Illinois Tool Works Inc (ITW) 2007 Q1 法說會逐字稿

Welcome to the first quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

[OPERATOR INSTRUCTIONS].

Today's conference is being recorded.

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

Now I will turn today's meeting over to John Brooklier, Vice President of Investor Relations.

Thank you, sir, you may begin.

Thank you very much.

Good afternoon, everybody, and welcome to ITW's first quarter 2007 conference call.

As noted I am John Brooklier, VP of Investor Relations and with me today is David Speer, our CEO, and Ron Kropp, our CFO.

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

At this point, David would like to make introductory remarks about the first quarter.

Thank you, John.

I believe our financial performance in the first quarter of 2007 was a solid report card.

We're pleased with the fact that we're able to grow revenues 14% during the quarter and net income 10%.

Even though a number of North American end markets have proven to be very challenging over the past two quarters.

We obviously have benefited from the strength and breadth of our international presence and our plan is to continue to diversify our geographic revenues in the years ahead.

We're also excited about our acquisition track record.

Not only in the first quarter, but for full year 2006 as well.

Since the beginning of 2006 we've now added over $2.1 billion of acquired revenues.

Based on our historical track record, we continue to believe acquisitions provide a reliable way to add to both our revenues and our future earnings.

Now let me turn the call back over to John.

Thank you, David.

Here is the agenda for today's call.

Ron will join us very shortly to discuss the financial metrics for the first quarter.

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

Ron will then address the 2007 second quarter and full year earnings forecast and associated assumptions, and finally, David, Ron and I will take your questions.

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

We're targeting a completion time of one hour for today's call.

First, traditional housekeeping items, compliments of our lawyers, 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 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, 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 spelled out in more detail in our form 10-K for 2006 and on the slide I hope you're looking at right now.

Moving to the next slide, finally, the telephone replay for this conference call is 203-369-0120, no pass code is necessary, and the playback number will be available through midnight on May 2, 2007.

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

Once you find the investor information section just look for the events tab and look for the presentations.

Now let me turn the call over to Ron.

Ron?

Thanks, John.

Good afternoon, everybody.

The highlights for the quarter are as follows: revenues grew 14% versus the first quarter of last year.

This growth rate was 210 basis points higher than the growth rate of the fourth quarter of 2006.

Operating income was up 5.3% versus the prior year, due primarily to higher revenues for the base businesses but favorable impact of currency translation and lower impairment charges.

Operating margins of 15.1% were lower than last year by 130 basis points, mainly due to the dilutive effect of acquisitions.

Diluted net income per share of $0.71 was 9.2% higher than last year.

Free operating cash flow of $338 million was higher than last year by $14 million and return on invested capital was 16.1%, which was lower than last year by 120 basis points.

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

Our 14% revenue growth is primarily due to three factors: first of all, base business revenue grew 1%.

This growth rate was 120 basis points lower than the fourth quarter of 2006.

International base revenues increased 8.9% which was 160 basis points higher that than the fourth quarter.

This solid performance was due to strong growth in most of the Company's end markets and Europe and Asia Pacific.

North America base revenues decreased 3.5%, primarily as a result of declines in the Company's North American new housing and auto end markets and slowing growth in the other North American end markets.

Secondly, acquisitions added 10.7% to revenue growth, which was 260 basis points higher than the fourth quarter acquisition effect.

Third, currency translation increased revenues by 3.0%, which was 90 basis points higher than the fourth quarter currency effect.

Overall, our 14% revenue growth was a result of strong base business growth internationally and the larger impact of acquisitions in translation.

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

Operating margins for the first quarter of 15.1% were lower than last year by 130 basis points.

Margins increased 30 basis points due to the base businesses and 30 basis points due to lower impairment charges.

Offsetting that, the lower margins of acquired businesses reduced margins by 160 basis points.

In a nonoperating area, other income was higher than the prior year by $16 million, primarily due to a $12 million gain on the sale of consumer packaging business during the quarter.

Note that due to its insignificance, investment income related to the former leasing and investment segment is now being presented within other income.

The first quarter effective tax rate was 29.5% versus 31% the first quarter of the prior year.

Turning to our invested capital, total invested capital increased $270 million from the fourth quarter primarily due to acquisitions.

The accounts receivable increased due to acquisitions and a higher mix of international revenues as our international businesses have longer receivable terms.

Inventories were higher than the fourth quarter due to acquisitions and seasonality.

For the first quarter, capital expenditures and depreciation expense were both $85 million.

On the financing side, our debt increased $115 million from last quarter and our debt to capital ratio increased from 13.6% to 14.3%.

Our cash position decreased $16 million in the first quarter as our free operating cash flow of $338 million, proceeds from divestitures of $92 million and additional borrowings of $89 million were utilized for acquisitions of $269 million, dividends of $117 million, and share repurchases of $180 million.

For the quarter, we repurchased 3.7 million shares under our ongoing open ended program.

Our first quarter return on invested capital, 16.1%, was lower than last year by 120 basis points due primarily to the impact of acquisitions.

Finally, on the acquisition front, we acquired nine companies in the first quarter which have annual revenues of $399 million.

We continue to forecast 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 segments.

Thank you, Ron.

Before I review our manufacturing segments, let me just spend a few moments highlighting the traditional data we give you, the international North American trend data.

Put simply, our very strong international results were driven by very solid end market demand across a broad array of geographies, while the converse was true for North American end markets.

You look internationally, the Euro zone purchasing manager's index was a relatively strong 55.4% in March, versus 56.5% in December, and as important Euro zone industrial production was 4.2% in February versus 2.5% in November.

Germany continues to lead the way with a very strong industrial production growth rate of 7.6% in February.

As noted earlier, the news in North America was not as good.

The ISM index came in at 50.9% in March, and that's down from 51.4% in December and 52.9% in September.

The ISM new order index also showed the same type of downward trend, 51.6% in March versus 52.1% in December, and 54.2% in September.

