Illinois Tool Works Inc (ITW) 2006 Q1 法說會逐字稿

Good afternoon and welcome to the Illinois Tool Works, ITW first quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS].

Also the conference will be recorded so if anyone has objections please disconnect at this time.

I would now like to turn the conference over to Mr. Brooklier, Vice President Investor Relations.

Thank you sir, you may begin.

Thank you, Kelly.

Good afternoon, everyone, and welcome to ITW's first quarter 2006 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.

Put simply, by all financial metrics, we had an outstanding first quarter and strong start to the year.

Revenues grew 8%, operating income increased 18%, net income rose 17%, and diluted net income per share grew a very robust 22%.

Our operating margins hit 16.4% in the quarter.

That's a 140 basis point improvement over the year-ago period.

Ron will join you in a few minutes to give you more details on this financial performance.

Here's the traditional agenda for today's call: As I said, Ron will be here in a moment to give you more details about the first quarter results.

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

Ron will then address our 2006 second quarter and full year earnings forecast and assumptions.

Finally we'll open the call to your questions.

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

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

As usual, a few housekeeping items for us.

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, earnings growth, operating income, tax rates, use of free cash, potential acquisitions for full year 2006 and the Company's related earnings forecasts.

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

These risks are more fully spelled out on the slide and are a part of our Form 10-K for 2005.

Moving to the next slide, the telephone replay for this conference call is 402-220-9685.

No passcode is necessary.

The play back number will be available until midnight on May 5th, 2006.

As always, you can access our webcast PowerPoint presentation on our itw.com website.

The presentation can be found in the investor information section.

Look for the earnings presentation tab.

Now let me introduce Ron Kropp who will take you through the financial highlights.

Thanks, John.

Good afternoon.

I'm happy to report that we had an excellent start to 2006.

The highlights for the first quarter are as follows.

Revenue grew 8% versus the first quarter of last year.

This growth rate was consistent with the growth rate for the fourth quarter of 2005.

Operating income was up 18% versus the prior year due primarily to higher base revenues and margins.

Operating margins were up 140 basis points.

Diluted net income per share was 22% higher.

Free operating cash flow continued strong at $321 million, and return on invested capital was 17.3%, which was 230 basis points higher than last year.

As we previously announced, starting with this quarter leasing and investments will no longer be reported as a separate operating segment due to the planned runoff of L and I Assets and our desire to utilize our free cash flow for core manufacturing activities.

Income from these investments will now be reported as non-operating investment income.

Revenues and operating income for 2005 have been restated to reflect the reclassification of the L and I activities to non-operating.

Now let me give you the details of our operating results.

Our 8% revenue growth was primarily due to three factors: First, base business grew 6.1%.

This growth rate was 250 basis points higher than the fourth quarter of 2005, and was made up of an 8.1% increase in North America which was higher than last quarter by 270 basis points, and a 2.4% increase internationally, which was 130 basis points higher than the fourth quarter.

Second, acquisitions added 5.3% to revenue growth, which was essentially consistent with the fourth quarter acquisition effect.

Third, currency translation reduced revenues by 2.6%, which was unfavorable by 190 basis points versus the fourth quarter currency effect.

Overall, our 8% revenue growth was a result of strong base revenue growth in North America and a larger impact of acquisitions partially offset by the unfavorable effect of currency translation.

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

Operating margins for the first quarter improved to 16.4%, an increase of 140 basis points over last year.

This margin improvement is primarily due to an improvement in base business margins of 170 basis points.

Operating leverage related to higher base revenues increased margins 140 basis points and non volume related items added 30 basis points.

Acquisitions reduced margins by 50 basis points.

Included in the non-volume items is an unfavorable one-time accounting adjustment of $19 million, related to retiree healthcare and life insurance liabilities in the first quarter 2006, partially offset by the effect of an unfavorable accounting adjustment last year of 8.7 million re-rated to a European food equipment business.

In the non- operating area, investment income was lower than last year by $10.7 million due to lower income related to mortgage investments, leases, and the venture capital fund.

The first quarter effective tax rate was 31% versus 32.5% in the prior year first quarter.

Turning to our invested capital, total invested capital increased $414 million from the fourth quarter of 2005 primarily due to the effect of acquisitions.

Inventory and accounts receivable levels increased slightly from the fourth quarter to 1.8 months on hand and 59.8 days sales outstanding respectively, but still are at lower levels than a year ago.

Capital expenditures for the first quarter were $68 million and depreciation expense was $74 million.

On the financing side, we decreased our debt $21 million from last quarter and our debt-to-capital ratio decreased from 14% to 13%.

Our cash position increased $84 million in the first quarter as our strong free operating cash flow of $321 million was utilized for acquisitions of $199 million, dividends of $93 million and debt repayments of $23 million.

Our first quarter return on invested capital of 17.3% was 230 basis points higher than last year.

This increase was mainly the result of a strong base business operating performance as after tax operating income increased 20%, while average invested capital only increased 4%.

We continue to generate economic profit as our ROIC significantly exceeds our estimated cost of capital of 9 to 10%.

Finally on the acquisition front, we acquired 11 companies in the first quarter, which have annualized revenues of 353 million.

Based on a very strong pipeline of potential deals, we are continuing to forecast $800 million to $1 billion of annualized acquisition revenues for 2006.

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

Thanks, Ron.

