Illinois Tool Works Inc (ITW) 2005 Q4 法說會逐字稿

Welcome to the ITW 2005 fourth quarter and year-end earnings call.

At this time, all participants will be in a listen-only mode. [OPERATOR INSTRUCTIONS] Today's call will be recorded.

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

Now, I would like to turn the meeting over to Mr. John Brooklier.

You may begin, sir.

Thank you very much.

Good afternoon, everybody, and welcome to ITW's fourth quarter 2005 conference call.

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

With me today is Ron Kropp, our VP and Controller for Financial Reporting.

We're pleased you could join us for today's call.

By now most of have you seen our fourth quarter results, which we would describe as strong.

Revenues grew 8%, operating income increased 11%, net income rose 12%, and diluted net income per share grew a robust 17%.

Our margins also hit 18.1% in the quarter, a 60-basis point improvement, versus the prior year.

Ron will give you more details on our Q4 financial performance in just a few moments.

Here is the traditional agenda for today's call: Ron will join us shortly to provide more details about our fourth quarter results.

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

Ron will then address our 2006 full-year and first quarter earnings forecast, and associated assumptions.

Finally, we will open the call to your questions.

Please note, we continue to ask for your cooperation as to the one question, one follow-up question policy.

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

We are also asking the people who are asking questions that they pertain to the Company and its results, and we will monitor that very closely.

First, a few traditional housekeeping items.

I would like to remind everyone that this 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; base revenue growth; potential acquisitions for full-year 2006; 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 on the slide and are part of our form 10-Q for the 2005 third quarter.

Moving on to the next slide, the telephone replay for this conference call is 203-369-0128.

No pass code is necessary.

The playback number will be good until 12 midnight on February 14, 2006.

As always, you can access our webcast Power Point 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, who will cover the financial highlights.

Thank you, John.

Good afternoon, everybody.

The highlights for the fourth quarter are as follows: Revenues grew 8% over the fourth quarter of last year.

This growth rate was 200 basis points lower than the 10% growth rates for the second and third quarters of this year.

Operating income was up 11% versus the prior year, due primarily to improved margins for the base businesses.

Operating margins were up 60 basis points; diluted income per share was 17% higher; free operating cash flow continued strong at $409 million; and return on invested capital was 20%, which was 100 basis points higher than last year.

Now, let me give you some details.

Our 8% revenue growth was primarily due to three factors: First, base business revenue grew 3.6%.

This growth rate was 50 basis points lower than the third quarter.

Secondly, acquisitions added 5.5% to revenue growth, which was 160 basis points higher than the third quarter.

Third, currency translation reduced revenues by 0.7%, which was unfavorable by 150 basis points versus the third quarter currency effect.

This was the first quarter that we've experienced an unfavorable currency effect since the first quarter of 2002.

Overall, our 8% revenue growth was a result of solid but slowing base revenue growth and the larger impact of acquisitions, partially offset by unfavorable effective currency translations.

Our 3.6% year-over-year base revenue growth was made up of a 5.4% increase in North America, which was consistent with last quarter, and a 1.1% increase internationally, which was 70 basis points lower than the third quarter.

John will provide more details on the operating results when he discusses the operating segments.

Operating margins for the fourth quarter improved to 18.1%, an increase of 60 basis points over last year.

This margin improvement is primarily due to an increase in base business margins of 60 basis points.

An 80-basis point margin increase, related to operating leverage, was slightly offset by a decrease of 20 basis points for non-volume-related items.

Although we have continued to recover higher raw material costs through price increases, the unfavorable non-volume effect of 20 basis points versus the favorable effect of 70 basis points last quarter was due mainly to favorable inventory adjustments of $25 million in the fourth quarter of last year versus the minimal effect for inventory adjustments this year.

In our Leasing and Investment segment, income was $9.6 million higher than last year, mainly due to higher income related to the sales of mortgage properties.

As expected, the first mortgage transaction was liquidated in the fourth quarter, resulting in cash proceeds of 150 million.

In addition, due to the planned runoff of L&I assets and our desire to utilize free cash flow for core manufacturing activities, we have decided to discontinue reporting this investment activity as a separate segment starting in the first quarter of 2006.

Income from these investments will be reported as nonoperating income going forward.

In the nonoperating area, interest expense was higher by 7 million versus last year, due to the effect of 2005 acquisitions.

Other expense was favorable by 5.4 million, primarily due to higher interest income.

Fourth quarter effective tax rate was 30%, as the full-year rate for 2005 decreased to 31.5% versus 32% in the third quarter.

Turning to our invested capital, total invested capital increased 114 million from the third quarter, primarily due to acquisitions.

Inventory and accounts receivable levels decreased slightly from the third quarter to 1.7 months on hand, and 57.3 day sales outstanding, respectively.

Capital expenditures for the fourth quarter were $77 million, and depreciation expense was 74 million.

On the financing side, we decreased our debt 133 million from last quarter, primarily due to strong free operating cash flow and cash repatriated from overseas, partially offset by cash used for acquisition.

As a result, our debt to capital ratio decreased from 16% to 14%.

During the fourth quarter, we repatriated approximately $350 million of foreign cash back to the U.S.

For the full year, we've repatriated approximately $1.4 billion.

Our cash position increased 19 million in the fourth quarter, mainly because our strong free operating cash flow of 409 million and proceeds of investments of 174 million were utilized for acquisitions of 314 million, dividends of 92 million, and debt repayments of 131 million.

Our fourth quarter return on invested capital of 20% was 100 basis points higher than last year.

This increase was mainly the result of our strong base business operating performance, as after-tax operating income increased 11% while average invested capital only increased 6%.

For the full year, return on invested capital of 18.7% was 60 basis points higher than last year.

Considering our cost of capital is in the 9 to 10% range, we continue to generate economic profit.

Finally, on the acquisition front, we acquired five companies in the fourth quarter which had annual revenues of 292 million.

For the year, we paid $627 million for 22 companies with annualized revenues of 584 million.

Based on a very strong pipeline of potential deals, we are forecasting 800 million to a billion of annualized acquisition revenues for 2006.

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

Thank you, Ron.

Before I address our manufacturing segments, let me spend just a few moments highlighting North American and International economic data we track and regularly share with you.

Clearly, there continues to be a dichotomy between U.S.-based end marks and those internationally, particularly in Europe.

While declining from earlier months, the North American ISM index continues to be reasonably strong at 54.2% for December and the ISM new order index came in at 55.5% in December.

Add to that an industrial production -- excluding technology -- number of 2.4% growth in December of 2005, and you have a backdrop for what we believe will be reasonable North American growth.