As important, industrial production that excludes technology grew a very tepid 1.2% in March versus 2.4% in December.

It is clear to us this macro data underpins the weakness we saw in a variety of North American end markets in Q1.

Moving to the next slide, let's review our four manufacturing segments.

Starting with North American engineered products, revenues declined 0.4% and operating income decreased 11.5%.

Operating margins of 14.9% were 190 basis points lower than the year ago period, largely as a result of volume declines in businesses which serve new housing construction and Detroit three auto.

Looking more closely at segment results, the 0.4% decrease in top line consisted of the following: minus 6.5% from base revenues, plus 6.7% from acquisitions, minus 0.5% from divestitures, and minus 0.1% from translation.

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

Similar to Q4 '06, our construction and automotive based revenues continue to reflect very difficult end market conditions.

For construction, total base revenues declined 10% in the quarter.

Base revenues for ITW construction, which is made up of our tool and fastener and truss units were down 12% in the quarter.

The decrease in our tool fastener truss category was largely link to do the ongoing weakness in new housing starts which were down 32% in Q1 versus the year ago period.

By construction category in Q1, our new housing related revenues were down a surprisingly low 7% in the quarter, mainly due to increased orders from distributors who needed to resupply inventories that were taken down to artificially low levels in the second half of 2006.

Our renovation category, on the other hand grew more than 20% in the quarter as home centers led by Home Depot restocked stores.

Meanwhile, our commercial category declined approximately 6% in the quarter, and if you look at the most recent Dodge data on commercial construction, that showed a 2% decline in the most recent period.

Moving to Wilsonart, their base revenues fell 8% in the quarter as its business units battled weaker commercial construction demand and very difficult comps from a year ago.

The decline in new housing starts also impacted Wilsonarts' residential business while the flooring business also contributed to weaker sales.

Moving to the next slide, and automotive, our base revenues declined 7% even though the Detroit three build was down 12% in the quarter.

Specific builds were as follows: GM was down 14%, Ford was down 15%, and Chrysler was down 3%.

The new domestics only increased their builds 1% in the quarter.

From an inventory standpoint, the numbers were fairly stagnant.

At the end of March, 31 total Detroit three inventories were at 74 days on hand, and that's down one day from the end of Q4.

Specifically, GM was at 86 days, Ford was at 64 days, and Chrysler was at 68 days.

As expected, new domestic inventories remained in better shape at 59 days on hand.

Finally in our industrial products category of businesses, base revenues declined 1% in the quarter as the number of our units reflected slowing end market trends, industrial plastics fell 3%, while polymers was only up 2% in the quarter.

Moving to International Engineered Products, in the first quarter segment revenues increased 33.4%, and operating income grew 28.6%.

However, operating margins of 11.7% were down 40 basis points from the year ago period thanks largely to the dilutive impact of acquisitions.

Take a closer look at the top line.

The 33.4% increase in revenues consisted of the following:.

Plus 8.2% from base revenues, plus 17.2% from acquisitions, minus 0.6% from divestitures, plus 8.5% from translation, and plus 0.1% from other.

Similar to our North American segment, E P International consists of construction, auto and industrial product businesses.

Unlike North America, the growth in our construction business units and end markets was very strong in Q1.

Total construction based revenues grew 13% in Q1, and by geography, Q1 base revenues were as follows: European construction up 11%, Australasia up 14%, and Wilsonart International up 14%.

Construction Europe was driven by increased demand penetration on wide variety of countries with Germany leading the way.

Asia Pacific benefited from strong end market demand in Australia and Wilsonart continued to post robust results thanks to strength in the U.K.

and Germany.

Automotive based revenues grew only 1%, even though builds were up approximately 5 to 6% in the quarter.

Our mix of larger customers who are weaker auto builds helped contribute to less penetration in the quarter, and key builds in that category would include Renault group growing only 0.8% and Fiat increasing builds only 2.3% in the quarter.

In addition, base revenues were impacted somewhat by our auto businesses walking away from low margin business in the quarter.

The remaining part of the segment is made up of our industrial based units, these business units in total produced base revenue growth of 7% in Q1 with base revenue growth of 17% from industrial plastics and 8% growth from fluid products, and 5% growth from polymers.

Moving to the North American specialty systems segment, for the first quarter, segment revenues increased 8.7% and operating income grew 1%.

Operating margins of 18.3% were 140 basis points lower than a year ago, mainly due to the dilutive impact of acquisitions.

Focusing on the top line, the 8.7% growth in revenues consisted of the following: minus 0.9% from base revenues, plus 9.9% from acquisitions, minus 0.1% from divestitures and minus 0.1% from translation and minus 0.1% from other.

This more CapEx equipment and consumables oriented segment finally saw base revenues go negative, albeit marginally, for the first time since the third quarter of 2003.

Clearly the decline in industrial production levels that started in 2006 and carried over to the first quarter of 2007 had an impact on our Q1 results.

Remember as I noted earlier, industrial production ex technology grew only 1.2% in March.

The major Q1 decline in the segment was related to industrial packaging which saw decreases of approximately 8% in the quarter, and that decline was principally associated with ongoing weakness in construction-related packaging categories such as lumber and brick and block.

Those categories were down approximately 25 to 30% in the quarter.

While our welding business grew base revenues 7% in the quarter, that's down from 15 to 20% levels from 2004 to 2006.

Please note, we are pleased with this growth rate and fully expected welding to moderate its growth coming into 2007.

Energy related end markets continue to be a key catalyst for welding's growth, and finally food equipment's base revenues increased 3% in the quarter thanks to growth on the restaurant and institutional side.

Moving to the final segment, international specialty systems, for the first quarter segment revenues increased 27.2%, and operating income was up a robust 35.9%.

Operating margins of 12% were 80 basis points higher than the year ago period due to the strong business performance partially offset by the dilutive impact of acquisitions.

