Illinois Tool Works Inc (ITW) 2005 Q1 法說會逐字稿

Good afternoon.

Welcome to the ITW 2005 first quarter earnings release conference call. (OPERATOR INSTRUCTIONS).

The conference is being recorded.

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

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

Sir, you may begin.

Good afternoon everyone and welcome to our first quarter 2005 conference call.

As noted, I am John Brooklier, ITW's VP of Investor Relations, and with me today is Jon Kinney, our CFO, and Ron Krupp (ph), our Vice President and Controller.

We are pleased you could join us today for what we consider to be a very solid first quarter.

By now most of you have seen our first quarter financial results, which produced the following year-over-year comparisons.

Revenues increased 13% and diluted net income per share grew 14%.

While our first quarter operating margins declined 100 basis points on a year-over-year basis, nearly half of this margin decrease was due to an unanticipated decline in high margin leasing and investment income in the quarter.

Here's the agenda for today's call.

Ron Krupp will join us shortly to provide more detail about our first quarter results.

I will then update you on our 4 manufacturing segments and associated end markets.

Jon Kinney will address our 2005 second quarter and full year earnings forecast, and we will then open the call to your questions.

Please note the following.

I will strictly enforce the one question, one follow-up question rule.

Also, if a question has been asked and answered, we will move on rather than respond to repeat questions.

We are targeting a completion time of one hour for this call.

As usual, we have a few housekeeping items.

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 of base business and future tax rate expectations for full year 2005, and the Company's related earnings forecast.

These statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ from those anticipated.

These risks are spelled out in our PowerPoint presentation, which many of you have, and are a part of our ITW Form 10-K for 2004.

Moving onto the next slide.

One final note, the telephone replay for the conference call is 203.369.0858.

No pass code is necessary.

The playback number will be good until 12 midnight on May 3, 2005.

As always, you can also access our web cast PowerPoint presentation on our ITW.com Website.

The presentation can be found in the Investor Information section.

Just look for the earnings presentation tab.

Now let me introduce Ron Krupp, who will talk to us about -- talk to you about our quarterly highlights.

Good afternoon everybody.

The highlights of our (technical difficulty).

Revenue grew 13% over the first quarter of last year.

This growth rate declined from the 16% growth rate in the fourth quarter of 2004.

Operating income was up 7% over the prior year.

Operating margins were down 100 basis points over last year and diluted income per share from continuing operations increased 14% over last year.

Free cash flow continued strong at $254 million for the quarter.

Return on invested capital was 15.8% for the quarter, which was 80 basis points lower than last year.

In short, the first quarter continues last year's strong earnings growth trend.

Now to the details.

Our 13% revenue growth was primarily due to three factors.

First, base business revenue grew 6.1%.

This growth rate was 210 basis points lower than the fourth quarter last year, due to slowing growth for both our North American and international businesses.

Secondly, currency translation added 2.3% to revenue growth.

This increase was 180 basis points lower than the translation effect last quarter, and reflects the continued decline of the U.S. dollar.

Thirdly, acquisitions added 6.2% to revenue growth, which was 190 basis points higher than the fourth quarter of last year.

Overall, our 13% revenue growth was the result of solid base business revenue growth, continued positive currency translation and the impact of acquisitions.

Our 6.1% year-over-year basis revenue growth was made up of a 6.7% increase in North America, which was 130 basis points lower than last quarter, and a 4.9% revenue increase internationally, which was 270 basis points lower than last quarter.

John Brooklier will provide more details on the operating results when he discusses our operating segment.

Turning to operating margins, we experienced a 100 basis point decrease in the first quarter compared to last year's first quarter.

Of this margin decrease, 40 basis points was due to the decline in high margin leasing and investments income.

In addition, acquisitions diluted margins 60 basis points and the base businesses decreased margins 40 basis points.

For the base businesses, margin increases of 140 basis points due to operating leverage were more than offset by margin decreases of 180 basis points due to non-volume-related items.

Included in the higher non-volume-related items is the continued impact of raw material cost increases.

Price increases have recovered material cost increases, but have not fully recovered the margins.

Also contributing to the negative margin impact of non-volume-related items are stock option expenses of 6.8 million, due to the early adoption in the first quarter of the new stock option accounting rule and accounting issues of 8.5 million at a European food equipment business.

The adoption of the new stock option expensing rule would decrease earnings by $0.015 for each quarter of 2005, or $0.06 for the full year.

In our Leasing and Investment segment income was $16 million lower than last year, mainly due to lower gains in the sales of mortgage properties in 2005.

In the non-operating area, interest expense increased 2.8 million from last year.

Other income and expense was unfavorable at $4.3 million, primarily due to lower interest income.

The effective tax rate for the first quarter declined to 32.5% versus 34% in the prior year.

The current quarter rate of 32.5% was lower than the full year 2004 rate of 33%, primarily due to the effect of the U.S. manufacturing tax benefit under the new tax law.

Turning to our invested capital, of the $273 million increase from the fourth quarter, $188 million relates to acquired companies.

Inventory month on hand and accounts receivable days sales outstanding continue to be under control at 2 months and 62.4 (ph) (technical difficulty) days respectively.

Capital expenditures for the quarter were $64 million and depreciation expense was 73 million.

On the financing side, we increase our debt 629 million from first quarter -- from last quarter, primarily to fund first quarter acquisitions and the start up of the second phase of our share purchase programs.

As a result, our total debt to cap ratio increased from 13% to 19%.

