Illinois Tool Works Inc (ITW) 2009 Q1 法說會逐字稿

Welcome to the Illinois Tool Works first quarter 2009 earnings conference call.

(Operator Instructions) This conference is being recorded.

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

I'll turn the call over to your first host today, Mr.

John Brooklier, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Kathy.

And good afternoon to everyone.

Welcome to our first quarter 2009 conference call.

With me today is our CEO, David Speer and our CFO, Ron Kropp.

Thanks for joining us.

At this point, David will make some brief remarks on what was a difficult and very challenging quarter for us.

David.

Thank you, John.

Certainly, no question the recently concluded first quarter was extraordinarily difficult, as we clearly were faced with very troubling economic trends in virtually all of the major global economies.

The dramatic declines in virtually all of our key end markets have provided clearly unprecedented challenges for our global businesses.

From a macro data standpoint, US industrial production, excluding technology, fell for the fifth straight month, hitting a minus 14.6% in March.

In Europe, the industrial production numbers ranged down from minus 20% to minus 12% for the major economies of the UK, France and Germany.

And as you know, the ISM Index for both US and European countries continued to hover around the mid-30's, indicating real signs of growth are certainly still an aspiration rather than a reality.

From an end market perspective, our industrial production businesses, our auto businesses and our construction businesses all continue to face very unique challenges.

The further declines in worldwide industrial production have certainly impacted our welding and our industrial packaging businesses.

Auto build declines were at record levels in the quarter and had negative consequences for all of our auto units.

And stubbornly negative construction trends in North America and declining trends internationally, were evident in our Q1 results for our worldwide construction businesses.

Despite this very challenging environment, we continue to make longer term investments that we believe will position us for future growth.

We spent $33 million during the quarter on restructuring initiatives and we expect to spend another $60 million of restructuring in the second quarter.

You may recall that we originally forecasted restructuring costs for the entire year to be in a range of $60 million to $100 million.

It's clear to us that we'll exceed that at the higher end of the range for the full year 2009.

The associated benefits of these restructuring programs will become more apparent as 2009 progresses.

We have likewise continued investing in key innovation programs that offer significant long-term growth potential when the end markets begin to recover.

We are also encouraged by our strong first quarter free operating cash flow of $386 million.

This level of free cash flow is only modestly lower than the year-ago period and underscores our ability to drive reductions in working capital throughout the Company, even in this challenging environment.

Finally, we remain confident that whenever economic trends and end markets do begin to improve, ITW and our relatively short lead time businesses will benefit in a meaningful and measurable fashion.

Now, let me turn the call back over to John.

Thanks, David.

For everybody on the call here, the agenda for today, Ron will join us shortly to cover Q1 financial highlights.

I will then cover operating highlights for our reporting segments.

Ron will then address our 2009 second quarter earnings forecast.

You may have seen from this morning's release that due to lack of long-term visibility, we have opted, at this point in time, to only forecast the second quarter.

Finally, we will take your questions.

As always, we ask for your cooperation per the one question and one follow-up question policy.

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

First, the usual items.

Please note, that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Including without limitations; statements regarding operating performance, revenue growth, operating income, income from continuing operations, diluted income per share from continuing ops, restructuring benefits, free operating cash flow, end market conditions and the Company's related forecasts.

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

And you can see those material changes that are detailed in our Form 10-K for 2008.

Finally, the telephone replay for this conference call is 402-220-3690, no pass code is necessary.

The playback number will be available through 12 Midnight of April 30.

You can also access, as always, our first quarter conference call PowerPoint presentation via the itw.com Website.

Please access the Investor Relations section and then, look for the Events presentation tab.

Now, here's Ron Kropp, who will talk about financial highlights for the 2009 first quarter.

Thanks, John.

Good afternoon, everybody.

As David mentioned, this has been a difficult and challenging quarter.

Before I go through the first quarter results, I thought it would be important to discuss two unusual charges we had this quarter and take you through their impact on the reported results.

Excluding these two charges, EPS from continuing operations was $0.17 per share, which was just over the high end of our revised forecasted EPS range of $0.08 to $0.16.

These two charges reduced earnings by $0.23 per share, which resulted in a reported loss of $0.06 per share.

The first charge relates to impairment of goodwill and intangibles.

As you may recall, we test all of our goodwill and intangibles in the first quarter of each year.

In addition, this quarter, we were required to adopt a new accounting standard, FAS 157, which changed the way that fair value is determined for our impairment testing.

As a result, we recorded a pretax impairment charge of $90 million in the first quarter, primarily related to two business platforms that we acquired in the last few years; our pressure sensitive adhesive businesses and our PC board fabrication businesses.

The impact of this impairment charge was $0.17 per share.

The second item relates to several discrete tax charges recorded in the first quarter, which totaled $28 million.

Of this amount, $11 million related to the reduction of tax loss carry-forwards in certain foreign jurisdictions.

The remainder related to adjustments to our tax reserves for various international issues.

The discrete tax charges reduced EPS by $0.06 per share.

Moving on to the reported results for the first quarter.

Revenues decreased 24% due to significantly lower base revenues.

Operating income was down 90%.

And margins of 2% were lower than last year by 13.2 percentage points.

Excluding the impairment charge, margins would have been 5.1%.

The diluted loss per share from continuing operations of $0.06 but excluding the charges I discussed, we would have had income of $0.17, down from $0.70 last year.

Despite the significantly lower income, free operating cash flow is very strong at $386 million.

Now, let's go to the details of the operating results.

Our 23.8% revenue decrease was primarily due to three factors.

First, base revenue was down 23.3%, which was unfavorable by 14.1 percentage points versus the fourth quarter of 2008.

As David discussed, we saw significant weakness across all of our end markets and geographies.

North American based revenues decreased 26.7%, which was significantly worse than the 12.3% decrease in the fourth quarter.

International base revenues decreased 19.5% versus a decrease of 6.2% in the fourth quarter.