Looking at the components of the top line, the 27.2% growth in revenues consisted of the following, plus 9.5% from base revenues, plus 10.8% from acquisitions, minus 0.9% from divestitures, plus 7.9% from translation, and minus 0.1% from other.

This segment benefited from contributions from a broad array of businesses, most notably welding and industrial packaging.

Welding's base revenues increased 21% in the quarter as demand for energy-related and ship building equipment and consumables in Asia remained strong.

Welding was also aided by a general industrial demand across Europe.

Helped by stronger industrial production activity across a wide variety of geographies, industrial packaging's base revenues grew 9% in Europe and 16% in Asia -Pacific.

Food equipment's base revenues were up 8% in the quarter thanks to institutional demand in Europe, and finishing's base revenues increased 22% due to strong command for Gema powder based products in a number of European countries.

Let me turn the call back over to Ron who will address the 2007 forecast [technical issues].

Thanks, John.

We are forecasting second quarter 2007 diluted income per share to be within a range of $0.86 to $0.90 per share.

Low end of this range assumes a 0.4% growth in base business revenues and a high-end of the range assumes a 2.4% growth in base revenues.

We are expecting that the base revenue trends that we saw in the first quarter will continue through the second quarter with strong growth internationally and declining revenues in North America.

The mid-point of this EPS range of $0.88 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 1.8% to 3.8%.

The mid-point 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, no further impairment of goodwill or intangibles, nonoperating other income which now includes investment income in a range of 70 to $80 million for the year which is lower than 2006 by 30 to $40 million and a tax rate of 29.5% for the second quarter and full year.

I will now turn the call back over to John.

Thank you, Ron.

We will now open the call to your questions.

[OPERATOR INSTRUCTIONS].

We have our first question from Rob LaGaipa, CIBC World Markets.

Your line is open.

Thank you.

Good afternoon.

Hi, Bob.

Just a couple questions.

In looking at the guidance for the rest of this year in light of the second quarter guidance, , it implies pick up in growth to if we use the mid-point of your range, of roughly 4.5% for the third and fourth quarter, and I guess what I am trying to get a handle on here, is I am sure it is comprised of three areas, and I am trying to get a sense of what's the magnitude of the three areas, those being the weaker comps in the back half of the year, you also have the benefits of acquisitions, anniversarying, and also end markets, and I am not sure what's the composition of those three?

Can you help me out with

I think if I look across it in total, Rob, you hit the key three points and from a mix standpoint I think clearly the second half of the year with the base businesses is clearly a comps question.

As you would recall, the comps in particularly the housing and auto businesses, auto in third quarter and fourth quarter, housing probably more skewed towards the latter part of the third quarter but certainly into the fourth quarter, those numbers are quite a bit different as we saw a fairly dramatic slide in those markets the second half of last year, so I would say just on a rough gut basis that the comps probably represent base business comps probably represent two-thirds of that improvement.

Okay.

Terrific.

The acquisition activity which was also heavy any the latter part of the year will create some up swing, there as well.

We do not see obviously in our forecast as you would see from the second quarter revenue numbers a significant improvement in North America during the quarter, so we think that what we've seen in the first quarter, particularly the weakness in March, we don't see any dramatic improvement other than the normal seasonality with some businesses during the second quarter.

Bob, I would also add to David's point that if you look at -- if you really sort of look at our assumptions, we're bringing down our international assumptions, too, for the second half.

While we think we have easier comps on the North American side we clearly recognize the fact that there are more difficult comps on the international side.

I think that we're being -- I think we're being reasonable.

Time will tell.

Terrific.

Two other real quick ones.

One, just the margin improvement that you're expecting for the rest of this year.

You're very vocal I think last quarter talking about the acquisition impact in the early part of 2007, and what kind of progression are are you expecting for the remainder of the year?

I think clearly we saw margin impact of acquisitions continue.

We had a very strong fourth quarter for acquisitions, so for a lot of those businesses this is the first full quarter we've had them in the fold.

Part of the burn on margins is also amortization from the newly acquired companies, and that will roll off a little bit as we get into the second and third year.

So overall, margins will still be relatively tough in the second quarter, but we expect them to get better back to the more normal ITW margins of the 17% range towards the end of the year.

Should we expect that the margins should be down through the second and third quarter or should it start to improve year-over-year in the third and fourth quarter?

I think down more in the second, down a little bit in the third, and favorable in the fourth.

And last question before I pass the baton, the other income, given the $26.6 million in the first quarter, using the mid-point of the 70, 80 million, the rest of the year implies $16 million or so per quarter.

What's that consist of?

It is a lot of pieces.

Let me go through it.

It is not -- definitely not a straight line deal.

In the first quarter, we had 26 million.

Of that, 12 million was a divesture gain, offsetting that, we had some other bits and pieces.

We had $5 million in investment income, but that was down $5 million from the prior year, so overall we're up $16 million year-on-year in the first quarter.

Most of that is related to divestitures because we also had a divesture loss in the first quarter of last year.

In the second quarter we also have another divesture that has closed with fairly sizable gain, 20 plus million dollars gain, so that will help the second quarter.

However, we have negative $15 million related to investment income in the second quarter.

We had a bigger second quarter last year in investment income.

That will offset that.

In the third quarter more negatives from investment income, around 20, $20 million, $25 million negative investment income, and in the fourth quarter, we had a $20 million divesture gained in the fourth quarter of last year.

That will be a negative.

Terrific.

Thanks very much.

Thank you.

Next Deane Dray, Goldman Sachs, your line is open.

Good afternoon.

Hi.

I guess the question key here in terms of the progress of the months in the quarter, you had been tracking January, February, towards the higher end of your base business range, it sounds like March really did fall apart.

It is harder to understand it looking at the engineered products North America business in construction because it doesn't look like the sell-through matches up with what your base business sales because of the distributor restocking, so kind of take us through what went on in March, and why that gives you confidence that your second quarter guidance for base business doesn't look as though it is a continuation of March's weakness?