Although our debt did increase, cash also increase as substantially (technical difficulty) held overseas, and we are waiting for final rules from the U.S. government regarding the repatriation of foreign dividends under the new tax law.

Assuming the Technical Corrections Act is passed by Congress, we still expect to repatriate at least $750 million in foreign dividends by the end of year.

Our cash position increased in the first quarter mainly because strong free cash from operations and cash from short-term borrowings were higher than the cash needs of our acquisition, investment and other financing activities.

Free operating cash flow for the quarter was $254 million.

During the quarter we spent 190 million on share repurchases, 188 million on acquisitions, and 82 million on dividends.

Free cash flow and proceeds from short-term borrowings exceeded these expenditures, and therefore our cash position increased by 386 million from last quarter.

As you know, our Board of Directors approved a 31 million share repurchase program in the second quarter of 2004.

As of the year-end of '04, we had spent $1.7 billion to acquire 18.9 million shares, which met our initial repurchase targets.

As announced in February, we have decided to continue the share repurchase program up to the full authorized level, which we expect to be achieved by the end of 2005.

In the first quarter we repurchased 2.1 million shares at an average price of $92.05 per share.

Our first quarter return on invested capital of 15.8% was 80 basis points lower than last year.

This decrease was a result of higher invested capital, mainly due to acquisitions over the last fall months.

Considering our cost of capital is in the 9 to 10% range, we continue to create value for shareholders.

Finally, on the acquisition front, we acquired three companies in the first quarter which have annual revenues of $151 million.

We believe our current acquisition backlog is adequate to achieve our planned range for 2005 for acquired revenues of 600 million to 800 million.

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

Before I talk about our manufacturing segment, let me spend just a very few brief moments talking about North American and international data we track a regular basis as a company.

Some key indexes we look at in North America -- the March ISM Index declined to 55.2% from 58.6% in December.

The March ISM new order Index also cooled (ph) registering 57.1% versus 67.4% in December.

Industrial production, ex technology, was also down to 3.1% in March from 4.1% in December 2004.

Internationally we are seeing some mixed signals.

On the downside, the March Eurozone Purchasing Managers Index was at 50.4% in the most recent period compared to 51.4% in December.

On the plus side, Eurozone industrial production was at 2% in the most recently reported month, versus 0.4 in November of '04.

With that as some background, let's take a look at our four manufacturing segments.

Starting with North America, Engineered Products segment revenues increased 13% and operating income grew 4.5% in the first quarter.

Operating margins of 15.7% were 130 basis points lower than the year earlier period, mainly as a result of pricing issues in automotive business units, particularly those providing metal fasteners to Tier 1 and 2 clients and OEMs.

Base business margins from those metal fastening units were down more than 200 basis points in Q1.

Looking more closely at first quarter revenues, the 13% growth in revenues consisted of the following -- 3.2% from base revenues (ph), (technical difficulty) 9.6% (technical difficulty) from acquisitions and 0.2% from translation.

Moving to the next slide, let's take a closer look at the business units within EP North America.

Total construction grew base revenues 3% in the first quarter.

And more specifically, ITW Construction, which are essentially our total and fastening units, saw base revenues increase (technical difficulty) Q1.

New housing and renovation rehab both crew base revenues within a range of 8 to 10% in the quarter.

And commercial construction grew at a rate of approximately 3 to 5% in the quarter.

Wilsonart's base revenues were essentially flat in the first quarter.

Some early signs of modest improvement in Wilsonart base laminate business for commercial applications have been tempered somewhat by some sluggishness in the units -- in Wilsonart's flooring business.

On a forward-looking basis, (technical difficulty) we remain encouraged (technical difficulty).

New housing starts were up some 13% in February, and while I did note that the new housing numbers came down in March, we still believe the housing markets will moderate somewhat in the second half of year, and we're not expecting a big falloff in demand.

Renovation rehab demand remains strong and our commercial construction business units are looking for modest expansion in the second half of the year.

Moving to our automotive businesses, base revenues declined only 1% in the first quarter.

That underscores our ongoing ability to increase our product penetration with North American automotive OEMs and Tier 1 and 2 customers, as well as our ability to recapture additional raw material price in the quarter.

Even with the reasonably good base revenue performance in Q1, production by the Big Three manufacturers was problematic and we think will continue to be.

Light vehicle production by the Big Three declined 9% in Q1, with GM leading impact with a 13% decreased.

Ford's production declined 9% and DaimlerChrysler dropped 3%.

The lone bright spot continues to be the transplants, which increased production 7% in Q1.

One bit of good news -- the Big Three inventory levels were at 79 days at the end of March, and that's down from 91 days in February.

Here is the end of March inventory breakdown by OEM.

GM was at 78 days, Ford was at 82 days and Chrysler was at 77 days.

Not surprisingly, (technical difficulty) that the thriving transplants, principally Toyota, Honda, Nissan and BMW, were at 54 days.

Looking ahead, we are forecasting a 5% decline in the Big Three auto bill (ph) for Q2 and a similar 4 to 5% decrease for the full year.

Obviously we will keep you updated on those numbers as we progress through the year.

In our industrial products category businesses, base revenues grew 7% in Q1.

The top performers in this category of businesses include our Mini-Grip Zip Pack business, Fibre Glass Evercoat, engineered polymers and fluid products.

On the down side, our industrial plastics unit's base revenues were modestly negative in the quarter, reflecting weaker demand by appliance manufacturers.

Moving to the next segment, international Engineered Products.

For the first quarter, segment revenues grew 23.3% and operating income increased 30.7%.

