Illinois Tool Works Inc (ITW) 2009 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Now I would like to turn the meeting over to Mr.

John Brooklier.

Sir, you may begin.

Thank you.

Good afternoon, everyone, and welcome to ITW's fourth quarter 2009 conference call.

I'm John Brooklier ITW's Investor Relations Officer, and with me today is our CEO, David Speer, and CFO, Ron Kropp.

Thanks for joining us on the call.

Let me now turn today's call over to David, who will make some very brief remarks on our strong fourth quarter operating performance.

David?

Thank you, John.

Our 2009 fourth quarter financial performance was very good, particularly when viewed against the modest improvements we saw in our worldwide end markets during the quarter.

While it's clear the easier Q4 2009 comparisons versus the prior year helped this quarter, we continue to be encouraged by the improvement in US and European industrial production, and ISM forecast data, as well as the uptick in certain worldwide end markets.

Here are some noteworthy quarter four developments, which have good implications for 2010.

Our total base company revenues improved sequentially, but base revenues declined 10% in Q4 compared to the Q4 of 2008.

That compares favorably to our total company-based revenue decrease of 17.9% in the third quarter of 2009 versus the year earlier period.

Some of the sequential improvement was clearly tied to easier comparables in the quarter four period versus a year ago.

But we continue to see real improvement in discrete markets, most notably worldwide automotive.

Our worldwide automotive base revenues grew 8.8% in the quarter versus a base revenue decline of 9.7% in the third quarter.

As you'll hear later, the dramatic improvement in base revenue growth was driven by a significant increase in auto builds in Europe and in North America in quarter four versus quarter three, and also significant additional penetration gains.

While our strong company performance in Q4 yielded operating margins of 12.7%, 120 basis points higher than Q4 2008, they were modestly below our Q3 margins, but in line with our expectations.

In any event, we believe we're well positioned for margin expansion in 2010.

It's clear our restructuring expenditures of $161 million for the year have loud us to respond to local market conditions as we right size the company.

Finally, our free operating cash flow numbers remain strong during the quarter and as a result, our free operating cash flow for the year totaled $1.9 billion.

That represents a free operating cash flow to net income conversion rate of 201% for the full year.

Now let me turn the call back over to John.

Thank you, David.

Here is the agenda for today's call.

Ron will join us shortly to cover the Q4 2009 financial highlights.

I will then address Q4 2009 operating highlights by reporting segment.

Ron will then return to detail our Q1 2010 and full year 2010 earnings forecast.

Finally, we will take your questions.

Since we are targeting a one-hour completion time for today's call, we ask for your cooperation for our one-question/one follow-up question policy.

First, let's cover the usual housekeeping items.

Please note that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995, including, without limitations, statements regarding operating performance, revenue growth, diluted income per share from continuing operations, restructuring expenses and related benefits, tax rates, end market conditions and the Company's related 2010 forecast.

For more information on this forward-looking statement, please consult our 10-K for 2008.

Finally, the telephone playback for this conference call is 402-220-3450.

No pass code is necessary.

Telephone replay is available through midnight of February 10.

One other note, per our customer webcast Power Point presentation, the company's call is available on our ITW.com website.

Now here's Ron Kropp, who will comment on our Q4 2009 financial highlights.

Ron?

Thanks, John.

Good afternoon, everyone.

Here are the key items for the fourth quarter.

Revenues decreased 5% due to lower base revenues, but showed improvement from the third quarter revenue decline of 20%.

Sequentially, fourth quarter revenues were higher than the third quarter by 5%.

Operating income was up 4.8%, and margins of 12.7% were higher than last year by 120 basis points.

Diluted income per share was $0.98, which was higher than last year by $0.39, primarily due to favorable discrete tax items recorded in the quarter of $187 million, or $0.37 per share.

Excluding the impact of these tax items, EPS would have been $0.61.

Finally, free operating cash flow continued to be very strong at $434 million.

Now let's go to the components of our operating results.

Our 5% revenue decrease was primarily due to three factors.

First, base revenues were down 10%, which was favorable by 790 basis points versus the third quarter.

As David mentioned, we have seen a modest pickup in certain end markets such as worldwide automotive OEMs.

North American base revenues decreased 10.9%, which was 10.7 percentage points better than the third quarter decline.

International base revenues decreased 9%, which was an improvement of 480 basis points from the third quarter.

Next, currency translation increased revenues by 3.3%, which was unfavorable by 890 basis points versus the third quarter negative currency effect.

Lastly, acquisition added 1.7% to revenue growth, which was 190 basis points lower than the third quarter acquisition impact.

Operating margins for the fourth quarter of 12.7% were higher than last year by 120 basis points.

The base business margins were higher by 160 basis points, as the unfavorable impact of lower sales volume was more than offset by non-volume items.

Non-volume items increased base margins by 490 basis points, which was favorable versus the third quarter non-volume impact by 90 basis points.

Including in non-volume impact for the fourth quarter were the following items.

Favorable price cost effect plus 170 basis points.

Lower costs as a result of restructuring programs during the year plus 140 basis points.

