Illinois Tool Works Inc (ITW) 2007 Q2 法說會逐字稿

Good afternoon.

Welcome to the ITW second 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 objections you may disconnect at this time.

I will turn the meeting over to Mr.

John Brooklier, Vice President of Investor Relations.

Thank you, sir, you may begin.

Thanks, Angie.

Good afternoon, everyone, and welcome to ITW's second quarter 2007 conference call.

I am here today with David Speer, our CEO, and Ron Kropp, our CFO.

As always, we're pleased you could join us for today's call.

At this point, David would like to make some introductory remarks about the recently completed quarter.

Thank you, John.

I believe our second quarter financial report card represented strong performance, especially as our international and North American end markets operated in very different economic environments.

We were pleased our international businesses produced base revenue growth of 8% in the second quarter.

And the international contributions covered a wide array of end markets and geographies across Europe, Asia, and Australia.

On the North American side, while our base business revenues declined 1.4% in the quarter, this metric represented improvement in growth rates of more than 200 basis points versus the first quarter.

In fact, we saw a modest improvement in our residential construction and Detroit 3 automotive end markets, as well as some easier comparables in the quarter.

Finally, we remain encouraged about the underlying acquisition environment both in terms of the number of potential acquisitions and the associated pricing.

As a result, we have increased our acquisition range for the year to $900 million to $1.2 billion.

Thank you, David.

Here is the agenda for today's call.

Ron will join us shortly to give us a financial overview of the second second quarter.

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

Ron will then address our 2007 third quarter and full year forecast and associated assumptions, and finally, we'll take your questions.

Please note as we always ask you ask for one question and one followup from each of you.

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

First, a few standard housekeeping items.

I would like to remind everyone this call and the Company presentation 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, other income, tax rates, use of free cash, acquisitions and the Company's related forecast.

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

These risks are spelled out in more detail on this page and in our Form 10Q for the 2007 first quarter.

Finally, the telephone replay for this conference call is 402-220-0196.

No pass code is necessary to access the call and the playback number will be available through midnight on August 2, 2007.

As always you can access the webcast PowerPoint via the itw.com website.

Once you access the investor information section looks for the events tab.

I will turn it over to Ron who will give you more details on the second quarter financial performance.

Thanks, John.

Good afternoon, everybody.

Highlights for the second quarter are as follows.

Revenue grew 16.2% versus the second quarter of last year.

This growth rate was 220 basis points higher than the growth rate for the first quarter of 2007.

Operating income was up 5.9% versus the prior year due, primarily to higher revenues for the base business, the favorable impact of currency translations and acquisitions.

Operating margins of 16.8% were lower than last year by 160 basis points mainly due to the lower margins of acquired companies.

Diluted net income per share of $0.90 was 11.1% higher than last year.

Free operating cash flow of $443 million was significantly higher than last year, and return on invested capital was 19.2% which was lower than last year by 130 basis points.

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

Our 16.2% revenue growth was primarily due to three factors.

First, base business revenue grew 2.4%.

This growth rate was 140 basis points higher than the first quarter of 2007.

International base revenues increased 8%, which was 90 basis points lower than the first quarter.

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

North American base revenues decreased 1.4%, which was favorable by 210 basis points versus the decline of 3.5% in the first quarter.

The revenue decrease was the result of more moderate declines in the Company's North American new housing and auto end market and slowing growth in the other North American end markets.

Second, acquisitions added 12% to revenue growth, which was 130 basis points higher than the first quarter acquisition effect.

Third, currency translation increased revenue by 3.6%, which was 60 basis points higher than the third quarter currency effect.

Overall our 16% revenue growth was a result of strong base business growth internationally and a larger impact of acquisitions.

Operating margins for the second quarter of 16.8% were lower than last year by 160 basis points, primarily due to the larger amount of acquired revenues and their typically lower margin, which reduced overall margins by 170 basis points.

In addition, higher restructuring costs reduced margins 30 basis points while the base businesses improved margins 20 basis points.

John will provide further details of the operating results when he discusses the individual operating segments.

The nonoperating area, other income was higher than the prior year by $18 million, primarily due to a previously disclosed gain of $23 million on the sale of an automotive machinery business, partially offset by lower investment income of $4 million versus last year.

The second quarter effective tax rate was 29.5% versus 30.1% in the second quarter of 2006.

Turning to our invested capital, total invested capital increased $276 million from the first quarter, primarily due to acquisitions.

Accounts receivable increased due to seasonality, acquisitions and a higher mix of international revenues, which have longer receivable terms.

Inventories were essentially flat and month on hand improved to 1.8 months versus 2.0 months last quarter.

For the second quarter, capital expenditures and depreciation expense were both approximately $90 million.

On the financing side, our debt decreased $49 million from last quarter, and our debt to capital ratio was consistent with last quarter at 14%.

Our cash position decreased $93 million in the second quarter as our free operating cash flow of $443 million and proceeds from divestures of $58 million were utilized for acquisitions of $155 million, dividends of $117 million and share repurchases of $300 million.

For the quarter we repurchased 5.8 million shares under our ongoing open-ended program.

Year-to-date we spent $480 million to repurchase 9.5 million shares.

Due to our continued strong cash flow and available debt capacity we have increased our full year share repurchase forecast to a range of $700 million to $900 million, up from our previous range of $500 million to $700 million.

Our second quarter return on invested capital of 19.2% was lower than last year by 130 basis points due primarily to acquisitions.

Finally, on the acquisition front, we acquired 10 companies in the second quarter, which have annual revenues of $213 million.

Based on a continued strong pipeline of potential deals, we are now forecasting acquisitions for 2007 to be in the range of $900 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, I will spend a few moments highlighting the international and North American economic trends we track on a regular basis.

Once again, as David noted earlier, our strong international resulted were driven by solid economic fundamentals against the -- across a broad set of geographies and related end markets.

For example, the international Euro zone purchase managing index remained as a growth oriented 55.6% in June versus 55.4% in March.

Sales and industrial production growth rate of 2.3% in May was lower than the 4.2% growth rate in February.