Operating margins of 13% were up 70 basis points in the quarter, thanks largely to the impact of acquisitions and translation.

Taking a closer look at top line, we already noted 23.3% growth in revenues consisted of the following components -- 3% from base revenues, 15% from acquisitions and 5.3% from translation.

Just like our North American segment, business units in EP International consist of construction, automotive and industrial products.

Looking at total construction, base revenues grew 8% in Q1.

By geography, first quarter base revenues were as follows.

European construction increased 11%;

Asia-Pacific was flat (ph). (indiscernible) (technical difficulty) Wilsonart international grew a robust 17%.

In Europe, growth was broad-based with notable expansion in the UK and France.

Activity in Germany was flat in the quarter.

In Asia-Pacific, (technical difficulty) retail construction units more than offset growth from the more traditional commercial and new housing business units.

And as to Wilsonart, its strong base revenue growth was directly tied to an increase in commercially-based sales activities in China, Germany and the UK.

As a result, Wilsonart's profitability and operating margins increased substantially in Q1.

Our automotive business units in Europe saw base revenues decline 3% in the quarter, largely as a result of mix issues with a handful of OEMs.

While total auto production was up 1% in Q1, production declined by Fiat, down 16.1%;

VW Group down 4.9%; and DaimlerChrysler down 1.5% skewed our product penetration and base revenue results.

On the up side, other production numbers included BMW, up 21.7%;

Peugeot up 8.4; and GM group up 8%.

For the full year 2005, we're still expecting builds to increase 2% on a year-over-year basis.

The remaining part of this segment is our industrial base business units.

These units grew base revenues 2% in Q1.

The two major contributors to growth were polymers, up 8%, and fluid products up 7%.

Similar to North American, industrial plastics base revenues were slightly negative in the quarter.

Moving to the next slide.

In North America Specialty Systems for the first quarter segment, revenues increased 2.6% and operating income grew 17.3%.

Operating margins of 17.6% were 100 basis points higher than the year earlier period, thanks to the ongoing strength in our welding, food equipment, marketing and decorating industrial packaging units.

Focusing on the top line, the 10.6% growth in revenues consisted of the following -- 9.8% from base (ph) (technical difficulty) revenues, 0.4% from acquisitions, and 0.4% from translation.

With Systems North America's strong revenue growth in the first quarter, this is our fifth in second quarter where the segment's base revenues have increased double-digit.

Our North American welding business again produced base revenue growth of approximately 20% in the quarter thanks to strong demand for replacement products in the construction and industrial parts of the economy.

We had another quarter where our welding equipment consumables and components business units all contributed to operating income growth and margin expansion.

In our food equipment business, base revenues were up 9% in the quarter largely as a result of improvement in the restaurant institutional part of our business, as well as the parts and service piece of our business.

We believe about 40% of the base revenue growth in food equipment was tied to price increases, and the remainder was related to volume.

Accordingly, operating margins were up significantly in the quarter.

Our marketing and decorating business grew base revenue approximately 20% in the quarter, mainly due to strength from our top (ph) melt (ph) (technical difficulty) business units, and margins also improved dramatically.

Finally, our industrial packaging business unit was up some 4% in the quarter, as the slower March, in part due to a very tough comparison from a year ago, moderated stronger growth in the first two months of the quarter.

We expect industrial packaging-based revenue numbers to strengthen in Q2.

And moving to our last segment, international systems.

For the first quarter, segment revenues increased 14% and operating income declined 9.6%.

Operating margins of 9.1% were 240 basis points lower than the year earlier period.

Income and margins declined (technical difficulty) mainly due to higher restructuring costs and onetime adjustments in our European food equipment business unit, related to accounting issues.

Taking a closer look at the top line, the 14% income in revenues consisted of the following -- 6.8% from base revenues, 1.8% from acquisitions and 5.4% from translation.

The growth in the segment's base revenues in the first quarter represented the fifth consecutive quarter of improvement, much like North America.

Major contributors to growth included in industrial packaging, food equipment and welding.

In our industrial packaging area Signode Europe, Signode Asia, both grew base revenues at approximately 15% in the quarter.

These businesses continue to be helped by increased demand for both consumables and machinery, and operating margins for these businesses also expanded significantly in the quarter.

Food equipment base revenues were 7% in the quarter, with much of the activity emanating from Germany, the UK and Asia.

Finally, our welding business grew 15% in Q1, with strong contributions from both Europe and Asia-Pacific.

This concludes my formal remarks, so let me reintroduce -- or let me introduce our CFO, Jon Kinney, who will discuss earnings forecast for the second quarter and full year.

Good afternoon everyone.

We're forecasting our second quarter income per share from continuing operations to be within the range of $1.30 to $1.36 per share.

The low end of this range assumes 4.7% growth in base revenues, and the high end reflects 6.7% growth in base revenues.

If we hit the midpoint of this range of $1.33 per share, we will be 15% higher than last year.

For the full year, our forecast range is between 5.06 and 5.20 per share.

The base revenue growth supporting this forecast is expected to be within a range of 4.6% to 6.1%.

Overall, if we hit the midpoint of this range, full year income from continuing operations of $5.13 a share would be 17% higher than last year.

Our 2005 forecast was increased 7 cents from our last forecast of 5.06 per share.

Three issues account for this increase.

On the positive (ph) (technical difficulty) a 50 basis point reduction in the tax, rate, and favorable translation gains due to the weaker dollar, resulted in a total impact of $0.12 per share upward.