Before I talk about our four manufacturing segments let me spend a few moments highlighting North American and international economic data that we give you on a fairly regular basis.

The trend of stronger North American economic and end market activity versus weaker European trends continued throughout the first quarter.

In particular, the North American ISM index was at 55.2% in March, roughly level with where the index was in December.

The new order index registered a relatively strong 58.4%in March, higher than where it was in December.

Add to that an industrial production excluding technology number of 3.7% growth in March, and you have a reasonably strong growth environment.

The news, however, on the international side continues to be somewhat less bullish.

While overall Euros under industrial production 2.4% growth in the most recent reporting period the U.K., industrial production figure was at minus 1.4%, and France was at minus 0.6%.

A more positive sign may be the March Euro's On Purchasing Managers Index which came in at 56.1%.

That's the strongest reading in more than a year, and hopefully points to some better fundamentals in Europe in particular as we progress.

Now, let's look at our four manufacturing segments.

Starting with North America, engineered products segment revenue increased 13.6% and operating income grew 22.5% in the first quarter.

Driven by stronger business unit results, operating margins of 16.9% were 120 basis points higher than the prior year period.

Looking more closely at first quarter results, the 13.6% growth in top line consisted of the following: 6.6% from base revenues, 6.7% from acquisitions, and 0.3% from currency translation.

Moving to the next slide, let's take a closer look at continues units and associated end markets in this segment.

Results were consistently strong across our three business categories, which include construction, our industrial base units, and our automotive businesses.

Total construction grew 8% in the quarter with strong contributions coming from both the Wilsonart and ITW Construction units.

Notably, Wilsonart's base revenues increased 11% in the quarter thanks to double-digit growth contributions from the flooring unit and healthy demand for base laminate products.

Both parts of the business were aided by new products introduced over the past two quarters.

While we don't expect Wilsonart to grow as fast in the upcoming quarters we are nonetheless encouraged by their first quarter results.

Our ITW Construction group, which include tool and fastener units grew base revenues 5% in the quarter.

Much of that growth was driven by a low double-digit increase in base revenues from our commercial construction units.

Our units serving the new housing sector were up 7% and our units serving the renovation based box stores were essentially flat in the quarter.

Please note that our renovation based revenues were impacted by an inventory adjustment program implemented by Home Depot in the early part of the quarter, and more recently order levels have returned to traditional levels.

On the automotive side, our base revenues grew 2% in the quarter.

With our revenue performance in line with the big three builds of plus two in the quarter, penetration was flat due to platform mix issues.

The first quarter builds were -- was as follows.

GM up 6%, Ford down 3%, and Chrysler up 4%.

New domestic builds were up 11% in the quarter.

From an inventory standpoint, big three inventories were at 80 days at the end of March.

Specifically, GM is at 86 days, I should say, Ford was at 77 days, and Chrysler was at 76 days.

Not surprisingly, new domestic inventories were at 55 days.

Looking ahead, despite the stronger than expected builds from the big three in the first quarter we are still estimating builds to be down in the range of 2 to 4% poor the full year.

In our industrial products category business units base revenues grew 8% in the first quarter.

All of the units in this category posted positive base revenue growth led by Minigrip, up nearly 20% , fluid products, which grew 16%, and polymers, up 5%.

Our industrial plastics unit which sells many of its products to appliance -- to the appliance sector, saw base revenues increase 2% in the quarter.

Moving to the next segment, international and engineered products, for the first quarter segment, revenues decreased 3.2%, and operating income fell 10.2%.

The negative impact of currency translation had the largest effect on top line and operating income.

Base revenues were up slightly in the quarter, thanks principally to the automotive businesses.

And operating margins of 12.1% were 90 basis points lower than the year earlier period.

Taking a closer look at top line, the 3.2% decline in segment revenues consisted of the following: 0.6% contribution from base revenues, 3% contribution from acquisitions and a 6.8% hit from currency translation.

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

All three of these business groups produced base revenues that were modestly up or slightly down in the quarter.

And I think underlies some of the tepid economic conditions we've seen in Europe over the last three to four quarters.

Looking at total construction, base revenues were down 1% in the quarter.

By geography, first quarter base revenues were at follows.

European construction declined 1%.

Australasia was down a similar 1%, and Wilsonart International fell 3%.

A slow down of construction sales in the U.K. and Ireland contributed to Europe's slight decline.

For Australasia, base revenues were soft due to slower demand for commercial and retail products in Australia and Wilsonart international saw weaker demand and U.K. offset growth in Germany.

Our automotive business units in Europe produced base revenue growth of 3% in the first quarter, thanks largely to an improving build there.

Auto builds were up 2% in the quarter led by Fiat, which grew -- was up essentially 28%, DaimlerChrysler up almost 8%, BMW up 4.5%.

Ford group up almost 3% and VW group up about 2.5%.

On the downside, Citroen-Peugeot saw builds decline about 11%, GM group was down 6%.

Looking ahead, we believe builds will be up 2 to 3% for full year 2006.

The remaining part of this segment is made up of our industrial based business units.

These units in total produce base revenue growth of 2% in the quarter, with polymers increasing 5% and electronic component packaging up 17%.

Industrial plastics base revenues declined 3% in the quarter.

Moving to North America, specialty systems for the first quarter, segment revenues increased 13.2%, and operating income was up a robust 23.9%.