The news on the International side is somewhat less bullish.

U.K. industrial production declined 2.4% and France grew a minimal 1.3% in the most recent reporting period.

And the Euro zone ISM indexes continue to hover slightly above the 50% growth/no growth level for the last number of months.

With that as backdrop, let's review our four manufacturing segments.

Starting with North American Engineered Products, segment revenues increased 10.1%, and operating income grew 19.9% for the fourth quarter.

Operating margins of 17.1% were 140 basis points higher than the year earlier period.

Margins continued to benefit from price recapture in the quarter on raw material increases from earlier in the year.

Looking more closely at fourth quarter revenues, the 10.1% growth in top line consisted of the following: 2.8% from base revenues; 7.1% from acquisitions; and 0.2% from currency translations.

Moving to the next slide, let's take a closer look at the business units and associated end markets in North American engineered products.

Total construction base revenues declined 1% amid slowing in demand for some Wilsonart products.

Specifically, Wilsonart-based revenues declined 7% in the quarter, largely due to volume issues related to the flooring business.

Wilsonart continues to focus on new product development in the flooring area to help address these issues.

We had better results from our ITW Construction Tool and Fastener units.

These businesses grew base revenues 5% in the quarter.

High-end market, commercial construction increased 5%, new housing grew 4%, and renovation was up 5%.

We continue to watch our commercial construction business units for meaningful signs of improvement.

The good news is that we continue to get penetration in the commercial sectors since the latest dodge data indicates that total commercial building, that is square footage put in place, declined 2% on a year-to-date basis through November of 2005.

Our growth in new housing was impressive, given that new housing starts declined 6% in December, and housing permits were down 1% in the same month.

Moving to Automotive, base revenues actually increased 5% in the quarter.

Our strong performance in the Automotive sector underscores our ability to recapture raw material price increases over the past number of quarters as well as to continue to penetrate targeted OEM and tier customers.

Our top line performance in Auto looks especially strong when you note that Big Three auto production was down 1% in the quarter and decreased 4% for the full year.

Components of the fourth quarter auto production decline include: GM actually increased production 1%;

Ford saw a decline of 7%; and Chrysler increased builds 2%.

Our growing success with the new American -- North American new domestics, which include Toyota, Honda, Nissan, and Hyundai, also helped our performance.

New domestic builds were up 15% in the quarter.

Inventory levels for the Big Three worsened to 77 days on hand at December 31, from 69 days on hand at September 30.

Specifically, GM inventories were at 71 days in December versus 58 days in September;

Ford inventories were at 79 days in December versus 74 days in September; and Chrysler inventories were at 86 days in December versus 83 days in September.

New domestic inventories were at an impressive 48 days versus 43 days in September.

Looking ahead, we believe Big Three builds will be down somewhere in the 2 to 4% range for full year 2006, with Ford and GM leading that decline.

In our Industrial Products category business units, base revenues grew 6% in the fourth quarter.

Nearly all of the units in this category posted positive top line in the quarter, led by Valeron Strength Film, which grew 15%, Fibre Glass-Evercoat grew 14%;

Minigrip/Zip-Pak up 11%; and engineered polymers up 10%.

Moving to the next slide.

On International Engineered Products: for the fourth quarter, segment revenues grew 3.6% and operating income increased 6.7%.

Most of our business units in the segment saw base revenues slightly up to slightly down in the quarter.

Even with the modest top line growth, operating margins of 16.4% were 50 basis points higher than the year-earlier period.

Taking a closer look at the top line, 3.6% growth in segment revenues consisted of the following: 0.5% from base revenues; 4.7 from acquisitions; and 1.6% decline from currency translation.

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

Looking at total construction, base revenues increased a slight 1% in the quarter.

By geography, fourth quarter base revenues were as follows: European construction grew 2%;

Austro-Asia declined 1%; and Wilsonart International decreased 2%.

In Europe, construction was aided by growth of Paslode products in France and in Nordic countries.

In Austro-Asia, base revenues declined modestly due to slower demand for commercial and retail products in Australia.

And Wilsonart International saw weaker demand for products in the U.K. offset growth growth in Asia and Germany.

Our Automotive business units in Europe used price recapture to generate a 1% decline in base revenues, even as production by OEMs fell 3% in the quarter.

For the quarter, production was as follows: Daimler-Chrysler was down 9.6%;

Renault was down 6.7%;

Citroen/Peugeot was down 5.2%; and GM Group was down 2.7%.

On the plus side, BMW was up 5.7%.

Looking ahead, we continue to believe that European auto production will be flat for full-year 2006.

The remaining part of the segment is made up of our industrial base business units.

These units produce base revenue growth of 2% in the quarter, with industrial plastics growing 2%, polymers increasing 1%, and electronic component packaging growing 13%.

Moving to the next slide, for North American specialty systems, for the fourth quarter segment revenues increased 12.4% and operating income grew 11.2%.

Operating margins of 18.6% were 20 basis points lower than the year-earlier period, thanks largely to the favorable inventory reevaluation adjustment in the prior-year period.

Focusing on the top line, the 12.4% growth in revenues consisted of the following: 7.7% for base revenues; 4.4% from acquisitions; and 0.3% from translation.

This longer cycle segment continued to produce strong results, even as it contended with very difficult growth and profitability comparisons from a year ago.

We had strong base revenue of base income performance by a number of units in the segment, including welding, food equipment, packaging, and finishing.

Welding's base revenues grew 14% in the quarter as that business continued to benefit from the replacement cycle for capital equipment.

Food equipment's base revenues grew 5% in the quarter and base income grew more than 20%, mainly as a result of stronger sales to institutions and restaurants.

While total packaging revenues grew 5% in the quarter, Signode Industrial Packaging increased only 1%.

Our other specialty packaging business units, such as stretch film and paper products, fared well in the quarter, with double-digit base revenue growth.

Finishing also saw strong growth, with a base revenue increase of 11% in the quarter.

In our next slide, International Speciality Systems, for the fourth quarter segment revenues increased 4.1% and operating income declined 3.3%.

Operating margins of 12.6% were 90 basis points lower than the year-earlier period, largely as a result of the current -- impact of currency translation, acquisitions, and higher restructuring expenses.

Taking a closer look at the top line, the 4.1% increase of revenues consisted of the following: 1.7% from base revenues, 4.9% from acquisitions, and a 2.5% decline from currency translation.

This segment's base revenues registered 2% growth in the fourth quarter, with with positive contributions coming from total packaging, food equipment, and welding.