The May index appears to be a more reasonable sustainable number going forward.

Germany continues to lead the way with introduction industrial production growth rate of 6.4% in May.

That compared to a growth rate of 7.6% in February.

The news on the North American side was mixed, most notably the industrial production excluding technology growth rate came in at a modest 0.6% in June.

That compares to a growth rate of 1.2% in March.

The better news was that the June ISM index was a 56.0% versus 50.9% in March, and the June ISM new order index registered 60.3% versus 51.6% in March.

Now, let's review our four manufacturing segments.

Starting with North American engineered products, revenues declined 0.3% and operating income decreased 7.3%.

Operating margins of 17.9% were 130 basis points lower than the prior year period largely as a result of businesses which serve new housing construction and Detroit 3 auto.

Looking more closely at segment results, the 0.3% decrease in top line consisted of the following: minus 3.3% from base revenues, plus 3.5% from acquisitions, minus 0.6% from divestures, and plus 0.1% from translation.

Moving to the next slide, our construction and automotive based revenues in this segment continue to reflect difficult but modestly improving end market conditions.

For total construction base revenues declined 5% in the quarter versus a decrease of 10% in the first quarter.

Specifically, base revenues for ITW construction made up of our tool and fasteners and truck units were down 9% in the quarter versus down 12% in Q1.

By channel, our Q2 new housing base revenues declined 19%, and U.S.

seasonally adjusted housing start decreased a similar amount as of June 2007.

You may recall seasonally adjusted housing starts were down 24% as of March 2007.

Construction performance and other construction categories was better, renovation base revenues increased 6% due to a higher level of activity at ITW brands and related box stores.

While our commercial construction base revenues declined 3% in Q2, this performance was better than the 8% decline on a square footage initiated basis as reported year-to-date by Dodge Construction.

Finally, Wilson Arts based revenues were flat in the quarter as growth of laminate and solid surfacing categories was offset by performance of the flooring business.

On the next slide in auto, our base revenues had a decline of 4% in the second quarter, and that was better than our 7% decrease in Q1.

Our penetration in the second quarter was evident as Detroit 3 auto builds were down 7% in Q2.

That's a sequential improvement as Detroit 3 builds declined 12% in Q1.

Specific Q2 builds were as follows: GM down 7%, Ford down 10%, and Chrysler down 2%.

We were also helped by new domestics.

We saw their builds grow a robust 9% in the quarter.

From an inventory standpoint the Detroit 3 numbers were stagnant at the end of June 30 total Detroit 3 were at 76 days versus 74 at the end of March.

Specifically GM was at 87 days, Ford at 63 day, Chrysler at 72 days.

New domestic inventories improved to 53 days on hand at the end of June from 59 days at the end of March 31.

In our industrial products category businesses the base revenue decline of 1% in the second quarter was the same as in Q1.

Key business unit performance in Q2 was as follows: industrial plastics down 11%, polymers up 2%, and fluid products up 7%.

Moving to the next slide, international engineered products, in the second quarter segment revenues increased 32.6%, and operating income grew 34.0%.

Operating margins of 15.2% were up 20 basis points on a year-over-year basis as gains from base margins were moderated by acquisitions.

Taking a closer look at the top line, the 32.6% increase in revenues consisted of the following: 7.2% from base revenues, 16.1% from acquisitions, and 9.3% from translation.

This segment in Q2 saw across the board revenue growth in all business categories, notably total construction based revenues increased 10% in Q2, as demand for commercial construction products in particular was strong throughout much of Europe including Germany, France and the U.K.

By geography Q2 based revenues were as follows: European construction up 12%, Asia Pacific up 10%, and Wilson Art International up 5%.

Asia Pacific had strong performance from a variety of businesses in Australia and New Zealand, and Wilson Art International was held by contributions from the German businesses.

Automotive-based revenues increased 5% in Q2, even as auto production grew 3% in the quarter.

The automotive Q2 base revenue growth of 5% was an improvement from our Q1 base revenue growth of 1%.

Key builds in the second quarter included the following: Ford group up 9.5%, Fiat up 6.8%, GM group up 3.6%, PSA group down 4.8%, and Renault down 5.5%.

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

These units in aggregate generated base revenue growth of 4% in the quarter, by business base revenues in Q2 were as follows: industrial plastics plus 2%, fluid products plus 8%, polymers plus 6%, and electronics minus 3%.

Move to go North American specialty systems for the second quarter segment revenues increased 10.5%, and operating income grew 2.6%.

Operating margins of 19% were 150 basis points lower than the year ago period mainly due to the dilutive impact of acquisitions.

Focusing on the top line, 10.5% growth in revenues consisted of the following: 0.4% for base revenues, 11.7% from acquisitions, negative 1.8% from divestitures, and 0.2% from translation.

This industrial production related segment saw base revenues up marginally in the quarter.

As I noted earlier, industrial production excluding technology grew approximately 1% in the quarter.

Major base revenue contributors in the quarter included: food equipment growing at a rate of 7% and welding growing their base revenues at 7%.

Food equipment continues to benefit from strong service capabilities, as well as new product introduction improving penetration into existing and new casual dining restaurants and other institutions such as schools, hospitals and hotels.

Welding base revenues increased 3% in the quarter as the business saw a slowdown in some industrial end markets and faced difficult comps from a year ago.

On the downside, industrial packaging's base revenues declined 3% as they continued to experience weak innocence a variety of end markets tied principally to residential construction.

Industrial packaging's lumber and brick and block related sectors were down approximately 24% in the quarter.

In the final segment, international specialty systems for the second quarter, segment revenues increased 33.5% and operating income was up 9.9%.

Operating margins of 12.3% were 260 basis points lower than the year ago period largely due to the dilutive impact of acquisitions.

Looking at the top line, 33.5% growth in revenues consisted of the following: 8.8% from base revenues, 19.6% from acquisitions, negative 2.8% from divestitures, and 7.1% from translation.

The segment benefited from underlying strong economic fundamentals as well as notable demand from broad sets of end markets.