On the negative side, as has been mentioned, we adopted the expensing of stock options and this reduced the forecast by $0.06 per share.

Other assumptions underlying this forecast are our exchange rates would hold at current quarter levels;

Acquired revenues of 700 to 800 million; restructuring costs of 30 to 50 million; leasing and investment income of 65 to 75 million, which is lower than 2004 by 55 to 65 million; and a tax rate of 32.5% for the year.

Okay, John, back to you.

We will now open the call to questions.

Once again we ask for your brevity in asking questions.

(OPERATOR INSTRUCTIONS).

Ann Duignan with Bear Stearns.

Just two quick questions.

The first one is can you give us a little bit more color on the non-volume-related costs in Europe in Specialty Systems, specifically what the accounting issue was and what we should forecast going forward for that business?

The accounting issue was sloppy accounting.

This is a relatively small business unit, about 20 million in revenues.

And the -- (technical difficulty) it was created about three years ago through the combination of a few other business units.

Unfortunately the Controller (technical difficulty) put in charge there was not up to some of the complexities, particularly associated with -- this was kind of a multi-country set up, and he had a fair number of exchange issues that he had to deal with and wasn't dealing with them, and certainly wasn't speaking up.

I think we got a somewhat early warning through what we call a high spot review by our audit team that things were a bit of a mess.

But we didn't have specifics and the Controller was left with (technical difficulty) things to do so we could determine just what the impact was of such basics as reconciling his receivables and his inter-company accounts and things that he wasn't doing.

Once we determined the magnitude, through both our own internal audit staff as well as an outside -- or a fraud-related type company, took a heavy look at it and came away believing that one, we don't believe that there was any detailed patience (ph) on cash or any intentional collusion between General Manager and Controller to prop up earnings.

I think we had a weak Controller that got (technical difficulty) and was afraid to speak up for whatever reason.

And he is gone at this point.

Non-recurring?

And in terms of -- we are sure I think at this point that 8.5 million coverers the exposure and will not repeat next quarter.

So it was an 8.5 million hit?

Yes.

And you are pretty confident it will not recur?

Yes.

Okay.

Secondly, just to follow-up, I'm just curious as to why you chose to adopt the options expensing rule this year when the SEC just announced that they're postponing their requirement until most likely the first calendar quarter of next year?

We looked at this new accounting rule, it obviously wasn't a surprise.

It has been talked about for many years now, and we felt it wasn't going away.

And we looked at how it impacts us as a Company.

We do not have a large amount of stock options outstanding, but why not just do it now, get it over with.

Doesn't have much of impact on this year, and next year will be comparable rather than talking about why we're not comparable for the next couple of years on this.

So $0.06 a share for the current year and it should be about flat this year versus next year.

Yes, it will make you guys look good next year with everybody else is implementing it for the first time.

Not that we thought of that. (laughter)

Just a real quick question on Wilsonart.

Once again kind of sluggish growth there, particularly on the flooring.

Again should we be getting concerned that that business is just losing share and not performing up to expectations, or can you give me a little bit more color that would reassure me that there is nothing fundamentally wrong with that business?

There’s two pieces to the business, as you well know.

The big piece is the basic laminate business, and we're actually seeing some signs there that things are starting to pick up -- lines starting to pick up (technical difficulty) construction activity starts to ramp up a bit.

To your question on -- the answer is no, we are not concerned about the laminate piece of the business.

Nor do I think we are particularly concerned about the flooring business.

They have had some quarters in the past where they had some very, very strong numbers.

And more recently, the sales have fallen off a bit but I don't think there's any secular issue related to flooring in the marketplace right now.

We fully anticipate their results to get better as the year progresses.

They have some nice products they continue to develop, and we have full (indiscernible) confidence in their ability to improve their results.

Deane Dray with Goldman Sachs.

On the base business number of 6.1%, how much of that can you say was price?

It's not a lot.

We (technical difficulty) -- it's not something that we're getting regular reporting on from all 600 business units. (technical difficulty) (indiscernible) just last quarter that it was in that 2-point range, 2 percentage point range.

Probably in that range.

If I heard Ron correctly, when you talked about recovering raw material cost, did you say that you have now been fully recovered in terms of offsetting raw material costs, but just not above that so you're not covering the margins?

Is that correct?

Yes.

We believe that we have recovered the cost.

However, is not there in the margins yet.

Good.

And then last question related to the base business estimate for '05, it looks as though you have lowered the top end from 6.4 to 6.1.

Is that reflection of any -- can you provide any color there in terms -- is it geographic, is it end market, is it auto?

What has caused you to tweak that down at this stage?

It is primarily international.

And it crosses a lot of different businesses, but there was a slight downward pressure on their forecast.

It is not an automotive issue?

No.

Gary McManus with JP Morgan.

On this non-volume-related cost, if I take 11.8% to last year's operating income, I come up with around $53 million?

Is that the dollar impact, roughly?

Yes, it is three things.

We've got the 6.5 million option expense in their, we have 8.5 million accounting issue in there.

And our margin impact, which we think is in the neighborhood of 130 basis points, would be probably close to 40 million.

Just so I understand what that is, I thought that's like raw material cost not fully recovered by pricing.

But in an earlier question, you're saying you are getting pricing -- (multiple speakers) raw material cost?

That is margin decline.

Year-over-year margin decline is what is in those numbers -- in the non-operating area.

So it is -- on the upside, our leverage is based on what it should be going (technical difficulty) last year's margins, and what is in the second line is the shortfall from last year on margins due to pricing or due to higher overhead costs, such as these costs we mentioned (technical difficulty) the share repurchase with the option.

