving margins, tight control on invested capital and lower taxes all contributed to this improvement.

Considering our cost of capital was in that 9 to 10% range, we continue to expand the economic profit that creates value for our shareholders.

Finally on the acquisition front, we acquired four companies in the fourth quarter with total revenues of 32 million and an aggregate purchase price of 56 million.

Our current acquisition backlog continues strong.

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

Thank you, Jon.

Before I give you more color on our four manufacturing segments, here is an update on some key economic data that we focus on as a company and to give you on a quarter by quarter basis.

We believe these data points serve as a reasonable proxy for our diversified end markets.

First of all the Institute for Supply Management continued it's March upward with the reading of 66.2% in December, that's substantially higher than the ISM index of 53.7% that I shared with you during our 2003 third quarter conference call.

Perhaps even more encouraging was the ISM New Order Index of 77.6% in December which compares to 60.4% Index number from last September.

Secondly, U.S. industrial production data, excluding technology, also continued to improve albeit more slowly.

In December, industrial production grew 1.6%, that's markedly better than the 2.3% industrial production decline we saw in August.

Finally, internationally the key data point for Europe mostly improved since the third quarter.

The European purchasing manager's index climbed from 50.1% in September to 52.4% in December, and at the same time Euro's on industrial production improved from minus 0.4% in July to a plus 0.9% in November.

Now let's review the four manufacturing segments.

In North America Engineered products for the fourth quarter segment revenue increased 3% and operating income declined 8.9%.

Operating margins of 15.3% were 200 basis points lower from the year ago period principally as a result of unusually high non-volume related costs.

These costs include higher medical and inventory reduction costs, as well as a more difficult comparison with the 2002 fourth quarter when one of our business units in this segment benefited from a $5 million insurance claim.

Moving on to the next slide.

Looking more closely at fourth quarter revenues, the 3% growth in revenues consisted of the following: 0.6 growth from base business, 1.9% growth from acquisitions and 0.5% growth from translation.

Now, let's take a closer look at the business units within this segment.

Construction is the largest part of this segment and it grew base revenues a modest 1% in the fourth quarter.

While base revenue growth wasn't strong, the 1% increase did represent the second consecutive quarter of top line growth for construction.

In particular, the IT other construction businesses including Paslode, ITW brands and Buildex and Ramset increased revenues 9% in the quarter with nearly all of that growth coming from Paslode and brands.

The components of the growth were as follows: art businesses serving the new housing and renovation and markets grew revenues in the range of plus 5 to plus 10% while our commercial businesses were up slightly on a year over year basis.

The news was not quite as good for our Wilsonart business.

Base revenues declined 5% in the quarter as weakness in Wilsonart's basic lamina catagory offset growth from it's flooring business.

It's apparent that weakness in the overall commercial construction arena is still making top line growth at Wilsonart a more difficult proposition.

Looking ahead to 2004,, our assumptions for the full year and the end markets are consistent with what we told you at our New York City investor meeting last month.

We continue to believe that new housing starts will decline some 3 to 4% in 2004, while commercial construction will remain essentially flat for the first half of this year and then start to modestly grow in the second half of the year.

On the plus side, we expect renovation rehab to grow 3 to 4% in 2004.

On the next slide, in the automotive area fourth quarter base revenues declined 3% largely due to 3% decline in auto production by the big three.

It's clear that our penetration suffered somewhat during the quarter but we attribute most of that to platform mix as well as aggressive price give back demands from the three auto producers in the quarter.

As a result our auto business saw margins decline in the quarter.

Here are the details of the 3% decline in the big three auto production in the quarter.

G.M. was down 2%, Ford declined 4% and Chrysler decreased 2%.

Fourth quarter inventory levels remained stable with big three fourth quarter days on hand levels at 72 days at the end of December and that's the roughly the same number of days on hand we reported at the end of the third quarter.

Here's a Q4 breakdown of days on hand.

G.M. is at 69 days, Ford is at 76 days and Chrysler at 73 days.

Looking ahead, we expect 2004 first quarter big three auto builds to be minus 3 for the quarter and minus 3 for the year.

In our industrial products category of businesses, base revenues increased 3% in the quarter.

Base revenue growth emanated from our industrial plastics and metal businesses, mini grip zip-pak and our engineered polymers units.