Welding grew its base revenues 15% in the quarter as demand for its consumables and equipment-based products in energy -- in Asian energy and ship-building applications remained strong.

Finishings base revenues increased 14% due to strong command in Europe and Asia for the powder-based finishing technologies.

Food equipment base revenues grew 9% in the quarter and saw sales increase in Europe, Asia and Latin America.

And finally, industrial packaging European-based revenues increased 8% in the quarter while its Asian-based revenues grew 5%.

Now, let me turn the call back over to Ron who will address the 2007 related forecast.

The forecasting third quarter 2007 diluted income per share will be within a range of $0.85 to $0.89.

The low end of this range assumes a 3% growth in base business revenues, and the high-end assumes a 5% growth in base revenues.

The midpoint of this EPS range of $0.87 per share would be 12% higher than the prior year.

For the full year of 2007 our forecasting earnings range is $3.31 to $3.41 per share.

The full year base revenue growth is expected to be in a range of 2.1% to 4.1%.

The midpoint of this earnings range of $3.36 per share is $0.03 higher than our previous forecast and would be 12% higher than 2006.

Other assumptions included in this forecast are: exchange rates holding at current levels, acquired revenues in the range of $900 million to $1.2 billion, share repurchases for the year of $700 million to $900 million, restructuring costs of $35 million to $50 million, no further impairment of goodwill, nonoperating other income, which now includes investment income in a range of $80 million to $90 million for the year, which is lower than last year by $20 million to $30 million, and a tax rate of 29.5%.

I will now turn it back over to John.

Thank you, Ron.

We will now open the call to your questions.

Once again, I remind everybody we ask for one question and one followup.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Robert Lagaipa.

Your line is open.

Please state your company name and you may ask your question.

Thank you, CIBC.

Good afternoon.

Hi, Bob.

I just have two questions.

The first question is related to the guidance.

If we look at the guidance for the third quarter, whether you look at core growth, base business growth, or EPS, I mean it implies a fairly large range for the fourth quarter both in terms of base sales growth and also EPS.

If you use the midpoint for the quarter 83 to 93 and then from base sales growth 1% to 2% at the low end, 8% to 9% at the high end.

Which areas are you most optimistic about for the fourth quarter and what concerns you in light that far large range?

Let me answer that question from an end market standpoint, Bob.

I think the markets that we would consider still to be weak and obviously of some concern as we look at our forecast for the second half of the year would be primarily residential construction in North America.

While we think it is probably at or close to the bottom, it is probably going to stay there for awhile, at least for the next several quarters anyway, and we built that into our outlook.

We have likewise built what we think is realistic outlook for the auto business which shows modest improvements in the second half of the year based on comps.

And I think the other variable would be in the international segments we have been posting 8% range growth for the last three quarters, and we just don't see that continuing in our outlook going forward.

So our outlook for the third and fourth quarter has our international base revenues growing in the 5% to 6% range.

So those would be probably the three key areas that would explain I think your question.

Terrific.

My followup is just related to pricing.

I think you had mentioned last quarter there were lags in terms of passing through the input -- higher input costs on the international businesses.

Where do you stand there?

Have they been pushed through?

Should we expect an impact -- a positive impact in the third quarter, or will it be more so in the fourth quarter?

Let me answer it with high level response, and then Ron perhaps can give you some detail.

The answer is yes, we have begun dealing with the price issues, cost issues that is with price increase pass-throughs and international businesses.

We're partially there.

We have implemented a number of price increases.

The yield and impact of which we've not fully felt yet.

Based on some commodity prices which continue to rise, particularly stainless steel and even some of our steel grades, that will continue to be a theme for us going forward, and that is further price increases now, maybe Ron can add flavor to that.

Yes.

The second quarter numbers around price versus costs for the whole company were about 60 basis points negative all in, but it is much bigger impact internationally as David mentioned.

It is about 80 basis points in Engineering Products International, and about 110 basis points in specialty systems, and specialty systems has the bigger impact of steel including stainless, so there is a bigger impact there.

North America, although it is having a slightly negative impact on margins, is not very significant.

And where do you see -- what's built into the forecast here and third and fourth quarter?

Does that 80 get down to -- and that 110 get down to flat by the fourth quarter?

Is it cut in half?

What level of magnitude are we talking about here?

We'd expect it to be close to flat by the fourth quarter.

Terrific.

Thank you very much.

Thank you.

Andy Casey, please state your company name and you may ask your question.

Wachovia.

Good afternoon, everybody.

Hi, Andy.

A question on cash allocation.

If I look at your guidance for earnings, share repurchase and acquisitions, it appears you have significantly higher capacity to increase the share repo above the implied [220 million to 420 million] range in the second half.

Is there some reason why you're a little hesitant to bump that up a little bit further or is it just more conservatism?

Well, if you remember, Andy, we put this new share repurchase program in place less than a year ago, last August, and different than our prior program this is a much more flexible program that will be variable depending on levels of free cash and acquisition activities, etc.

Since then we've had some very strong acquisition activity.

We had a very strong fourth quarter last year.

Overall last year I think we acquired $1.7 billion in revenues.

We continue to see strength in the acquisition market this year, and even with that we've been able to purchase shares in the first half of the year at a faster pace than we originally thought, and therefore we've upped the guidance for the whole year by about 200 million, but that's something we look at on a quarterly basis and if in fact we continue to have strong free cash flow even with strong acquisition activity, that will be something that we'll update as we go.

Okay.

Thanks a lot.

Thank you.

Deane Dray your line is open.

Please state your company name.

You may ask your question.

Deane Dray with Goldman Sachs.

If we can drill down on two end markets that jump out in terms of looking a little bit different than what we might be -- might have been expecting, commercial construction being down 3%, and I know John you mentioned that it is a disconnect with Dodge, but just give us a sense of what you all are seeing that would either suggest that this was a one-time number or is it a trend, and the same point on renovation.

It is always that the expectation of renovation is dampened from what you see in new housing but looks to be even better.

Well, let me -- let's take renovation first.

We know that the growth rates we have for renovation are usually, or are actually on an annual basis renovation is expected to grow at a rate of about 1.5% for '07.