Operating margins of 19.2% were 170 basis points higher than the year earlier period thanks to strong base income growth from a variety of business units.

Focusing on top line, the 13.2% growth in revenues consisted of the following: 9.6% contribution from base, 3.2% from acquisitions, and 0.4% from translation.

Moving to the next slide, this more capex oriented segment continued to produce strong results even as it contended with very tough growth and profitability comparisons from a year ago.

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

Welding-based revenues grew an impressive 22% in the quarter, as that business continued to benefit from the replacement cycle for capital equipment and accompanying new product introductions.

Total packaging base revenues grew 6% in quarter with Sig node increasing base revenues 4%.

Sig node benefited specifically from stronger machinery sales.

The other industrial packaging units, which include our stretch and paper base businesses group ace revenues -- grew base revenues double digits in the quarter Food equipment base revenues were up 5% in the quarter, mainly as a result of stronger sales to the casual dining restaurants and other institutional buyers and finishings base revenues also were up 12% in the quarter.

For our final segment, International Specialty Systems, for the first quarter, segment revenues increased 5.4% and operating income grew 28.4%.

Operating margins of 11.1% were 200 basis points than the year earlier period, thanks to stronger base income growth from a variety of business units.

Taking a closer look at top line, the 5.4% increase in revenues consisted the following: 4.4% contribution from base revenues, 8.4% contribution from acquisitions and a 7.4% hit from currency translation.

This segment benefited from positive contributions from our welding, total packaging, food equipment and finishing units.

Welding's base revenues grew 18% on the quarter, due to strong consumable sales in Asia.

As part of the total packaging 3% growth in the quarter, Sigma Europe saw base revenues fall 5%, while Sigma Asia produced base revenue growth of 9%.

Food equipment's base revenues increased 3%, with most of that originating from Europe.

And finally, our finishing business grew 8% in the quarter.

This concludes my formal remarks so let me reintroduce Ron who will talk to you about our earnings forecast for the second quarter and full year.

Thanks, John.

Forecast for the second quarter diluted income per share to be within a range of $1.52 to $1.58.

The low end of this range assumes a 4.8% growth and high end of the range assumes a 6.2% growth in base revenues.

The midpoint of this range of $1.55 per share would be 20% higher than last year.

For the full year, our forecasted earnings range is $5.89 to $6.07 per share.

The full year base business revenue growth is expected to be in a range of 4.6% to 6%.

The midpoint of this earnings range of $5.98 per share would be 15% higher than 2005.

The new midpoint of the full year earnings range has been increased by $0.13 from our prior midpoint from our March forecast due to primarily improved base business performance as well as a slight benefit from a lower tax rate.

Assumptions included in this forecast :are exchange rates holding at current levels, acquired revenues in the range of 800 million to a billion, restructuring costs of 30 to 50 million, no further impairment charges related to goodwill and intangibles, nonoperating investment income to be in a range of 50 to 60 million, which is lower than last year by 70 to 80 million, and a tax rate of 31% for the second quarter and full year.

I will now turn it back over to John.

Thank you Ron.

We'll now open the call to your questions.

[OPERATOR INSTRUCTIONS].

Our first question comes from David Bleustein.

Sir, your line is open.

I noticed that you -- some stock in the quarter to fund acquisitions.

Is that the result of a specific seller's requirement or is that some -- should we expect you to be doing much more than that in the future?

No, that was a specific single transaction where the seller basically needed to get part of the purchase price in the form of ITW stock for tax reasons.

All right.

And the next question is, you continue to buy businesses at about one times revenue.

Do you not see price escalation out there, or is this just real good selectivity on your part?

I think what we -- we've -- I think it's probably both.

I think we've been very encouraged by the environment.

We've gotten -- we've looked at more deals than we ever have.

Part of that sues getting out there at the business unit level and getting more feet on the street to look at deals.

Also, we've gotten a lot more deals from private equity buyers as well, so I think it's a good environment.

Some deals we've made a little bit more and some a little bit less, but it's kind of held in there a little bit more than one times revenue, so that's been encouraging.

Thanks a bunch.

Thank you.

Our next question comes from Joel Tiss Your line is open.

Can you give me a little sense, your cost of revenues was down about 200 basis points.

Can you give me a little sense where that came from?

Was it pricing or cost cutting or acquisitions?

I think primarily acquisitions is where that's coming from.

Remember we typically buy lower margin businesses.

Okay.

Also, can you give us a sense on sort of the pace of acquisitions?

Because it seems like you're flat in April with where you were in March at about 350 million.

But you're still sticking to 800 to a billion.

Are there some bigger deals in the pipeline, or are there some things that are close to closing but didn't quite make it for this cut-off point?

Just a little color there.

Thank you.

The wone thing to remember about act we sitting's not a straight-line exercise.

They come in bunches, then there's lulls, so it's -- we did have a bunch towards the beginning of the year.

Now we've had a little while where we haven't had a lot.

But there are plenty of acquisitions in the pipeline, and, they will be a little bit choppy through the rest of year but we expect to be in that range.

Joel remember we've told you gaze our pipeline well over a billion dollars in it that deals we're actively working on, , so as Ron said, they're not going to be straight lain but the pipe line we think is sufficiently full to justify the range we're looking at.

And there are a couple of two to four hundred million dollars deals in there that could get you to the goal pretty quickly?