I know, but even if I strip out the options and the European food equipment accounting, you still had as you say 35, 40 million or something, and you only had 10 million I believe and the fourth quarter '04.

So it really (technical difficulty) deteriorated sequentially and I'm trying to --.

Recall in the fourth quarter we had a 25 million inventory step up.

So I should strip that out and still (multiple speakers) -- you're running about the same level in the first quarter as you were in the fourth quarter, ex these non-recurring stuff?

Is that right?

That's right.

And what do you expect for the second quarter and full year?

What is implied in your guidance?

The second quarter our -- at the very bottom line, our incrementals and the increase in income versus the increase in revenue in Q1 was 8%.

In Q4, if you strip out that inventory adjustment, the incremental was 10%.

If you add back the option issue that is in our numbers in Q1, are incremental were 10% if you -- in the bigger one.

The issue we haven't talked about at all is Leasing and Investments.

That decline, if you back that out our incrementals are 15.

So sequentially, we're going from 10% and truly talking manufacturing operations, we're going from a 10% incremental in the fourth quarter to 15% in Q1.

In Q2 we're looking in the neighborhood of 18% and in the second half of the year, albeit the comparables are getting easier in the third in fourth quarter because we were suffering some of these pricing issues and cost issues, we should be north of 20% (ph) (technical difficulty) on incrementals in Q3 and 4.

And that is just better pricing relative to raw material cost -- the improvement in incrementals you expect for the year?

Primarily.

Primarily, yes.

And just one last question.

What is your share count assumption for the second quarter and for the full year?

It is -- we have -- our average shares that we use for the calculation of earnings per share were like 290 million -- 290.6 million for the quarter (technical difficulty) Q2 and 289 million for the year.

Joel Tiss, Lehman Brothers.

Can you give us a sense of why the free cash flow was down in the quarter?

It is down slightly in the quarter from I think 278 to 250 million, and part of it is just a function of increased working capital, which is pretty typical in our first quarter year-on-year.

That is probably the biggest piece of it, so (indiscernible) -- higher inventory levels.

Our second quarter is typically our strongest quarter, so we're building up inventory levels, and it is just a little bit higher level activity than last year.

That is my second question.

Can you talk a little bit more about the inventory levels you are seeing in some of the different channels?

I am sure I'm sure you can't measure all of the different channels, but can you give us a sense of what's out there versus demand if we're starting to create a little bit of extra inventory sort of industry level?

I think that -- we don't have a whole lot of visibility on that.

I think our inventory levels are about where we would expect them to be given the level of activity, and those decline as we go throughout the year here.

John Inch, Merrill Lynch.

I just want to go back to the guidance -- the $0.07 midpoint range.

You've got $0.06 of options incrementally, and then if you take the lower tax rate and then your L&I contribution by 5 million, that is about $0.05 to $0.06.

So I am just thinking those two wash.

You mentioned translation (technical difficulty) understand John or Jon, how much of this incremental $0.07, because you said translation was going to be higher--?

Firstly, what was translation in the quarter?

What was your yearly assumption?

What it is it now.

And then assuming the rest of this is just the base business if that is correct?

Our translation -- I will have to check on that, what it was versus what it came in.

I know for the remaining (technical difficulty) translation is up $0.08 for the last 3 quarters of the year compared to where -- we don't anticipate increases or declines in translation.

We generally forecast our numbers using end of year rates, so we are $0.08 higher for the last 3 quarter.

That is what I was not clear on.

The dollar I didn't think changed that much.

Did -- you're saying the $0.08 from where we were at the end of the fourth quarter is an 8 incremental cent contribution because of a weaker dollar or your assumption changed?

Yes.

So going back to my $0.07, the midpoint of the range, if options washes with tax and higher L&I, the rest of this is just translation?

(multiple speakers) a little bit on the tax rate.

I'm sorry, I took tax and L&I as one bucket of $0.05 to $0.06 (multiple speakers).

There's other changes going on we haven't -- there's nothing of much consequence.

Those are the three principal things.

My question that is just -- the quality (ph) is then what is the contribution from the base business, and frankly what is the contribution, if any, from narrowing the gap on pricing versus the raw material?

And I don't understand if these are all washing, then shouldn't the guidance even be little higher or may be no?

The contribution from the base business is in that second quarter -- is about $0.07.

And it is coming from higher incrementals and -- but we've got that corresponding issue of Leasing and Investment dropping 30 million year-over-year in the second quarter, and that is taking $0.07 out.

It only took out $0.03 in Q1.

But your Leasing and Investment guidance for the year, didn't it go up 5 million?

I thought it was 60 to 70 as of first quarter.

Yes, that is not happening in Q2 though.

It is happening in Q4.

Okay, so net net you're talking $0.07 from base.

What about then the pricing -- what sort of incremental (multiple speakers) '04 and '05 from pricing and closing (multiple speakers) raw material.

In base manufacturing, that $0.07 increase is -- primarily that improvement is a combination of -- we grow faster (technical difficulty) -- overall a larger increase in revenues.

But it is -- so it is a little bit of growth and it's -- the rest of it would be pricing.

Just lastly, any of these businesses as you look out --North America, Europe, rest of world, materially have changed in terms of your outlook for '05 versus what you thought at the beginning at the year, construction, commercial construction?

I guess auto we know is weaker.

What are some of the offsets, if any?

I would agree that auto is a little weaker than we had expected.

Construction probably is going to be a little bit better than we thought, given some of the assumptions we had.

