Illinois Tool Works Inc (ITW) 2006 Q4 法說會逐字稿

Welcome to the fourth quarter and year-end 2006 earnings release conference call. [OPERATOR INSTRUCTIONS].

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

Sir, you may begin.

Thank you, Julie.

Good afternoon, everyone, and welcome to our fourth quarter 2006 conference call.

As noted, I'm John Brooklier, ITW's VP of Investor Relations, and as usual with me today is Ron Kropp, our CFO.

What's new today is that David Speer, our CEO, has joined us for today's call.

Please note that David will join us on all future calls to help answer your probing questions.

At this point, David would like to make a few remarks about the quarter.

Thank you, John.

I believe given the conditions we've faced in an assortment of North American end markets, we post a very credible quarter.

Here are the highlights for the 2006 fourth quarter.

Revenues increased by 12%, operating income grew 7%, and our diluted income per share rose 8%.

The fourth quarter was really two different stories.

International end markets were very strong while North American end markets weakened.

Most notably, new housing and Detroit-three automotive being the most difficult.

Acquisition activity remained strong for the quarter and for the full year.

We completed a record-setting 53 transactions in 2006, totaling over $1.7 billion of annualized revenues.

We believe these acquired revenues with associated margins that are substantially less than ITW average margins represent significant earnings growth opportunities for the Company ahead.

We'll talk more about this later in the call.

John, back to you.

Thank you, David.

Here's the agenda for today's call.

Ron will join us shortly to discuss the quarter.

I'll then come back and update you on our four manufacturing segments and associated end markets.

Ron will address our 2007 first quarter and full-year earnings forecast and associated assumptions.

Finally, David, Ron, and I will be available to take your questions.

Please note, as always, we are asking your cooperation as to the one question, one follow-up question policy, and as always, we are targeting a completion time of one hour for this call.

First, a few housekeeping items.

I would like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Private Securities Litigation Reform Act of 1995, including without limitations statements regarding end market conditions, base revenue growth, earnings growth, operating income, tax rates, use of free cash, share repurchases and potential acquisitions for full-year 2007, as well as 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 spelled out in more detail on our form 10-Q for the third quarter.

Finally, the telephone replay for this conference call is 203-369-1295.

No pass code is necessary.

The playback number will be available until midnight on February 13, 2007.

As always, you can access our Webcast PowerPoint presentation on our ITW.com website.

Once you find the investor information section, just look for the earnings presentation tab.

Now, here's Ron Kropp, who will cover the fourth quarter financial highlights.

Thank you, John.

Good afternoon, everybody.

The highlights for the fourth quarter are as follows.

Revenues grew 11.9% versus the fourth quarter of last year.

This growth rate was 130 basis points higher than the growth rate for the third quarter of 2006.

Operating income was up 6.7% versus the prior year, due primarily to acquisitions, higher revenues, and improved margins for the base businesses and lower restructuring costs.

Operating margins of 16.3% were lower than last year by 80 basis points due primarily to the dilutive affect of acquisitions.

Diluted net income per share was 8.5% higher than last year, free operating cash flow of $658 million was higher than last year by $247 million, primarily due to the timing of tax payments.

And return on invested capital was 17.8%, which was lower than last year by 90 basis points.

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

Our 11.9% revenue growth is primarily due to three factors.

First, base business revenue grew 2.2%.

This growth rate was 20 basis points lower than the third quarter.

North American-based revenues decreased 1.5%, primarily as a result of declines in the Company's North American auto and new housing end markets, offset by slowing but still reasonable growth in certain other North American end markets.

International-based revenues increased 7.3%, which was 230 basis points higher than the third quarter.

Secondly, acquisitions added 8.1% to revenue growth, which was 60 basis points higher than the third quarter acquisition affect.

Third, currency translation increased revenues by 2.1%, which was 50 basis points higher than the third quarter currency affect.

Overall, our 12% revenue growth was a result of stronger base business growth internationally and a larger impact of acquisitions.

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

Operating margins for the fourth quarter of 16.3% were lower than last year by 80 basis points.

Margins increased 30 basis points due to improvements in the base businesses and 20 basis points due to lower restructuring costs.

Lower margins of acquired businesses reduced margins by 130 basis points.

Of the 30 basis point improvement in base business margins, 50 basis points related to operating leverage offset by a 20 basis points reduction due to non-volume items.

In the nonoperating area, investment income was lower than last year by $27 million primarily due to lower income related to the mortgage investments.

During the fourth quarter, the second mortgage portfolio was liquidated as scheduled and the third and final portfolio was liquidated a year early.

Other income was higher than the prior year by $25 million, primarily due to a $19 million gain on the sale of a business.

The fourth quarter effective tax rate was 27.5% versus 30% in the prior year.

The full-year tax rate for 2006 was 29.75%.

Turning to our invested capital, total invested capital increased $242 million from the third quarter primarily due to acquisitions, partially offset by reduced investments as a result of the mortgage portfolio liquidations.

Inventory and accounts receivable remained at reasonable levels of 1.9 inventory months on hand and 61.1 receivable day sales outstanding.

For the fourth quarter, capital expenditures were $78 million and depreciation expense was $87 million.

On the financing side, our debt increased $71 million from last year and our debt to cap ratio declined slightly from 15% to 14%.

Our cash position decreased $28 million in the fourth quarter as our free operating cash flow of $658 million, and proceeds from investments of $335 million were utilized for acquisitions of $650 million, dividends of $119 million, and share repurchases of $199 million.

For the year, we spent $447 million to repurchase 9.7 million shares.

Our fourth quarter return on invested capital of 17.8% was lower than last year by 90 basis points.

The year-to-date return on invested capital of 18.6% was 90 basis points higher than last year.

Finally, on the acquisition front, we had a very busy quarter.

We acquired 19 companies in the fourth quarter which have annual revenues of $820 million.

For the full year, we paid more than $1.5 billion to acquire 53 businesses with annual revenues of more than $1.7 billion.

Based on a strong pipeline of potential deals going into 2007, we are forecasting acquisitions for 2007 to be in a range of $800 million to $1.2 billion of annualized revenues.

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

Thank you, Ron.

Before I review our manufacturing segments, as always, let me spend a few moments highlighting the North American and international trend data we track on a regular basis.