I don't think that big but clearly in the 100 plus to 200 plus is probably more related to what we're doing.

Okay.

Thank you very much.

Thank you.

Our next question comes from Mark Koznarek.

One question about the full year forecast.

Up, in the fourth quarter you gave us some, you know, thoughts about how some of the major markets were expected to do and, you know, here in the first quarter, looks like everything was better, you know, sometimes a little, sometimes a lot, and the big outliers versus your full year are Wilsonart, food equipment, then welding, of course.

So could you update us on what your current thinking is with the full year industry outlook for those categories?

Well, let me take the -- let's start with the construction side, Mark.

I think when we were talking earlier, construction, commercial construction being up in the 3 to 5% rang I think today we're looking at a number more like 5 to 7 in terms of endmarket activity and that would support, you know, some of the activity, some of the improvement we've seen from the Wilsonart side and other types of businesses.

I don't think that things are going to change all that much in terms of the new housing side.

While new housing was better in the first quarter than we expected, I sometime think that we believe the new housing starts are going to be somewhere in that flat to down a couple points arena.

So I think that as you see housing starts as they progress through the year they're going to become more negative than they were in the first quarter.

The most recent number I have, I have housing starts being down 4% in the most recent reporting month, so I think that that number is still pretty viable.

On the -- was your question -- the other question on the welding side of the equation?

And also food.

Those two.

Food equipment is performing at a higher level than we had anticipated.

I think earlier on we said 2 to 4 and right now it's throwing off a number for the first quarter that was 5.

I think we're probably more comfortable with food equipment being in the range of 5, maybe a little bit north of that.

But not significantly so.

I think that the big sea change for us in the first quarter was at some point we anticipate our welding business and the end markets they're serving slowing somewhat.

We still haven't seen that yet.

We're still putting double-digit increases on top of where we were a year and where we were two years ago.

At some point that has to slow.

I know we've been telling you that every quarter.

It just hasn't happened yet.

I think we'll take the traditional E T approach and say that's going to happen, we think the second half of the year.

So that would provide a bit of a slowing environment for us.

you were saying 8 to 10, and we just rolled off a 20ish kind of number.

So is it halfway in between more reasonable?

Probably 10 to 12 is probably what we're thinking right now.

Thank you.

Thank you.

And our next question comes from John Inch, your line is open.

Could you remind us how big construction is part of your European business mix?

The reason I'm asking, other companies are calling out Europe as a source of improvement, and you guys seem to be -- you're not quite there, and I'm just wondering you're waiting for construction, if you're waiting for other reasons.

I will remind you remember our construction numbers and international numbers lag a little bit.

They lag month.

So what we're reporting in the quarter is really through the end of February.

So it is lagging a bit.

I would subscribe to the theory that we're probably going to see some modest improvement in our construction numbers on the European side as we progress through the second quarter.

Are you, by the way, pointing that out -- sorry.

John, are you pointing that out because you think the more sort of month to month data is showing improvement?

I think some of the macro things are showing some slight improvement in Europe, yes.

I think our numbers are not in sync with those numbers necessarily.

And how big is the construction roughly?

In the range of 250 million per quarter, so a billion something for the year.

Okay.

That's all international.

but Europe is the bulk of that, right?

There's a fair piece in Asia Pacific.

Europe's probably 60% of that.

What about pricing and raw material spreads some what was the impact of pricing on your top line this quarter and maybe could you update us in terms of what you're seeing in terms of those spreads?

the estimated impact on the how much of the revenue increase is around 1% for the quarter.

And it added about 40 basis points to our margins.

The difference between price and cost increases.

From a cost side, we're seeing definite increases in the chemical side of our business, worldwide.

As far as resin goes, it's been down slightly but we're expecting, given the price of oil of oil that it will be upticking through the rest of the year.

Steel's been up slightly, and that's also expected to go up, but both steel and resin did not have a major impact.

Chemicals had the biggest effect.

Remind me, what is the -- or tell us what's your assumptions are for these spreads to do over the course of the year as part of the range you provided?

Built into our forecast we have very little in the way of price and very little in the way of incremental margin as a result of recovering cost and price.

So remember last year, is when we -- about the third quarter or so is when we finally got ahead of the cost on the pricing side.

So our comparables this year to last year should be pretty consistent.

I'm sorry, maybe I should have asked the question this way.

If the pricing that 1% holds, based on comparisons of raw costs over the course of the year, do you continue to see this 40 bips of benefit, or --

no.

The 1% is the first quarter, and we're still -- although we had a lot of price increases in place in the first part of last year, all of them were finally put in place by the third quarter.

So we'll have much less of an impact, especially the second half of the year.

Okay.

Then just lastly, do you guys track any kind of order or backlog data that you would be willing to share?

Maybe not on a macro basis for ITW but maybe just stuff you could point in to various segments to kind of support some of the base business growth numbers that you think you can realize?

We really don't track it.

Most of our businesses have relatively short lead times.

Even our machinery businesses like welding has a very short lead time on orders.

So even if we did track a backlog it wouldn't give us much of a forward-looking view of things.

So your view on the base business -- I'm just trying to understand.

How do you construct your outlook for base sentence are you extrapolating trends, or is it kind of what customers telling you, or is there business you think is going to get better?

How do you want us to think about it?

The way we do it is we roll it up from 700 different business units, and each of the units are relatively close their customers.