Well, I would -- Deane, I would start off with the fact if you break out March separately, our North American businesses were down approximately about 8%, and they had been running down more like 2% prior to that.

We got a big stepdown in March.

There is no question.

The big variable we got in March was again construction-related, and I would say a couple of businesses, our pass load business clearly felt the impact of a weaker March, having had a stronger January and February where they had orders for restocking.

That apparently came to a screeching halt in March, and if you look at Signode industrial packaging, a lot of their decline in the month of March which was close to sort of the 8 to 10% range really was predicated on the fact their end markets in the lumber, lumber, brick and block area continue to be very, very negative.

Now, one other thing you throw into the equation, you have to remember we had one less day in March, too.

That's going to have an impact.

That's going to impact the numbers by 4 or 5%.

I would add to that that March last year also was the peak for residential housing businesses, so it was an extremely strong, in fact a record month for us, so we got a real tough comparable in that regard as well.

On the renovations side, that comp is tough or at least the base business number is tough because of you said restocking at the home centers, is that --

You may recall last year we went through the same cycle that we went through.

We went through it in the first quarter, we went through it again in the third and into the fourth quarter where there was clearly in our estimation destocking going on in that channel.

Clearly it occurred very significantly during the fourth quarter of '06, and obviously it came back strong in the first quarter, so we had significantly higher revenues revenues, and our view is that was primarily refilling the shelf.

As you know, there is not a lot of excess inventory capability in that sort of supply chain, so it is not a sell-through.

Our sell-through date was nicely into the mid-single digits, but certainly not reflective of what we saw in terms of the 20 plus percent number John talked about.

David, one of your comments last quarter was given the data we've seen on the housing front, you felt some of the worst of the housing downturn of was behind you, and clearly now you're past your anniversarying some of the toughest comps.

What's your sentiment today based upon what your customers are telling on you the housing front?

I think if you look at the housing data, I think what I said, Dean, was to the effect that I think we're getting close to the bottom.

Correct.

I think if you look at the housing data that I am seeing, I think that's reflective of that.

I think that this is not going to be a V-shaped curve here.

We're not going to hit the bottom and bounce up.

I think we'll be at the bottom probably for two to three quarters, the bottom being hovering somewhere between 1.45 and probably 1.5 in terms of annualized housing starts, a million housing starts.

I think that the data that I have seen from NHB that just came out suggests for the first quarter we're at 1.45, which is down 30 some percent from the annualized rate last year, and their projections for the second quarter only show a modest 1 or 2% from that level.

I think the data I am seeing and from what I am hearing in the channel, the user level is that we're probably close to the bottom.

The question is how long are we going to be at that level.

Okay.

Just last point, we've seen a couple of business divestitures here, and you've got one coming up in the second quarter.

Any change in strategy, sentiment, about moving some of these businesses out this way?

Are there more divestitures, and how should we read into this?

I think as I said in the past, Deane, we have done a reasonably good job the last year of really looking at businesses that we don't think have that long-term fit, and we developed a list as I described in the past of these businesses that we've looked at when it makes sense to look at divesting these.

We have divested in the past year probably -- actually more in the past six months, three businesses that were larger in size than the normal types of things we divested.

I think that's reflective of the fact these were businesses that we didn't think had a strong long-term fit with our growth objectives, and that's why obviously we moved those.

We do have a modest pipeline for divestitures.

We have probably 5 to 7 businesses in that pipeline at the moment that are in various stages of consideration.

Nothing imminent.

The one that just closed in April is really the last one that I would call imminent in terms of timing, but as you know, these things do change.

I expect we definitely will divest some of these additional units between now and the end of the year.

The timing is difficult to predict with those matters.

We'll have about a quarter advance look at those?

Well, we don't obviously we don't project those sales until we've actually completed the sales, much like gains in the former L&I portfolio, we don't predict gains before we sell something, but I can tell that you that the process is active.

It is alive.

I think the things that I look at that are currently in the pipeline are modestly smaller than what we've been transacting over the last six months.

I wouldn't expect anything dramatically different.

Thank you.

Thank you.

Next David Bleustein, UBS.

Your line is open.

Good afternoon.

Hi, David.

On the base business, aside from the easier comps in auto and housing, which of the markets do you see in the back half of the year that might be a little stronger than the front half?

Where are you looking for actual sequential improvement?

I think the key markets clearly are auto and housing.

The general industrial markets clearly for us in the first quarter, we saw some trends downward in the fourth quarter but still in positive territory, and I think some of the general industrial markets we've seen in North America have clearly weakened, even more in the first quarter, so I would expect that by the latter half of the year, we'll see improvement in those as well.

The North American store is still primarily driven by what's going on in auto and construction and as Ron pointed out in his comments, in our industrial packaging businesses we have a fair concentration of activity that's associated with those markets as well, so it is not all contained in the engineered products segment.

It is primarily those markets, David.

Understood.

Are there pockets where you have businesses in eastern Europe?

Do you have any exposure to Middle East where things are actually accelerating?

I thought you were talking about North America.

Broadly defined.

I think from an international perspective the strong growth clearly in Europe well above our expectations.

The growth in Asia Pacific has certainly been good growth but not as far above our expectations as what we're seeing in Europe.

It is really western Europe at the moment driving our results.

While we have concentration in eastern Europe, the bulk of the results are clearly coming out of the west, and I think as Ron and John pointed out in comments, it has been largely a story out of the big countries where we have a strong presence, Germany, the U.K.

and France.

And my related follow-up, congratulations on the acquisitions, but what was it that changed in the middle of last summer that's really enabled you to pick up the pace to such a much more rapid level obviously?

I think it is really a question of the amount of activity, David.

The activity level really increased going back to the latter part of 2005, but as you know, closing transactions in the acquisition space is not a straight line, so we were confident that during the year last year that we had a good strong pipeline.