Finishing's base revenues were slightly negative in the quarter.

As part of total packaging's 1% base revenue growth, Signode Industrial Packaging declined 6% in Europe and grew 3% in Asia-Pacific in the quarter.

Our other specialty packaging businesses, including stretch and paper-based products, fared better with a combined double-digit increase.

Food equipment's base revenue growth, 2% in the quarter, was driven by demand for dishwashing and refrigeration product for institutional use in Europe.

And welding grew base revenues 15% in the quarter, thanks to strong consumable sales in Europe and equipment sales -- sorry, 15% in the quarter, thanks to strong consumable sales in Asia and equipment sales in Europe.

Finishings' base revenues declined 3%, due to weaker demand from industrial-based customers.

This concludes my formal remarks.

So let me reintroduce Ron.

He will discuss our earnings forecast for the 2006 full year and first quarter.

Thank you, John.

We are forecasting first quarter diluted income per share to be within a range of $1.12 to $1.18.

The low end of this range assumes a 2.7 growth in base business revenues, and the high end of the range assumes a 4.7% growth in base revenues.

The mid-point of this range of $1.15 per share would be 8% higher than the prior year.

For the full year, our forecasted earnings range is $5.60 to $5.78 per share.

The full-year base revenue growth is expected to be in the range of 3.2% to 5.2%, with operating income, excluding L&I, forecasted to increase between 9.4%, and 13%.

The mid-point of this earnings range of $5.69 per share would be 9% higher than 2005.

Other assumptions included in this forecast are exchange rates holding at current levels; acquired revenues between 800 million and a billion; restructuring costs of 30 to 50 million; estimated impairment in the first quarter of 15 to 25 million; non-operating investment income between 45 million and 55 million, which is lower than last year, lower than 2005, by 75 million to 85 million; and a tax rate of 31.5% for both the first quarter and the full year.

Okay, John, back to you.

Thank you, Ron.

We'll now open the call to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is coming from Robert LaGaipa.

You may ask your question, sir.

Hi, good afternoon.

Just a couple of questions.

One I, just wanted to circle back to the acquisition target, the 800 million to the 1 billion that you have forecasted.

Is there any particular geography, in any particular business?

Maybe if you could just put that into context, you know, where you're seeing the improvement, I know you've talked about the improvement in the past, but now you've officially raised your forecast from the prior ranges and I was just looking for additional color there.

What we've seen is in -- especially towards the second half of 2005, really a big increase in the acquisition pipeline that we have.

We do keep a backlog list, and there is just a lot of things on the list.

There is no one geography.

There is a fair amount of international on there, but there is also some North American.

Across all our different business units, we're seeing a lot of good activity, especially on the acquisitions that are coming from the bottom up, our typical 30 to $50 million ones.

But then there are also several that are in the 100 million to $500 million range.

So it is really just an overall increase in the environment that we're seeing here.

Okay.

Terrific.

And one follow-up, if I could.

On the Leasing and Investments segment, I know you're no longer going to report it as a segment, but if we look at the income versus the prior forecast, it looks like it is down a little bit.

What changes have occurred in the leasing investments and also the outlook there?

You're talking about the --

From the preliminary forecast in the December meeting.

Actually, we're just a little bit up from our prior forecast for the fourth quarter in leasing and investments because we had higher gains on sales.

But looking forward, into 2006, we have now peeled off this first mortgage transaction, we've liquidated it, and we've looked at all the rest of the transactions and that's our best estimate at this point.

So we're looking to be 80 million down from where we were in '05 in '06.

If I can just sneak one last question in, just with regard to the growth rates that you're anticipating for the remainder of the year.

Now, the first quarter, obviously you have the growth rates a little bit less and then you have the growth rate to get to the full-year range, a bit more, and I'm just trying to think about it conceptually.

What are you expecting as the year progresses?

Are you expecting an improved environment or is it just a function of the comps getting easier?

You know, because the comps would of course get easier if you look at it on a year-over-year basis, second, third, fourth quarter?

I think it is a combination of both, Bob.

I would look at comps being a factor, but I would say, more fundamentally, I think that we think that we have a chance for international businesses to get a little bit better as the year progresses.

I'm not talking about dramatically.

But enough where it could help us on the base.

I think first quarter, we were -- we obviously came out with a bit of a lower number and that's a continuation from what we saw in December, where base was a little slower, both on the North American and on the International side, but I think as we look at our plans and we look at what our business units are telling us on a go-forward basis, that we think that things will improve, albeit modestly, as the year progresses.

Terrific.

Thank you very much.

Thank you, sir.

Our next question is coming from Gary McManus.

Hey, Gary.

Hey, John.

Gary McManus, J.P. Morgan.

Hey, on the nonoperating investment income, you say 45 to 55 million this year.

Is that like a run rate that we would expect going forward or is there still winding down of this real estate portfolio, that it would be even lower in '07?

Is this kind of a true run rate on an ongoing basis?

Well, two-thirds of the income in the segment in '05 relates to the mortgage deals, and the first mortgage deal is now gone.

We also had some gains in '05 related to the second and third deals, as -- what happens is as these deals start getting close to the end, you start looking to sell property.

So we did sell some properties in both the second and third deals, and really brought income forward probably from '06 and '07 into '05.

So I think going forward, after '06, I think you're looking at a pretty de minimus amount of activity here.

You know, the other big things in here besides the mortgage deals is the leveraged leases, and by their nature, they don't generate a lot of income in the middle years.

They generate a lot of income in the early years, not much in the middle years, and then some on the back end, and that's jut the function of how the accounting for those work.

Other than that, there is no other real big significant investments in there, so I would expect that, going forward, you're talking maybe a long-term run rate of 10 to 20 million.

So there is another drop-off in -- you would expect another drop-off in '07 going from roughly 50 million to maybe 10 to 20 million?

Yes.

Okay.

And that $80 million decline from 2005, is that spread out pretty consistently by quarter?

I notice you had big operating profit numbers in the L&I segment in the second half, so it looks like it is going to be a bigger delta, so to speak, in the second half of 2006.

Is that correct?

That is correct.

In the second half, especially in the third quarter, we had some large gains in 2005.

Also in the first quarter, there's somewhat of a drag, because we had a pretty good first quarter last year as well.

Okay.

And just one real quick -- the two other assumptions you used for '06 restructuring costs of 30 to 50 million and the goodwill and intangibles of 15 to 25 million: do I spread that out pretty evenly by quarter?

Or is it more of an impact in the first quarter or less of an impact in the first quarter?