Clearly even with the March new housing start numbers that came out today, the housing starts being down 4 to 5 for the year, probably is going to be a stretch.

Probably -- we would -- probably are on our forecast a little bit more negative, and I think that's probably going to be a little better than that.

I think there is some upside on the construction side of the world, both on the renovation piece of it and on the commercial construction piece of it.

And I think that new housing will remain fairly constant in terms of our prediction, probably a little bit of upside there.

I think anything else has really changed dramatically.

Food equipment is probably a little bit better than we thought it was going to be in North America, at least through the first 3 months.

We are seeing some increase in volume and a little bit better pricing.

So that is a bit of a surprise.

But nothing else on the system side of the world is dramatically different.

Welding perhaps is a little higher than we thought, but not growing nearly as fast as it did in '04 because the comps are little bit more difficult.

But welding is still throwing off some pretty strong numbers.

I can't think of anything on the downside other than what we talked about in North American auto and actually we're factoring in some decline there.

I don't see anything else that portends some real dramatic declines.

Jon mentioned international going down a little bit.

That seems directionally what we are seeing in some of our international businesses, but nothing dramatic.

Just curious.

We haven't had a weak Europe and certainly Emerson (ph) called that weak Europe.

It sounds like your European businesses are holding in better.

I think so.

They're starting to move down a little bit.

But as we have always said, our European businesses never improved that much nor did they go down that much.

So the band with a performance -- there's not a big gap between up and down there.

I think the North American piece, obviously there's much greater propensity for increases or decreases there.

But we're not seeing it in North America at this point.

Stephen Weiss of Merrill Lynch.

I wanted to know from you guys -- could you provide some caller as into what processes you guys have (technical difficulty) to reduce your raw material costs and your facilities costs for the remainder of the year and going into '06?

Ongoing?

It is an ongoing activity.

Particularly on the raw material side, we do not have a purchasing group here at the corporate office.

It is a centralized activity, but our major pockets, namely paper in the Wilsonart businesses, and stainless steel in our food equipment businesses, and resins in our automotive Signode businesses, those are all major chunks.

And we have small teams, cross business teams that work directly with our suppliers on a continuing basis to monitor and measure --.

What are they doing to ensure they are always getting the lowest cost from their suppliers, like in the resins area?

We certainly felt this steel increase rather severely because of our offshore purchasing.

And I think that is a good example of being willing to go anywhere in the world to get our materials at a competitive cost.

David Bleustein, UBS.

A couple of little ones.

First, is the earnings impact of the 750 million repatriation in your guidance at all?

No.

If you remember, when the new tax law came out last year we looked at it and looked at how much we could bring back.

And we booked a $25 million reserve for that in fourth quarter of 2004, which would cover us if we brought back 750 million and this tax law gets revised by the Technical Corrections Bill.

So if we do bring back the 750, there's no additional incremental effect on the tax rate.

There isn't another 10 million bucks?

No.

Second question.

Were your input costs in the first quarter sequentially higher or lower than the fourth quarter?

And what does the sequential change look like for Q2?

If you remember, we talked about a raw material cost last year, and the idea of it comes from 600 different places.

So this year we have started looking a little bit at purchase price variances, which are the difference between our standard costs and our actual costs, and tried to roll that up a little bit to get an idea directionally where we are going on a worldwide basis.

In the first quarter, it was about flat worldwide, and I think a little bit of decrease in steel but it is offset by a little bit of increase in resin.

But really no significant change in maternal costs, and that is really I think what we are predicting in our forecast the rest of the year.

Roughly flat, you are assuming?

Yes.

But clearly not going up.

Finally, outside of automotive any sense for April levels of activity?

No.

At this point, no, it is too early.

I always hesitate to try to qualify or give you qualitative input as it relates to North American businesses because we just -- we're so diverse and we have so many different businesses. (multiple speakers) We'll beg off that question.

How about Europe in March?

I think that Europe in March was a little weaker than what we had seen before, but consistent with what we're talking about in terms of forecasting for the rest of the year.

Some moderate decline.

Brian Langenberg with Langenberg and Company.

A quick clarification, then the real question.

The clarification, you mentioned basis points being down -- I'm sorry, margins being down 200 basis points in auto.

Was that just for the steel-related auto?

Just the metal fastening piece (multiple speakers).

Thank you for that.

The question for -- (technical difficulty) on auto, your base revenues were down 1.

How much of that was volume versus price?

And then can you give us a broad brush review of perhaps how much of your auto portfolio is sport utility kind of stuff, gas hogs, and let's call it normal cars within EP North America?

Again, I can't precisely break out the difference between builds and our base revenues, but our sense is that we probably were able to grow our penetration at a rate of about 4% in the quarter.

The remainder would be some price recapture.

So that 4% I think is fairly consistent with what we have seen over the longer-term in North America, but again those are not precise numbers.

We do not capture this data on an ongoing basis.

So roughly speaking, if we were to think of this as -- I'm sorry, just trying to get this.

Builds are down minus 9 and the base revenues are down 1, and (technical difficulty) volume is affected by penetration --(multiple speakers)

And mix, too.

And mix, okay.

If we were to take a guess at price, and you can give me -- give us a range just to have an idea(multiple speakers).

A couple of points due to price.

A couple of points?

Okay, thank you.

Mark Koznarek with Midwest Research.

A question on the acquisition side initially here.

It looks like the price you paid for these properties is up pretty substantially from the 2004 average.