It just so happens that the bulk of the deals, although we had a good first quarter last year as well, the bulk of the deal is actually closed in the latter half of the year, and the fourth quarter was extremely strong, so hard to predict exactly when the timing of those things are going to close, but I would say the primary reason why the numbers were up is really the amount of activity and the amount of resources we've devoted to the process.

Do you think it was that more so than deceleration?

Deceleration in what regard?

North America, and obviously, some of your acquisitions have been international, but do you think it makes it easier for you to buy companies when things are softening a little bit?

It hasn't so far.

It hasn't changed the valuations, and in my view is hasn't changed the availability.

There are things I am suddenly seeing on the market because people see things weaker.

Auto might be accepted in that, but we didn't do any significant transactions in auto in North America, so I don't think there has been any material change yet.

Auto might be excepted in that, but we didn't do any significant transactions in auto in North America, so I don't think there has been any material change yet.

Generally, I would expect there's a prolonged weakness, you would generally see more assets available.

Certainly haven't seen that yet.

Thanks a lot.

Thank you.

Next Jamie Cook, Credit Suisse, your line is open.

Good morning.

Good morning, Jamie.

Good afternoon.

I guess my first question, John, you mentioned when people are asking about your growth assumptions for the second half of the year that you also tempered your assumptions overseas, and I am guessing I guess why it sounds like the overseas businesses, whether it is Europe, Asia Pacific all of those markets seem to be going better than expectations, so is there anything I am missing here?

I think it is purely a function of comps.

As we start to anniversary the comps, we said at some point the numbers are going to get more difficult.

We brought down our assumptions.

In the second half of the year we're basically looking at growth from international in the range of about 6%, and on the North American side in the range of about 3%.

Those are our second half assumptions.

I don't think those egregiously high.

In the second half of year-over-year we were in the 6.5 to 7% range internationally.

We're coming off as John points out pretty strong comps, particularly strong comps when you look at the historical levels for Europe.

Even though as you just commented before you're low on your assumptions even though you say business is going so far better than expected overseas?

Better than expected but in line with what sort of our second half assumptions are in line with what our original assumptions were about what we saw happening.

We had already factored in the fact that we had strong comps, and I think the sustainability of the numbers we have seen in Europe, while it would be nice to see them, I am not sure we're comfortable predicting that's going to be the case.

My second question, just a clarification John, when you were talking about North American engineered products, did you say commercial on the ITW construction, commercial was down 6%, and I think the slides say 13, so I just want to make sure I didn't --

The slide is incorrect.

Okay.

Great.

We got some more recent dated a that changed that number down 5 to 6 range.

And the renovation is off, too, is wrong?

Yes.

Okay.

So I guess on the commercial construction side it does seem like your markets are down a little more I guess than what I am hearing from other sources, so I guess is there anything structurally going on there, any market share issues or do you feel like you're down in line with the market?

I think, Jamie, this is a reflection of what typically happens when things begin to slow, and that is we see destocking, and I think that's a fair amount of what we've seen in the first quarter is destocking by the channel.

This market tends to be served largely almost exclusive by by independent distribution.

The destocking that's gone on there has certainly had an impact.

We're also impacted by the categories that are in the process or that are retracting, and I think that we are not going to have an even mix across all the construction categories or the building categories.

That has some impact, but the primary impact would be destocking.

How long does this destocking last in your opinion?

I think at least into the first half of the second quarter.

And Jamie, one other thing, we have a significant amount of revenues in the commercial category that are much later cycle to the extent that projects are getting delayed, pushed back, our products which tend to be in the later of the cycle we're going to feel in terms of our revenues.

Okay.

Thank you.

I will get back in queue.

Thank you.

Next Mark Koznarek Cleveland Research.

Your line is open.

Good afternoon.

A question here about the acquisitions and the contribution to income here, does it here, it really seems to have nosedived from the experience of 2006, and before where you were generating early in the year, 10, 12 million a quarter from acquisitions and then by the end of the year it slowed, but was still positive and now we got in negative -- outright negative contribution to income, so I understand that there is more -- there is more pig in the python, a lot more acquisition that's in there that you're working on, but is there an issue with lower quality businesses or lower introductory margins of some of the more recent properties which would suggest more work before we get to ITW kind of margins from these properties?

Let me answer it a couple factors.

I don't know if it is in the acquisition income being flat for the quarter.

One, amortization which is some more theme we had really through the last part of 2006 in the early months, the early quarters of an acquisition, we're amortizing inventory step-ups and backlog which generally are pretty quick amortizations, six to nine months, so that can be a few million dollars for acquisitions.

Is that a few million dollars per quarter, you said, Ron?

Per acquisition.

Per acquisition.

Okay.

To give you an idea of the impact of that, without that amortization expense, just pure operating numbers without any amortization expense at all, the margins for the businesses at quarter are more like 7% which is pretty consistent with our historical typically talked about acquiring businesses at an8 to 10% initial margin, so it is a little bit lower than what's typical, but not drastically so.

I think the other thing that impacts us somewhat is also the extent that the acquisitions were North America, these acquisitions have had the same downturn we talked about in base business, so Alpine, for instance, with acquisitions in the first quarter of last year and as construction went down in the last part of '06 and early '07 those numbers are in the acquisition numbers as well, and there is other businesses in North America.

Okay.

I think you continue to see that phenomenon as you look at this on a quarterly basis because we had a very strong fourth quarter in these early amortization periods that Ron is talking about.

You can expect that those are going to continue.

Those are -- the acquisitions, Dave, a couple are pretty in which line with what our expectations were, and the preamortization margins are certainly in the 7 to 9% range, so to your quality question part, there is no real difference in terms of the quality earnings that have been acquired.

I think the amortization and the volume of acquisitions has clearly change that metric somewhat.

Looking at the other side of that, David, have you guys changed your strategy in terms of the pace of integration and the schedule for margin improvement historically you've talked about a five-year ramp-up to get to ITW margins.