As noted earlier by both David and Ron, the international economies and end markets clearly demonstrated a high level of strength in Q4.

For example, EuroZone a purchasing manager's index was at a fairly robust 56.5% in December, and that number was consistent with Eurozone readings in Q3.

As important, Eurozone industrial production grew 2.5% in November with Germany leading the way with a growth rate of 6.1% in that month.

On the North American front, the news was not as good as indices moved down from earlier in 2006.

The ISM purchasing manager's index came in at 51.4% in December and that's down 52.9% in September, and the ISM new order index totalled 52.1% in December versus 54.2% in September.

As important, industrial production, excluding technology, grew only 1.8% in December.

That's down from 4.9% in September.

Clearly this macro data underpins weakness we saw in a variety of North American end markets in Q4.

Now let's take a closer look at our four manufacturing segments.

Starting with North American Engineered Products, revenues increased 2.9% and operating income declined 8.5%, .

Largely as a result of volume declines in our business units which serve new housing construction and Big Three auto, operating margins of 15.2% were 190 basis points lower than the year-earlier period.

Moving to the next slide and looking more closely at segment results, the 2.9% growth in topline consisted of the following, negative 5% from base revenues, plus 7.8% from acquisition, and plus 0.1% from translation.

Now let's take a closer look at the business units in associated end markets in this segment.

Put simply, our construction and automotive base revenues continue to reflect very difficult end market conditions in the quarter.

In construction, total base revenues declined 7% in the quarter.

Base revenues for ITW construction consisting of our tool and fastening units were down 14% in the quarter, while Wilsonart's base revenues were flat.

The decrease in the tool and fastener category was directly linked to the falloff in new housing starts, which declined 24% in the quarter.

By construction category in Q4, our new housing-related revenue were down 21%, renovation grew 9%, and commercial construction increased 1%.

As noted, Wilsonart's base revenues were even with the year-ago period.

Wilsonart's performance demonstrates once again that their business is largely driven by demand for commercial construction products, albeit they participate in the later stages of that buildout.

As has been the trend for the most of the 2006, Wilsonart's base laminate business grew revenues 2% while the flooring business produced a base revenue decline of more than 10%.

For full year 2007, we now expect new housing starts to decline 7 to 9%, renovation to decline 1 to 2%, and commercial construction on a square footage basis to grow 2%.

Moving to auto, our base revenues declined 9% in the quarter.

The decline was attributable to the very weak Q4 Detroit-Three build, which was down 12% in Q4.

Specific builds were as follows -- GM down 14%;

Ford down 20%; and Chrysler down 2%.

We were helped somewhat in the quarter by the new domestics increasing their builds 3%.

From an inventory standpoint, the numbers were stagnant.

At the end of December 31, total Detroit-Three inventories were at 75 days on hand, only two days less than at the end of Q3.

Specifically, GM was at 80 days, Ford was at 70 days, and Chrysler was at 74 days.

As expected, new domestic inventories were in better shape at 67 days on hand, which was even with their inventory level at the end of Q3.

Looking ahead to full-year 2007, we expect Detroit-Three builds to decline 3 to 5% and new domestic builds to increase 8 to 10%.

Based on Detroit-Three's strong build of plus 11 in the first quarter of 2006, please note current build forecasts for Q1 '07 now call for production to be down about 10% on a year-over-year basis.

In our Industrial Products category, business base revenues were flat in the quarter as a number of our units reflected slowing end market trends.

While we had modest base revenue gains from our Fluid Products, which was up 5%, polymers up 2, and industrial plastics up 1, we saw a decline in our contamination control businesses, which were down approximately 9%.

Moving to the next segment, International Engineered Products.

In the fourth quarter, segment researches increased 13.9%, and operating income grew 13.5%.

However, operating margins of 16.3% were down 10 basis points from the year-earlier period, thanks largely to the dilutive impact of acquisitions.

Taking a closer look at the topline, the 13.9% increase in revenues consisted of the following -- plus 5.9% from base revenues; plus 3.4% from acquisitions; and plus 4.6% from translation.

Like our North American segment, EP International consists of Construction, Auto, and industrial Products businesses.

Unlike North America, the growth in our construction businesses and end markets were very strong in Q4.

Total construction increased 12% in the quarter and by geography, Q4-based revenues were as follows -- European construction was up 8%;

Asia-Pacific was up 11%; and Wilsonart International was up a very strong 24%.

Construction in Europe was driven by increased demand of penetration across the broad swath of countries, especially Germany.

Asia-Pacific benefited from strong Australian and New Zealand markets, and Wilsonart posted robust results in Q4 due to strength in Germany and the U.K..

Looking ahead to 2007, our end market assumptions are as follows: In Europe, we expect commercial construction to grow 3%, new housing up 1%, and renovation plus 2%.

In Australia and new Zealand, commercial construction plus 6%, new housing, minus 3%; renovation, plus 4%.

In China, total construction, up 6 to 7%.

And in southeast Asia, total construction up 3%.

Moving to international auto, our units in Europe produced a base revenue decline of 1% in Q4, and that was in-line with the 1% decrease in auto production for the year.

Builds were Fiat plus 11%, Ford, plus 4%, VW Group, which was flat, PSA group, down 1%, GM group down 7%, and Renault group down 15%.

Our inability to improve our penetration in the quarter continued to be a mix issue, related to our larger OEM customers, who included VW group and PSA group.

For full-year 2007, we expect International auto builds to be flat to up 2%.

The final part of this segment is made up of our industrial-based units.

These businesses in total produced base revenue growth of 3% in the quarter.

The breakdown by businesses was as follows;

Fluid products, plus 9%; polymers, plus 8%; and industrial plastics, minus 1%.

Moving to the next segment, North American Specialty Systems.

For the fourth quarter, segment revenues increased 9.7% and operating income was essentially flat.

As a result, operating margins of 16.9% were 160 basis points lower than the year-ago period, mainly due to the dilutive impact of acquisitions in the quarter.

Focusing on top line, the 9.7% growth in revenues consisted of the following: 1.5% base from growth -- from base revenue growth, I should say, plus 8.1% from acquisitions, and plus 0.1% from translation.