We clearly have seen better numbers than that coming out of our businesses which by in large serve the box stores.

Our 6% number for the second quarter was a reasonably good number, and we would expect growth over and above 1.5% as we go through the remainder of 2007.

On that, in the big box is this restocking or do you have a sense of what the sell through is?

Deane, I would suggest that it's both.

We do get sell-through data although it is somewhat lagged on same-store comparable basis, and our big box data on a sell-through basis is up in the midsingle digits.

We do have some I think still carry-on effect from restocking that probably carried over at least through April, probably not much beyond April, but we are seeing additional penetration gains in our big box activities, and I would expect that to continue.

That's our normal trend, so I think we're at least for the second quarter we're seeing what we would think to be more normalized trends in our renovation businesses after going through about three quarters of some pretty erratic numbers up and down primarily based on inventory swings.

Great.

And then on commercial construction?

On commercial construction, if you look at the square footage year-to-date from a start stand pointed, the overall category is down, on the order of 8%.

Our commercial activity down 3%, so as we're doing somewhat better than the overall market.

If you look at it in the areas that we're concentrated in, the commercial categories and the manufacturing categories, commercial categories overall this includes retail, warehouses, and office construction, that category is down 7.5%.

That is the largest single category in nonres construction, so it remains a difficult market from I think a start standpoint.

There are ups and downs.

There is positives in various areas like the educational area, public construction -- public building construction, but the major category that is we count on, warehouse, office, etc., are all done on a square footage basis so far.

I don't expect to see any dramatic change in these numbers.

These are larger type of projects with longer lead times, and so my view of what we're going to see for the commercial construction, this is obviously commercial building construction, just to make that clear, as we have very little in the infrastructure side, so this doesn't include any highway bridge road construction.

Interesting.

I don't see much change in what I would expect these numbers to yield for the year, so I think the square footage numbers are probably going to be down in that 5% to 7% range when we look at the numbers at the end of the year.

Great.

And just so we're clear, is that being more exposed to the verticals on commercial manufacturing?

That means you're not seeing the benefit of the two verticals which are really strong right now in commercial construction, education, and healthcare, so you just have less exposure there?

Yes.

Education and healthcare, but education -- actually just to be accurate, healthcare on a square footage basis is actually down 10% year-to-date.

Education we do have less exposure, and education is up modestly at about 4%.

Great.

Very helpful.

I am looking at the Dodge numbers, Deane.

Great.

Thank you.

Do you need the numbers, this is initiated construction numbers square footage basis.

Right.

This is not speculative.

These are actual projects that are in process.

Thank you.

Thank you.

John Inch, please state your company name.

You may ask your question.

Good afternoon.

Hi, John.

Hi.

I want to ask about Wilson Art.

It kind of put up underwhelming top line performance again, and the big picture, David, it doesn't seem to have met top line expectations.

Did you a great job in terms of the profitability improvement, but when you look at the landscape it strikes me that private equity would pay a lot of money for that type of business, so why wouldn't you consider selling that Wilson Art business or swapping it or doing something with it?

Well, I would say a couple things as it relates to the growth in Wilson Art.

Certainly from the time of the acquisition in '99 until now we have not seen the top line growth rate, but we've also been through a couple of cycles in their business, so the peak of their business was actually in 2000.

We're comfortable with what we've seen in terms of the improvements in some of their end markets.

The flooring business has remained a challenging business for us as has the solid surfacing business.

Those are two categories of the Wilson Art business here domestically that have been under pressure for the last several years.

If you look at our core laminate business at Wilson Art it has performed reasonably well all things considered.

It has a reasonable concentration in the commercial markets, so it is not just a residential play, but overall the growth in North America in Wilson Art has in fact been relatively flat.

There is no question tempered primary by what's going on the solid surfacing markets and the flooring markets.

Internationally it's been another story, it's been a very solid growth market for us both on the top line and the bottom line.

You may recall the margins when we acquired the Wilson Art businesses internationally were actually negative, almost double-digit negative, and today they're comfortably into the double-digits, and more recently in the last two years we've done acquisitions in that space as well.

So overall as a group I think we're pleased with the way it has performed.

To your last question about speculation regarding private equity, I mean we look at all of our businesses and their growth prospects and profiles and we manage our view of where they fit and how they grow based on our expectations long term, and certainly we've grown with the Wilson Art business, and I think the success we've had with it has been satisfying to us.

So, is the inference, David, you expect the Wilson Art at this point to get better over time, is that how to read between the lines of your answer?

Certainly, yes, no, there's no question we expect Wilson Art to get better over time.

Clearly we're at a trough in the residential housing market and as noted from my earlier comments as it relates to commercial construction that's not a particularly robust market either and we'll -- in spite of those numbers we'll post some good solid gains in our core laminate business this year.

We clearly have looked at and continue to look at how we structure both the solid surfacing and flooring businesses here in North America and look at what more reasonable alternatives for those things going forward from a growth standpoint.

Okay.

My followup, I want to go back to the share repurchase answer because I'm not sure I really understand what the answer is or whatnot.

It strikes me you guys could raise $1 billion today, have lots of financial flexibility, only be at your target debt to cap and obviously be able to buy your stock at its historical multiple low.

Why are you not being more aggressive with share repurchase?

I understand you want to keep flexibility and you've taken it up a couple hundred million, but you guys are sitting on an incredibly over capitalized balance sheet.

It strikes me there is a lot of value to be created by stepping up the share repurchase today, not waiting for the stock to go up.

What are your thoughts there?

Well, I think as I said earlier, I think acquisitions is a key part of our capital allocation, and given the strong acquisition markets we've seen over the last couple of -- last 12 months, we're hesitating to allocate more capital to share repurchase.

We are allocating some more, but a large amount given the strong acquisition environment.

So if we continue to generate strong free cash flow, and still are able to do the high end of our range and acquisitions we may have some more flexibility and we'll update that as we go, but we didn't look at the share repurchase as a way to go from our existing balance sheet to our target balance sheet in one fell swoop.