Are you doing anything different to try and accelerate that given this head wind issue that you have right now?

No.

I mean the five years, it is an average across lots of acquisitions, so, no, we're not doing anything remarkably different.

We respond in all of our businesses to the market trends, so clearly if an Alpine is an example which is in residential construction has faced a downturn, we expect them to take moves to control our costs and improve their margins, in that kind of environment whether they're an acquisition or not, and certainly Alpine is an example has done that.

But, no, there is no dramatic change in terms of how we look at the integration process.

It is not as simple as just accelerating it because you have a down quarter.

We would expect people to be looking at that regardless and certainly adjust their business activity in cost levels that are reflective of the market conditions as well.

And just because we've had a lot of acquisitions, remember most of these I acquisitions are bottom's up deals.

We have a lot more acquisitions than we had recently, but also got a lot more people in charge of integrating it, so the fact we have a lot of deals doesn't necessarily preclude us from working on improving them.

Okay.

Good.

Thanks a lot for the color.

Thank you, next, Andy Casey, Wachovia Securities, your line is open.

Good afternoon, everybody.

Andy.

On the divestitures, David you mentioned the -- you're kind of measuring those and trying to achieve your growth objectives.

Do you mean potentially divesting higher margin, low-growth businesses or is there something else higher margin, low-growth businesses or is there something else going, and can you size the revenue for us that you're looking at potentially divesting?

I think Ron can give you some data if you give him a moment on what we've already divested, give him flavor, and in terms of the flavor of the businesses, it is less just -- it is not just looking at earnings capability, in other words, when you look at some of the business we've divested, they had good rates of earnings, good margins, but they didn't either fit strategically with other pieces of the business we were trying to grow so they were off if you will on their own with no real center strategy for us, or they may have been businesses that at one time had different growth prospects and different fits with our existing portfolio that they no longer have.

It is really a variety of sort of reasons, but when I look at them, performance could in fact be one reason.

If I look at the divestiture of the Buildex roofing business as an example in the fourth quarter of last year, that was not going to perform at the levels that it had performed at in the past.

That one made sense.

Others are for a variety of reasons including several last year that were pieces of acquisition that is we had done and these were pieces that didn't fit with anything that we saw central to those acquisitions.

You might imagine you end up with a variety of reasons.

To give you an idea of the size of what we divested so far, about $165 million in annual revenues and about $20 million of operating income.

Thanks.

And then I guess for you, Ron, lastly on the working capital bump up, was that totally acquisition or were there effects from some of the back ups that you talked about in the North American end markets?

A couple things.

One, clearly if you look at AR and inventory, acquisitions has an impact.

AR went up 210 million, 150 million of that is acquisitions.

Also, affecting receivables is we have a higher mix of international revenues versus North American, and we typically have because of the strong growth internationally, and our international businesses are in countries where the typical receivable terms are longer than North America.

As we grow more internationally we should see the DSO lengthen a little bit because of that.

On the inventory side, inventory is up about $120 million.

$50 million of that is acquisitions.

Also we had some advanced purchases of raw material, advanced of price increases right at the understand of the quarter, and also seasonality plays a part at the end of end of the first quarter.

We typically build inventories a bit because the second quarter is typically our strongest revenue quarter.

Okay.

Thank you very much.

Thank you.

Next Chris Kotowicz from AG Edwards, your line is open.

This ties into the M&A question.

You've done 62 deals in the last five quarters.

That's a lot to digest.

With all of those folks outlooking for new deals, do you have any concerns about internal bandwidth to get all 62 of those deals kind of off on the right foot to absorb the ITW culture there?

No, I don't, Chris.

I think if you look at how we go about the process as Ron described earlier, the bottoms up process, the people involved in integrating the 62 acquisitions would only perhaps be a handful of them involved in doing any other acquisition activity at the moment.

They're generally not linked directly.

The typical integration process that takes place with our trained resources represents generally somewhere around a one-year period, could be longer, sometimes somewhat shorter.

In order to really get the integration process launched and under way.

It really is largely the responsibility of the energy on that comes out of the acquired management teams that ultimately takes the burden if you will of the integration, the subpoena and driving the margin improvements.

We often look at the very question, what is the capability and what is our capacity.

We look at that before we put things in the pipeline, not after we acquire them.

We're constantly looking at that with our executive team to say make sure that the things that we're looking at where we think there is good opportunities we have the management, capability, and time and talent to properly integrate those.

With so much volume, have you at all changed your approach?

Have you, for instance, had like group sessions as opposed to in the past when the deals were more intermittent?

Have you had any adjustments along those lines.

I am not sure what you mean by group session -- if you have one or two people, that's one level of contact, but if you have ten companies you bought in five or six weeks, it might make sense to get everybody together and go go through some of the themes.

We purposely avoid that actually, Chris, because we want the discussions to be at the acquired business unit level.

We want them to talk to us about their businesses.

We want to talk to them about their products, their customers and so forth.

We want it to be very much a one on one sort of business environment.

We'll bring in more than one person in those sessions.

We try not to mix the businesses together because we find we get better results earlier on and better understanding if we're dealing with an individual business unit as we're going through the integration process.

We certainly encourage networking and a good deal of follow-up during the integration process may lead those business to say get involved in what other businesses have done, and we may even pair them up with another business on a particular project or objective they're working on.

We try not to mix the integration process across businesses.

Switching gears, it is interesting in looking at the operating income columns each of your segment breakouts, it looks like wherever you had positive operating leverage in your base business you had negative non-volume related, which is effectively your North American -- I think it was your North American businesses and on the specialty systems -- I am sorry, on the international businesses, it was the opposite, right, so you had a lot of operating leverage on the income line but then the non-volume was negative.

Is that an indication that you're getting pricing in the U.S.

but not getting pricing on international businesses?

That's part of it.

In the non-volume overall in pricing the total company had about a negative 20 basis points effect on margins, but the effect internationally was bigger, for instance in Specialty Systems International, it was 80 basis points negative.