As noted, this more CapEx equipment-oriented segment produced positive base revenue growth if the fourth quarter, albeit down from Q1, Q2, and Q3 levels.

Clearly, the decline in the industrial production levels as 2006 progressed impacted the business units in the segment.

For example, while weldings-based revenues grew 13% in the quarter, that's down from 20 plus percent base revenue growth in the first half of 2006.

Even so, welding continues to produce impressive base revenue growth thanks to strong end markets such as energy and heavy fabrication.

Food equipment's base revenues increased 5% in the quarter thanks again to demand from and penetration with end market customers in the casual dining and constitutional category.

Food equipment service businesses also contributed to growth in the quarter.

The weakness in this particular segment continued to be our packaging area.

While total packaging was down 10% in the quarter, the industrial packaging businesses were down even more.

Much of that decline was attributable from weakness in construction-related customers, including lumber and brick and block, who utilized Signode strapping for the shipment of their products.

Both of Signode's lumber and brick and block categories had end market declines of 26% in Q4.

Finally, moving to our last segment, International Specialty Systems, for the fourth quarter, segment revenues increased 25.9% and operating income was up 41.3%.

As a result, operating margins of 14% were 150 basis points higher than a year ago.

Looking at topline, the 25.9% growth in revenues consisted of the following: Plus 8.8% from base revenues, plus 12.3% from acquisitions, and plus 4.8% from translation.

This segment benefited from contributions from a number of businesses, most notably welding and finishing.

Welding's base revenues grew 19% in the quarter due to strong consumable and equipment sales in equipment in Asia and Europe, and China continues to be a vibrant geography for welding products.

Finishing space revenues were up 18%, thanks again to increased sales of Gema powder-based systems in Europe and finishing equipment in Japan and China.

Total packaging base revenues were up 6% in the quarter with Signode Europe growing 10% and Signode Asia increasing 2%.

Food equipment-based researches grew 3% in the quarter with the majority of that growth coming from Asia Pacific.

That concludes my remarks, and I'll turn it back over to Ron who will talk about 2007 forecast.

Thanks, John.

We are forecasting first quarter 2007 dilutive income per share to be within a range of $0.69 to $0.73 per share.

The low end of this range assumes a 1.2% growth in base business revenues and the high end assumes a 3.2% growth in base revenues.

We're expecting the base revenue trends we saw in the first quarter will continue into the first part of 2007 with strong growth internationally and flat growth in North America.

The midpoint of the EPS range of $0.71 per share would be 9% higher than the prior year.

For the full-year 2007, our forecasted earnings range is $3.27 to $3.39 per share.

The full-year base business revenue growth is expected to be in a range of 2.5% to 4.5%.

The midpoint of this earnings range of $3.33 per share would be 11% higher than 2006.

Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues in the range of $800 million to $1.2 billion, share repurchases for the year of $500 million to $700 million, restructuring costs for the year of $30 million to $50 million, impairment of goodwill and intangibles in the first quarter between $15 million and $20 million, nonoperating investment income in a range of 25 to $30 million for the year, which is lower than 2006 by 50 to $55 million, and a tax rate of 29.75% for the first quarter and full year.

I'll now turn it back over to John.

Thank you, Ron.

We'll now open the call to your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Robert LaGaipa with CIBC World Markets.

Sir, you may ask your question.

Thank you.

Good afternoon.

Hey, Bob.

Just had a few questions.

One, with regard to the guidance, you mentioned some of the weaker growth translating into the first quarter.

You also have built into the impairment of the goodwill intangibles, which implies for the rest of the year you're anticipating a pickup.

And my question is, what are the drivers behind that?

On the sale side, is it just the comps, on the margin side, is it just the integration of these acquisitions?

How should we think about the rest of the year in order to get to the guidance?

Let's start with the impairment that you mentioned.

The impairment is something we do in the first quarter every year.

So year on year, we always have some level of impairment when we have 400 businesses that have goodwill intangibles associated with it.

So year on year, that's not really a change, our guidance is not a change.

I think the way to think of it is, North America we continue to see soft in the first part of the year, especially in the first quarter.

If you remember in 2006, North America was a very strong first quarter, much stronger than we expected last year.

As the year goes on, we anticipate it getting better.

Partly due to better comps in the last part of the year.

On the flip side, internationally, we continue to be strong, especially in the first quarter and softening a little bit, but fill pretty strong growth through the end of the year.

To amplify Ron's remarks, Bob, if you look at our forecast for '07, the strongest North American base numbers we have in Q4 is approximately about 4.5%.

So I don't think that's unreasonable given the history of what we've done and the comps we're facing as we compare ourselves to a very difficult second half of '06, as Ron said.

Absolutely.

And on the margin side, what type of improvements are you anticipating?

Especially in light of -- obviously it's going to be another active year in terms of acquisitions.

How should we think about the margin progression throughout the year?

Should we expect it to be gradual?

Should we expect it to be more back half-weighted?

How should we think about that, especially given the acquisitions you're planning on?

Clearly, the acquisitions have had an affect on margins, both in the current quarter and what we're forecasting for 2007.

I think for the full year, we're actually looking at margins being down a little bit because of the dilutive impact of acquisitions.

Especially in the first part of the year, the first quarter and the second quarter, margins to be down in the 100-basis point to 150-basis point range, but picking up toward the end of the year and by the fourth quarter being slightly favorable to 2006.

Last question before I pass the baton, just with regard to the acquisitions that you've had in 2006.

Obviously from a revenue standpoint, almost half of them were acquired in the third and fourth quarter.

I guess my question is, what are the core growth rates associated with the $1.7 billion in acquisitions?

How favorable are the core growth rates relative to some of the base levels that you're seeing recently?

Rob, let me answer that question.

This is David.

Hi, David.

I think if I look back at the data for last year across the acquisitions, certainly the second half of the year we had much more activity, primarily because as we ramped up a lot of those things fell into the third quarter that could have been second quarter potentials.

So there's not necessarily a straight line relationship.

And as we've seen, things change regularly.

I think in terms of growth rates, I think in on average if we look across the portfolio of what we've acquired, the growth rates would have been somewhere in the 7 to 8% range.

So clearly somewhat higher than our existing base business growth rates, if that answers your question.

It does.

I appreciate it.

Thanks very much.