Next, currency translation decreased revenues by 7.3%, which was unfavorable by 2.8 percentage points versus the fourth quarter negative currency effect.

Lastly, acquisitions added 6.6% to revenue growth, which was 1.2 percentage points lower than the fourth quarter 2008 acquisition effect.

Operating margins for the first quarter of 2% were lower than last year by 13.2 percentage points.

The base business margins were lower by 7.4 percentage points, primarily due to the lower sales volume.

In addition, the impairment charge reduced margins by three percentage points, translation diluted margins by 1.2 points and higher restructuring costs reduced margins by one point.

Restructuring expense for the first quarter was $33 million, which was similar to the restructuring amount in the fourth quarter.

As a result of the significant restructuring we have done over the last six months, we have reduced our base business overhead cost by more than 10% from the first quarter 2008 levels.

When I turn it back over to John, he will provide more details on the operating results as he discusses the individual segments.

In the non-operating area, interest expense was lower by $6 million, as a result of lower interest rates on commercial paper.

Other non-operating income and expense in the first quarter was favorable by $17 million, mainly due to a German transfer tax expense in 2008.

The first quarter effective tax rate was 230%, due to the non-deductible impairment charge and the discrete tax charges of $28 million.

Absent the impact of these charges, the effective tax rate would have been 26%.

Turning to the balance sheet.

Total invested capital decreased $486 million from the fourth quarter, primarily due to lower operating working capital of $282 million and lower goodwill and intangibles of $178 million.

Some of which was due to the impairment charge.

Although accounts receivable DSO was 64.1 days versus 59.4 days at the end of the fourth quarter, it was lower than the 66.4 days at the end of the first quarter of 2008.

Inventory months on hand was 2.2 at the end of the quarter versus 2.1 at the end of 2008.

For the first quarter, capital expenditures were $61 million and depreciation was $82 million.

Excluding the impact of the impairment and tax charges, ROIC declined to 4.2% versus 15% last year, largely as a result of the lower base business income.

On the financing side, our debt increased $194 million from last quarter.

On March 1, we repaid maturing debt of $500 million.

In late March, we decided to take advantage of the favorable credit markets to term out some of our short-term commercial paper borrowings.

We issued long-term debt of $1.5 billion; $800 million of five year bonds; and $700 million of 10 year bonds.

The proceeds of this bond offering were primarily used to repay commercial paper.

As of March 31, proceeds of $260 million were still held as cash on the balance sheet, pending repayment of additional commercial paper that matured in early April.

Our debt-to-capital ratio increased to 34% from 32% last quarter, primarily due to the bond proceeds of $260 million that were still held as cash.

Use of this cash in April to repay debt will bring the leverage ratio close to the fourth quarter level.

Shares outstanding on March 31 were $499.3 million.

Note that the effective options typically adds up to two million shares to the dilutive share calculation.

Our cash position increased $378 million in the first quarter, as our free operating cash flow of $386 million and net debt proceeds of $196 million were utilized for dividends of $155 million, and acquisitions of $65 million.

Despite the lower income levels, we were able to generate strong free operating cash flow by reducing our working capital.

Regarding acquisitions, we acquired six companies in the first quarter, which have annual revenues of $75 million.

We've continued to see a reduced level of activity in our acquisition pipeline.

I will now turn it back over to John who will provide more details on the operating results.

Thank you, Ron.

Now, let's review our first quarter segment highlights.

And we'll start with the industrial packaging area, where segment revenue has declined 32.3% and operating income fell 106.3% in the quarter.

Operating margins of negative 1% were 12 percentage points lower than a year-ago period, largely due to 10.6 percentage points of base margin dilution and 1.3 percentage points of dilution related to translation.

The 32.3% decrease in revenues consisted of the following; minus 24.5% from base revenues, 0.7% from acquisitions and minus 8.5% from translation.

Moving to the next slide.

Industrial packaging segment's Q1 base revenue of minus 24.5% represented a significant decline from Q4 2008 when base revenues declined 5.7%.

The substantial sequential decrease in base revenues was linked to declining industrial production rates in key geographies.

For example, US industrial production, excluding technology, declined further to 14.6% in March of 2009.

And as David noted earlier, in Europe, we're seeing similar trends.

Industrial production rates fell to minus 20% in Germany, minus 16% in France and minus 12% in the UK.

And that's through February '09.

These indexes, along with weakness in key end markets, such as construction related areas, such as lumber, brick and block, as well as primary metals; led to falling demand for both strapping and equipment products, as well as stretch wrap and protective packaging products.

As a result, total North American and international industrial packaging base revenues declined 30% and 24% respectively in Q1.

Within the segment, worldwide insulation was the segment's best performer, with base revenues down only 9% in Q1.

Moving to power systems and electronics.

In the first quarter, segment revenues declined 32.1% and operating income fell 80.2%.

Operating margins of 6.2% were 15.1 percentage points lower than the year-ago period.

With impairment negatively impacting margins by six percentage points; base margins declining 5.1 percentage points; and restructuring costs negatively impacting margins by two percentage points.

The 32.1% decrease in revenues consisted of the following; minus 31.9% from base revenues; 3.2% from acquisitions; and minus 3.4% from translation.

As noted earlier, power systems and electronics segment base revenues declined 31.9% in Q1, a substantial decrease from Q4 when base revenues fell 10.8%.

In welding, which accounts for roughly 75% of the segment revenues, falling industrial production demand globally drove total worldwide welding base revenues to minus 31% in Q1.

With North American base revenues at minus 36%, and international base revenues at minus 16%.

The PC board fabrication business saw its base revenue decline more than 50%, as consumer demand for electronic products, including popular cell phones and PDA's, dropped markedly in the quarter.

The only bit of good news in the segment was the ground support equipment businesses, which supply at the gate power units for commercial and military airport infrastructure type projects.

Base revenues grew 16% for these worldwide business units in Q1.

Let's move to the transportation segment.

In Q1, segment revenues decreased 26.8% and operating income fell 118.7%.