The restructuring is pretty much even throughout the year.

The impairment, if you remember, what we do is we do impairment in the first quarter for all of our businesses that have goodwill assigned to it.

So all that impairment amount in the forecast is for the first quarter.

Okay.

Thank you.

Thank you.

Our next one is coming from Mark Koznarek.

Your line is open, sir.

Thanks.

Good afternoon, John;

Ron.

It is FTN Midwest Securities, by the way.

Just one clarification on that last thing.

A year ago in the first quarter, did you take a goodwill impairment of a similar magnitude?

What we have in the forecast for 2006 is 15 to 25 million, so 20, say, is the midpoint.

And last year our impairment in the first quarter was 12 million.

Okay.

Great.

My question is on the construction-related businesses.

In the December meeting, we went through the market dynamics and you guys offered an outlook for every business except for construction, because apparently you didn't have all your forecasts pulled together.

So would you care to offer something more specific about construction at this point?

Well, I don't remember specifically what we told you, Mark, at the December meeting, but we are basically operating under the assumptions that new housing in North America is going to be down about 3, 4% in the year.

We think commercial construction activity is going to be up probably 3 to 5%, talking about market activity now, not our revenues.

And the renovation piece of what we're going to be doing has been growing at a rate of about 5 to 10.

We don't think that is fundamentally going to change a whole lot on a go-forward basis.

So, John, what does that then lead to in terms of ITW base revenue outlook?

I'm sorry?

What does that lead to in a basis of an ITW organic growth outlook?

Probably somewhere in the range of about 4 to 5%.

So that is actually an acceleration from -- it looks like your base this year was only about 1.5%.

Are we talking North America, International, or combined?

North America is what I'm talking about.

I think it would represent an acceleration, primarily because we think commercial is going to be more of a help this year than last year.

And presumably, in this, Wilsonart has got to contribute, versus this 7% decline in the quarter.

You can point to specifically a couple items that are going to get some growth out of that business?

Well, we have long believed that when commercial construction gets better, that their base laminate business is going to get better.

We think that is fundamentally true and will play out over the year.

You clearly have to fix the problem in the flooring area and they have new product being developed at this point in time.

I'm told that the more recent numbers for flooring are better in January, so I think that is at least some partially good news.

But I think it is a function of commercial construction moving base laminate sales up, and flooring being less of a drag or more of a contributor as the year progresses.

So those new flooring products are going to be early enough in the year to move the needle?

Well, I think they will clearly help.

You're talking about the high definition laminates and then those kinds of introductions?

The product introductions, product launches on those have been, we think, have been pretty good, but still muted by what we believe overall has been fairly tepid commercial construction demand.

You got to remember that they play later in the cycle in commercial construction.

You have to build something and you have to get it just about finished before the laminates usually get applied in that environment.

Thanks a lot, John.

Thank you.

Thank you.

Our next question is coming from Andrew Kaplowitz.

Your line is open, sir.

Please state your company.

Good afternoon.

Lehman Brothers.

Hello, Andrew.

You can elaborate -- you talked about it a little bit, but what you are you seeing by geography right now, what areas are getting better?

Are there any that are getting worse as you see it right now?

By geography?

I would say that the North America -- give me a time frame.

Compared to a month ago?

Compared to, like, three months ago.

Last quarter.

Well, I think North America actually was pretty good for us, except in December.

So I think it is a bit of a mixed picture and we're not exactly sure which way the number breaks in the first quarter.

I think we've tended to be slanted on the more conservative side.

Europe looks like, if anything, it's -- best case there, it is probably flat to maybe down a little bit more.

And Asia, we think it probably has potential for a little bit of growth coming out of Asia.

Clearly, China is still growing at a reasonable rate, and we're still seeing that -- we think Australia and New Zealand will probably improve as the year progresses.

That will be helpful to our construction numbers.

I think it is a bit of a mixed picture.

Got it.

And one follow-up: can you talk about North American Specialty Systems in particular?

You had I guess a 2% hit on restructuring and I know you take restructuring as a usual part of the business.

Is there anything unusual that happened in the segment this quarter?

And does it have any sort of repercussions on 2006?

The biggest thing that is really affecting the non-volume line, we had a -- if you remember, a favorable inventory adjustment in the fourth quarter last year. 25million in total in North America, half in engineered products, half in specialty systems.

This year, we had about a $2 million favorable inventory adjustment.

So we have a $23 million swing in the two North American segments for inventory adjustments.

The bigger part of that, of the 23, 14 of it is in Speciality Systems, North America.

So if you look at the non-volume line, that shows that we're down .9% in margins, but if you take out that $14 million of unfavorable inventory adjustments, we're actually up 0.5%.

I see.

So that is basically all it is and we shouldn't read into it too much going forward?

No.

Thank you.

Thank you.

Our next one is from John Inch.

Please state your company name.

Thanks.

It's Merrill Lynch.

Sorry for that noise.

Hi, John.

Hey.

John and Ron, what are yours and ITW's auto and residential, new residential housing assumptions for 2006?

Auto, we think, is going to be down two to four.

North America, flat on the international side.

And new housing in North America, down in the range of 3, 4, 5%, somewhere around there.

Those are our assumptions we built into our plan.

Okay.

But isn't that what you assumed Auto was for the market?

So you're not assuming penetration?

Oh, no I'm talking about -- I thought you meant with builds.

I'm asking what do you think ITW's automotive and new housing businesses are going to do in 2006 as part of your guidance?

I think they will be -- Ron, do you want to --

For automotive, North America, we are looking at -- the forecast is negative 2 to negative 4 rand we're looking at base revenues being up 1 to 2%.

So there is some penetration there.

On the construction side, residential, the external forecast is down 2 to 3, 2 to 4.

We're looking at ITW to be up 2 to 3% up.

Commercial, we're looking at ITW to be up 4 to 5.

And these are just North America numbers, right, Ron?

Yes.

What about the International for auto and then construction?

Auto, Europe, the forecast is flat.

And we're up slightly there, 0.5% to 1%.

And in construction, we're up 5 to 6% more towards the second half of the year.

Just my follow-up question, really, is around the restatement.

Sort two of parts.

One, why did you restate the 2005 quarters?

And then the operating income line seems to be different, both in the fourth quarter and full year, for the restated numbers and I'm just -- manufacturing operating income and the actual numbers.

It is off by about 2.2 million for the full year.

Is there any reason for that?

There is a couple of things.

One, we did move a business from our Speciality Systems International segment to our Engineered Products International segment.

It's our zipper business, that the way we rolled it up internally changed and therefore we had to move the segment.