Our next question comes from Deane Dray with Goldman Sachs.

Your line is open.

Thank you, good afternoon, and a special welcome to the new guy on the call.

Be nice to him, Deane.

Will try.

Just to follow up on the guidance question.

The way we would like to see the assumptions you're baking into '07, is you've given the midpoint of base business growth.

That's for the top line.

How about on the earnings side?

If we were to disaggregate the contribution from base business, the acquisitions in '06, and then acquisitions in '07 to earnings?

How much has come from base business, what sort of earnings contribution from the deals done in '06 will you see in that midpoint of 333, and then what do you get -- assume deals you'll get done in '07?

Clearly, Deane, the acquisitions that don't contribute that much, especially in the first year.

The first year, there's a fairly sizable amortization expense associated with stepping up inventory, et cetera.

So the first year is the toughest year for these acquisitions.

And we're buying typically fixer uppers and we spend some time sorting through that in the first year.

I think the way to think about it is in terms of incremental, first of all, if you think about the base business, we typically are running between 30 and 40% incrementals and that's probably appropriate, probably closer to 40 for the year next year, but lower on the front half for the base businesses.

The acquisition incrementals are more in the range of 6% or so after the affect of amortization.

Translation's adding a little bit next year as well.

So if you just look at the operating income percentages, the base businesses are adding something along the lines of 8 to 9% for the year to operating income, acquisitions, 3%, 3 to 4%, translation, 1 to 2%.

Okay.

That's helpful.

Just as a follow-up, David, we've been through a fairly rocky period with the worst -- what could be the worst of the housing downturn with your guidance at 25 to down 30%.

Based upon the businesses that ITW touches, have we seen the worst of it yet, or -- what are your distributors telling you and how do you expect it to play out in the first half of '07?

Are you talking about in construction now, Deane?

Yes.

Yes.

I think in terms of decline, my estimation is that we're close to the bottom in terms of housing start activity.

I think there's still probably of housing start activity.

I think there's still probably geographically some further regional displacements we'll see, but I think the overall numbers are probably at the bottom.

I think the difficult comparables are obviously in the first half, where we had strong activity through the first quarter of '06.

That's clearly a very difficult comparable.

Probably, if you look at it on an annualized rate, we're talking about a comparable that is probably 20 plus percent different for the first quarter in terms of activity of '07.

I think what we're hearing from our channel partners is largely what I just reflected, my comments which is the inventory adjustments that went along with a lot of the downturn seemed to be largely behind us, and I think the activity levels that people are seeing now at the actual job site level look like they're starting to normalize or at least showing some consistency from week to week.

So I think that's probably the best assessment I can give on the housing market.

Clearly the first quarter is the most difficult comparable.

The second quarter is challenging, but not nearly as challenging as the first quarter.

Very helpful.

Just last question, was that renovation number of up 9%, was that surprising to you?

I know you're baking in a modest decline.

It's hard to gauge how much of a dampening affect renovation provides, but what's your feeling on that side of the business?

The renovation numbers right now, I'm still scratching my head a bit, Deane, because we had very strong early numbers last year that backed down quickly in the latter part of the year.

Frankly, with the numbers I'm looking at, I'm a little bit surprised at seeing negative renovation forecast at this moment, but I can't say that I've got any better data that would supplant that.

We were helped a little bit in the renovation category by Home Depot doing narrow usual buying at the end of the year.

That came as a little bit of surprise to us in December and we ended up with some additional ramps that buys at some of the box stores, which also helped in the quarter.

I guess those would be the two big surprises for us.

Thank you.

And David, thanks for joining the call.

You bet.

Thank you.

Mark Koznarek with Cleveland Research, your line is open.

Hi, good afternoon.

Hi, Mark.

Given that here domestically things have been slowing down over the course of the quarter, I'm wondering if you guys would be able to update some of the growth outlook for the key markets outside of construction and auto.

Basically, what I'm asking, relative to the things we discussed back the December 1st at the analyst meeting, there was some growth rates given for packaging welding, food, et cetera.

Could you update them and give us a sense whether they've changed at all?

They really have not, Mark, changed remarkably since our December meeting.

The ranges we provided you there are largely the ranges that we see at the moment.

I'd be happy to go back through those, if you'd like, but there really isn't any significant change.

In construction we talked about a 2 to 3% overall growth worldwide .

In the auto businesses, we talked about -- global auto, we talked about -- let me find my number here to make sure I accurately quote it, 2 to 3% also in auto on a global basis.

Food equipment, we were in the 3 to 4% range.

Welding, we were in the 8% range.

Those are all consistent with what we're looking at today.

So there's really been no significant change.

I think the only significant data change since we met in December in New York was the auto build forecast for North America has in fact gone down by about 1 to 1.5% for the year.

Other than that, most of what we shared with you is essentially the same.

Okay, great.

Then just a big picture question about the overall outlook for the year.

It just kind of strikes me that we're looking at base growth of the midpoint being 3.5%, which is very close to what you delivered this year, if my numbers are correct, you delivered 3.6 for the year.

Yet your earnings growth this year just ended, we're up 16% and you're forecasting 11% for '07.

So we've got a similar kind of investment income roll off, a similar kind of share buyback embedded in the forecast.

I'm wondering, what are the big differences that are slowing the growth here?

I think one is margins, which I've talked about already.

Our acquisitions have having a dilutive affect on margins and some of our base businesses have had some margin issues, especially in North America.

I guess the way to look at it is, if you look at it on a per share basis, we're up $0.32 and the midpoint of our forecast versus '06, and $0.23 of that is base, which is almost 8%. $0.10 of the increase would be attributed to acquisition, which is between 3 and 4%, and the rest of it kind of nets out. the nonoperating area, including investment income is down $0.09, but that's being offset by shares and translation.

That's the way I would look at it.

Part of the increase in the current year, the base was a little bit stronger.

It was $0.26 '06 versus '05, which is about 10%, so a little bit stronger, so we had less impact on acquisitions, it was less than 2%.

So for '06, Ron, you're saying of the $0.41 we grew this past year, $0.26 of that was base?

Yes.

The other thing that's in the '06 that's not in the '07 is the reduction of tax rate.

So year on year, the tax rate we're holding at of tax rate.