The target leverage we put out there of 20% to 25% is really a long-term target, and we don't need to get there tomorrow.

John, I would just add to that going back to August of last year when we announced this share repurchase program, our debt it cap was in the 11% range.

We have consistently moved that up, and we're clearly moving up into what we have described as the 20% to 25% range, which we think is more ideal, excluding any significant acquisitions, and I think we're well on the way to that mark.

In fact, I think by the time we reach the end of the year we'll be clearly within striking distance of that 20% number.

So, I think that's the way I would look at it, and as Ron said we do adjust our view on how we're going to use our free cash on a quarterly basis and certainly we'll take a look at this again during the third quarter, and if we have reason to up the repurchase program activity levels, which we already did during the first half of the year, we'll certainly do that.

So there is likelihood that as you look at these numbers that we may well be revising these numbers as we go forward again.

Yes.

No.

I hear you.

Is there a trigger point we should be watching, though, for, David?

If it stays at 14% debt to cap the rest of the year, are you just going to -- how -- you give the same answer every quarter, and it is fine and I understand where you're coming from, but at some point people's patience is going to wear thin.

What should we be watching to try to get a clue one way or another versus simply saying we want to hold back and keep our powder dry?

I think it is the debt to cap ratio, if you want to look at it from a universal measurement standpoint.

I think you will see that number move.

When you look at some of the comparables, remember that we have -- we've had some unusually strong cash flows as a result of activity that is are not operating that have created if you will even more pressure on that debt to cap number, but I would suggest going forward for the balance of the year it would be the debt it cap number.

Ron highlighted it acquisitions clearly play a role in that, but even including our acquisitions I would expect us to be within striking distance of that 20% number as we approach the end of the year.

Thank you.

Ann Duignan your line is open.

Please state your company name and you may ask your question.

Hi.

Good afternoon.

Bear, Stearns.

And I agree with John just from that perspective.

I would like to ask you to consider an accelerated share repurchase program at least going into 2008, so that you buy back all your shares at the beginning of the year instead of doing it in the face of your share price going up 25% through the course of the year.

Anyway, my real question is you act like rest of world.

I mean, I know you know that rest of world has been up organically very strong for the last three quarters.

We're seeing some slowdown in construction in the United Kingdom and France on the back of higher interest rates and industrial production seems to be slowing a little bit in Germany probably related to the strength of the Euro.

Are you guys seeing any slowdown in your end markets in Europe either construction or in industrial production, or is this just classic ITW just being conservative.

It's been good for three quarters and can't go on?

Well, thank you for that.

I think that was a compliment.

It was, it was.

I think it is a little both, Ann.

Frankly, we have seen clearly some indications of slowing.

I think it is probably more in how we look at the go-forward numbers.

Certainly our numbers so far in terms of our results haven't indicated that, but we do see some slowing in the marketplace.

And certainly the industrial production numbers, as John pointed out in his comments, have clearly trended down in the second quarter, so the kinds of numbers we were seeing in the first quarter that were in the 4% kind of range are clearly down in the 2.5% to 3% range which is where we see things settling out from an industrial standpoint.

Our construction numbers have remained quite strong, and I think the visibility we have on those would suggest that's probably a little stronger story, but the industrial production numbers I think we're starting to see that reflected, the industry numbers we've seen reflected in our activity levels in Europe industrially.

So they clearly are trending downward from the heady levels they were at in the fourth quarter and the first quarter.

And is the data that you're looking at, is that supported by your feet on the street, the folks working and selling into the industrial environment in Germany?

-- Ann, and what I gave you is our sort of feet on the street because as you know we don't operate with significantly large backlogs in those market, so we're talking backlog that is are measured in weeks.

So it is really the sort of drum beat if you will hearing from our people in the market place that while they still see good growth it is not going to be nearly the kind of growth we've seen, plus we're entering a period of difficult comparables certainly in the industrial production side as the third quarter last year was the first quarter that we saw some real breakout kind of numbers.

And let me give you a couple of numbers around the example David gave you for construction.

If you look and first quarter and second quarter the numbers were in the 10% to 12% base range -- base revenue range.

Q3 and Q4 we'd expect to be more in the 6% to 8% range.

Part of that is comparables, and part of that is probably some slowing in those end markets, but still pretty decent numbers, but we're not expecting 10% to 12%.

Okay.

And just -- and one final just followup.

International specialty systems, you had what looked like decent restructuring in that business.

Was that due to integration of acquisitions or is that -- is there something else going on that we should be aware of?

I think it is not new acquisitions because the first year doesn't go through the P&L.

Right.

Through goodwill.

It is some acquisitions that we acquired more than a year ago, but it is also some existing (inaudible) there is no one big business in that number.

Okay.

So, not one big business unit that's struggling or one region struggling, a lot of little bits and pieces.

Yes.

Okay.

Okay.

Thanks for the colors.

Thank you.

Mark Koznarek, your line is open.

Please state your company name.

You may ask your question.

Good afternoon.

It is Cleveland Research.

Question on the ROIC.

It is down 130 basis points, it was down a similar amount in the first quarter.

Is there a target range to get that back to flat or up year-over-year?

Is there particular place you want to be by year end relative to year ago ROIC levels?

I think first of all it is really being driven by one thing, that's acquisition activity.

Over the last 1.5 years we've had significant acquisitions that -- as normal, aren't add ago lot of earnings but added some amount of investment, so that's going to dilute the ROIC.

If you strip out the effective acquisitions, it is really favorable versus where we've been a year ago.

And we don't really have a definitive target for ROIC.

We look long term to be in the 16% to 18% range, which we're in.

We've been on the high end of that range a year ago and earlier because of a lower level of acquisition activity, so it is natural that as we increase acquisitions which we want to do, our ROIC is initially going to go down.

As we improve those businesses that require and they become part of the base, that will also improve ROIC even as we add more acquisitions.

So 16% to 18% is the long-term target.

So, Mark, where we are in the range is where we would have expected to be, given the strong acquisitions that we had last year, so we're comfortable with the number certainly on a comparable basis to the prior year.