So that is one of the reasons that the revenues changed between segments.

The other thing we did, obviously, is we -- we're reclassing the leasing investment out of segments and as part of that, there is some allocated costs that we're -- SG&A costs that were allocated to Leasing and Investments, now it has to go into the other segment.

So -- just so I understand this, there is allocated SG&A for Leasing and Investments that is now under the reclass being reallocated?

You got it.

Okay.

And that explains the 2.2?

Yes.

Okay.

Great.

Thank you.

Thank you.

Our next one is coming from Chris Kotowicz.

Please state your company, sir.

Hi, guys.

Chris Kotowicz at A.G. Edwards.

I guess I wanted to dive back into the M&A real quick.

Have you guys completed any deals in the month of January?

Yes, we have.

Three to four deals.

I'm not sure exactly, but --

I mean, is that pretty meaningful in revenues?

They tend to be the smaller, 30 to $50 million ones.

Not a 2 or $300 million one.

Okay.

Less than 100 million total?

Probably not, no.

I guess I mean for the consolidated.

Is it 100 million combined or --

I think it's less -- about 40 to 50 million,.

Yes.

They have all been pretty small, Chris, thus far.

Okay.

Is there anything on the board in China, specifically?

I know you guys had talked about Asia being a better opportunity for growth in the year relative to some of the other international markets, and that's an area where I know you've wanted to increase your penetration.

We do have something in Korea that is on the list that as a result of the acquisition, we'll also be moving part of that business to China.

Okay.

And as far as the systems international business, it looks like the acquisitions there were losing money.

Is that something that we should continue to expect for the next few quarters there?

Is there kind of a shakeout going on as far as product line and rationalization or --

That primarily relates to the Instron business that we acquired in October.

So that is two months worth of results.

And part of that is related to -- we do the acquisition accounting, you to step up assets.

So we've stepped up both inventory and a backlog asset, that -- those two assets amortized in a pretty short time frame, within a six-month period.

So over the first six months we will see some fairly strong expense related to that.

Also, the way Instron was run prior to being acquired by ITW, it really ran it as three separate worldwide businesses, so they looked at it on a worldwide basis, and they didn't pay a lot of attention between what was U.S. profit versus international profit, and what we found is that as we start breaking it up and we look at it separately, obviously, we found that the U.S. business was making a lot more money than the international guys, and we're in the process of reviewing that situation and doing our normal segmentation of the businesses, and running them as stand-alone businesses.

So as we get into that more, likely we will be changing some transfer prices and things like that.

Okay.

It looks like Wilsonart might have been a $15 million headwind in the quarter, roughly?

Is that reasonable for base sales growth?

I don't know if we have that number.

Clearly it was the headwind.

Is that -- do you guys have a sense of what that might do in '06?

I mean, is that still going to be a low single digit type grower, do you think, in --

Chris, I think it gets back to the whole issue is how fast does commercial construction grow.

I think they're going to grow in line with them.

We clearly expect growth out of Wilsonart.

There is no question about that.

To the degree they grow faster or slower is going to be contingent on the continuing to rebound on the commercial construction side.

All right.

Thanks, guys.

Thank you.

Our next one is coming from Jamie Cook.

Please state your company.

Credit Suisse.

Good afternoon.

Hi, Jamie.

My question gets back to the acquisitions again.

Can you just talk a little bit about the margins on those acquisitions that you're looking at or the profitability assumptions, whether it is the normal historical range of 8 to 9% and doubling that over a three to five-year period.

I guess just because it seems like you're obviously increasing your acquisition focus, but to me, still, the guidance looks conservative given the increase in revenues you're assuming from acquisitions this year versus historical levels.

Yes.

Typically the sweet spot for us is companies that are making less than 10%, whether that is 8 or 9 or 5, typically less than 10% are the kinds of businesses we can buy and generate significant improvements in, including doubling margins.

So all of the businesses that we're looking at typically would fall into that type of margin.

Okay.

So there is no significant change versus historic sort of type margins?

No.

And then my next question, can you just talk a little bit about your material cost assumptions for the year, and pricing?

You're talking about '06?

Yes, I'm sorry.

We're really looking at minimal cost increases in our '06 forecast, as well as minimal price increases.

So the price increases are probably flat to 0.5%.

Okay.

Great.

Thank you very much.

Thank you.

Our next one is coming from Ann Duignan.

You may begin.

Please state your company name.

Hi, good afternoon.

It is Ann Duignan of Bear Stearns.

Hi, Ann.

I think I really have to change my last name.

Quick question on automotive.

Your revenues were up 5% in Q4.

How much of that was volume and how much was pricing?

Or do you even break it out that way?

I would say probably 2 to 3 on volume.

We don't have an exact number, but 2 to 3 on volume in the rest of the pricing.

I think pricing would probably be mitigated, Ann, as the year progressed.

Okay.

Well, that was going to be my next question, is the pricing going to hold going into '06 and is that included in your outlook or is your outlook --

-- I think pricing is always under pressure.

So when you forecast, you really just forecast zero pricing and just volume?

That's right.

That's typically what we do in a normal environment.

Yes.

And I just wanted to reconfirm that that's the way you forecast --

Not unless GM and Ford are willing to give us lots of price increases.

Well, having worked in the industry, I know how hard that is.

On the impairments, could you just give us a little bit of color on where the impairment charges are coming from?

And also, just your philosophy, why wouldn't you consider selling some of those businesses before you would have to take an impairment charge?

Well, I assume you're talking about the '06 forecast as opposed to the fourth quarter impairment?

I will talk about that as well.

We did have one business in the fourth quarter, a packaging business in North America that makes machines, packaging machines, where we had an impairment in the first quarter of the year, and we relooked at it in the fourth quarter and added an additional impairment of about 3 million.

The way we do goodwill impairment and the way it works is you have to select one quarter during the year when you're going to test the -- all the goodwill for the whole company.

So we've selected the first quarter each year as the time to do that review.

So of our 700 business, about half of those have some type of goodwill or intangible associated with it.

So we're doing tests at that level, at the 350 unit level, individual unit level, in the first quarter of each year to figure out if we've got any impairments.

So that is a pretty big universe of companies and there is always a few that fall out, and we don't know what those are yet necessarily, but there are always a few that fall out in our first quarter impairment charge.

So we've typically had a charge between 10 to $20 million on an annual basis in the first quarter.

So last year it was 12 million, and there were probably five businesses in that last year.

This quarter we're forecasting 15 to 25, but we don't know what those businesses are yet.