So year on year, the tax rate we're holding at 29.75, but the prior-year tax rate was higher than that.

So that added $0.07 in '06, or almost 3% to the '06 versus '05 comparison.

And then the acquisition would have been that remainder $0.08?

Acquisitions were 4, restructuring was favorable 4, that would be $0.08, I think.

Great.

Mark, I would just add, remember, now, the first half of the year has got some very difficult comps in it.

If you look at it on an annualized basis from the second to third quarter and fourth quarter of last year, the first and second quarter of this year, you've got similar trajectories in terms of decline.

So I think once you get past the first quarter, you're into some more reasonable comparables.

Plus, we had overall very, very strong international growth in '06 that we have not baked in that same level of growth overall in '07.

Okay.

Let's hope there's a happy surprise there.

Thanks a lot.

Our next question comes from Andy Casey with Wachovia Securities.

Your line is open.

Thanks.

Good afternoon, everybody.

Andy.

Just a couple quick questions.

What is your input cost experience been across the quarter, and so far, year-to-date if you can talk about raw materials?

Raw materials in general were down in the quarter, as you might expect.

Resin was down except for recycled PET, which was actually up.

It had been down quite a bit for the beginning part of the year.

In fact, it was down 26% for the full year, even with an 8% increase in the rest of the quarter.

The rest of resin was down in the fourth quarter.

We see resin prices relatively stable going into 2007.

On the steel side, we also some decreases, more in the hot rolled, cold rolled side in North America.

Rod was down a little bit, hot-rolled the rest of the world was also down a little bit.

But that was up 9% for the year.

Again, steel, we think is relatively stable and actually goes down a little bit going into '07.

With the exception of stainless steel.

Yes.

Okay.

And chemicals, which had been increasing worldwide all year stabilized somewhat in the fourth quarter.

Some parts of it were up, some were down, but overall probably up slightly in the fourth quarter.

But that is also stabilizing going into 2007.

Okay.

Just a clarification, Ron.

When you talk about stabilizing resin, is that on a sequential basis or year to year?

I think first quarter versus fourth quarter, the way we're looking at it.

Okay.

So if it stays here, is that baked into your margin forecast for the base business?

Yes.

Okay.

Lastly, on price realization, with the costs coming down, are some of your customers coming back to you to lower the price, or are you able to maintain your price where it is right now?

I think by and large we'll in a position where in most cases, we'll have to give some of that price back, as we would have expected.

Given we've factored into our current cost levels, we've factored it in from a pricing standpoint.

I would expect there to be some decline in prices as a result of some of these raw material changes.

Certainly where they're significant.

Okay.

Thank you very much.

Our next question comes from John Inch with Merrill Lynch.

Your line is open.

Thank you, good afternoon.

Hi, John.

Just a couple of more nitpicky question.

Al and I are just going back through the presentation you guys gave in December.

You thought the contribution was going to be around $20 million.

You're now calling on nonoperating items of 25 to 30.

Is there something else that's been added to that?

The only thing that's changed from that forecast is additional income related to our leverage leases.

There's an accounting change that's coming in the first quarter related to how you treat tax benefits and leverage leases.

That will result in a small charge to equity and then a change in the go-forward income.

Ron, you've also called out FIN 48 -- I'm going back to the December presentation.

Is that going to have any sort of discernible impact, or is that dovetailing with why the tax rate now is dropping versus the run rate we thought we were at at the end of the third quarter?

FIN 48 didn't have to do anything with the tax rate dropping.

There's just a lot of nits and nats that ended up dropping the rate for the fourth quarter and it's a rate we think can be the rate going forward.

And why is that?

I understand maybe there was an accrual trueup or something for the fourth quarter, but why does the rate stay low or at a lower rate for the rest of the year?

Some of it is tax planning that was put in place during 2006 that has an ongoing benefit.

There's also a doubling of the manufacturer's credit that was put in place a couple years ago for U.S.-based manufacturers, so that will help us significantly going forward.

Regarding FIN 48, it's a complex accounting rule with the taxes.

We're going through it right now, and at this point we don't have any conclusion on what the impact would be to equity on adoption.

Okay.

Acquisition, does that have any discernible impact given the elevated run rate in terms of sort of tax rates or how to think about anything else as it pertains to these nonoperating items?

No.

Any tax benefits that comes with acquisitions, for instance, loss carryforwards end up get caught up in purchase accounting and don't really go through the tax rate.

The point being, the tax rate would be dropping even if you weren't doing this elevated run rate of acquisitions?

Correct.

Okay, thank you.

Our next question comes from David Bleustein with UBS.

Your line is open.

Good afternoon.

Just a quick cleanup.

What is the split of business between the big three and the new domestics nowadays?

In North America only?

North America only.

It would have to be North America only, it's about 80/20.

And if you blended your forecast and added your expected penetration gains, what should we expect for ITW's North American auto business in 2007?

Remember, we said big three builds down 3 to 5, so if you assume a midpoint of 4 and better penetration on the new domestic side, we should be somewhere flat to maybe up 1.

Yes, I would think our plan would be in the 1 to hopefully 2% range.

Okay.

Up 1 to 2%, and what component of that is pricing?

Zero.

And my related follow-up question is, can you talk just a little bit about your revenue base in China, which is the biggest business, what you saw in November and December, and what '07 looks like to you?

Our two largest businesses in China are Welding Group and Wilsonart.

As John pointed out earlier, the Welding Group continues to be very, very strong in China.

That's primarily a business that's based around consumables that we're selling into, the ship building, and energy-related markets.

So very, very strong demand there.

And we are in the process of expanding that facility at the moment to add significantly more capacity.

The Wilsonart business in China has been under more pressure in terms of end markets as some of the end markets they serve have really flattened out in terms of growth.

Some of those are based on government spending initiatives, some of which have become kind of lumpy, particularly in the educational and institutional categories.

So they've faced more dramatic issues there from a growth profile.

Those are the two largest businesses.

Overall, our China businesses in the fourth quarter continued to show continued strong demand.

And for the year, I haven't had a final look at the China numbers, but our overall growth in China for the year will be in that 20 plus percent range again.

And thanks a bunch for the slides and the clarity.

Take care.

Our next question comes from Jamie Cook with Credit Suisse.

Your line is open.

Hi, good afternoon.