So they're obviously on the street, talking to them on a daily basis.

On the corporate side, we look at what's rolling up to the business units, versus expected trends in auto and construction and the general industrial end markets and try to form a view on is it reasonable or is it, you know, need to be adjusted up or down.

So there's no easy answer to your question because it's coming from 700 different places.

I understand.

Finally, your beat this quarter in terms of EPS, was there something that got better at the end of the month versus what you thought kind of mid month when you provided the guidance?

I think it's just the results in March were much better than we expected.

particular am in North America.

We don't get those until the end of the month.

That's right.

So that's -- that can be a big swing factor for us, and North America continued to throw off some pretty impressive numbers, particularly on the systems side.

Actually, E P got better, too, better than we had expected.

Congratulations.

Thank you.

Thank you.

Next question comes from Deane Dray.

Your line is open.

Thank you.

Good afternoon.

Just to follow up on that last question, so because you increased guidance on March 15th and then you've done it hear today, it was particular strengths in the month of man?

Yes.

Particularly on the North American side, Deane.

Good.

One of the interesting indicators that looks a little bit mixed is on Sig node. 4% positive in the U.S., Europe down 5, Asia up 9.

Right.

Certainly U.S. is better and Asia is better than recent trends.

How do you view that I know terms of leading indicators that you'd like to look at?

Again, we're at a bit of a disadvantage when we're trying to forecast actual numbers for Europe because our numbers lag month but I think the decline we're seeing in Europe out of the Sig node business certainly suggest that the economies are mixed there, and demand is mixed based on various countries.

We have better results from Sig node in some countries rather than others so I think it's a mix picture.

I think it's still more negative than positive based on the results we're seeing to date.

But I would agree that as I said earlier some of the macro data we're looking at some looks like it's a bit more promising.

I'm not saying dramatically better but perhaps although better.

I know you don't split it out but the difference between the Sig node, the equipment and consumables, are they roughly in line, so when we look at a 4% in the U.S.

That would be indicative of both?

We actually did analysis of it and our machinery numbers were stronger than our consumable numbers.

very good.

Thank you.

Thank you.

Our next question comes from David Raso.

Your line is open.

did you mention a one time accounting adjustment of 19 million?

It's related to retiree healthcare and life insurance plans.

We have one main plan that covers the majority of the employees.

Over the year we've add several companies that had small plans that were never factored into the am you the what I recall calculations because -- actuarial calculations.

We had the actuaries calculate a liability and it came out to be 19 million.

that's pretax, correct?

Pre tax.

so tax affected that tack a nickel out of the quarter.

roughly.

Yes.

my question is about the guidance for the second quarter.

First, the acceleration we had in March, would you think has led to decent momentum to start the quarter.

Your comp doesn't look any harder if you look at over two-year average or even easier if you look at just a year ago.

Why the slower top line?

And then related to that, historically, sips pre mark in particular, every time since first to second quarter your earnings grow 22% versus the second on average 29%.

So if I add back that nickel, and run out the normal relationship second to first, we're looking at more like $1.65, $1.70.

Why the midpoint of 1.55?

Well, couple things.

We had the phenomenon of Easter falling in different quarters, last year it was in March, this year it wasn't, so we had a pickup last quarter that normally wouldn't be there.

Secondly there's certain businesses that had operate strong first quarter, abnormally strong that won't be quite as strong going forward Wilsonart is a good example.

I think they are up 11% in the first quarter we're looking at maybe 5 to 6% on a year for Wilsonart.

Margins is another area where we had a benefit of 40 basis points in our operating margins in the first quarter and that won't be as large going forward especially if raw material costs increase.

We had some favorable numbers in our new housing construction businesses in the first quarter that we don't think will stick the rest of the year.

So it's a variety of things.

There's no one big thing in there, but it's the way we've looked at it.

We've upped our guidance on some of these businesses from our original forecast, but we haven't brought them up to the levels of the first quarter.

David, we also probably threw out a dash of ITW conservatism to the numbers, too.

The housing and raw materials I can understand, obviously like to see an offset on pricing for that raw material, but the Wilsonart, what's going on there to slow it down that much so quickly?

Remember when you introduced new products both on the laminate side and on the new flooring side, you're basically stuffing lots of new product into the channel.

So you're getting a lot of prebuy on the initial product launches.

We don't expect those sales to stay consistently high throughout the rest of the quarters, because there's a lot of pre buy that went on in that first quarter.

So as Ron said, are they going to grow 11%?

No.

But would half that be a more normalized number for them and a more realistic number?

Yes.

That's the kind of phenomenon we're going to see in that particular business.

And I guess also you're implying acquisition benefits slow when it comes to new acquisitions.

You just did 350 in the quarter and you're implying the rest of the year your quarters will be more like 150 to 180.

That's right.

More likely, yes.

thank you very much.

Okay.

Thank you.

Next question comes from Jamie Cook.

Your line is open.

Hi.

Good afternoon and nice quarter.

My first question, I guess, can you just elaborate on the strength in Wilsonart?

The flooring business was up much higher than my expectation.

What gives you confidence that it's, you know, or how do you measure owe he could you give us some color on market share or how do you measure the growth versus strength or pickup in demand for those markets.

Remember their base product is base laminate product, high pressure laminate that's used for countertops, for offices and countertops and kitchens and bathrooms and things of that sore.