Operating margins of minus 4% were 19.5 percentage points lower than the year-ago period, largely due to unprecedented declines in Q1 North American international car builds.

More on that later.

Base margins declined 14.7 percentage points in the quarter, with restructuring and translation accounting for 3.1 percentage points and two percentage points of dilution, respectively.

The 26.8% revenue decrease consisted of the following; minus 35.5% from base revenues; 15.6% contribution from acquisitions; and minus 7% from translation.

As noted, segment revenues here declined 35.5% in Q1 versus a base revenue decrease of 20.3% in Q4.

And as noted earlier, the explanation was simple.

Both the North American and international auto builds reached extraordinarily low levels in Q1.

Our North American automotive base revenues declined 46% in Q1, as North American auto builds, which includes both Detroit three and new domestic production, fell 51%.

Detroit three build actually declined 54% in Q1, with GM down 59%; Ford down 49%; and Chrysler down 55%.

New domestic builds fell 45% in the quarter.

Internationally, the build environment was also problematic.

Our automotive international base revenues declined 44% in Q1, as total European car production fell a similar 44%.

Key European OEM's struggled with builds in Q1.

Renault was down 50%; GM Group down 48%; Peugeot Group down 44%; Fiat down 39%; Ford Group down 38%; and VW Group down 32%.

Looking ahead, our CSM Auto Build Tracking Service is now predicting some modest improvement in Q2 builds, both in North America and internationally.

With Q2 North American builds down approximately 40% and international builds down approximately 32%.

This would be -- this was versus Q2 2008.

The only semblance of good news in this segment was our automotive aftermarket business, which saw base revenues decline only 10% in Q1.

Moving to food equipment, which was our strongest performing segment in the quarter.

Segment revenues declined 15.4% and operating income fell 37.4%.

Operating margins of 10.1% were 3.6 percentage points lower than the year-ago period, mainly as a result of base margin dilution of 2.8 percentage points.

The 15.4% decrease in revenues consisted of the following; minus 9.2% for base; 1.3% contribution from acquisitions; and minus 7.5% for translation.

Food equipment's base revenues decreased 9.2% in Q1 versus base revenue growth of 1.7% in Q4.

The decline in Q1 base revenues was attributed to further weakening in both North American and international customers' demand for equipment.

In Q1, total food equipment North America base revenues declined 14%.

Notably, institutional base revenues were down 18%, as customers representing airports, universities, hospitals and casual dining restaurants deferred equipment orders in the quarter.

The service portion of the business was also impacted modestly, as base revenues declined 3%.

Internationally, base revenues fell 6%, with European food equipment declining 5% in the quarter.

Moving next to construction products.

In Q1, segment revenues fell 33.1% and operating income declined 121.9%.

Operating margins of minus 3.4% were 13.8 percentage points lower than the year-ago period.

Mainly as a result of a 9.5 percentage point decline in base margins; a three percentage point decrease due to translation; and a one percentage point decline due to restructuring.

The 33.1% decrease in revenues consisted of the following; minus 21.2% from base revenues; 0.6% contribution from acquisition; and minus 12.5% from translation.

Looking further at the construction segment.

Worldwide base revenues decreased 21.2% in the quarter, compared to a 14.6% decline in Q4.

And the main drivers of the more negative sequential results encompass both North American and international end markets.

North American based revenues fell 31% in Q1, with residential based revenues down 43%.

These housing related numbers come as no surprise, given the fact that housing starts declined approximately 50% in Q1 versus the year-ago period.

In our other North American construction category, our commercial construction based revenues declined 32%, versus a decrease of 51% in the latest Dodge Commercial Construction Index, which is based on square footage through March of '09.

Finally, our renovation-based revenues fell 18% in the quarter, largely due to weakness at the big box stores.

Internationally, construction activity weakened worldwide.

Total construction fell 20% in Q1, with Europe down 29% and Asia-Pacific down a more modest 5%.

Moving to polymers and fluids.

In Q1, segment revenues decreased 2.9% and operating income fell 246.7%.

That number, obviously, impacted by the impairment.

Operating margins of minus 20.8% were 34.5 percentage points lower than the year-ago period, mainly as a result of 24.3 percentage points of dilution due to impairment; 4.3 percentage points of base margin dilution; and 3.6 percentage points of dilution due to acquisitions.

The 2.9% decrease in revenues consisted of minus 16.9% from base revenues; 23.7% contribution from acquisitions; and minus 9.7% from translation.

Looking a little closer at polymers and fluid.

Segment revenues declined 16.9% in Q1 versus a decrease of 7.9% in Q4.

Again, the sequential weakening in revenues reflects the further falloff in industrial production rates in both North America and international locales, as well as slowing in demand for a wide array of MRO products.

Worldwide polymer base revenues declined 18% in Q1, with North America down 22% and international down 15%.

And worldwide fluids base revenues decreased 20% in the quarter, with North America down 25% and international down 16%.

Finally, our all other segment, in Q1, segment revenues declined 15.4% and operating income fell 46.9%.

Operating margins of 11.1% were 6.6 percentage points lower than the year-ago period, largely due to 4.4 percentage points of base margin dilution; one percentage point of acquisition dilution; and 0.5 percentage point of dilution associated with the restructuring.

The 15.4% decrease in revenues consisted of minus 18.9% base revenues; 8.7% contribution from acquisitions; and minus 5.1% from translation.

As noted, the all other segment produced base revenue decline of 18.9% versus a decrease of 7.5% in Q4.

And this segment principally consists of four major categories; test and measurement; consumer packaging; finishing; and industrial appliance products.

All four categories saw further weakening of base revenue performance in Q1 versus Q4.

More specifically, test and measurement worldwide base revenues declined 13% in Q1 versus growth of 3% in Q4.

This sequential decline was a result of weakening CapEx spending in North America, Europe and Asia.

In consumer packaging, worldwide base revenues totaled minus 15% in Q1 versus minus 8% in Q4.