These businesses grew base revenues anywhere in the range of plus 2 to plus 6 for the quarter.

Moving on to international engineered products.

For the fourth quarter segment revenues grew 19.5% and operating income increased 29.5%.

As a result of this strong top line and income growth fourth quarter operating margins of 16.1% were 120 basis points higher than the prior year.

Taking a closer look at the top line, the aforementioned 19.5% increase in revenues consisted of the following: 2.4% growth from the base, 1.5% increase from acquisitions and a 15.6% contribution from currency.

Similar to North America, the principal business groupings in the segment are construction, auto and industrial.

In the fourth quarter base revenue growth was led by our construction and industrial business units.

In construction base revenues grew 3% in the fourth quarter.

By category growth breaks down as follows: Europe was plus 3, Australia/Asia plus 2 and Wilsonart was plus 3.

Growth in Europe was as a result of better top line for our businesses in France, Germany and the UK.

Hopefully this trend will continue into 2004 first quarter and full year.

In Australia/Asia growth mainly emanated from the traditional Paslode and Buildex business units.

Wilsonart International had another good quarter as top line growth was largely the result of stronger end market activities in China.

Moving to automotive.

The businesses in Europe produced flat revenues in the fourth quarter.

This compares to a minus 1 base revenue in the third quarter.

The story there continues to be auto production, which for the fourth quarter came in at minus 2.

So you could see that we enjoyed two points of penetration in the quarter.

Year-to-date builds were as follows: BMW down 2, Ford down 4, VW down 5, and Daimler down 3%.

The only producers to increase production in 2003 was G.M.

Group at plus 2% and Renault at plus 3.

Looking ahead we anticipate car production to grow 2 to 3% for full year 2004.

Last piece of business in this segment would be our industrial based business units.

Base revenue performance for these businesses was a healthy plus 5% in the fourth quarter which is much stronger than the flat based revenues they produced in the third quarter.

The units that improved the most include the following: Industrial plastics moved to plus 4 in Q4 versus a minus 2 in Q3, polymers moved to plus 8 in Q4 versus a minus 1 in Q3, and electronic component packaging moves to a plus 10 in Q4 versus a zero in Q3.

Moving to the next slide.

North America specialty systems.

For the fourth quarter segment revenues increased 7.3%, and operating income grew 21.7%.

Notably operating margins of 16.4% were 200 basis points higher than a year ago thanks to better operating leverage and a number of businesses, most notably our welding and our decorating units.

Focusing on the top line, the 7.3% increase in revenues consisted of the following: 2.4% growth from base, 4.0% increase from acquisitions and a 0.9% contribution from translations.

Moving to the next slide, the fourth quarter story for the segment centers on improved base revenue performance which translated into significantly enhanced income performance.

The two biggest contributors to both top line and income growth was welding and our decorating units.

First, welding base revenues grew 12% in the quarter thanks mainly to contributions from the welding equipment business units.

The overall welding business also saw modest growth from it's consumable and specialty components business units.

In total welding operating income and operating margins grew significantly in the fourth quarter.

Moving to decorating.

While base revenues only grew 2% in the quarter this is markedly better than it's minus 10% base revenue performance in Q3.

The income and margin growth in the decorating businesses was led by the hot stamp businesses.

As a result decorating's income and operating margins were also up substantially in the fourth quarter.

In the food equipment business, while its base revenues declined 3% in the fourth quarter this was the best base revenue performance of the year.

By comparison, for the first three quarters of 2003 base revenues were down some 10%.

Not surprisingly the food equipment business is still battling weak top line trends in both the supermarket, what we call the food retail, as well as the restaurant, what we also call the food service parts of the business.

Margins in the quarter which came in at 17% continued to grow on a year over year basis thanks to ongoing 80/20 initiatives.

And finally in industrial packaging our Signode business saw it's base revenues remained at minus 4 in the fourth quarter.

As we have said over and over and over, for the past number of quarters demand in North America for Signode consumables and equipment remains relatively week.

We would not expect a bigger pickup of both categories until industrial production and capital spending begin to grow at a more agressive rate.

Even with base revenues being down, Signode was able to nudge margins up 40 basis points in the quarter.

Finally our finishing business had a good quarter as base revenues grew at 13% and operating margins improved 180 basis points.