Roughly 20% of their business is flooring related.

They launched a new flooring product in the late fourth quarter, early first quarter of this year and that, as I said earlier, when answering David's question, there he was pretty significant response, so we got a strong bay on the flooring product.

So that clearly helped the numbers in the first quarter.

The base laminate volumes went up a little bit in concert with, the improving macro fundamentals, did you want go as fast what is we saw on the flooring side, but clearly, that's going to help them that helped them in the first quarter.

We don't think they're going to be able to sustain that type of growth.

We estimate that on flooring probably half the growth comes from pipeline, and the other half is real growth.

Filling the pipeline, then real growth.

So we think that it's going to be very difficult to repeat those kinds of strong growth trends we saw in the first quarter.

Having said that we do believe that, you know, Wilsonart growing at a rate 5% of strong -- anywhere from flat to up a point so that would be a nice incremental gain.

Secondly, on acquisitions, so far we've been focusing on the top line.

I think last quarter you suggested in terms of the bottom line acquisitions that add about $0.10 for the year.

Is that still a good number to assume?

let me see here.

Acquisitions.

Yeah, about 14.

$0.14?

Okay.

Great.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Gary McManus.

One real quick question. 163 million in stock, what would that be in number of shares?

And what's your current share count, let's say at the end of the quarter?

Hold on here.

Let me tell that you. 283.8 is the shares count and the shares issued were -- hold on, Gary.

We're calculating.

283.8 was the average shares of the first quarter.

I assume the share count at that time end of the quarter would we higher.

Snow yeah.

Ron said, what was it, around 2 million?

Just under 2 million.

but are you sure the ending share count is 283.8?

Because that was the average diluted for the first quarter.

yeah, it's more like 285ish, I think.

Okay.

All right.

So I'm just wondering what kind of number to use for the second quarter full year, so 285 plus.

Yes.

Okay.

Just getting back to the price and raw material costs, if I recall a few years ago, I think ITW wasn't able to increase pricing right away to offset the rise in material costs.

Correct me if I'm wrong but that's kind of how I remember it.

Now that looks like those material costs are going to go up.

Are you confident that you're not going to have a lag in getting price?

Do you think the pricing you have in place today is sufficient to offset what these material costs could be rising for the next few quarters?

I think your recollection is correct, when this happened back in 2004, did it take us a few quarters to get up and running and all of our businesses on the pricing.

Part of that was a lot of our people had never really had to go get a price increase from a customer, and they learned how to do that over the last year and a half, and so I would expect that although there would be some lag in certain industries, like auto, for example, that we would be quick tore do it than we did in the past.

Okay.

And the 1% you talked about in the first quarter, was that a gross price increase or is that a price increase net raw material -- net raw material cost?

That's gross.

That was gross.

And that was sufficient to offset the raw material costs.

Yes.

Okay.

Thanks.

Thank you.

Next question comes from Robert McCarthy.

Your line is open.

Good afternoon, guys.

Hey, rob.

Let me first follow up on the pricing questions.

I'm interested in -- excuse me, interested in performance of two of your businesses in specialty North America.

You had Sig node plus four, and as you said yourselves, primarily on the back of the equipment business.

And finishing -- I'm sorry, food equipment up 5.

Increased pricing has been a big part of the story at food equipment, so first part is what do you think's going on at food equipment in terms of volume?

And then secondarily, with most of Sig node's growth in North America accounted for by machinery, where are we at on pricing for consumables?

Are we still running lower prices than a year ago, or -- basically I'm asking about volume in both businesses.

On the volume side in food equipment, we're we had good volume gains, more than the pricing.

So Sig node is in the 4 to 5% volume range.

That it was first part of your question.

What was the second part?

I'm sorry, Ron.

You were answering food equipment, right?

Yeah.

Or Sig node?

Which?

Food equipment volume was up more than pricing contributed.

Yes.

And what happened at Sig node?

Yes And on the Sig node side, steel pricing is down, plastic is up.

And how does that -- how does that act -- what's the dynamic on that going forward?

Do we get to a point midyear or some point where based on prevailing pricing, price willing to longer be a drag at Sig node?

Well I think first of all at Sig node, they're one of the businesses that is one of the best ones that can pass on price.

Right.

Especially on the steel side because they're buying their raw materials from the customer, the steal customer.

We're expecting not that much of a drag on this price/cost issue.

In construction product in North America, you, of course, noted that Home Depot's inventory programs had an impact on the business.

Do you have a rough estimate of what you might have done at construction products if not for that in addition did it cost you a point or two of growth?

Rob, I don't think we have that data.

Okay.

But we can get that for you.

Acquisition pipeline.

Again, as you say, north of $1 billion, in terms of annualized revenue.

You all historically talk about pipeline in terms of businesses that you're actively trying to negotiate towards a transaction.

And typically with less than 8 or 9 months of lead time.

So I'm wondering why you haven't raised your forecast for the full year contribution from acquisitions.

Is it simply that you don't think you're going to do a lot in the second quarter and you hate to make too big a bet on the balance of the year at this point, or what?

I think like you said it's not a long lead time on these acquisitions. five, six months is the average, probably.

And, I think it's something that we'll look at more closely at the end of the second quarter and see where we're at.

Okay.