It looks like it is a deterioration, but it is as you expect based on the acquisitions and the added investment that go with them.

Okay.

That's helpful.

A question about a particular business Wilson Art we touched on it a little earlier.

We're picking up from sources that there is a pretty significant new product introduction/SKU expansion going on in your core laminate line, and also in the deep star high-end line.

And what I would like to know is whether those introductions are significant enough to move the needle, or are they in -- to be considered kind of as the standard annual updates to occur, and if you could talk about just what should we expect for the full year from Wilson Art.

Well, sure.

Let me answer the new product introductions.

I am glad our advertising programs are working because those aren't rumors.

Those are reality.

We are in fact in the midst of several new product launches in the Wilson Art business, both in the core laminate business and in the flooring business.

In the core laminate business we have expanded our range of the decorative laminate series, the deep star is a core part of, and we have added a wider range of products at the retail level that is taking those products that is initially introduced primarily in the commercial categories and now putting them into the retail categories, so that is a significant push.

I believe that on our display boards with our laminate counter products are displayed that we're changing out something on the order of 20% to 25% of the range, so it is a pretty significant range change if you will.

The bulk of the new items are in the high definition product category which deep star is the core product of, so that certainly is a major push and major initiative.

So you're going to begin to see that on a broader basis than a number of retail outlets much more so than you would have in the past.

The flooring range it is the same thing.

We introduced our latest range of flooring products which are at this point fully rolled out, and we're beginning now to see the impact of some of those new designs in products as well, so those are the two major launches that we have undergone.

We would expect to see some second half improvements which we built into our numbers on the basis of both of those product launches, more so in the core laminate business than the flooring business as those products begin to penetrate particularly the renovation segment where we think there will be good opportunities for us.

So at the end of the year should Wilson Art be up say a midsingle digit because of this?

Mark, the worldwide numbers would be in the range of about 2% to 3% with North America being a little less than that and obviously the international piece being in sort that far 6%, 7%, 8% range.

Okay.

Great.

Thanks very much.

Thank you.

Ned Armstrong your line is open.

Please state your company name and you may ask your question.

Yes.

Thank you.

FBR.

I just had a couple questions on some of your industrial businesses.

I noticed in the PowerPoint that first your plastics business in the North American sector was off 11%.

Can you give a little bit of color behind what was driving that?

It is primarily related to the electronics piece of their business.

It is a fairly sizable piece of what they do.

In the appliance portion.

The appliance piece, too.

Those two pieces are primarily the contributors to the negative performance in the quarter.

And North American welding while it was still up, up 3%, I believe, it is less than it has been in the past, and you attributed that to some weaker industrial markets.

What were those markets and what was it that made them weaker this time around?

Yes.

The -- well, first of all, they saw a bigger decline in what they call light industrial.

And that would include the smaller volume orders from places like Farm Fleet and a lot of sort of the hobbyists using welding equipment.

You can imagine at discretionary income goes down that market can dry up quickly.

So that has a bigger impact on their business than you would have expected.

The industrial piece of what they do for larger manufacturing activity, there has also been a bit of a decline in that category, too.

They're general industrial markets, Ned, have clearly slowed as the industrial production data has shown.

That's clearly been a drag on their business, and most of that category would appear to us to have be pretty well built out with capacity additions and that's what we're not seeing now is any significant new equipment additions or capacity additions going on.

So we're seeing more of the replacement cycle products, so that's clearly a difficult comparable.

The other thing of note is that in the second quarter last year we had significant shipments of products that were based on the change in the [ROE house] standard in Europe, and so we had a great big pipeline fill in anticipation of those changes that had some impact as well.

So it is probably those those three things that would describe the biggest impact on the numbers here.

Okay.

Good.

Thank you.

Joel Tiss, your line is open.

Please state your company name and you may ask your question.

Hi, I'm still at Lehman Brothers.

How are you doing?

I wondered if just quick you can talk about why the free cash flow was up so much more than the operating profits.

When we look at free cash flow, we kind of compare it so net income, so it is slightly -- typically we're at about one and one to net income this quarter.

We're actually slightly below that, about 90% net income.

The comparison to the prior year were up significantly versus the second quarter of last year, and that's mostly related to the timing of income tax payments.

Last year we had some bigger income tax payments than we had this year, so most of the difference between the years is tied to that.

Okay.

And I wonder if, David, if you can just give us sort of an early read your feet on the ground for 2008, just maybe some of the bigger trends that you see unfolding?

2008 will be here in six months, Joel.

Wow.

Early read on 2008.

Well, I can give you a couple highlights from things that I have been talking about.

One is residential construction.

I think we have been watching the numbers bounce around the 1.45% to 1.5% level now for the last four plus months.

My expectation is that that's sort of the number we're going to see as we head into '08.

I suspect the housing market is going to be many that range probably at least until perhaps the fourth quarter of next year, so I don't see any significant change there.

On the commercial construction side, I don't see any significant changes occurring there either.

I think we're going to be perhaps into some easier comparables by the time we get to the second quarter of next year so perhaps that goes from a modest decline single digits to maybe even flat.

Europe I certainly think from an industrial production where we've seen the beginnings of some slowing there, but there is still pretty strong underlying demand, so while it is slowing from the heady levels they've been at, still looks reasonable to me.

And I think the industrial production numbers we've seen here slowing, we think that trend is going to continue into the beginning of next year, and that's probably about as good visibility as I have.

The auto build numbers here have been much more realistic the last several quarters, and I think that our view is the auto build and the 15.2 million to 15.5 million range here in North America is probably a fairly realistic number, and the auto builds in Europe flat to maybe up 1% to 2%.

That's probably the early reads on those markets, but again as John pointed out we're six months away from this year, so it is a little hard to be too definitive.

Okay.

Thank you.

Jamie Cook, your line is open.

Please state your company name and you may ask your question.

Hi.

Good afternoon.

Credit Suisse.

I guess just I am trying to -- there is a lot of different moving parts here.

As I look at the increase in organic growth rate in the back half I am trying to understand what the driver of it is.