Finally for the last segment in the manufacturing area.

International specialty systems for the fourth quarter segment revenues increased 17.6%, and operating income grew 85.7%.

Operating margins of 12.5% were 460 basis points higher than the year ago period when we took a charge for goodwill impairment at the two business units, which were actually two Signode International units.

Taking a closer look at the top line, the 17.6% growth and revenues consisted of the following: Currency translation was 13.5%, acquisitions grew 9.3% and base business declined 5.2%.

In our total packaging category, base revenues declined 7% due largely to a 9% decrease in base revenues from a Signode Europe units.

Similar to North America, sales of both consumables and equipment have been impacted by problematic end markets such as primary metals and agriculture.

Signode Asia saw its base revenues decline 3% in the quarter.

In the food equipment area, internationally, the lack of top line growth in base revenues were down about 4% in the quarter, still did not deter the business from improving income and operating margins.

Thanks to 80/20 programs, income grew nearly double digit and operating margins improved 180 basis points.

Demand for products continued to be tied to commercial dishwashing and refrigeration products typically for larger institutional purchasers such as hotels and airports.

Finally, our finishing unit had base revenue growth of 1% in the quarter which is a turn around from the minus 5% performance in Q3.

The increase in base revenues translated into a margin improvement of 60 basis points in the fourth quarter.

The finishing business has generally served the automotive and general industrial sectors and both of these end market categories improved slightly in the fourth quarter.

This concludes my formal remarks so let me reintroduce Jon Kinney will who detail the forecast for the first quarter and the full year of 2004.

Thank you, John.

The significant improvement in our fourth quarter was an encouraging sign.

We have built in a continuation of these gains into our first quarter and total year forecast.

We are forecasting first quarter income per share from continuing operations to be within a range of 73 to 81 cents per share.

The low end of this range assumes no growth in the base business and the high end reflects a 3% growth in base revenues.

If we hit the midpoint of this range of 77 cents per share, we will be 18% higher than last year's first quarter.

By the way, if we hit the high end we'd be 25% above for the quarter.

For the total year, our forecast range is $3.66 to $3.96 per share.

The base revenue growth supporting this forecast is expected to be in the range of 1 to 4%.

Overall if we hit the midpoint of this range, full income from continuing operations of $3.81 per share would be 13% higher than last year.

We believe this would be solid performance on a 3% growth in base revenues.

Other assumptions included in this forecast are our exchange rates.

We've held those in our planning process at year-end levels.

Now we expect to acquire revenues in the 500 to $700 million range.

Our restructuring costs should range from 55 to 65 million.

And goodwill and intangible impairment costs could range from 5 to 15 million occuring principally in the first quarter.

And we also will plan to hold our tax rate at 34%.

Okay, John, back to you.

Thank you, Jon.

That concludes our formal remarks so we'll now open the call to your questions.

Thank you.

At this time we are ready to begin the formal question-and-answer session.

If you would like to ask a question, please press star one on your touch-tone phone.

You will be announced prior to asking your question and will be required to record your name.

You may withdrawal a question by pressing star 2.

Once again, if you would like to ask a question, please press star one.

Our first question is from Joel Tiss with Lehman Brothers.

Mr. Tiss, you may ask your question.

Hey, guys, how are you doing.

Hey, Joel.

It looked like the incremental margins were somewhere close to 40%.

Can you give us a sense of where they've been historically and if this is a little bit better than where they've been.

Incremental for the quarter, they're strong.

We had a very good, strong quarter.

Our incrementals and aggregate are in the 25 to 30% range.

Okay.

And then on your guidance, it looks like you are having a deceleration as we roll through the year, the first quarter is a lot stronger than the rest of the year, can you give us a sense of what is built in there?

Yeah, the principal thing that is affecting the balance of the year is our leasing and investment activity.

You may recall that in the second quarter of last year we had a significant mark-to-market adjustment, that was under our old accounting requirements before we deconsolidated it, and that added about, roughly, 8 cents a share, I mean, it's taking away 8 cents on a comparative basis.

This year it's about $40 million swing.

And that's the principal driver.

More subtle things are translation is the highest impact at roughly 3 cents in the first quarter and then that gradually diminishes, beginning year-over-year tax benefit, also.