Hi, Jamie.

I guess my first question, you touched a little bit on -- you talked a little about inventory when you were talking about residential construction.

I guess my question is, if you look broader when you're talking to your distributors, how comfortable do you feel with the inventories out there, or do you feel like there's too much and we need to decrease inventory for a while?

Well, I think if you're talking about it sort of generally, Jamie, I would say that certainly the dramatic changes we saw in inventories that occurred as they were related to construction I think are behind us.

We don't have and we traditionally don't run with inventory in the pipeline with automotive.

That's direct to tier 1, tier 2, and OEMs.

There's not much of an inventory issue there.

The inventory concerns there are more what we highlighted earlier, and that is, what is their finished goods they have on the lots around their distribution channel.

On the industrial side, I think we may have a little bit more to go.

As we looked at industrial packaging as an example, the lag affect that we've seen in our Signode business as the metals markets, steel, and aluminum have dropped, and all of the building material-related markets have dropped.

Their lag versus what we saw on our construction businesses was probably something on the order of 60 to 90 days.

I suspect there's probably a little bit more inventory to come down in those channels before we hit some kind of equilibrium.

I think in the general industrial markets, we're probably not dealing with any significant inventory burn issues.

Okay.

My second question, just going back to the acquisitions.

One, can you just talk about the profitability of these acquisitions relative to what you've done historically?

I think you usually said you can get to ITW margins in three to five years.

Is that still a reasonable assumption?

My second question is, given -- when you look at the acquisitions that you've done, have you seen -- since you've done the acquisitions, have you seen any weakness in those market that is you weren't expecting, which could be a possible headwind as we look into '07?

Let me answer that, Jamie.

The answer on the margin side is absolutely, we think that the profile of the overall acquisition portfolio from last year fits with what we've said in the past.

Operating income in the high single digit range and our opportunity to double those margins in a five-year time frame is clearly what we continue to look at and feel very optimistic about.

Remember that the first year is the most challenging from a margin standpoint, as Ron pointed out earlier.

That's when all the amortization, the bulk of it takes place.

So that has a very big impact on the first year.

If you look at it on an operating basis going forward, certainly those margins are clearly there and the opportunities are there.

There's been nothing of significance to your second question that has occurred that has changed the growth profile to any significant extent on any of the major acquisitions that we've done.

We're pleased with what we've acquired and the growth rates that are embedded in those businesses.

Great.

Thank you very much.

I'll get back in queue.

Our next question comes from Robert McCarthy with Robert W. Baird.

Your line is open.

Hi, guys.

Hi, Robert.

First just had a minor clarification -- well, I guess it's an incremental piece of information.

You gave us some growth rates on construction forecasts for Australia and New Zealand, there's a plus 6, plus 4, and a minus 3, do you have any item what that totals to?

We can get back to you on that.

Okay.

I have two questions about the '07 outlook.

One is just a data item.

Can you give us some indication of what kind of difference in organic growth rates that you're using in North America versus International?

In aggregate, Ron.

For the year, International is in the 4.5 to 5.5 range, and North America in the 2 to 3% range.

And then my other question, a little bigger picture having to do with how you put together the actual earnings per share forecast.

I'm sort of struck by, what, $1.7 billion in acquired annual revenue and no more than 30 to $50 million of estimated restructuring expenses for the year, and a big pipeline of incremental acquisitions baked into your forecast as well.

Are we looking at a situation where you can't -- you don't want to quantify anymore because you don't have visibility on something that you have some belief will likely increase, or is there a reason to expect that only to be to that level based on what you've been buying, for example.

Rob, let me take that.

I think when we go through our planning from a restructuring standpoint, clearly the most important element we look at are the recent acquisitions and any restructuring associated with that.

That's obviously a part of what we ask our managers to look at when we're doing the acquisition.

So we have, I would call it, reasonable visibility of the restructuring plans when we do acquisitions.

So what we put into that acquisition or that restructuring forecast, I think, is a reasonable estimate of with a we think will in fact occur.

And as you've seen in the past, sometimes our estimates, if anything, are too high and we don't always spend what we put in the restructuring budget.

I think by and large, we try to base it on what we actually look at from a project standpoint.

We go through the budgeting process, we actually ask the businesses to identify their major restructuring programs for the coming year.

So it's -- I won't call it scientific, I think it's reasonably accurate and I think the range we have is I think supportable by what we have seen from the businesses.

Let me make sure I understand you correctly.

You have taken a shot at a rough estimate for the small number that would be attributable to the incremental $1 billion of revenue you expect to acquire during the course of year?

Let me remind you, Rob, that in the first year of acquisition, any restructuring goes against the goodwill and purchase accounting.

Oh, thank you.

So it's really the ones that were acquired in the first part of '06 that really start hit the P&L during '07.

And those are the ones where obviously we have better visibility.

We've had them for a while and we have a much better view of what it is we're going to be doing.

Yes, okay.

Very good, thank you.

Our next question comes from Ann Duignan with Bear Stearns.

Your line is open.

Hi, guys.

Hi, Ann.

Let's go back to acquisitions for a moment.

Eleven of your deals in fourth quarter were international.

Can you just talk a little bit about what's in the backlog and what the distribution might be outside of North America versus inside?

And is there any change or are you seeing any changes in deals available more outside of North America as you grow your businesses out there, or is it just kind of same old, same old?

The pipeline right now is still over $1 billion in terms of the deals we're deals we're looking at.

We've been able to identify, we're working on deals right now as we speak in the quarter, we should be fairly in the first quarter.

Right now, if you go back to when we talked to you in New York, we did a split of 55% of our revenues that are North American end-market based, and 45% that are international based.

I think that number is still pretty relevant for us as these acquisitions come in.

If I look at the pipeline, Ann, I would probably say at the moment it's more international.

Probably the flip side of what John just said, which our experience base last year was roughly 55/45.

But it's difficult.

Those measures are at moments in time, so depending on what gets acquired in what quarter, you can draw different conclusions, but I would say by and large the overall activity we're seeing is probably reasonably equally split between North America and International and I'm certainly seeing more activity from our International managers, but I think that's part of what we would have expected given that some of them were perhaps trained later in the cycle and our acquisition training program.