And my last question would be the more generic -- we had some questions about what transpired late in the quarter to affect the most recent forecast, but if we go to the original forecast could you identify the two, three, four businesses that have started the year stronger than what you originally expected?

I gather Wilsonart is one of them.

That's much stronger.

I think you'd have to -- food equipment would be the other one , and I think you'd also have to lack at welding.

Welding, as we said earlier, is still growing at a rate of 20% on comps of 20%, and we expected, growth of, what, 8 to 10 coming into the year.

So I think those three things are probably the big swing factors for us.

I have to admit, I, like some of the other people on the call, struggle with the Wilsonart forecast a little bit, because with half that business in North America driven by non residential markets, which have just started to turn, why wouldn't you expect that business to actually gather more momentum going forward?

What I'm getting at is, if half of your growth in the quarter was from sort of one-timers and in a sense, stronger residential, new product launches, especially in flooring, that would still leave you up 5 to 6, which is what you're talking about for the full year.

I mean, don't you think it's reasonable for to us look at that as a fairly conservative estimate even at this point?

I think that we still would consider Wilsonart at 5 to 6 to be a good growth number for them.

We are reluctant -- you're always reluctant when you do new product introductions to make big bets.

You clearly think you've got good product and you clearly think it's something the market is going to like, but until you see sustained growth over a period of two, three-quarters, I don't think we're willing to make that bet.

So part of it you just don't have the information on sell-through at this point.

That's right.

Okay.

Thanks, guys.

Thank you.

The next question comes from Julie LaPunzina.

Your line is open.

Hi.

It's Julie Lapunzina of Wachovia.

Can you talk about the platform mix issues in North American autos, particularly when you expect those to be resolved and when we'll see you back to exceeding build rates?

I don't think I could sit here and predict when they're going to be resolved you're going to always face platform mix issues particularly in auto every quarter, and it's going to be -- some quarters are going to be better, some quarters are going to be worse.

The particular issues we had in this particular quarter was that we walked away from some low profitability business from a domestic manufacturer.

Okay.

We literally didn't want the business because the margins were too low, and then we are involved in a particular component supply reslappings with a new domestic supplier, and we think we're going to get great penetration there but production is not up to levels we think they're going to be at when we get into the second , third, and fourth quarters.

So I point those out as two examples of how mix can shift quarter to quarter.

Having said that, it would be very difficult to predict what's going to happen next quarter.

I would say generically speaking, we tend, and we still believe that our penetration will continue to be higher than builds as we move through the year.

Okay.

Thank you.

Your next question comes from Ann Duignan.

Your line is open.

I've got my six questions and my six follow-ups.

did I say six or one?

I wish you had kept to the one.

Just on automotive, we heard a couple of other companies report earlier this week that build rate may be a little bit stronger in the second quarter than anticipated.

If that were the case, it will make your full year forecast down two to four.

Looks very conservative.

What are you hearing out there for second quarter for big three build and others?

Our estimates are we think builds are going to be down 3 to 5.

In the second quarter?

Yes.

That's not what we're hearing from others out there what we heard earlier in the week from a couple of other suppliers, so maybe your mix is just a little different.

My response is we hope you're right.

I'm tired of asking you if you're conservative still.

remember, that 3 to 5 number is a big three number, and you've got to build the new domestics, and I think new domestic is running at a rate of up 10, 11, over the next couple of quarters, probably pretty viable, and as we increase our penetration on the new domestic side that's going to help us but I'd say the big three build rate is, still looking like it's going to be down as we move into the second quarter.

Okay.

And on food equipment, we attended a food equipment show here recently in New York and some of the distributors were talking about activity levels being up, as good as they had seen them in a number of years.

You noted on the food service side that it's really the institutional spending that's driving demand right now.

Can you talk a little bit about the restaurant side, what's happening there, and what's happening in the aftermarket parts business?

Casual dining, as we've said consistently over the last couple of years, continues to be very strong, and that's been the bread and butter of their business for a long, long time.

And we think it will continue to be so as we move forward.

I believe that the other part of the business that is strong that will remain strong is our parts and service business.

That has been a consistent grower for us over the last two to three years, and they continue to benefit from further focus and further 80/20 efforts in that business.

I would also not discount what's happening on the retail supermarket side.

While we have decreased our share of revenues related to that business, I'd say that the fundamentals also there are better than they have been over the last couple of years.

I'm not suggesting huge growth but over the last couple of quarters we've had some quarters where business has been either, you know, flat to slightly up, you know, 5, 6%.

Again, that's a smaller contribution, than we had before, but I don't think the numbers are moving quite as negatively, and I think they're more positive than they have been.

Any color on that, John?

Traditional grocery stores or is it more the Wal-Marts and --

The bigger chain stores, we're getting more penetration with Wal-Mart, which is our number one customer and they're the big player, but that second tier of restaurants, sort of the specialty restaurants -- I'm sorry, the specialty grocery stores, the Grand Foods and places like that, we continue to get pretty good penetration and fairly good business.

So I think there's some things happening on the whole more positive than negative.

Then my final follow-up, Home Depot, their inventory reduction program, was that a Home Depot-wide program where they took supplier inventories down by X days, or was it specifically in your product areas?

It was company-wide, and it was really their attempt to try to improve their balance sheet before they reported full year numbers.

Because I heard yesterday that Wal-Mart is taking down their supplier inventory inventories to two days.