Last year it was at 35, this year at 34.

But for the year it will be no effect because we adjusted the tax rate in the fourth quarter.

So those are the types of things that are happening in the balance of the year that are not happening in the first quarter.

Okay.

Thank you.

Sure.

Mr. Gary McManus with JP Morgan.

You may ask your question.

Hi, guys.

Hey, with all the cash you're generating how come interest expense is not going down faster.

I mean if I look full year '03, versus full year '02, debt went down by like 600 million.

I don't know what kind of interest rate assumption I should have there but I assume it's 5, 6% or something like.

That how come interest expenses aren't going down more.

And I assume that's not net interest expense.

The fact that you are building up cash, the interest income is shown in other income, is that right?

That's right.

But still it doesn't seem like you are getting much benefit of generating cash below the operating line.

The interest income on the $600 million debt reduction is in the operating cost of leasing and investment.

It is not on the interest income line.

So that's a -- you know --.

That's a big factor.

That's a big factor, right.

And just on that, just responding, you said there was 40 million negative swing in leasing investments, are you really talking about expected '04 income versus '03.

Yes.

Right.

I think the question was we're showing a 18% earnings growth in the first quarter but only 13% growth for the year.

Yeah, I got it.

I mean you basically said you had about, was 117 million of income and leasing investments in '03, you expected to be about 40 million less than that.

Yes.

Just wanted to make that was it.

Just one last question.

If I take bits and pieces of your full year forecast, base up 3%, midpoint, your acquisitions, if I assume you do them steadily through the year that adds about 3%.

I'm taking 300 million over 10 billion, roughly.

You'll get some residual currency effect, I assume it's 1 or 2% or something like that.

So that's about 8, 9% top line growth but earnings per share only up 13%.

So it doesn't seem like you are assuming much margin improvement in '04.

Well, our revenue we're expecting to be up roughly 900 million.

Of that 900 million, 300 million is from the base, 200 million is from translation and about 480 million from acquisitions.

Doesn't it come up to more like a billion?

Leasing and investment is a net minus 80.

Okay.

All right?

The income increases of approximately 220 million, acquisitions are in there for roughly 8%, translations in there for about 15% incremental, leasing and investment is down 40 million and the base is looking to be up close to 190 million, which is a strong 60% incremental, and about 120 million of that is volume driven and 60 to 70 million is cost improvement driven.

So I think we've got the right numbers.

Clearly if our base business is where we really generate the incremental, if that's stronger than the 3% that we've got factored in we add one point to that if we get a 4% year, a much stronger year we could see it 18% earnings improvement for the total year.

So I think we've got a reasonable forecast here.

It's still built in a fair degree of improvement from -- I mean we're sitting in this quarter flat.

We're down from probably 2000 levels by 11% on the base revenue.

We breathe deeply and say 3% growth is not all that much, but it's been 13 quarters of negatives, so maybe we're conservative here.

I hope that's the case.

Hope we see a good strong economy.

Okay.

Thanks for the detail.

It was helpful.

Miss Ann Deignan with Bear Stearns.

You may ask your question.

Hi there.

Can you give us some color on what kinds of customers were ordering welding equipment and finishing equipment.

Was it mostly automotive on the finishing side.

And were those kind of one off projects or are you seeing a real sustained recovery in both of those businesses?

The first question related to welding?

Yes.

Yes, welding principally was driven more by construction related projects.

Right.

That's been the biggest purchaser of welding equipment.

On the finishing side, it's really been more of a combination of some recovery on the general industrial side with a little bit of improvement in auto.

Some of the capital projects in auto have been slower to come back but we did see a little bit of a pickup in the fourth quarter.

Did you think that those improvements are sustainable into 2004?

Hard to say.

We hope so.

Well, that leads me to a second followup question.

Can you give us any color on what your capital spending budget might look like for '04, versus '03?

'03, we spent about 258 million, and the plan calls for about 300 million.

Okay.

So it seems like all of the companies in our sector are increasing their capital spending budgets for '04, which at the end of the day should be good for your business?

Yes, it should.

Yes.

But having said that, Ann, we also budgeted close to 300 for the last two to three years and we have yet to achieve that over the last three years.

And that's probably similar to most other companies in this industry.