As weakening demand for graphics, decorating and marketing businesses, outweighed positive performance by the ZipPak consumer packaging business.

In the finishing area, worldwide base revenues fell 24% in Q1 versus a base revenue decline of 8% in Q4.

And in Q1, North American finishing was down 33% and international finishing was down 22%.

And finally, industrial appliance products worldwide base revenues declined 28% in the quarter versus a base revenue decrease of 15% in Q4.

The worldwide appliances sub category base revenues decreased 24% in the quarter, as housing starts and renovation activities continued to weaken in the quarter.

Now, at this point, I'll turn it back over to Ron who will take you through the second quarter 2009 forecast.

Ron?

Thanks, John.

As a result of the ongoing broad based weakness, we have limited long-term visibility to the worldwide end markets.

Therefore, at this time, we are limiting our forecast to just the second quarter of 2009.

For the second quarter, we are forecasting diluted income per share from continuing operations to be within a range of $0.25 to $0.37.

The low end of this range assumes a 28% decrease in total revenues from 2008 and the high end of the range assumes a 23% decrease.

The midpoint of this EPS range, of $0.31, would be 67% lower than 2008.

Given the economic situation, a more relevant comparison may be to the first quarter of 2009.

The second quarter 2009 forecasted revenues would be higher versus the first quarter by a range of 5% to 11%.

And second quarter EPS would be higher than the first quarter by 47% to 118%.

Other assumptions included in this forecast are; exchange rates holding at current levels; restructuring costs of $50 million to $70 million for the second quarter, which compares to $33 million for the first quarter; net non operating expense in a range of $35 million to $40 million for the second quarter; and a tax rate range between 24.75% and 25.25% for the second quarter.

I will now turn it back over to John for the Q&A.

Thanks, Ron.

We'll open the call to your questions.

We'll ask once again, very politely, to please honor our one question, one follow-up question policy.

Thank you.

(Operator Instructions).

Our first question comes from Robert Wertheimer of Morgan Stanley.

Hi, good morning everyone.

Good afternoon, excuse me.

It is afternoon here, yes.

So first question, would be, whether you have given any guidance to units or whether they've conveyed up to you sort of what level of business they're trying to size for?

It's sort of a question of how much of the downturn is inventory or not.

But obviously, you can make some cuts that will impair future growth or you can believe there's no future growth for awhile and you could cut deeper.

So that's the question, if you're able to address it.

Well, Rob, we've been at this from a sizing standpoint here for the last three quarters in a number of our businesses and auto and construction even longer.

It's not a perfect science.

It's hard to give you a precise answer to your question.

But clearly, as we approached 2009, as I think we've shared with you folks in the past, we were looking at a first quarter that we felt was going to be down 16% in our base businesses.

And as Ron just told you, as he went through the numbers, it was closer to 24%.

So clearly, a 50% lower activity level than what we had projected.

So we entered the year with businesses collectively looking at their own markets but overall, that was what we were expecting.

So clearly, during the quarter, we took further restructuring measures as a result of looking at even weaker activity levels.

It's hard to predict how weak some of those activity levels will be going forward.

As John pointed out, with the auto data as an example, the first quarter was clearly a significantly lower quarter.

The second quarter looks to be somewhat better.

So sizing the business in this environment is not a very accurate science.

I can tell you that we've made adjustments based on what we expect now to be lower operating levels than what we had originally projected for Q2.

And frankly, for Q3 and Q4, it's not even appropriate for us to comment at this moment because until we get through Q2, it's hard to predict what those quarters would look like.

But the last three months, we have seen base business declines in the 20% plus category.

So the numbers have been similar from January through March, although the differences among segments and between domestic and international have been somewhat different.

So we've clearly spent a significant amount of money on restructuring the last two quarters.

Between the fourth quarter of last year and the first quarter of this year, we spent over $60 million.

And we're targeting to spend another $60 million during the second quarter.

So we continue to allow our businesses to determine what the right balance is between restructuring and investing in the long term.

And we really use the bottoms up approach in generating these restructuring projects.

Okay.

Thank you and as a follow-up, if I could ask it, can '10 earnings be up from '09?

And if so, will it be because you've restructured and you're actually aiming to be profitable at this business level?

Or will it be because the markets come back?

Well, it's clearly difficult to give any view of '10 in terms of any finite numbers.

But clearly, I would expect with what we've done in restructuring and with what I would anticipate to be albeit modest some recoveries in end markets in 2010, I would certainly expect earnings in 2010 to be greater.

I guess that's my quota.

Thank you.

You reached your quota.

Thank you, Rob.

Our next question comes from John Inch from Merrill Lynch.

Thank you, good afternoon.

So the revenue guidance, what is -- the up 5% to 11%, what does that impute to with respect to the base business range?

What kind of base business are you expecting in the second quarter?

Low 20's.

So, kind of is there any material difference in base business versus the trend or no?

No, I think the way to think of it is, it is up from the first quarter 5% to 11% sequentially or it would be.

But if you look at just the last half of the first quarter, it's more of a range of 0% to 6% above that last half.

Because the first half of the quarter was typically lower in the January and December time frame from international that falls in our first quarter.

Right.

There's also a larger translation headwind in the second quarter as well.

10%.

Okay.

So but basically, the question really is, if you factor in sort of the -- those sorts of data and just the comparisons, is base business stabilizing?

Is it getting a little bit better?

A little bit worse?

How to think about that trend.

Well, John, I think the way to think about it overall, is that the numbers the last two months have been relatively consistent but it's made up of a lot of moving parts.

So, while auto improved in March over February, other businesses decreased from February to March.

But the overall numbers, the last two months, have been in that 22%, 24% range in terms of base.

So from that standpoint, we haven't seen any further declines.

I would expect that based on what we're seeing in some of the end markets, that we would expect to see, as our second quarter outlook suggests, some modest improvement in these end markets.

But still on a comp basis, to compare it to the second quarter of last year, the comps on a base business basis would actually be higher.

Okay.