I think overall, I would expect the -- based on what I'm seeing, the pipeline has remained strong and there's new things coming into the pipeline each month.

I think we're seeing more of what we experienced in 2006 in that regard.

Okay.

Are you comfortable that you've rolled out the process to all the significant managers that you need to, or is that an ongoing process?

I think you said when you were in New York, you'd trained 150 managers.

Is the process now robust, or is there always another 100 managers that need to be trained?

I'm not sure there's always another 100, but there's certainly always more managers to be trained as we look at the situations in each of the groups and we're asking the Executive Vice Presidents to identify dish people that would benefit from this training.

So this will be ongoing, but it won't be 150 a year, certainly.

I would expect in '07, maybe we're talking about training another 50 to 70 managers, something in that range.

Okay.

So those guys get trained and up to speed, we should expect them to start generating new leads, is that the way we should think about it?

That's exactly right.

We only train them if we have a specific mission and objective for them.

This is not training just to say they've got a certificate, if you will.

We expect them to put the training to work.

Okay, very good.

One quick follow-up on your share repurchases and share count.

What was your year end actual share count, not your average for the quarter?

Or if I put it another way, what's your count you guys are using for '07?

The share count we're using for '07 is in the range of 557 million to 559 million shares, and that's after the affect of dilution.

Okay.

Dilution is typically 3 to 4 million shares.

And do you have your actual year-end, by any chance?

Year end before dilution is 559.

And do you have it after dilution?

Not handy.

It's in the release, I think.

You've exceeded your questions, anyway, Ann.

You didn't answer them, though.

Okay, I'll talk to you guys offline about it.

You can ask me that later.

Okay. thanks.

Our next question comes from Eli Lustgarten with Longbow.

You may ask your question.

What was the year-end share count, for Ann?

The actual outstanding was 559.

That's fully diluted or primary?

Before dilution.

And you don't have the number?

Just for fun anyway.

Two quick --

Gave you the same answer, Eli.

Two quick questions, pricing, do you have a measure of what pricing was in '06, and I assume the pricing was almost zero in '07 in your forecast?

Yes.

In '06, it was around 1% total worldwide.

And assuming '07 has any pricing in numbers?

No.

Virtually zero?

Yes.

And the acquisitions, you've tripled the amount of acquisitions year-over-year and staying at a higher base, is there any embedded costs?

Is there costs associated with going to that level that now have to be absorbed because you're three time the acquisition level?

Is there any internal basis costs?

And an aside to it, by making more International acquisitions, are you finding the accounting differences and the rules over there causing you a different way of having to absorb the cost of acquisitions over the first year?

First of all, Eli, on the question on incremental costs from acquisitions, we don't have a corporate development group that we need to double in size because we've doubled the size of acquisitions.

Our acquisitions are found by the local business unit managers.

And David talked earlier about training of people.

These are people we've had.

These aren't acquisition experts we've brought in from the outside.

These are people that are running ITW business today.

So the incremental is simply getting them trained up and out on the street.

There's maybe a little bit of outside legal and other due diligence costs, but nothing of significance related to the higher acquisition level.

As far as making it more Internationally, because of the rules overseas and what you can and can't do and changes in restructuring, are there any differences in costs associated, any adjustments to the process that costs associated, any adjustments to the process that have to be done?

Not really.

Whatever accounting rules they're following in their local country, we convert them to U.S.

GAAP upon acquisition.

So we go through a pretty exhaustive financial due diligence process and identify some of those issues.

They're keeping their books in Germany, and it's under German rules, we know what the difference are.

So in our due diligence process, we call those out.

I realize the accounting side, but also you can't necessarily lay off people or move people or close plants or things like that.

We're very familiar with the rules around restructuring given the level of restructuring we've had over the last few years.

And Eli, we bake those into our acquisition plans.

So we know, for example in Europe, it is more expensive to go through a restructuring that involve the displacement of people.

We clearly build that into our acquisition model and our assumptions.

As Ron pointed out earlier, almost all of those adjustments in the first year are part of the purchase accounting, and going forward they're part of our overall restructuring budget.

We do have a lot of familiarity with how those things work.

And yes, they are more expensive up front, but clearly we build that into the benefit analysis as we make those decisions.

Thank you.

Our next question is from Joel Tiss with Lehman.

Your line is open.

I have my three clarifications and six related follow-ups.

I'll just glue my two questions into one.

Can you talk about what's happening in Germany in January now that they've put the VAT through.

I know everybody was worried about that earlier.

And if you can give us an on the ground of what's happening.

And also, can you give us an idea of how many businesses you sold in 2006, or at least sort of the net revenue decline from what you guys sold, just so we can net out the acquisitions a little clearer?

Thank you.

Joel, I'll answer the first question about Germany, because I was just there ten days ago, and I'll let Ron handle the divestiture question.

I would say that the mood in Germany -- I visited several of our businesses in automotive and in construction and also in our testing and measurement area.

I would say that most of them are surprised that there has been at least so far not much impact of the VAT which was so much talked about in the press as it went into affect the first of January.

So nobody has seen anything reflected significantly on their order books and the general mood certainly on the industrial markets there seems to remain much as it did the latter half of last year, which is strong.

No definite change in the short-term, anyway.

Regarding the question on the divestitures, we sold seven businesses during 2006.

The biggest one being in December.

And the revenues on those are in the 35 to $40 million range.

In the last week, we've also sold another business that had revenues of $70 plus million which will also have an impact on the rest of '07.

So about $100 million in total, $100 plus million in total of revenues going away from divested business.

Great.

Thank you.

Our next question comes from David Raso with Citigroup.

Good afternoon.

Question on the cash flow balance sheet usage.

If we look at $600 million repo midpoint of guidance, assume you buy acquisitions of one-time sales, about $1 billion, you're up to 1.6 and about $400 million of dividends.

That's $2 billion of cash needs, but you generate pretty close to that on an annual basis in your free cash flow, and your net debt to cap is only 8% going into '07.

Shouldn't we expect a greater use of your balance sheet and cash flow than what you've guided to?

The estimates going in on the share repo are fairly conservative.

We just had a strong acquisition year of $1.7 billion, where we basically doubled our forecast.