We clearly hope that that's a number we get to.

Do you guys talk internally at all about the difference between the improvement in the ISM order data for December versus the durable goods order?

And are you getting any feedback from the operations in terms of which one is closer to reality?

No, I think most of the macro data that we look at is really discussed among a smaller group here at the corporate headquarters and depending on what you believe.

We look at the ISM and industrial production more directionally.

You are not seeing any disconnect there or hearing anything about disconnects between --

Industrial production in some cases is very difficult to tie in because we're so diverse across so many different businesses.

We really look more in a directional way.

Okay.

Thank you.

Mr. Andy Casey with Prudential Equity Group.

You may ask your question.

Good afternoon.

Hi, Andy.

Just, I guess, another dive into the detail a little bit in terms of Signode.

First, within your forecast for the year, are you looking at that flat, down or up, and if so what?

And then second, are you seeing any orders whatsoever at this point?

Thanks.

Signode, the last I looked in terms of the 2004 is that they are looking for some modest improvement in top line both North America and on the international side.

Now, your specific question of whether or not we've seen any pickup, clearly there's been no pickup on the equipment side.

And the consumable side looked like it picked up a little bit in December based on the numbers that we saw.

But nothing so dramatic that it would allow us to declare any kind of a big trend, shift in Signode at this point.

Okay.

Thanks.

Adding to that too, if you looked at our specialty systems North America, we're again in aggregate where Signode resides are in that 2 to 3% growth rate.

Okay, thanks, Jon.

One last one is the follow-up.

In terms of disposition towards what you are seeing in the acquisition arena right now versus what you talked about in December, is there any change at all?

We've raised our forecast on the acquisition front.

We have a backlog today that would probably get us to the midpoint if all that came to pass.

So we've got a good backlog and from what we hear from people, there's lots of activity going on.

So we think we've got a reasonable forecast here.

Things have picked up.

Great.

Thanks a lot.

Deane Dray with Goldman Sachs, you may ask your question.

Thank you.

Good afternoon.

I would like to get some more color regarding your commentary in engineered products North America and pricing on the automotive side.

Price pressure is not new to the sector or new to ITW, but has anything changed there?

And kind of take us through what the business mix is today, dollar content this year versus new programs and provide some update if you could, please.

Well, I think that the crux of the issue really is that the auto manufacturers were much more aggressive in looking for price givebacks in the fourth quarter than they had been throughout the course of 2003.

So a lot of the price pressure really hit us in the fourth quarter.

I can't answer your question specifically, deane as to the mix.

Where it hit the most, we seem to be pretty well positioned across a pretty broad range of larger and smaller vehicles including light trucks.

So I can't break it down in that respect.

But I will say that pricing certainly became more of an issue and it showed up in our penetration numbers clearly.

Oftentimes when you get hit with pricing pressures you respond by getting more content, more products.

Were you successful there.

And that's a longer term issue.

What you have to do is you have to negotiate a price that you can live with short-term with the full knowledge that you have to really push new products longer term.

So you could start to get penetration, increase penetration on a longer term basis and find the right platforms, find the right mix, and get back to a penetration rate that is more acceptable to the company.

So quarter to quarter, you can certainly get some dislocation and we certainly felt it in the fourth quarter of this year.

Dollar content probably declined because of pricing.

Yes, it did.

And then clarification on the restructuring plans.

Did you say what the restructuring assumption for the first quarter might be?

For the first quarter, we did not.

But it's in that $14 million, $15 million range.

Okay.

And --

But that's a number that --

We have to take it as it comes.

We take it as it comes, we don't have a list of those projects that are coming.

Again, going back, we have 600 business units, all of which could come up with projects for the year.

We get some read on that as we go through the annual plan and try to get a feel for what we're looking at here, but it's still, as demonstrated I think by this last year, it can swing up and down between quarters.

Good and if I could just get one last followup?

And that would be regarding the tax.

Could you just remind us, please, what the catchup was this quarter.

What was driving that and what the expectation is.

What has changed regarding your tax situation that you've got this lower sustained rate?

And is there further opportunity there?

We've been doing a fair amount of tax planning over the years.

And as we went into this year, we were thinking that the rate would possibly go to 34, but we really had to button up the tax planning and get some reading from folks about the viability and so on and so forth of the issues that we are doing and a fair number of these were outside the country and some here in the U.S. also.