So just so I understand this, seasonally, your second quarter is traditionally a little bit stronger.

So, you're saying that trend is likely to continue.

If you look at the year-over-year deltas, they're kind of in the same zone.

Is that fair?

That's fair.

That's a fair statement, yes.

Although you said, David, you thought auto was going to get a little bit better, so I'm just wondering if that was material enough to sort of uplift the whole thing?

No, I was just using auto as an example of something that's gotten better in the last couple months.

But no, auto alone is not significant enough to raise the whole.

Okay.

Then, my follow-up is really just the question on variable contribution margins.

I think on the base, again, these are just your numbers, it looks like it was down about 39% year-over-year.

So, what is that number kind of in the second quarter?

What sort of variable decremental margins, if you will, are you expecting?

On base business, by the way, are you expecting it to get better, worse, constant?

I think pretty similar, maybe slightly better given the level of restructuring we've had but definitely in the less than 40% range.

And these are decrementals, we're talking about here.

So less is better.

But a little bit better than 39%.

When you say a little bit better, is it better than 30% or is it sort of -- ?

No, no, maybe 1 point or 2 points better.

Maybe 35% or 36%.

Not 30%.

Okay, great.

Thank you.

Your next question comes from Henry Kirn of UBS.

Hi, guys.

A quick question on the destocking.

Where are we with distributor and OE destocking at this point?

That's a great question.

I'm still looking for the answer myself, Henry.

I would say, that clearly in some businesses, we know that the inventory is not really in the pipeline.

I would say that is true in our residential construction businesses.

We know that there has not been inventory in the pipeline for some time, so that's really not been an inventory correction scenario.

Some of the later cycle businesses, like our welding businesses, we suspect we're still seeing destocking going on.

In fact, we know that by comparing with some of our larger channel partners, what their in-sale activity is versus their purchases from us.

So, we know there's still a disconnect there.

I would suspect that it's probably, given that some of those later cycle businesses only really began to decline towards the latter part of the fourth quarter, that we're probably going to see some continued destocking in the first month or so of the second quarter.

I would think overall, though, here, certainly in North America, we would have to begin to see that destocking activity really come to an end sometime during the second quarter.

The international markets, Europe in particular, it started later.

I'm sure that it's going to take a little longer for that to work through the system.

But it would be less -- I would expect less material impact by the second half of the second quarter, if you will, than what we've been seeing.

Thanks, that's helpful.

And could you talk a little bit about pricing power across your end markets?

Are your competitors behaving rationally or are you seeing spots where folks are discounting?

Well, you see, obviously, in any of these kind of markets with the kind of displacements we've seen, you see a variety of activity.

You see some that are making pricing decisions in order to move inventory.

We've discovered that in order to move inventory, you have to actually have an order.

So, the time to cut prices is not then.

I think really what we're seeing, overall, is generally price stability in most of our markets.

In fact, during the quarter, we gained over -- about 150 basis points on the price cost scenario.

So costs have come down more rapidly than prices have.

So I think that's pretty much been what we've seen across our businesses.

Okay.

Thanks a lot.

The next question comes from Mark Koznarek from Cleveland Research.

Hi, good afternoon.

A question on the auto, the transportation business, in the quarter it looks like you guys actually outperformed the unit build by about 10 percentage points.

And is that something we ought to expect to continue in the second half or second quarter, anyway?

I think the outperformance was more like 5 or 6 points, Mark.

Yes but on a percentage basis, he's right.

Yes, on a percentage basis, yes.

Mark, I would say that our typical performance, from a penetration standpoint, is in the 4 to 5 point range and I think that's probably more typical.

I think it is very dependent on what vehicles get built during the quarter.

And I would not suggest that the 10 point gains that we saw in the first quarter are what I would dial in for the year.

I think more typical is in the 5 point range.

Okay.

And then, just kind of stepping back, the overall decision to withdraw guidance for the year.

Here, there's been a couple comments and discussions already about how the business, maybe 'stabilized' is the wrong word, if you can apply that to down 20%.

But if the last three months, you've had a relatively consistent pace of decline each month, why pull the guidance?

Why not conclude that possibly the year stays down 20%?

Is it that the potential range would have been just so broad to not be valuable or do you actually think things could further weaken from here?

Well, I think you've answered the question, in what you've just said there.

We -- it could weaken from here or it could strengthen from here.

It's hard enough to look at the quarter, let alone begin to look at what the year might yield.

I would expect that if the trends we have built into our second quarter outlook in fact come true in the revenue line, that we will be able to say we've seen some stability in some of these end markets and perhaps we'll be in a better position to look further ahead.

But at this point, it's very difficult to look further forward.

You may recall that only in January, we were talking about auto builds that were expected to be in the 10 million range.

And by the end of February, we were talking about auto builds that were in the 8 million range.

So, it's pretty hard to put together a very accurate forecasting around these end markets, as they continue to be volatile and adjust as quickly as they have.

So, it's really a question of visibility.

And as you know, we've traditionally provided annual guidance.

And I think when we see enough stability in the end markets to be able to look at activity levels with some level of confidence, we'll certainly return to doing that.

And I would also add, Mark, unlike many companies, we'll still be providing you with monthly updates.

So we can confirm on the off months the quarterly guidance we're giving you.

So, I think that should give you at least some quasi direction in terms of what might be happening longer term.

That stability you're looking for, would that be something across the board or is there like one or two key indicators that really you focus on?

I'd be looking for it to be reasonably across our various segments.

We may see some stability in one or two segments before we see it in all of our segments.

So, I wouldn't want to predict exactly what it's going to take but it's going to take, overall, more stability in terms of market outlooks than what we clearly have today.

Great.

Thanks very much.

Jamie Cook of Credit Suisse, you may ask your question.

Hi.

Good afternoon.

My first question, I just wanted to follow up on I think an earlier one.

David, you mentioned that -- when you mentioned EPS for 2010 could possibly be up, you talked about some markets possibly being up.

So which ones do you anticipate to sort of trend up first?