Going in I think -- if you look at the cash flow from the high end of the ranges, you start at $1 .8 to $1.9 billion of free operating cash flow, which is even with net income, acquisitions at $1.2 billion, share repo was 700, dividends are almost 500 now.

You end up using debt of about 500 and some million, which gets your debt to cap up a little bit from where it's at closer to the 20% target.

Hopefully, we do better than that.

And when it comes to the base revenue growth, it looks like the back end to December, the stand-alone month was a real drop-off for Specialty Systems North America.

Can you explain the drop-off there?

And it dove tails into the point, if last year North America was 2.9 base and International was 4.8, I'm surprised you're not baking in a greater slowdown for full-year North America.

You noted earlier, Ron, about 2.5% using your midpoint.

The year is going to start awfully slow in North America, especially if you back into December, SSNA really fell like a stone in December, down 8, 9%.

Can you help us understand the full-year North America being 2.5, especially some insight on why SSNA dropped so hard in December?

Are you seeing anything different to start the year.

David.

Remember we had one less day in North America in December.

That affected our base revenues 5% in both categories.

Okay.

So your assumption in terms of going from a weaker December into the year, if you really normalize it, it was a stronger base number than it appears to be.

Okay.

So North America in the first quarter while still being tossed in the EPNA, with that issue, I shouldn't take December's SSNA and think first quarter is down for SSNA core?

Right, correct.

Thank you very much.

Our next question is with Martin Jacobs with Capital Research.

Your line is open.

Hey, guys.

Good afternoon.

Hey, Martin, how are you?

Good.

Most of my questions have been answered, but I did have one.

As you exit 2006, do you know in relatively specific terms what your either percentage or dollar exposure is to domestic, auto, and housing?

The answer is yes, but I think we have it aggregated on a total company basis, Eugene?

Yes.

I think we're going to probably have to get back to you on that, because we only have it in the category of automotive on a worldwide basis.

Yes.

And that comes to about 12%.

So if you did your -- domestic auto is what, I'm sorry. 800.

So domestic auto is about $800 million.

So you can do your calculation based on that.

Of the 12% number, domestic auto is about 55% of that.

Okay.

So that gives you a little bit -- about 7%, somewhere around there.

And the housing?

That's a total company number.

Okay.

And the other was housing.

Housing, North America only?

Right.

It would be roughly 550 to $600 million.

And that just new housing, or does that include repair, remodel?

Well, there's some crossover.

That would be our proxy for new housing.

Okay, great.

Great.

Okay.

Thanks, guys.

Thank you.

Our next question, Jim Edelman with Highland Capital.

Your line is open.

Thank you, good afternoon.

If you could just provide a little more color on the acquisitions as you stated, you doubled what you thought you were going to do.

In the fourth quarter, you pretty much matched your original guidance for the whole year.

Why were these opportunities available?

What was the role of private equity?

Was there any particular business lines?

Motivated sellers?

Anything you can tell us to help us understand why you were able to -- why you saw fit to make such a large acquisition in the quarter.

Thanks.

I think the biggest -- I think the quarter is really an extension of the year.

I think the biggest reason for the strong year and the strong fourth quarter is that we simply put a lot more time and energy into the process.

I mentioned earlier the acquisition training that we've gone through with our management group over the past 18 months, we've trained about 150 of our managers in our acquisition process with specific objectives.

So they are all engaged in some level of acquisition activity, and I think that additional effort has clearly paid off.

The role of private equity, certainly the private equity from a valuation standpoint has made larger acquisitions in particular very challenging from a valuation standpoint.

However, with that said, if you look at the larger acquisitions that we've done over the course of the last 18 months, I believe seven or eight of them now in excess of $100 million in size, we actually have purchased from private equity owners.

While they're often difficult competitors on the one had, they are also a source of the deals for us on the other hand.

So private equity clearly has had a role in the valuation area, and there are a number of acquisitions, opportunities that would have been nice to have done, but they're not affordable from our standards.

Overall, the reason the activity has improved is we're putting more effort and emphasis on it with our management team.

Thanks very much.

Last question comes from Mark Koznarek with Cleveland Research.

Your line is open.

Great.

Thanks for letting me sneak back in.

A couple real quick ones.

This other income expense line was kind of a happy surprise for the quarter, and I'm wondering, what should we be thinking about for '07 on a full-year basis there?

Mark, let me answer the first half of that.

It was a happy surprise for the quarter, but when we put our December numbers out, we had anticipated that happy surprise, so it was already built into our range we provided in the fourth quarter.

I'll let Ron answer the question as it relates to '07.

The biggest pieces of other relate to divestitures and one-off kind of things like gain losses on fixed assets and translation, et cetera.

So, really, from a run rate perspective, there's not much you can take from this quarter.

Sometimes there's income, sometimes there's expense.

So, at this point, we're really looking at basically flat going forward.

Okay.

And the final thing I've got is just looking at the margins you guys report for your acquired revenue.

You can work into that given the data you provide for each of the segments and build up to what that is and it was kind of interesting to observe the first three quarters of the year that margin on your acquired revenue is 6%, 8%, 6%, and then in the fourth quarter here it was 0.

Is that simply a function of the big slug of revenues that came in in the quarter?

But more importantly, is that now going to be the run rate for next three quarters until you get this slug of deals integrated?

Well, part of it is the, as I mentioned earlier, there is a, in the first six months or so, there is a heavier amortization charge related to stepping up inventory, recording backlog and tangibles and amortize fairly quickly.

Because we had so many deals happen in the quarter, there is a big charge for the amortization.

Secondly, some of these deals were purchased in November, early December and some of these companies, there are shutdowns that happen around Christmas, etc., so we didn't get our normal revenue that we would have normally expected as a run rate when we were only looking at a month and a half or a month of results. think we expect it to be better going into '07.

Overall for '07, we're in the 5 to 6% range after amortization for the whole year in the current forecast.

I'm sorry, that was how much, 5 to 6%?

5 to 6%.

Post-amortization.

After amortization.

Okay.

Of the traunch that you did in '06, running into '07?

As well as '07 ones coming in as well.

Oh, okay.

Even those.

All right.

Very good.

Thanks.

We have no further questions.

Thank you.

We appreciate everybody joining us on the call, and we will talk to you again.

Thank you.

Thank you.

Thank you for your participation.

This does conclude today's conference call.