But we've got, needless to say come the fourth quarter, we got pretty well settled and put in place the various programs that we wanted to.

That drove that rate down.

We think it is sustainable, at least into next year, and hopefully further.

Okay.

Thank you.

Mr. Walt Liptak with McDonald Investments.

You may ask your question.

Good afternoon, guys.

On the acquisitions, you talked a little bit about this but of the 500 to 700 million, your cost to capital is low, you've got a lot of cash and typically when we think about acquisitions they are dilutive in the first year.

Should we change our thinking on that?

Could your acquisitions be more accretive this year?

Well, they are dilutive to margins.

They are generally accretive to income per share.

If you worked with an 8% margin and a 1% interest cost --

Right.

Okay.

You know, you've got an accretive situation albeit it's still -

Right but the point is, as your cost of capital has gone down it should be easier to do accretive acquisitions?

We could do accretive acquisitions until we're blue in the face but could we cover our broader cost of capital, which is at the 9 or 10% after-tax rate, and we just don't want to achieve that cost of capital.

We want to exceed it substantially and our return on invested capital is 16% after tax and that spread, we think, is a healthy one.

So that's more what we shoot to than increase in earnings per share.

Okay.

What are you seeing on pricing on acquisitions?

It'sanywhere from -- it really depends on the deal.

We've done some deals out of bankruptcy that are 0.5, up to 1.1, 1.2 of sales.

So on average it's roughly 0.8 of sales.

I would say probably 0.8, Walter, is a good number for '03.

And probably a good historic number, at least over the last two to three years.

Okay.

Thank you.

Mr. Mark Jimbroney with Barrel Hanley, you may ask your question.

Good afternoon, fellows.

Hi, Mark.

I hate to sound like a broken record when I ask this question, but, again I look at the cash on the balance sheet and I consider the cash flow for your business and I think about the uses of cash, even if you meet your acquisition goal, which has been a difficult thing for years, and I'm a little bit confused as to why some of this cash isn't being returned to shareholders, either in the form of a larger dividend, or a significant share repurchase or something.

I don't assume that you guys are turning into just a place to hold cash.

And I'm curious as to what your thoughts are on this and how close we're getting to that point of finally doing something.

You are a broken record! [ LAUGHTER ]

Well, if things were to change I'd stop not but -- [ LAUGHTER ] You generate more and more and more cash all the time and I don't understand.

I just don't understand that.

A good part of our cash utilization in the company has been acquisitions.

And acquisition activity for this past few years has been low for all the reasons that we talked about before and we think there's plenty of opportunity for that to improve.

This year, and hopefully our forecast is on the low side.

And then periodically we do come across a business that's substantially larger, like Premark and clearly if that were to happen, it would soak up all that cash and then some.

But having said that, we are also quite aware, not only by your questioning but we understand your feeling on this point and we do look at alternatives.

We'll look at stock buyback and that 60 that was looking okay at 85, it gets a little squeaky but we continue to look at that.

We think our stock is an excellent investment and so we continue to look at that side also.

Okay.

Thanks.

Uh hmm

Mr. James Samuels with Granfield and Dodd, you may ask your question.

That's Dodd, d-o-d-d.

I was wondering if you could give a little more information about the health costs and inventory.

I presume charges that caused the operating income decline in North America.

I will take the easier one first.

The inventory decline is good news.

The problem, of course, is when you draw down inventories, actually you cut back production a bit, and you get a double hit on your fixed costs, your overhead structure and that was in that 3 to $4 million range.

And then also inventory related we had our inventories, a good chunk of our domestic inventories, are on LIFO.

And our year over year comparison on that took another 1.5 million or so out of income.

The benefits area, John mentioned medical, it's more broadly benefit cost and we true up our accruals.

Harder look at year end than we do quarterly because of the shorter time period, and we have had some increases in our medical costs, and a little bit in the pension, and odds and ends and in cleaning that stuff up, we had a $6 million higher accrual that we had to take care.

Okay.

And one followup here.

The amortization and impairment of goodwill, that number declined over 7.4.

Could you talk about that decline a little bit?

We had an impairment in the fourth quarter of last year.

I'm wanting to say in the neighborhood of $10 million.