15 to 25 million.

25 million, right.

Right.

So what you're telling me, if I understand it right, is that the forecast for impairment charge is just purely a forecast at this point.

You don't know, you have you no idea what businesses might incur impairments, and it is just conservatism on your part, baking in a higher number than last year?

Is that -- am I interpreting that correctly?

I am not sure I would say conservatism.

We have had years where we've had $22 million of impairments.

I think in '03 it was 22 million.

So it is one of those things, we've typically used 20 million, I think we used 20 million as an estimate last year, and we only had 12 in the first quarter.

So it tends to be a pretty reasonable estimate over time, I think, given the amount of goodwill intangibles we have on the books, that is a relatively small number and whether it is 15 or 20 or 10, it is still a very small percentage.

Okay.

So it is the sum of a number of small impairment charges and this is a forecast of what you expect for '06?

Yes.

Now, the second part of your question, why don't we divest some of these businesses before impairment, well, when you decide to divest a business you are willing to take a loss anyway as part of the divestiture.

So you're not really necessarily avoiding a P&L charge.

And typically, these businesses are -- because we're measuring it at such a low level, they're part -- they're complementary to other existing base businesses that we think there is added value there.

So we tend not to try to break that up until we've really digested the acquisitions and tried to fix things, so we typically haven't had a lot of those sales, but we are always looking at businesses that are underperforming, and whether or not we need to stay in that business.

So that is an ongoing process and that process does happen as part of the first quarter impairment review.

And I assume, having asked the question about Wilsonart flooring every quarter for the last eight quarters, I presume something like Wilsonart gets included in that review?

Wilsonart flooring, because Wilsonart came with Premark, which was a pooling, there really is no goodwill associated with Wilsonart.

Yes, I understand there is no goodwill associated with it, but the review of whether you should be in that business or not, I mean, that flooring business --

I think it is more of a strategic decision.

And I think the decision has been made that we think it is a viable business.

We just -- you just have to have the right product and that's what they're working on and we're confident that they're going to be able to turn it around.

Okay.

I will get back in line or I will talk to you guys offline.

Thanks.

Thank you.

Our next one is coming from Deane Dray.

Please state your company, sir.

Thank you.

It is Deane Dray from Goldman Sachs.

Hi, Deane.

The question -- first as follow-up on the leasing and investments, just to make sure I understand the source of what looks like, incrementally, some more income than what we were looking for this quarter.

And Ron, when you were walking through, I just wanted to make sure, you said there were two or three deals coming through that you would be looking to sell.

It makes it sound as though there was some discretion on these transactions, and my understanding is on the mortgage side of the business, you don't have discretion.

They get sold, you don't really have a say in that, in terms of your participation.

So was there anything discretionary about the incremental income in leasing investments in the last part of December?

No.

Really, no, I mean, the three mortgage deals are -- generate most of the income in the segment.

The reason we were above our forecast for this income was related to the mortgage deals and it was simply a matter of us getting more than we expected on the first deal.

The first deal had to end at the end of the year.

So any properties that were still there had to be sold.

So there were four or five properties that were -- we knew were going to be sold in the fourth quarter, and we had an estimate of the proceeds for that and we actually got more than we expected.

So it really is not discretionary.

We're a passive investor in these mortgage investments.

Our partner in this is the one who is really responsible for managing the properties as well as determining when the right time is to sell.

Ron, that sounds helpful, because -- and that's one of those high quality problems, when you're actually getting more than you were expecting and so that's fine.

And then the second question relates to Signode, and if I got the numbers right, North America up a percent, Europe, down 6, and Asia up 3.

How about if you separate those numbers by equipment versus consumables?

My question is, in previous quarters we've seen a little bit of price pressure on the consumables side and it sort of throws off the overall number about the growth rate is Signode.

Is there any of that going on this quarter?

Well, I don't think we have -- we don't have the data to separate out the equipment versus the consumables.

How about directionally?

I think directionally, that what we saw during the year is that the equipment sales started to slack as the year progressed, so sales are -- you're going to see less equipment sales throughout '05, and you're going to see consumable sales probably up slightly, with some raw material pressures moving in and out, either plastic up and steel down.

I wouldn't portray Signode as having great volume, but clearly their volumes are positive, low single digits.

I would probably say that the -- on the equipment side, that their sales have flattened out as the year progressed.

And within the '06 guidance, what are you looking for for Signode for the year?

By geography, if you could.

As far as base revenues?

Yes.

The -- for the U.S., or for North America, total packaging, which would include Signode, is in the 4 to 5% range.

And internationally, also in the 4 to 5% range.

That's on a combined basis?

Yes.

Okay.

Thank you.

Thanks Dean.

Thank you.

Our next one is coming from Julie LaPunzina.

Please state your company. [Inaudible -- background noise] Julie, that is coming from your phone.

We're getting big feedback here.

That's coming from Julie's phone.

Can you hear me now better?

Better, yes.

Okay.

Sorry.

Can you tell me what R&D as a percent of sales was in 2005 and what you think it will be in 2006?

We haven't accumulated that number yet.

That is a disclosure for the end report, but I think it has been in the 1 to 2% range, I believe, but you will have to get that number later.

It might be higher than that.

Do you expect it to go up in '06?

Yes.

Okay.

Thank you.

Thank you.

And our next one is coming from Robert McCarthy.

Please state your company, sir.

It is Robert W. Baird.

Good morning -- or good afternoon, John and Ron.

Hi.

It looks like, to me, restructuring expenses in the fourth quarter were a little below your expectations.

Is that right?

Yes, a tad below.

Does it mean anything?

It's just timing?

Yes.

I mean, there are probably a few that we had in the forecast that flipped over into the first quarter.

Okay.

Is it appropriate to use the consolidated tax rate to calculate the after-tax impact of the goodwill impairment and isolation?

It is probably a reasonable guess.

It depends on the specific items being impaired, whether they've got tax basis or not.

It would be close, right?

Yes.

Okay.

And you know, historically, when you guys talk about the acquisition pipeline, you talk about having something like six months of visibility or thereabouts, and the number that you spent a lot of time this past year talking about was in the 400 or even a little higher range.

That doesn't seem much different than half of 800 to a billion, so I'm wondering if perhaps your active pipeline actually has more than just six months times 800 to a billion in it right now?

Does that make sense?

No.

Try that again.

In the past when you've been talking about 600 to 800 million, you talk about, you know, based on your current pipeline, that would be the projection, and your pipeline usually goes out about six months and you've generally had around 400, 400 or 400 million in annualized revenue in your pipeline, and so in the context of 800 million, it seemed to make sense -- of course, you didn't do that much this past year.