And then, if you could just walk me through, we talked about you had I think $33 million in restructuring in Q1 and we'll see another $60 million or so in the second quarter.

I'm just trying to think about how I should think about those cost savings as we roll into the second half of the year and the implications for '10?

We can make our own assumptions on what the markets will do.

Yes, I think if I were to talk about ends markets, that I would expect to see improvements in '10.

Obviously, it may be a bit premature to put any range on those.

But I would expect that with an 8 million vehicle build in the US, as an example and a 15 million vehicle build in Europe this year, that we would expect to see some upside in those markets, as an example.

We've said in our original discussion about 2009, when asked about what we saw in terms of timing for an industrial recovery, that we didn't believe that would occur until sometime mid-next year.

I think that's probably likely as well.

So I would expect, based on what we would expect to see in terms of cyclical recovery, that we would begin to see a number of end markets respond with more favorable conditions.

But we've also said, we don't expect this to be a very fast and dramatically upward recovery in a lot of these end markets.

I think it's going to be a much slower recovery.

The slope of the curve will be much different than what it was clearly going into these downturns.

And so, I think the improvements, while I expect them to be modest improvements, I think they'll be, by middle of next year, much more broad based than just the handful of markets that we might see towards the end of the year.

As it relates to the restructuring numbers, clearly the reason for a bigger number in the second quarter is particularly, a number of our international businesses are adjusting to the new realities of their end market demands.

That's clearly true in Europe and to some extent in the Asia-Pacific regions.

And we continue, with some of our later cycle businesses here, to really resize the businesses based on what looks like different activity levels and what they began their planning scenarios with this year.

I don't know, Ron, whether you have any other comments you'd like to add to that?

I think the way to think about the savings is, typically, we're able to do better than a 1-for-1 payback on the spend.

So, if you look at the fourth quarter of '08 and the first quarter of '09, that's $65 million or so of spend.

So, you're probably looking north of that for the 2009 benefit.

And then, obviously, there will be benefit around the $60 million spend in the second quarter but not a full year's worth.

All right.

Thanks.

I'll get back in queue.

Andy Casey from Wachovia Securities, you may ask your question.

Good afternoon, everybody.

A question on the industrial packaging, just within that, have you seen any rate of decline moderation for North American consumables?

No.

We have not so far, Andy.

If you look at the key end markets that we highlight when we talk about the business here, and certainly, if you talk about the metals market, the steel and aluminum markets primarily, those markets are clearly well down.

Those markets, as you know, serve key end customers like automotive and appliance markets and those markets are well down.

The second big category for them are building materials, lumber, brick, block, pavers, et cetera, those markets are also well off.

So, we've seen no significant improvement in consumable demand and obviously, not in the equipment side either.

In the general industrial markets, we likewise have continued to see declines there, although not at the same rate as obviously the metals and the construction markets.

Okay.

Thanks, David.

And then lastly, could you possibly give us an update on the progress for the divestitures?

Sure.

Let me give you a quick update on where we are at.

As you know, we have several businesses held in the discontinued operations category.

The quick commerce software business is the first one that I would talk about.

We've been at that process now in terms of divestiture for, now probably, about three months in terms of actively marketing the business.

We are in the final rounds of discussions with several potential buyers at the moment.

And if the time line we have at the moment holds, we would expect to divest that business sometime during the second quarter.

On the decorative services group, that process has been much slower.

It required audited financial statements, given its size and significance, which we are just finalizing now with the auditors.

Obviously, the market conditions, since we announced this in August, have changed significantly.

So, over the next several months, we'll be assessing the market conditions and see what kind of a process we think we can actually run with those businesses.

And we'll make a determination based on that, as to how we proceed and what the likely outcomes are.

Okay.

Thank you very much.

Daniel Dowd from Bernstein, you may ask you question.

Good afternoon.

Can you spend some time talking about the acquisition pipeline, if you're seeing any activity in any particular areas or what kind of areas you're seeing it in?

Yes, Dan, it's -- we have not really seen any significant improvement, first of all.

As you saw from the data that Ron talked to earlier, we did six deals for $75 million in the first quarter.

The pipeline right now in total, is under $300 million in size.

To put that in perspective, this time last year, it was about four times that size.

So the same phenomenon we reported when we talked about the fourth quarter in the pipeline, as we looked at this year, continues.

And that is that a lot of potential sellers have clearly either decided to push back from the table or are re-evaluating altogether whether they want to be in the market selling at this moment.

We've not seen any significant change in that regard.

The acquisitions that we've done in the quarter, we did two in the industrial packaging space and several others spread around different groups.

So there's been no significant areas.

And obviously, as you could see from the numbers, none of them were large individual transactions.

The outlook for the second quarter, in terms of the pipeline, remains roughly the same as what we saw in the first quarter.

It might be modestly better but again, too early to predict any precision on the numbers.

So no material change, I would say, is the best way to sum up what we see in the pipeline at the moment.

So if we assume that the pipeline remains as slow in Q2 and probably in Q3, as you're seeing now and potentially the Click Commerce deal closes, what would you have to see in the macro economy or in your specific order book to make you think about or review your options for the cash on the balance sheet and the cash that will be building up?

Well, I think as we've said all along, Dan, we're clearly interested from an acquisition standpoint.

That is a definite preferred use of free cash.

And obviously, we're opportunistic in terms of how we look at those acquisitions and valuation discipline.

So we have to have ready and willing buyers on the other side or sellers on the other side of the table to be able to transact.

With that said, I'm not worried about accumulating cash in this environment because I do believe that at some point, whether it's in the third quarter or the fourth quarter or maybe even early next year, this acquisition environment is, in fact, is going to change.

It's clear that there are going to be a whole host of sellers in the market, that due to lots of different reasons, reality sets in in terms of earnings potential.

Perhaps lenders set in in terms of their willingness to renew lines of credit.

There will be lots of different circumstances that I think will create a much more robust environment.