It doesn't sound like anything in North America is getting better, res and auto seem flat, industrial isn't getting any better, you're a little more cautious overseas.

I mean, you always said you would have tough comps overseas, but now is seems like things are getting worse.

So, I am just trying to piece that together and figure out what I am missing here.

I think you summarized it fairly well, Jamie.

I think the comparables in the second half of the year are clearly what is driving the improved results here in North America, certainly in our auto and our construction-related businesses.

If you look at the auto build data as you go out from the second half of the year we actually get into positive territory when we look at the third quarter and fourth quarter for the year.

Third quarter is about flat if you compare it to last year and the fourth quarter is actually up slightly, so those are easier comparables from an end market standpoint, and certainly when we get to the fourth quarter residential construction we're in much better comparable territory as well.

So I think it is really the comp data on the construction and auto side here, and the slowing industrial production numbers we've been talking about here in North America for the last two quarters have started to clearly show up in the industrial production numbers that the various industries are showing.

So I think it is here primarily more an easier comp story than anything else.

We don't see anything fundamentally getting better if you will, but the comparables are easier in the second half.

I think internationally, as I said earlier, we've already seen some modest signs of slowing in the industrial markets in Europe, and certainly we're now entering into four quarters of pretty strong growth, and we simply don't see the kind much 8% plus growth we've been seeing internationally continuing.

So our forecast in the second half of the year show our international organic growth rates more in the 5% to 6% range.

Okay.

And just you've been talking mainly about Europe.

What are you seeing in sort of the Asia Pacific regions?

Anything different there or is that still pretty much gangbusters?

The Asia Pacific region obviously you have several different pieces there.

The Australia, New Zealand, south and southern Pacific areas moving at modest single digit kind of numbers whereas if you look at China and India you're talking about very strong market numbers there.

China depending on what numbers you want to look at somewhere between 10% to 12% growth this year and India likewise.

Our numbers in those markets -- we expect many China we'll be up 20% plus this year and in India close to the same kind of numbers, so we see strong numbers there.

Our base there is relatively small, as you know, and improving, but we see continued strong numbers in southeast Asia outside of China and India probably midsingle digits.

Okay.

Great.

Thanks.

I will get back in queue.

Thank you.

Chris Kotowicz your line is open.

Please state your company name and you may ask your question.

A.G.

Edwards.

Hi, guys.

I've got a question, I guess for David.

This is really more on running the business.

Is there -- you talked about in the past how you've trained a lot of your management folks to go out and identify and -- opportunities from a deal standpoint.

Do you have some kind of comparable program on driving new product introductions within the Company, as far as driving the organic growth, that extra 50 or 100 basis points over time?

We in fact do.

It is not the same structure obviously as our acquisition program but operates at a different level in our businesses.

The new product development activities are largely contained inside of our business units, so the workshops if you will, will be run around our product development programs we do have a new product development workshop program that we offer.

It is generally run within the groups, and it is run by targeting the business units in those groups that our EVPs and group presidents think have the most significant opportunities.

It is a similar format in terms of who we're trying to train, but obviously it is a different level.

It is focused primarily on our engineering and marketing people who are the primary folks that drive the new product development process, and our business units have their product development targets and agendas built into their planning process, and we get a chance to look at those as we go through both their longer-range strategic plan reviews and the annual budgeted reviews.

And they establish targets within those planned reviews for what their product development activities should yield.

So we get a pretty good look at it.

We've accelerated that in several of our larger businesses where we've highlighted end market opportunities that we think have above average growth prospects, and we're there putting dedicated resources to be able to achieve those opportunities.

So I expect that as we go forward we'll have more examples to use as to how that plays out and more metrics to use around it.

And how receptive is the system to people down at the lowest levels interfacing with the customer to new ideas and maybe seeding some of those ideas with a little money or time a la 3M.

That something always there or just doesn't get discussed or is there an opportunity there?

There is clearly an opportunity there.

I think it has been there but not at the level it should have been, and that's clearly something that we're trying to accentuate now and we're clearly highlighting that as we go through these -- I have highlighted with the help of our group presidents and EVPs what I would describe as probably 50 to 60 growth opportunities that we want to be investing in, probably ahead of the normal pace and curve we would have in the past, and that helps us set the tone for how we want to look at those opportunities, how we want to organize ourselves around realizing those, and then the types of resources we need to put against it.

So I would say that while the concept is always been a concept that we've been comfortable with, I would say to be honest we probably haven't paid as much attention to it as we should, and that's clearly what we're trying to accelerate with this move.

Okay.

And then on my followup, at the system --

Second followup, Chris.

The first one was a related question.

At the systems businesses how would you characterize the sales patterns as far as equipment versus the consumables?

Are we going to be looking at a mix shift to more consumables that should help drive margins over the rest of the year and into next year or not?

Which systems businesses are you talking about, Chris?

Well, clearly the welding business and the packaging businesses are the ones that stand out.

Well, certainly in the welding side I think as we've been saying for the last couple of quarters certainly here in North America while the equipment sales are slowing, we still see solid consumable sales because the capacities are in place are being utilized.

On the equipment side we're just not seeing the expansion and capacities we've been seeing the last three years.

I think that's somewhat true perhaps to a lesser degree on the Signode business, if you exclude the construction-related part of Signode.

I think we've had reasonably good equipment sales, but we're seeing more shift towards consumables as you expect to see any time the industrial markets begin to slow because the equipment mix becomes less.

It is more of a replacement cycle.

If you look at the food equipment area, which is also included in that group, that is clearly a different pattern.

We still see very strong equipment sales in that category, and as you know, in that category the other element for us is the service element, which is the after-sales service which has also seen strong growth.

But we've had I think 7% growth in the quarter in North American food equipment and 9% internationally, so we continue to see very strong numbers in those equipment businesses.

Obviously that's all food service institution related.

Okay.

I will take my followup on my followup off line.

Thanks, guys.

Thank you.

Robert McCarthy your line is open.

Please state your company name and you may ask your question.

It is Robert W.

Baird.

Hi, guys.

Just a couple quick ones.