Using the same logic, as I look at your 800 to a billion forecast for annualized acquired revenue this coming year, half of that is about the same number that you've been talking about for the last several quarters, John.

Yes.

I think the short answer to that is we have significantly more than that in our pipeline.

Right now.

As we sit here today.

Okay.

So there is every reason to believe that the number you're using for a full year estimate has some inherent conservatism in it, unless the improvement in your pipeline doesn't really reflect an underlying improvement in the market.

Isn't that right?

Well, all we can say is that we have more deals, more potential acquired revenues, in our pipeline than we've had in the seven years since I've been back here, Rob.

Okay.

That's good.

If I may, one more.

As long as you're talking about expectations for growth in '06, what is the forecast for Wilsonart and does it include -- I mean, do you expect it to get to a positive growth comparison at any point during '06?

Talking about base revenue growth?

Yes, Ron.

That's 3 to 4%.

That's up?

Up, yes.

Okay.

And back-end weighted?

Or are you looking for some immediate improvement there?

I think we're looking for some in the front half of the year.

Okay.

Very good.

Thank you.

Thank you.

Our next one is coming from Karen Ubelhart.

Please state your company.

Hi, it is Karen Ubelhart at Lehman Brothers.

You talked about the average price paid pre revenue for the year for acquisitions.

Can you give us that you number for the fourth quarter?

I think it is actually in the slides.

Oh, is it?

Okay.

I missed it.

We closed five deals and the cash paid was 314.

Okay.

Thank you.

That's it.

Your next one is coming from Mark Heilweil.

Spectrum Advisory Services.

Hi.

Can you give us, do you have any way of measuring what the return has been on capital for the Premark businesses, all in?

I know I've followed Florida Tile, or whatever the company was, for many years, and they never seemed to earn any real return on investment over different cycles.

Do have you a figure for these Premark businesses?

And I'm wondering, not to ask you to speak for David, but whether there has been any reconsideration of the wisdom of some of these acquisitions.

I know you've previously commented that you're going to hold on to the flooring, Wilsonart, but does he have any different take on it than John did?

Well, first of all, I think we, for I think the first few years after the Premark deal, we did specifically track and report on the progress of Premark.

And if you remember, when we did talk about that, we did -- we expected to double margins over five years and we did do that, even in a declining economy.

So for the businesses that we've kept out of Premark, food equipment and Wilsonart, I think we're still -- we still feel very strongly that there are improvements to be made there, we're continuing to doing 80/20, a lot of the restructuring is still related to doing things at either of those companies.

So I think we definitely are -- tend to continue to improve those two companies and there is no intention as far as I've heard to divest either of those.

You did mention Florida Tile, and and there were three other businesses that we did look at after the acquisition, and we did decide to dispose of those.

All three of those were in the consumer-related businesses, Precor, West Bend, and Florida Tile.

Okay.

And so -- David, to speak a little for him, has the same view toward Wilsonart and Hobart that John did?

There has been no change of strategy?

Absolutely.

I mean, we're committed to growing these businesses.

I mean if you go back and look at Wilsonart, I think Wilsonart has really been hamstrung more by end market conditions than anything else.

Food equipment had the benefit of some better end market conditions over the last year and you've seen growth in the rate of about 5 to 7%.

Wilsonart has not had that benefit based on poor fundamentals on the commercial construction side.

We think when they start to get some help from commercial construction that their -- it is a very viable business.

It is a very strong business.

It is a number one brand --

Sure.

-- in lots of different places.

So we think that they have -- they still have a lot of powder left for some good growth down the road.

Thanks very much.

Thank you.

Our next one is coming from Walt Liptak.

Please state your company, sir.

KeyBanc Capital Markets.

Good afternoon, guys.

Hello, Walt.

In the EPNA, you mentioned, John, in your commentary, that the new housing products held up pretty well despite the December falloff in housing starts.

I wonder if we can read anything into that, what the actual number might have looked like, and might you be conservative on the '06 outlook for new housing?

Well, I don't know.

I mean I just -- these numbers are looked at in -- somewhat in isolation when you look at them in the quarter and when you try to extrapolate across the year.

Clearly we got some help from some of those products in Q4.

I think that -- I think we believe that we're going to see new housing starts continue to decline as the year progresses.

So it is going to be a bit more of a headwind, but we still think we're pretty well positioned with the variety of the Paslode products in particular.

Okay.

That's fine.

And the new commercial construction, with that perhaps picking up during 2006, what does the profitability look like?

Is there a mix shift where you could see higher profitability in those products versus other construction products?

I don't think the margins are all that much different, Walt.

You know, they tend to be sort of at or slightly above company average.

Okay.

That's fine.

Okay.

Thank you.

Thank you.

Our next one is coming from David Raso.

Your line is open, sir.

Hi.

Quick question on -- just want to walk through the guidance from '05 to '06.

Just some rough terms.

The 519 for '05, what you're going to lose in L&I earnings, depending on timing, you probably can make it back on what you acquire when it comes to profits from acquisitions.

Tax rate's the same, restructuring, goodwill impairment, not terribly different.

And you are losing, if currency is no help at all in '06, obviously it would be a drag.

Let's assume right now it is a push.

You did you have $0.06 a share help in '05.

So that said, trying to really come from a 513 number, so to speak, ex-currency, up to the midpoint of the guidance, the 569.

The core business, and this is essentially my question on, is it mix?

Is it cost?

If you use the midpoint of your revenue growth rate, the incremental margin on the base business to get you from 513 to 569 is going to have to be over 40%.

In '05 you did a shade below 30.

Why should I expect a bigger increment in '06 versus '05, or is as straight forward as you're just not getting the headwind of cost incrementally that you got in '05?

Or is there something with mix or something I don't appreciate what the Company is doing?

Well I think one thing to consider when you're looking at '05 is, when you're just looking at the base incrementals, there is this 20-some million dollar negative incremental from '04 from the inventory adjustments.

So if you factor that out, and you also factor out incremental option expense, which was about 11 million in the quarter, you're in the 50% incremental for base.

Okay.

So stripping those two comp issues out, '04 versus '05, what you're asking the base business to do in '06 is not anything different than you did in '05, essentially.

That's correct.

Okay.

And then when it comes to, again, the road map on the share count, obviously, for '06, you've no authorization right now.

How should I think about the share count for '06?

Typical, the times before we had the repurchase, it is not going to go up very much, we don't have a large number of options, which is the only reason it really goes up or down.