And I'm wondering if that is sort of a new level of price for deal activity out in the -- out there now, based on more competition or what have you?

I think if you go back and look at us historically, on average we're still paying it about 1 time.

We're up to about 1.25 in this particular quarter, principally because we had a couple of bigger deals that we paid a little bit more for in this cycle.

But I don't think it is predictive of what we're going to pay on an ongoing basis.

We don't think we should take your 700, 800 target and apply that 1.25 times?

No, I don't.

And in fact, if you go back to last year you will see that the quarter is varied based on what we paid.

Some quarters were a little bit more than one time, some were a little bit less.

So in the near-term pipeline, does it look like we will get back toward that 1.0?

I would expect it to be closer to 1.0 then certainly 1.25.

Yes.

I just have a quick one on Wilsonart.

What is the secret sauce that the international guys have that the domestic business does not, given the momentum that it is generating over there versus really the plodding activity over here?

Is there any best practice sharing or any kind of recalibration you can do to boost the top line of Wilsonart?

I think part of the advantage of the international people have is that it is a smaller percentage of the business and they're starting from a smaller base, so their growth numbers look better.

But having said that, they clearly identified some areas in terms of product that are very appropriate for the geographies.

We have talked about what is going on in China, the build off there in institutional, specified high pressure laminate for institutional use.

And they have gotten very nice high margin on that.

So they're I the right business at the right time with the right product in an economy that is growing very rapidly.

We have made some real progress in the UK and in Germany, too, in restructuring a couple of businesses there that were pretty weak when with first bought them.

So yes, growth has been nice but I don't think is necessarily instructive of what we can do on the North American side.

Clearly North America business, 85% of total Wilsonart revenues, they are still basically a basic -- high pressure laminate producer, and a lot of their fortune is still tied to commercial recovery.

And as I said, we are seeing some early signs -- nascent signs of recovery but it is still not there yet.

So I think that is what I would -- that is the thing I would point to most in terms of North American activity and prospects for North America.

I think back at the analyst meeting you said 4 to 5% target for Wilsonart North America for the year.

Does that still feel right?

I don't know.

Clearly the thing started off a little slow, but if commercial construction can continue to grow at a rate of 3 to 5 and maybe improve a little bit more, clearly their numbers are going to get better.

Andy Casey with Prudential Equity Group.

A question on the amortization expense.

While it is down versus the first quarter '04, can you explain why it is up sequentially in 1Q from 4Q?

You're talking the amortization of goodwill and intangible assets.

Yes, we are required to once a year measure impairment of goodwill and intangibles, and we selected the first quarter of each year to do that.

Typically you will see some amount of impairment when we have 600 different businesses, 300 of which have goodwill and intangibles on it.

We are always going to have some.

I think this year, this quarter we had about 12 million of impairment expense, which we did not have any in the fourth quarter of last year.

And then on the 8.5 million of the accounting issues in Specialty Systems international, where did that fall in the P&L?

Was that all in SG&A?

Yes.

Robert McCarthy, Robert W. Baird.

Just a follow-up to Andy's question.

Is there -- can we use a 32.5% tax rate on that $8.5 million item?

Yes.

Unless I misunderstood what you were talking about in terms of when you were going through the businesses, you said the industrial packaging North American business was up 4%?

Is that right?

North American industrial packaging being up 4%?

Yes.

Did significantly better or worse than that?

That strikes me to be a significantly lower number then we have heard for a while.

It is.

And I think I addressed it in my comments that their March was slower than -- they had been running at a rate of about 10 to 15 in January and February, and things slowed down a little bit for them.

Part of it we think is comp related.

They have some very -- extraordinarily difficult comps on a year-over-year basis.

The Signode people believe that April on go forward basis that their numbers are going to probably be more like what they saw earlier in the year.

Can I get someone to be a little more -- provide a little more information about what your acquisition pipeline looks like?

I understand -- consistent with 600 to 800 but -- there's nothing -- if we just go from the first quarter, for example, I would extrapolate from that you're going to be at the low end of the range.

Is there any reason -- do you have enough in there to dissuade me from taking that position, or --?

The pipeline is 5 or 6 months of visibility.

Right now the pipeline plus what is accomplished would probably be at the low end of the range.

But I don't think that needs a whole bunch at this time for the year -- just at the end of the first quarter.

Meaning that there is plenty of time for that pipeline to have more added into it that could be done this year?

Absolutely.

David Raso with Citigroup Smith Barney.

Did I hear correctly that the incremental margins for the manufacturing company were noted as 15% for the first quarter?

I am coming up with 12% based on the reported numbers.

We said that the incremental for the total Company was 8, and then we backed out the option expense -- backed out at the (indiscernible) 10, and then we backed out L&I, and that got us to 15.

I am getting 12.

And if I add back the 6.8 -- are you also pulling out the 8.5?

No.

I'm still not quite getting there, but I guess looking at the rest of the year, the stronger incremental margins, the re-class in the first quarter of '04 -- do you have the rest of the year?

On a profitability (indiscernible) SS&A money gets swung over to EP North America.

Are the numbers good for the rest of year trying to do this analysis?

Typically in the first quarter is when business change around a little bit, and I think there were some minor re-classes.

I think there's anything significant there.

So I think probably using the same kind of assumption would be reasonable.

Just to be clear that there was $5 million -- if my number is right, 156 million of profit in SS&A a year ago first quarter.

The re-class today brought it down to 151 and it brought it up into Engineering North America?

Yes.

Are those changes consistent throughout the year?

Yes.

They will stay -- is your question will they stayed in those classifications?