And we're going to be patient and be ready to react when, in fact, that happens.

We've got a laundry list, if you will, of targets we'd love to be able to transact going forward.

And I think as the market improves and as those assets become available, we're going to be ready to move.

So, I think that any storage of cash, in my view, from an acquisition standpoint, is not going to be a long-term issue for us.

And the other thing I would add is that, one of the reasons we decided to take advantage of the credit markets this quarter and issue some bonds, is to give ourselves some flexibility longer term for acquisitions as the market frees up.

And I assume -- the way you've stated your policy on dividends, it's about a trailing net income.

That would imply, given what's happened to net income, that your dividends are headed down but I assume with this level of cash built up, you're not anticipating any changes to the dividends?

Well, our dividend policy is based on a trailing two-year look.

So the real dramatic decline in earnings is a 2009 phenomenon, which means that that would be something that would have a 2010 impact as we evaluate it.

That certainly is not me signaling any suggested change in the dividend.

We're comfortable with the cash flows and the dividend rate we have at the moment.

We've made no decisions around changing that and we evaluate our dividend policy annually, our dividend payout.

And I expect that, as we do that again this year, we'll expect to see some -- the normal approach that we've used and a similar outcome.

So, I would not signal anything that would suggest, that because of the weaker operating environment, that we're making any decision about changing our dividend approach.

All right.

Thank you.

Our next question comes from Joel Tiss of Buckingham Research.

Good afternoon, how you doing?

Could you just talk for a second maybe, Ron, about this assets held for sale line?

Because I see, year-over-year, it's risen a lot.

And is there anything else in there, besides commerce and the decorative surfaces business?

And then, maybe, how do you account for the values of the [properties?]

So the way discontinued operations accounting works is you classify the assets held for sale for the businesses that are considered for sale and you don't necessarily go back and restate the prior period.

So if you're looking back at this time last year on the balance sheet, if you remember, the biggest piece in there is the decorative services group, the Wilsonart business, and that became part of discontinued operations in the third quarter of 2008.

So, that would not be included in the numbers if you look a year ago there.

Is this your best guess at realizable value today or is this just what sort of the asset values of the businesses are?

No, it's the historical cost basis of asset values.

The only adjustment you make for value, is if your cost basis is higher than what you expect to get from a proceeds perspective.

Okay.

And then just a quick, to drill into the food business a little bit.

Can you talk about if you're seeing any potential positive impacts in the food segment from some of your competitors becoming so levered?

No, we have not seen any significant change, if you're talking about it on the competitive front, no.

I think -- obviously, I'm not spending a lot of time focused on what our competitors' numbers look like but certainly, we're pleased with, given the environment, what we've been able to accomplish in those businesses.

The service volume, as Ron pointed out, was down 3% here in the quarter in North America.

We have seen service pushback, as some customers have delayed doing service altogether.

But clearly, at minus 3% compared to the end markets, that's a pretty good outcome.

But I can't say that we've seen any significant change in the competitive profile in the markets, certainly, in the last 90 days.

Okay.

Thank you.

Our next question comes from Ann Duignan of J.P.

Morgan.

Hi, good afternoon, everybody.

Can I dig a little bit more into restructuring?

Can you help me figure out, for the monies you've spent, what percent of your workforce have you reduced or intend to reduce or can you give me absolute numbers?

I'm just trying to keep track of the percent of headcount reduction.

Yes, absolute numbers would be tough to give you but if you look at it on sort of a global headcount basis, at this point in our restructuring, over the last probably six to nine months, we have probably reduced our headcount somewhere in the 2,500 to 3,000 range.

As a percentage, it's hard to give you a precise percentage because our numbers also include acquired businesses, which have brought in a significant number of additional employees to our overall headcount.

So, I can't really give you a precise answer, looking at it on quite that basis Ann.

Okay.

And looking forward then with the monies you're going to spend this quarter, you've spent about roughly $60 million.

You're going to spend roughly another $60 million.

Should we conclude that the headcount reduction will be somewhere in the order of magnitude 5,000 to 6,000 total by the time we get down.

Yes, probably by the time we get done, that's reasonable, yes.

About 75% to 80% of the restructuring dollars are related to people related expenses, so that's a pretty good measure.

And that's exactly what I wanted to follow up on.

Of the 25% to 15% then, the remaining spend, are you taking permanent capacity out at this point?

Or are you still kind of running at suboptimal capacity utilization levels in the hopes that when these cycles turn they'll go back to where they were?

Or do you think some of these industries, let's take automotive for example, that's it's never going to go back to 18 million SAR and so, you're permanently right sizing some of these businesses?

If you could just give me some color on that, that would be great.

Sure, well we've done some of all of that, Ann.

Some of this is capacity that we basically have moth-balled.

In other words, we haven't rid ourselves of the capacity but we basically put it in moth balls, with the expectation that we'll be able to use it again in the future.

We're not clear when that future is but we feel comfortable enough that we think we'll need it.

In other cases, we have made permanent capacity reductions.

We're not of the belief that the US auto market is going to return to 17 million or 18 million vehicle builds any time soon.

And so, we're not making our planning scenarios around anything that would look like that.

I just use that as an example of an end market that, clearly, we don't expect to return to those kind of levels.

So in some cases it's -- these are short-term adjustments.

In other cases, as we get more clarity around where we think the end markets will end up over the next several years, we will make longer term decisions.

So, it's really a combination.

I would say the majority of what we have done has been more down sizing the labor force to utilize the capacities that we have.

Meaning that we've moth balled more capacity than what we've retired.

Okay.

That's helpful.

And just real quick, you've always given us some good color on the challenges facing some of your customers and particularly, your small customers.

You were some of the first to talk about the lack of credit availability out there, for example, for food equipment customers.

Can you give us any color on what you're seeing out there now?

Have you seen any opening up of credit to some of these smaller customers?

I think inside the smaller to medium sized customer base, maybe some modest improvement in credit but not significant.

There is clearly still a significant fear factor in those markets.