So I think a pretty consistent with where it was at the end of the year is probably reasonable.

And addressing, obviously, the issue of the cash flow and balance sheet strength you have with regard to repo, the upcoming Board meetings, how should we think at all about David's philosophy where acquisition's of course number one in your business model.

But how should we think about his willingness to utilize the balance sheet?

I think, especially in the short term, I think given the strong acquisition pipeline, although I think David has indicated he would consider relooking at the capital structure at some point, I think at least in this first part of the year, given the strong acquisitions, we probably will not be doing that.

Okay.

Great.

Thank you very much.

Thank you.

Our next one is coming from Mark Koznarek.

Your line is open, sir.

Thanks for taking this follow-up.

You know, in the December meeting, we spent a lot of time talking about boosting the base revenue growth to 5 to 6% as a long-term target.

And with that as a backdrop, it seemed to be that it was going to be kind of pulling yourself up by our own bootstraps with identification of new markets and developing new products and that sort of thing.

So this year seems like it is a transition year, because you're not projecting revenue growth at that targeted level.

So is this the year that we are absorbing some unusual costs of some materiality associated with that revenue acceleration program?

Ron and I are looking at each other.

I think we -- I think the answer to that is no.

I think the answer is really more related to our base in relationship to underlying market dynamics.

You know, our range is sort of in that 3 to 5.

So if we did get to the higher end of the range, if the economy got better, obviously the base would be growing at at faster rate and above our company average.

But I don't think there is any material cost that has been built into this particular plan that would impede the so-called base growth.

I'm not -- maybe I didn't ask the question well, John.

I'm asking, you're shooting to boost the base growth up to 5 to 6%.

Right.

We're not there yet.

It doesn't happen by magic.

You got to do something.

And usually those somethings cost money.

So are you absorbing some costs this year to accelerate base growth, say, in '07, that are impacting your earnings outlook this year?

Yes, I think there for sure are some of those costs in there and specific business units.

If you remember what David talked about, is finding specific opportunities in the specific businesses, and trying to boost those through higher spending.

And I think -- is there some of that in there?

Yes.

Is it significant?

No.

If it was we would be seeing impact on the margins which we're really not in the '06 forecast.

Okay.

So you really can't -- you can't say that hey, we're taking -- we're setting aside $0.20 or something like that of unusual R&D or development investment this year that we expect to really pay off next year?

There is no --

This type of activity really happens at the operating unit level and it is not something that we have really accumulated up and -- or tried to capture at the corporate level.

So it is happening, but it is just sort of built in, kind of geared by everything else.

Right.

Okay.

Great.

Thanks.

Thank you.

Our next one is coming from Eli Lustgarden.

Please state your company, sir.

Longbow Research.

Good afternoon, finally.

Hi, Eli.

Just a quick question.

Can you talk about what in December?

You put out press releases with base business guidance through the fourth quarter and you had 5% through November and all of a sudden we came in at 3.6, and North American went from 6 to 5.4 and National went from 2 to 1.1.

So it was a very, very tough comparison and a very tough add-on.

And you dropped the September month, which is a hurricane month, so it's sort of surprising to see that big of a drop, so December had to be very weak on a comparative basis, you guys.

Look at December in North America, the base was essentially flat by having grown at a rate of 4 to 5% in the prior months.

What happened?

Well, it was pretty broad-based.

We saw our construction businesses get a little weaker in the month.

Auto went flat in the month.

And our industrial businesses actually hung in there better.

They were up more like in that 4 to 5% range.

Actually, the biggest change, the biggest swing would have been on the construction side.

Both our businesses were negative in the month of December.

And you know, some of that is -- some of it is just timing.

Some months you're going have shipments that don't make it out and some months you're going to have shipments that are going to make it in a particular month.

That's why we don't like to talk about months in isolation.

We don't think it's a trend necessarily.

That's what happened in the month, but is that a trend?

We'd like to look at a three-month period before we really try to come up a --

I was just looking at the big change as opposed to to one month.

It was just very noticeable.

And can we talk a little bit about the acquisitions.

One, did some of the acquisitions that probably were planned for '05 spill into '06?

And David [inaudible] was trying to build a road map from '05 to '06.

He sort of cavalierly said acquisitions would offset the L&I drop, or to some degree.

Do you have any of the acquisitions for this year, which I doubt, and even -- you can't be that material from last year, built into your forecast for the guidance?

Yes.

What we do every year is, based on the acquisition guidance we're giving, we do build in revenues and operating income for those acquisitions, even if they have not been identified.

So we're using an overall average margin, et cetera, to include that.

You had 500 million of acquisitions built into this year's numbers?

Well, remember -- yes, the -- yes, approximately, that is probably about right.

Okay.

And all the -- one final point.

All the impairment [inaudible] will be in the first quarter for this year, at least the expected impairment charges, in the first quarter?

Yes.

Again, that is when we do our annual testing.

So we will be looking at every business in the first quarter.

Thank you.

Thank you.

Our next question is coming from Andrew Casey.

Your line is open, sir.

Good afternoon.

I guess two quick questions.

In the first quarter, in the guidance, what are you assuming for auto contribution there?

In terms of revenues?

North America?

Yes.

In the 2% range.

2% up?

Yes.

Okay.

And so builds would be down 2 to 4% pretty evenly through the year?

I don't know there.

The forecasts right now are saying a little bit better now and weakening as the year progresses, but I think they're going to get a little -- I think they're going to get weaker more immediately.

And I think 2 to 4 for the next number of quarters is probably pretty good.

Okay.

I'm trying to reconcile what I think some other people have been trying to do, the slight better growth rate for the year versus the first quarter in terms of the midpoint of the earnings forecast.

What market, is it just nonresidential construction and international markets you expect to improve towards the back end of the year?

Yes.

I think those are two key areas you would have to look at.

Okay.

Thank you.

Our last question is coming from Chris Kotowicz.

Your line is open, sir.

Thanks for taking the follow-up, guys.

Just a real quick follow-up on the acquisition pipeline.

Would you characterize all the deals as bottoms up, both on acquisitions or are there some -- I wouldn't call them new platforms, exactly, but some new things that are more top down in there, too?

Yes, I think all the ones that we've seen on the list now are complementary ones, whether they're the smaller ones that are coming up from the bottom or even the little bit bigger ones, the 100 to $400 million range.

Okay.

All right.

Thanks, guys.

Thank you.

And that's all the questions for today, sir.

Thank you very much.

We appreciate everybody phoning in.

And we will talk to you, I'm assuming, shortly.

Take care.

Bye.