Engineered products international 40 basis points.

What's really happened is we've seen higher raw material cost increases internationally than we have in North America which is kind of the inverse of what it was a couple years ago, so in most cases we're recovering those cost increases, a lot of cases we're not recovering margin yet, and obviously the goal is to --

It kind of feels like maybe you're lagging a little bit there given the strength in the demand on the base business outside of the U.S.

I know that's a tough thing to stay on top of?

There is always a lag period when you see these cost moves that you typically internationally usually takes almost twice as long to recover, so it is probably it is more like a 6 to seven-month recovery period North America which may be three to four.

And given the strong demand particularly in Europe and parts of Asia, there is no question we've seen raw material inflation which is when you're growing as we've been growing, it is sometimes hard to keep up with.

The pipeline and when things stabilize, we'll see the price costs come back, but certainly at the moment we're still chasing price increase on costs we've already incurred.

Okay.

Fair enough.

Thanks, guys.

Thank you.

Thank you.

Next Eli Lustgarten with Longbow Securities.

Can you give what your automotive forecast for the second quarter and for 2007 is beyond guidance?

Our forecast for 2007 is -- are you talking auto production?

Auto production, right.

We expect builds to be down about 8%, somewhere about 8%, and for the year we're expecting builds to be down in about the 6% range.

And that -- are you expecting the domestic big three to be down 8 to 10% for the rest of the year effectively.

Effectively, yes.

They were down 12 this quarter.

Q2 outlook for the Detroit three, Eli, is down 8.

That's in our outlook.

Can I get a little bit of a clarification on two issues.

One, other income you had one versus the end of the year it was going to be down because of the L and I situation, and I think it was down closer to 40.

The difference between the original guidance 40 and the 70 to 80, it is obviously divestitures, and you had in the $0.88 you gave us for the second quarter is about $0..25 whatever it is from the gain on the divestitures?

That's correct.

There is about a $25 million gain in the second quarter.

Okay.

We have a couple things.

That's the number, and the difference between the original base finance or other income and the 70/80 is divestitures.

Yes.

One other clarification on the construction and engineered products, the construction you had base revenues down 12%.

Is that correct?

Yes.

The other piece you you have down 7, commercial down 6 and renovation is up, what, 5?

Renovation was up -- our numbers?

Yes.

Renovation was up 20.

Up 20.

22 actually.

Renovation up 22, but minus 7, minus 6, plus 22, to get minus 12 for the whole sector, in that, I am just trying to understand something must have been much weaker for those numbers to work out?

You would have to -- are you doing the appropriate waiting on the -- the new housing represents the biggest percentage in North America for us.

Yes.

It was only down 7.

Well over 50% down so it was only down 1 for you.

-- down 7 for you.

No.

Eli, let's go off line and do this, okay?

Okay.

No problem.

There is something wrong with math there, Eli.

I understand the question, but -- our residential numbers were down more than 7.

I am not sure where that number is coming from.

If you said total construction down 10% for the quarter and new housing down 7, commercial down 6, and renovation plus 22.

I am trying to figure out how do I get it down ten for the whole sector with those numbers.

We will go off line and I will give you the weighting on the revenues.

Thank you.

Thank you.

Next Ann Duignan Bear Stearns.

Your line is open.

Good afternoon.

Can we talk about the food equipment business for a moment?

We normally think of that as being commercial related and lagging housing.

What are you hearing in that business?

How are you feeling about the rest of the year for food equipment and could you do you have any color on restaurants versus groceries versus parts and service that will be great, too?

When David was answering, when David was answering the question earlier, Ann, about some of the things we think we will have some stronger activity in the second half, I think you probably want to put food equipment in that category.

We're looking at growth on a rate of about 5% in the second half, and that's largely still coming from what we consider be to be the commercial side, c and that would be the institutions and restaurants.

There is supermarket business is getting marginally better, but still fighting some negative numbers from before.

I wouldn't expect supermarket to get significantly better, but we're still seeing a lot of strength in the restaurant category which as you know is very much tied to the casual dining, the mid-tier restaurant activity.

Yes.

And our service business, too continuing to draw a very, very strong growth rates.

We continue to expand that business.

As it stands now service is the largest contributor to revenue in the food equipment today in North America.

So that's an area we think has some potential upside for us in the second half of the year.

The retail grocery business continues to be weak.

We have negative numbers in the first quarter.

We did have a strong first quarter '06.

We had difficult comparables, but overall that market still I think will be a difficult market for us to see much growth.

Okay.

And just a follow-up question.

You spent about close to $200 million on purchases in the first quarter which like 500 to 700.

You know, what's going on there either why did you spend more than you might have expected in Q1 or why are you expecting a slowdown for the rest of the year or is that just a little conservativism baked in?

I think one thing to realize is it is not necessarily a straight line exercise.

We're buying back shares in relation to our cash flow as well as our acquisition level, and based on our forecast of cash flow for the quarter, we're able to be a little bit more aggressive than a range would have called for.

At this point we're not changing the range for the year.

You can assume that the remaining 5 to 700 million is straight line over the next three quarters.

What we had said with our whole forecast is that as last year we would evaluate our acquisition activities mid-year point, and we would evaluate our share repurchase program, and if we're going to make changes we would be coming forward in the July time frame with July or August time frame with what that might be, but I think you can assume for now these are the ranges.

We'll evaluate that as we go forward as well.

That's perfect.

One final question.

You had noted I think at the end of the year that you had trained I think 150 kind of middle managers or General Managers on the acquisition process, and I think you were rolling out your training program to roughly I think 50 more you said at that point.

Are you still rolling out at the acquisition training program or the process to more General Managers?

Yes.

It is a continuous process, so as I think I have reiterated in the past, Ann, we ask our executive team to basically nominate people to be part of this process.

These are people that have to be qualified if you will to engage in the acquisition process.