In the past year it seems to me that the acquisition pipeline that you've been talking about has gone from something approaching $1.5 billion to closer to $1 billion in recent updates.

Can you characterize where -- what it looks like now and is there a particular reason for it to be trending down?

Rob, let me answer that.

The acquisition pipeline if you exclude the fourth quarter of last year, the acquisition pipeline really has been hovering for the last probably four quarters in the $1 billion to $1.2 billion range.

The fourth quarter of last year, which actually would have probably been more like midthird quarter, is when it spiked when we had several unusually large deals that came into the pipe pipeline.

You may recall in the fourth quarter of last year we did almost half of our acquisitions occurred in the fourth quarter, and we had several very large ones in the fourth quarter including Kester and Speedline, as an example.

So if I look at the pipeline today versus the pipeline a year ago, it is about the same.

Now, this time last year Kester and Speedline weren't in the pipeline.

So I would characterize the pipeline, excluding what I would say is abnormally high fourth quarter activity is reasonably the same.

And so there is nothing you're seeing in the marketplace that would prevent a recurrence of something like that, suddenly a couple large deals pop up?

Well, that's right, suddenly a couple large deals could pop up.

As I think I said to people who asked us about the acquisition numbers, gee, you should be able to do what you did last year, and I point out a lot of what we did last year in the fourth quarter we didn't have visibility on until September.

So, yes, the likelihood or the possibility is there.

No question.

There have been a number of larger deals we have looked at as we said in the past continue to be challenging from a valuation standpoint, but the likelihood of us doing the same number of deals we did last year at same level of acquisitions, I think at this point based on our pipeline would be speculative, but as again as I pointed out a number of deals entered the pipeline in the fourth quarter during the mid-to-late third quarter last year, so that could in fact happen again.

Okay.

And my other question is probably geared more for Ron.

I've done my calculations right, the acquisition contribution in the international specialty systems segment was actually negative.

Mildly, so it looks.

I assume related to the food equipment deal that you did in the first quarter.

And my question is assuming that's correct, is the negative contribution on the quarter more a function of very short-term purchase accounting issues, or is it indicative of a more troubled business, and -- which would suggest that we're not likely to see much of a contribution in -- on that line this year?

Yes.

First of all, you are correct.

It's -- most of the negative relates to our food equipment acquisition in Europe, and part of it is related to purchase accounting in the early charge you take beginning, and the other part of it is this is a business that needs to be proved and probably has slightly below margins than we've seen historically.

However, part of it is also seasonality in this business.

Kind of on an annual basis, this first half of the year typically is their slower part, and typically it should improve.

So we would expect to see improvement throughout the rest of this year and into next year on that particular acquisition.

On an overall basis, the acquisitions before the effect of amortization and purchase accounting is just about at the 8% margin.

So pretty typical even with the negative food equipment acquisition in there, pretty typical with where we've been historically.

Can we see a fairly quick snap in the third quarter or do we need one more quarter before the number can improve significantly?

Are you talking about Horst?

I am talking about the purchased accounting drag going away?

Yes.

I think it is probably fourth quarter, but just to put it in perspective, I would add the business is really performing in line with what we expected, so this isn't a surprise.

The timing of the purchase accounting and the level of it is always difficult to project until we get into it, but it is the business as we suspected it would be from an operating standpoint, perhaps some more seasonality than what we had originally anticipated, but our expectation for their full year results for '07 are in line with what we built into our plans.

Okay.

Very good.

Thank you.

Thank you.

David Bleustein your line is open.

Please state your company name and you may ask your question.

It is UBS.

Good afternoon.

David.

A quick question on the acquisitions.

You mentioned the pricing was looking at a minimum attractive.

Are there specific industries where it is looking more attractive, specific geographic locations, is it easier to buy things in Europe now or the U.S.?

When -- where are you most focused?

I think the pricing between the Europe and the U.S.

I would say is pretty flat.

I don't think we've seen any significant difference in the levels.

I think our ability to execute in the acquisitions in the smaller space leads us to generally get better valuations and better opportunities, so if you measure those numbers on a comparable to revenues, we're actually buying businesses at a lower level than we were last year.

If you look at it on a EBITDA basis, it is probably not remarkably different.

It is in the 7%, 7.5% or 7 to 7.5 times range, so I would say my view on acquisitions that we've been able to close is the valuations are modestly better this year but not significantly so.

In the larger ones that we've looked at and in many cases have not been able to transact, the valuations clearly continue to be I think going higher and higher.

EBITDA numbers that are clearly in the 10 plus range on a number of deals and some over 12.

So I think the inflation in acquisitions for the general acquisition environment continues to be fairly strong.

I think in our environment, because of the focus on the smaller bolt-on acquisition opportunities, we haven't seen the same level of inflation.

I guess the question is, one of the things you're good at is buying small businesses and making them bigger.

And somebody earlier mentioned potentially selling up that the Wilson Art business.

Is there a sense, or is there any thought process towards selling some of those businesses that may be good businesses where you could get 10 times for them and accelerating the base at which you're buying businesses at 7 times?

I don't think they're linked first of all, David.

I think we will be happy to accelerate the pace at which we can buy businesses at seven times, and based on our capital structure I don't think it requires that we sell businesses and be able to do that.

I think on the latter point you made, or perhaps a former point about how often do we look at actually divesting businesses that may be available to get 10 times, we've been more -- certainly more studious at looking at opportunities to divest businesses that we don't think meet our growth profiles, and in fact we have picked up that pace in the last 12 months.

And in the last 12 months we've divested of about $170 million worth of revenue, including three deals this year so far, and more that we're looking at.

So it is a process that we're looking at on a regular basis.

And we recognize that as we look at these portfolio businesses over time we have to continue to look at them in terms of their fit and growth prospects in how we see them fitting our long-term growth plans as well.

So we continue to do that.

And we're in the middle of our strategic planning process at the moment, and that's an active part of the discussion I have with the EVPs and the group presidents.

Terrific.

Okay.

Thanks a bunch.

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Okay.

Thank you very much.

We appreciate everybody joining us today, and we will talk to you again.

Thanks.

Thank you.

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