So I doubt that Home Depot is at that level of efficiency yet.

I would suspect they're not.

Maybe it's coming.

Okay.

That's it.

I've had my follow-ups.

Thanks, guys.

Thanks.

Thank you.

Next question comes from Chris Kotowicz.

Your line is open.

Hi.

Good afternoon guys.

Good quarter.

I guess my first question, do you guys have a sense of how much activity in the gulf, aided the North American sales of both E P and specialty systems?

Any feel for that?

I don't think -- I though we don't have a number.

I'd say generally speaking that it had to help our welding business.

Oil and pipeline and the associated platforms that are using welding products benefited in the fourth quarter, and I'm sure there was some pull-through in the first quarter but we don't capture those numbers.

Is it too early to -- you'd assume that the construction businesses are going to benefit from that, too.

Maybe we started to see that in March.

Is it too early to have a sense of that?

I think it's too early for that phenomenon to actually have an impact on our business.

We believe that the construction rebuild in that area is still getting pushed off.

Largely because our government is involved in the whole process.

And it's going to take longer than people had originally planned, or haven't planned, I should say.

It's a big job.

I think we still believe that it's a 2007 impact for us where we're going get most of the benefits.

Okay.

And then for my follow-up, if you continue to pay roughly one-time sales or a little more for the, I guess the balance of sales that you hope to acquire this year, that's maybe 550 million-ish.

I'm kind of showing an $8 to $900 million balance of cash on hand at the end of the year, and an underleveraged balance sheet.

You guys have any comment on incremental allocation to repurchase or what you might do with the dividend?

I think we've gotten this question obviously in the past, and, you know, I think our CEO, David Speer, has been on record as saying that is something we're going to look at by the end of the year.

Our preference has always been and will continue to be to use our free cash for acquisitions.

And so we're very encouraged by our strong pipeline.

We're only one quarter of the way through and we're -- we've spent a fair amount, and we've got a good lift going, and we're not done with the year yet.

So I think it's probably a little bit premature to address that issue at this point.

Fair enough.

Good quarter.

Thanks, guys.

Thank you.

And our next question comes from Martin Sankey.

My question is as follows.

When you were in New York last December you discussed very extensively the potential for a larger than usual impairment assessment in the first quarter of this year.

And looking at the income statement, amortization and impairment was 36 million versus 26 million versus last year.

Could you discuss how much of that was the result of your annual goodwill assessment and how much -- and what would be the run rate for the rest of the year?

Well, I don't think we alluded to a big impairment charge in our discussion in December.

Perhaps we mentioned that we do do an annual assessment as required by the accounting rules.

We've chosen to first quarter of each year to do our assessment, where we look at the individual pieces of goodwill at all of our businesses that have goodwill, and it's somewhere in the neighborhood of 350 of our 700 businesses have some amount of goodwill attributed to it, so we do an exhaustive impairment test in the first quarter for all those, and as you would expect, there's always a handful that have an issue, so we ended up with a charge of about 12 million in the current year, and that's consistent with what we had in the prior year.

It was about eight different businesses in the current year.

We're not required to do any further testing the rest of the year unless there's a particular business that has indication that they have an issue, so at this point, as we've laid out in the assumptions, there are no future impairment charges included in the forecast for the balance of the year.

Okay.

So we should assume something like 24 to 25 million of amortization for the rest -- per quarter for the rest of the year, barring any unforeseen events?

Yeah, it's hard to predict that.

The acquisitions will have -- obviously the acquisitions we haven't even closed yet will have an impact on that, so we don't really come one a number for that, per se, because we just add the acquisition and their incremental margins after amortization, but 25 million is the current run rate, and it will clearly go up as we acquire more companies the rest of the year.

Okay.

Thank you.

You have a question from Mark Koznarek.

Your line is open.

Thanks.

Couple details here.

For the accounting adjustment, Ron, the thing you talked about with regard to retiree, where does that appear in the P & L?

Is that in segment operating income or is it one of the other line items?

No, it's in operating income.

It's in SG&A, and it relates to both the North American segments about equally.

Okay.

So it would be an offset to operating income in the two North American segments?

Yes.

okay.

Good.

And then I have a question on the earnings leverage on the currency translation effect, and, just looking at that time international businesses there, the impact of translation was down like 7% in each of them, and the operating income impact was as great or even greater, and when we look back at a few prior quarters, it seemed like the leverage was less, like in the fourth quarter, there's a modest negative currency impact, but there's no income impact reported, and, you know, gave you the sense that you guys might have been hedged pretty well, but it doesn't appear like it this quarter.

So is this an anomaly, or should we expect pretty direct one for one downward leverage if currency trends remain they are?

I think generally you should expect close to a one for one.

It's somewhat of an anomaly the Waite's played out this quarter.

It's a lot of different currencies, although the Euro is the biggest one, there are other currencies that are part of that.

We don't do any significant hedging.

Really, no hedging related to this kind of operating activity.

So whatever the numbers are, after we add up the 45 different countries, that's how it plays out.

So mix plays a part in it.

So really the fourth quarter was more of the anomaly, and this is the kind of thing we should expect.

Yes.

Negative impact on currency.

Yes.

Okay.

Thanks.

At this time I am showing no further questions.

Okay.

Thank you very much.

We appreciate everybody joining us on the call, and we look forward to talking to you again.

Thanks.

Have a good day.