That means they have got solid existing experience with an ITW, run a good business, and they're going to have the time to get involved in the acquisition process, so it is not a question of training people and having them sit by idly, when we train them we want them to be actively engaged in the acquisition process.

It is a continuous process.

I don't think we'll be training 150 managers per year if that's what your question is, but certainly I would expect on an ongoing basis we would be training probably 50 to 75 new people a year, but it will depend on what the executive teams are telling us in terms of training requirements.

Yes.

I wasn't -- I know you said roughly 50.

I guess the root cause of my question is that we shouldn't expect the acquisition pipeline to dry up because everybody is engaged in the acquisitions, and you have no strength left.

You shouldn't expect that at all.

Thank you very much.

Thank you.

Next Joel Tiss, Lehman Brothers, your line is open.

Didn't think I was going to make it.

Can we spend a second just digging into welding and talking about how the comps look for the rest of the year, who are some of the main customers?

I am wondering in the back of my mind if that's going to turn negative somewhere over the next four to six quarters?

In North America.

over the next four to six quarters?

In North America.

Yes.

Clearly in the industrial markets we're seeing the same trend as John pointed out in his comments earlier, the strong numbers in welding in North America were basically energy related, energy infrastructure related, the general industrial markets we clearly are seeing slowing in those markets, so I think we're going to see that same trend continue, so if you're talking about seeing the overall number for welding in North America go negative, no, I don't foresee that.

Certainly their general industrial markets have clearly slowed, and the strong growth in the energy infrastructure and even some of the large equipment categories have helped them, but I don't see the number going negative.

Okay.

Just on the follow-up, the international engineered, there was non-volume related margin, what was that from?

Was that from divesting businesses?

It is a couple things.

One as I mentioned earlier, 40 basis points of the 150 basis points non-volume is costs, so higher raw material costs.

Also, there is some other miss miscellaneous issues around lower variable margins, in-efficiencies in earn certain places, mix issues in some of the businesses, higher over head costs, and construction, so it is there is no one thing in there.

It is a lot of puts and takes, but part of it is the higher raw material costs.

Okay.

Just last because my questions are fast.

You guys seeing any opportunities for pricing or is it going to be sort of the 0 to 1 across the board for the year?

I personally don't think we're going to get much out of pricing.

I think we're scrambling as was pointed out earlier on the international side to catch up.

We are start to go see more cost pressures even here in North America in steel and some plastic resins so I think we're going to be working hard to get cost recovery and with a little bit of luck maybe some margin recovery, but it is going to be a battle.

Okay.

Thank you very much.

Thank you.

Robert McCarthy of Robert W.

Baird, your line is open.

I am still here.

Hi, guys.

Hi, Rob.

Two things.

I will keep it short.

One, the more important of the two, I am still not clear on what has changed in your North American outlook since the last time you made a forecast.

While I understand that housing and auto are the main drivers and why we have negative comparisons, and that's why we're talking about those kind of numbers, it is not clear to me that's what's worse than expected.

I think I hear that general industrial is if we had to pick one market that is most disappointing to you, that it is general industrial.

Talking about North America.

Rob, let me answer that first.

I would say that the new head line would definitely be that, general industrial has clearly slowed.

I would however, add that certainly in the residential construction the decline in residential construction has been more dramatic than even what we had in our original plan forecast for the year.

If there is some influence from that, you may recall when we talked about these numbers we were talking about housing starts in the 1.6 million range when we were in New York, and we're now below 1.5.

That has had an impact.

There is no question.

Okay.

No, I didn't.

Thank you for the clarification.

Information largely around general industrial.

Right.

If that's the case, is that what has changed in your organic growth rate going forward?

For the rest of the year you have trimmed your outlook for North America, general, industrial?

And we have also modified it for the construction related businesses on the newer levels that we're looking at.

Not just what happened reflecting what happened in the first quarter.

No, not at all.

In fact, to my earlier comments, Rob, we see the NHB's latest data on housing as an example, shows the housing starts for the first quarter 1.45.

Basically a flat line for the rest of the year goes up slightly to 1.54 by the fourth quarter.

Those are annualized rates.

Those are somewhere between 100 to 150,000 units annualized rate per request less than what we originally started.

We have adjusted our forecast accordingly.

Considerable in other words.

Okay.

The other -- I hate to beat a dead horse, but in respecting the fact that you're going to update your acquisition forecast at mid-year, what can you tell us about pipeline?

Do you have enough stuff in your pipeline that you could conceivably equal last year's total?

I would not be so bold as to say that only because there is so many situations that occur with acquisitions.

The pipeline I can tell you now is as strong as the pipeline was this time last year.

We're sitting here in April.

There were a number of acquisitions that were larger acquisitions that we closed in the fourth quarter that weren't in the pipeline in April of 2006.

I would assume that that will be the same case this year, but for me to predict that we could or will do as much as we did last year would not be responsible.

No, but thanks for helping us understand where we are relative -- [ Multiple Speakers ]

We have a pipe line in excess of $1billion.

Very good.

Thank you.

Thank you.

Next Andy Casey, Wachovia Securities.

Your line is open.

Just to follow up on Rob's question on the general industrial, in some of the other conference calls that we've been listening to, we heard a sequential pickup in March from the prior two months.

Did you see that and are you just kind of saying that inventory restocking is really the main driver of that or did March for you in general industrial actually fall off?

General industrial fell off for us in March, no question.

Remember, a lot of our general industrial businesses are shorter lead time businesses, so these are pretty close to end of the line production kind of stuff, so we saw a fall off, and we saw it across a host of businesses in our industrial packaging area and our coating and decorating and marking businesses, across a whole host of businesses, even our welding businesses, so we saw a general decline if you will in activity levels.

Built in our Signode business, too.

Yes.

Okay.

Thanks a lot.

Thank you.

At this time, we're showing no further questions.

Okay.

We thank everybody for participating in today's call, and we look forward to talking to everybody later.

Thank you.