Yeah, to Signode businesses and we did not have an impairment this quarter.

Okay.

Thank you.

Sure.

Mr. Robert McCarthy with Robert W Baird, you may ask your question.

Hi, John, Jon.

Hi, Rob.

Just to follow on that last question, Jon.

If I calculate correctly the non-volume related benefit to earnings in specialty systems International was around $25 million.

You bet!

So 10 goodwill, what is the rest of it?

Approximately our last four quarters of restructuring costs --

Yeah.

About a little less than half of it has gone to this segment.

And those benefits are really come home to roost in terms of cost of improvements.

Okay.

So that's really where I wanted to go.

There is a cost reduction element in that non-volume related number that you're showing us on the breakdown analysis for each segment.

Uh hmm

Okay.

Good.

Restructuring charges forecast at 55 to 65 million for the coming year.

Mm-hmm.

Unless I'm mistaken, the number has been around 60 million for -- well, assuming you do it in '04, I think that would be like the fourth year in a row.

Yep.

We're no longer at the outset of a recession that requires taking out a lot of people, nor have we had a tremendous amount of recent acquisition activity either.

So I'm wondering -- well, obviously I'm wondering why it isn't lower.

I'm wondering if maybe we should just simply be thinking about $60 million as a run rate, kind of irrespective of what's happening with macro conditions or acquisition activity.

You're right, we've been running in that 55 to 60 million range for the last four years since we acquired Premark.

But not only Premark.

At the end of '99, half of ITW had been acquired within a couple of years.

Right.

Including Premark.

So we've had a lot of work to be done and we've said in the past our 80/20 efforts generally go three to five years and if you had half the business that was at substantially lower margins than the other half that's the part that we're working on.

And it's been about four years.

Yeah.

So we think at least another year of it.

We still see opportunity.

Okay.

I can accept that.

Can I infer from that that in 2005 we could see a a substantial reduction.

Possibly.

Even assuming that you buy $500,000 worth of annual revenue this year.

Right, substantial reduction could be 30 to 40 million versus 60.

Yeah.

Okay.

One more. 2004.

Your organic growth outlook, could you break that down between North America and international?

Yes, I can.

It's North America about 2.5 and international a little less than 4.

A little less than four?

Mm-hmm.

But isn't the midpoint of your range 2.5.

No, midpoint of the range is 3.

I'm sorry.

Okay.

Thank you.

Mark Heilwile with Spectrum Advisory Services, you may ask your question.

Hi, I just was wondering where we stand with the consumer dispositions at Premark.

I am happy to say they are done.

Okay.

Nothing left then from that acquisition?

Nothing is left on the consumer side.

Thank you.

Wendy Caplan with Wachovia, you may ask your question.

Thank you.

This year's cash flow as a percentage of net income was nearly 150% in '03.

As you look at '04, what's your expectation and specifically how are you thinking about working capital changes in '04?

This year has been a continuing declining year so not looking at any one quarter but I think looking for the total year, our free cash flow was about 120% of income.

Something in that range, if my memory serves me.

That won't continue in a growing situation.

We're going to have certainly more receivables.

The likelihood is we'll probably have more inventories to support that too.

I would think probably closer to 90% of our income would turn into free cash versus 120.

And working capital as a percentage of sales has been trending up.

Where would you expect that to be?

I don't have a specific number in front of me, but let me look.

Part of the trending up is, just by way of information, is you know what's happened to currencies.

Our working capital needs in Europe and in the far east both are higher than they are here in the U.S.

Mainly the trade credit not so much the receivable side.

And there's a much heavier weighting of our working capital in foreign currencies.

I mean that part of our total working capital has increased.

So that's driven the rate up a bit, as a percent to revenues.

So I would say going forward we'd think in the terms of 16, 17% with currency staying where it is.

Thank you.

Mr. Matt Collins with Edward Jones, you may ask your question.

Thanks.

Another followup on the non-volume related issues.

Is there any particular reason that those issued engineered products, at least medical, which I think would be companywide, did not also impact specialty systems in the quarter?

Because there you actually had a pretty nice benefit from non-volume related activity.

Yes.

And it did.

Not to the same magnitude but we also have higher costs there, but we have been doing a fair degree of restructuring and there, if you remember the food equipment business is in the North America have really been improving margins, as well as other businesses.