They were clearly displaced for a period of time in terms of having access to the credit lines they thought they had.

So, some of them have overreacted and are now storing cash and are making decisions around working capital that you would not make in a normal business environment.

So, while I think it's -- availability maybe improved modestly, the reaction of the segment, it's still very hand to mouth in terms of how people are thinking of investing in those segments today.

So, I think there's still a high degree of nervousness.

If you look across the housing market, clearly, the foreclosure issue has still not been effectively addressed.

And I think that until that gets affectively addressed, we're going to continue to see big concerns about what happens to housing values.

The end market numbers in terms of starts and permits, they have stabilized at a relatively low level.

When I say 'stabilized,' they bounced around between the high 400's and the mid-500's for the last four months.

But I don't see us getting any significant improvement in those markets until we see some real fundamental improvement in the foreclosure process.

We're still seeing a lot of properties dumped on the market at distressed values, which are driving down housing values.

So it's kind of a vicious circle in some of those markets.

Okay.

I'll get back in the line and take my further questions offline.

Thanks.

Our next question comes from Shannon O'Callaghan from Barclays Capital.

Good afternoon, guys.

So historically, you guys get kind of a seasonal lift in 2Q and then, in the second half you're sort of the same or maybe slightly down from there.

It doesn't sound like you guys are expecting a lot of help from end markets.

Are there other things that would hit in that second half that alter that seasonal pattern meaningfully?

Is restructuring going to be a net benefit in the second half or what other moving parts are there to think about that second half?

Well certainly, as Ron pointed out, the restructuring that we've done in the fourth quarter and the first quarter this year will have impacts, clearly, in the second half of the year for sure.

On the revenue side, it's great to talk about seasonality and that's something that we often would look at in a more normal environment but I would also point out that we had a significant decline in the first quarter from the fourth quarter and that's not normally the trend.

So, it's hard to talk about any level of seasonality, especially when you pour into the sort of granular details of some of these markets.

So, I think our expectation in the second quarter is, in terms of the modest lift we see is, probably not so much about seasonality, as it is that we've seen some signs we'd expect to see activity levels overall slightly better.

But I wouldn't describe a whole lot of what we're looking at as expectations of significant seasonal changes.

Perhaps as we move through the second quarter, we'll get a better look at that and we may have a different view when we approach the third quarter.

But I certainly wouldn't look at any normal seasonal pattern in our numbers as anything we would expect to see, obviously, this year.

And the restructuring benefit in the second half, what did you say again about the high end?

Are you going to be above the high end?

How much P&L expense are we going to have for restructuring in the second half?

We haven't talked about the second half restructuring.

We talked about the second quarter at $60 million.

But clearly, if you take the first quarter at $33 million and the second quarter at $60 million, we've already spent the upper end of what we had provided in our original guidance.

I would expect that if we achieved the kind of numbers that we have put out for the second quarter, I would expect the restructuring in the second half of the year to be less than what we're doing in the first half of the year.

But I wouldn't be able to give you any precise look at that until we get a better handle on it.

Okay.

Thanks, guys.

Our next question comes from Eli Lustgarten of Longbow Securities.

Good afternoon.

One quick clarification, you had a 7.3%, I think, foreign translation hit in the first quarter.

Did you use 10% in the second quarter or was it the same number?

No, I think it's 10% or 10.2%.

10.2% for the second quarter, Eli.

So, you are having a bigger hit in the revenue number as a 10% number?

Yes, the second quarter, I believe, was the peak in terms of currency valuation.

The third quarter was pretty close.

So, second and third quarter, we'd expect to be in that 10% plus range in terms of just the translation differences.

And can we talk about a little bit about both transportation and construction, both of them lost money in the quarter.

Can you look at volume levels in the second quarter, can we get to breakeven in those businesses in the second quarter or by the end of the year?

And more importantly, given, as I said, your 8 million cars and you're not going back to 15 million plus so quickly.

Can that business get back to double-digit margins in the next 12 or 18 months, based on a modest improvement in volume?

Or does it really take to get back closer to prior levels to get close to double-digit margins?

Yes, well, I think a couple things.

First of all, when you look at the transportation segment in particular, the auto builds were the most dramatically declined.

They were down more than 50% globally in the first quarter.

Obviously, we weren't sized for that, number one.

And number two, we don't believe that's the ongoing market demand level.

We think it's modestly better than that, as our Q2 numbers would suggest.

So, we would clearly expect the transportation segment to return to profitability.

I believe that will happen in Q2.

In terms being able to get back to double-digit operating margins, certainly, with this hole in the first quarter, I wouldn't expect that to probably happen this year.

I think, on a quarterly basis, I would expect to see it happen during the year.

On an annual basis, certainly, in 2010.

I think it's a similar story on the construction side.

I would expect that as we begin to see the construction volumes improve the end market activities improve, that we're going to see improvement in those numbers.

These numbers are also impacted by a fairly significant spend in restructuring, which we have not recognized the benefits of yet, which we'll see in the latter part of the year.

So, the answer to your question, in both cases, is I would expect them to be profitable for the year and I'd expect them to be able to return to double-digit annual profits, hopefully, in the 2010 time frame.

Okay.

And just one follow-up.

With all the restructuring and acquisitions that you've made, is there another list of businesses you're looking at internally that you may want to divest?

You made $5 billion worth of acquisitions the last four years.

Are you taking a hard look at everything to see whether you should be increasing that pipeline of assets for sale?

Well, we do that, as we've I think described in the past, that's an annual process we go through.

That process is usually begins in the second quarter, so we'll go through that process again.

We may well end up deciding that there are other assets that we think don't fit long-term but we haven't made any of those decisions yet.

But that typically is something we do in Q2, Q3.

All right.

Thank you.

Kathy, this will be our last question.

At this time, I show no further questions.

Well, how about that?

Okay, we thank everybody for joining us today and we look forward to talking to you again.

Thank you very much

Thank you.

This concludes today's conference call.

You may disconnect at this time.