Yes -- I'm just trying to do the analysis.

The rest of my model, second, third, fourth quarter for the operating profits by division are I guess I stale.

Are the re-class of those divisions going to be provided?

They are pretty de minimus.

It is really just one business that has a North American piece and an international piece that really changed EP during the changes at the beginning of year.

The acceleration of the incremental margin -- obviously SS&A is a big incremental margin business.

The acceleration of the total manufacturing company's incremental margins, is it further acceleration of SS&A?

Or do you see SSI bouncing back?

Even if you add back the food adjustment, we're still only at 3% incremental margin for Specialty Systems International.

I'm just trying to see where's the delta to get the higher incremental margins.

I know you mentioned back half last year had some pricing issues in auto -- in EP N.A.

But can you just take me through where do we see the acceleration in incremental margins?

I don't have the forecast broken down by segment available.

Maybe John, you could provide it or talk the that a bit more after the meeting.

Coming back your question on the incrementals, we had 364 of incremental revenues in Q1, 30 million of the incremental income.

If you add back 7 million for the options and 16 million on the downward L&I, you're up to 53 million of incremental income and that is 15%.

I would venture to say going from 15 to 18 is going to be across a lot of different businesses, probably in North America more than international, because North America has suffered more relative to pricing than our international businesses.

And the revenue increase was 380 million, correct, as per the press release?

364 million.

Yes, 364. (multiple speakers).

364, right.

I'm looking at 380 right in front of me here, I am just trying to understand. (multiple speakers)

Can we move on?

Ned Armstrong, FBR.

As far as any of the countries that you do business in, are you noticing any country that is weak or appears to be getting weaker?

I think the consistent answer we give to that is not to pick on our friends in Germany, but the German economy doesn't seem to have much legs these days.

And while we have a few businesses that are doing better than we expected, I would say the overall economic activity in Germany is still, on a relative basis, probably the weakest among our European countries.

Would you put France in that same ballpark, or are they a little bit better?

I would say France in showing better improvement.

And I think we are much more bullish on France right now than we are on Germany, not to draw political distinctions but --.

Walt Liptak, KeyBanc.

I will be brief.

The one follow-up I had was that Signode -- you said you thought that that was going to reaccelerate after a slow March in the second quarter.

Is that right?

And why would that be the case?

I think that the business that they saw -- in the first two months of the year, Signode business was growing at a rate of 10 to 15.

That fell off fairly significantly.

There are still positives, but single digits in the month of March.

The order book looks pretty strong right now.

Equipment activity looks reasonably good.

Consumable activity, last I heard, through April was reasonably good.

So I think that we have seen an acceleration.

I can't speak to the particulars of the actual fundamentals in terms of March -- exactly what happened there.

Clearly they were hurt in some areas.

Some of it may be weather-related.

I noted what happened on the new housing front -- in new housing starts.

Clearly that is a big end market for the Signode business, and that could have affected them in March.

I'm only speculating right now.

That's fine.

But the data on a looking forward looks more positive.

I always caution you guys, we try not to get too caught up in what happens in a particular month.

We're looking at trends on a much longer basis.

That's fine.

I just wanted to ask the question.

Is Europe and international still accounted on a one month lag, or is that adjusted so that when you closed out your quarter, it was at the end of March for your international, especially Europe?

All of international, including Europe, except for Canada and Mexico, are on a one-month lag.

So the number -- the base number that you showed for international, that was all through February?

Correct.

That's correct.

And then to go back to the Europe issue then, in March maybe you said you might have seen some weakness.

I wonder what sectors you might have seen that weakness?

I think I reported in the numbers, when we look at international that our industrial plastic areas were relatively weak in Europe.

Our auto business actually was a little weak on the European automotive side.

Trying to think what else.

Construction was a little weaker than we anticipated due to weather.

I think those are big enough pieces right there to move the needle a little bit.

Mark Howell (ph), Spectrum Advisory Service. (ph)

I have a little broader question and I know Jim, you probably don't want to speak for somebody else, but from your discussions with your named successor, Dave Spear (ph), do you have any sense of any thoughts that he may have that would modify what you all are doing now?

Does he have any particular interests that may make a small shift in strategy?

Unfortunately, Jim Farrell, our CEO, of whom I think you are referring to, is not here on the call with us today.

I had the opportunity to travel with Mr. Spear more recently, and I think the answer to that question is that I think David's background in the construction area -- he grew up in the construction area -- which has a very sizable international piece.

I think that the short answer to the question is I think he looks and international as a real growth opportunity for us, just based in his comfort level with the businesses he had on international side.

And areas like Asia would be ripe for either acquisition activity or further expansion of businesses as our customers go to those particular areas.

I think that is the way David would answer that question.

Robert McCarthy with Robert W. Baird.

Two small follow-ups.

One is really a statement.

I couldn't agree more with Dave Raso.

John and Jon and Ron, it would be extremely helpful to everybody going forward and a significant timesaver on these earnings (ph) (technical difficulty) release (technical difficulty) if you could give us the revised segment results for the last three quarters of the year sometime before the next quarter is reported, so that we can adjust and have the appropriate basis of comparison as we go into the quarter, and for use and forecasting.

My question -- the 8.5 million European accounting issue item was not, I gather, any part of your forecast coming out of last quarter?

No, it was not.

Never mind.

That answers it.

Thank you.

At this time there are no further questions.

We want to thank everybody for joining us on the call today, and we look forward to talking to you again.

Have a good day.

This concludes today's conference.

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