So we basically offset the costs.

And then as a followup, should we expect any significant non-volume related issues as we head into '04.

No, I think our pension costs are going to be about even.

I know our retiring medical is going to be up 6 or 7 million.

This whole stock option thing we have shifted to restricted shares at this point, at least.

We had higher costs in '03 of 17 million.

That cost for this year is 15 million.

So that's a cost that we're bearing as we go into this year, essentially because of a change in accounting that requires whether it be options or restricted shares to expensive.

So we are feeling the effects of that.

But outside of that, I can't think of anything.

Okay.

Thanks.

Ms. Ann Deignan with Bear Stearns.

You may ask your question.

I just had a follow-up on the food equipment business.

You mentioned that restaurant demand was down in the quarter.

What's your outlook for the restaurant business?

We had anticipated that that business would start to pick up either most recently or very soon.

If you go back and you look at the way the revenues are sort of parceled out and put equipment.

About half the revenues are restaurant related.

Yeah.

About 25% are supermarket related and 25% are parts and service.

We clearly think that there is a better chance for a rebound on the restaurant side than on the supermarket side at this point.

I think the latest forecast coming out of food equipment is that they are trying to move top line up 2 to 3 points for the year.

Now, I can't carve that out per different segment, but I would surmise that the piece related to the restaurant side is the biggest piece.

So it would have the biggest impact.

Okay.

So up disproportionately as grocery is hardly likely -

I can tell you right now, Ann, given what is continuing to happen on the grocery/supermarket side of the world, that growth there is going to continue to be very difficult.

Right.

So if you're going to get growth, you're going to have to get it from the restaurant and the other large institutions as well as the parts and service, which continues to be a pretty good growth area for us right now.

So if we're going to get growth, we're going to have to get it more from the restaurant side.

Okay.

Thank you.

Mm-hmm.

Mr. Robert McCarthy with Robert W Baird.

You may ask your question.

John -- just to come back on my question about North America versus international organic growth.

I think the middle of the range is 2.5.

But maybe the range includes the projected revenue decline at L&I?

Could be.

In fact, I'm just looking at manufacturing.

Manufacturing only at three point midpoint.

Yes.

Right.

All right.

And given that you just had a quarter where the specialty system side of international was down five organically, can you talk a little bit about how you arrive at a 3 to 4% positive forecast for the coming year?

On the international side?

Yeah.

Well, let me just look here.

I can tell you that it's more heavily weighted on our specialty system side.

It is?

Of international.

Rob that would have some built-in improvement on the Signode side of the world.

That would be one of the key improvement areas because their revenues have been running down the last couple of years anywhere from down 8 to 10%.

Yeah.

So we're looking for some recovery from Signode on the international side.

Given that's the biggest piece that would be the biggest mover in the segment.

Ignoring what the year-to-year declines have been, Signode Europe down nine in the quarter, have you been getting some sequential improvement in the business as we move through the year which would imply that just anniversaring things would give you positive growth, or -- Well, we can follow this up later.

Different question.

Mr. Kinney.

Following on the questions about share repurchases, do you currently have board approval?

No.

Okay.

Is that something that you intend to seek in 2004?

Possibly.

Like I say we continue to look at this situation, try to judge what we may want to do, but there's certainly no certainty to that.

If it's something that you are actively considering, wouldn't it make sense to actually have the weapon in your holster?

It may.

Okay.

That's fine, Jon.

Thank you very much.

Let me come back, Rob, too on you on the international side.

Our engineered products are still nicely above where we were back in 2000 or kind of our peak year.

Whereas on the other side, the specialty systems, were down close to 11% at the end of this year from 2000.

So that's the relative growth out of those declines is what we're really looking for.

Okay.

You are, I assume, however, also looking for positive growth on engineered products?

Yes.

Yeah.

Oh, yeah, we are.

Just not as high as specialty?

Not as high as specialty.

That's right.

Okay, got it.

Thank you.

Sure.

Once again if you would like to ask a question, please press star one.

At this time, gentlemen, there are no further questions.

Okay.

Well, we thank everybody for joining us and we look forward to talking to everybody either later this afternoon or sometime in the future.

Thank you very much.

Have a good day.