Miscellaneous one-time adjustments such as inventory reserves, life insurance investments and other corporate items, plus 80 basis points.

In addition, acquisitions reduced margins by 20 basis points and translation diluted margins by 10 basis points.

I'm going to turn it back over to John, who will provide more results on the operating results as he discusses individual segments.

In the nonoperating area, other nonoperating income expense in the fourth quarter was favorable by $21 million, mainly due to higher income from investments.

The fourth quarter effective tax rate was negative 13% as a result of discrete tax adjustments of $187 million in the quarter, primarily related for a favorable German tax settlement of $77 million and additional foreign tax credits of $86 million, which were recorded as a result of a legal entity restructuring.

For the full year, the effective tax rate was 20.1%.

The tax rate for 2010 is forecasted to be in a range of 28.75% to 29.25%.

For the full year, revenues decreased 19% and operating income was 45% lower.

Income from continuing operations of $1.93 was $1.31 lower than last year.

However, as a result of significant reductions in operating working capital during the year, free operating cash flow was very strong at $1.9 billion, or more than 200% of net income.

Our 18.8% full year revenue decrease was primarily due to base revenues being down 18.4%.

The revenue contributions from acquisitions were essentially offset by the negative currency impact.

For the full year, North American base revenues decreased 21.6% and international base revenues were down 14.9%.

Full year operating margins of 10% were lower than 2008 by 460 basis points.

Base business margins were lower by 220 basis points.

Acquisitions reduced margins by 60 basis points, and higher impairment and restructuring charges reduced margins 70 basis points each.

Turning to the balance sheet, total invested capital increased $392 million from the third quarter, primarily due to favorable currency translation and acquisitions.

Operating working capital was essentially flat.

Accounts receivable DSO improved to 59.7 days versus 60.6 days at the end of the third quarter.

Inventory months on hand is 1.7 at the end of the quarter versus 1.8 at the end of last quarter.

Excluding the impact to translation and acquisition, inventory levels were reduced by almost $50 million during the fourth quarter and by almost $600 million year to date.

For the fourth quarter, capital expenditures were $73 million and depreciation was $94 million.

ROIC for the fourth quarter, excluding the discrete tax adjustments, increased 13.9% versus 12.3% last year, larger as a result of the lower invested capital and higher base business income.

On the financing side, our debt increased slightly by $192 million from the third quarter and debt to capital remains stable at 26%.

Cash on the balance sheet increased to $1.3 billion from $943 million at the end of the third quarter.

The increase in our cash position of $376 million in the fourth quarter was due to our free operating cash flow of $434 million being utilized for acquisitions of $163 million and dividends of $155 million.

Regarding acquisitions, we acquired seven companies in the fourth quarter, which have annual revenues of $155 million.

The biggest acquisition in the quarter was Hartness International, which provides conveyor systems and line integration and automation for the beverage and food industries.

For the year, we acquired 20 businesses with $290 million of annualized revenues, as the M&A environment remained weak throughout the year.

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

Thank you, Ron.

Let's now review our fourth quarter segment highlights.

We'll begin with transportation, where Q4 2009 segment revenues grew.

Emphasize the word grew.

9.6% in operating income, dramatically increased more than 430% versus the year-ago period.

By comparison, Q3 2009 revenues fell 7% and operating income decreased 17% versus Q3 2008.

Most notably, operating margins of 15% in Q4 were 1190 basis points higher than the year-ago period and 450 basis points higher than Q3 2009.

The 9.6% increase in Q4 revenues consisted of 6.3% for base revenues minus 0.3% from acquisitions, and 3.7% from translation.

Moving to the next slide, there's a very simple explanation for better Q4 base revenue performance in the transportation segment, and that increased auto builds.

Sequential improvement in segment base revenues from a decline of 7.9% in Q3 to growth of 6.3% in Q4 was directly tied to significantly higher levels of auto builds in Europe and North America in the quarter.

Notably, worldwide automotive OEM-based revenues improved from a decrease of 9.7% in Q3 to growth of 8.8% in Q4.

European auto builds jumped from 3.9 million units in the third quarter to a very robust 5.1 million units in Q4.

This 31% increase in sequential builds was attributable to virtually all the European OEMs increasing production.

With VW group, PSA group, Renault, Fiat and Ford group leading the way.

In North America, Q4 auto build of 2.7 million units were 364,000 units higher than Q3 production rates.

Q3 to Q4 ramp-up in North American auto builds was due to Detroit domestically increasing production 16 and 15% respectively.

In our auto aftermarket business, Q4 2009 base revenues declined 3% versus the year-ago period.

That's slightly better than what we saw in Q3, and it was attributable to an increase in miles driven and a modest uptick in consumer spending in this category.

Moving to the next segment, industrial packaging revenues declined 9.9% and operating income fell 5.3% in Q4 versus the year earlier period.

By comparison, Q3 2009 revenues decreased 29.5% and operating income fell 52% in Q3.

Fourth quarter 2009 operating margins of 7.3% were 40 basis points higher than the year-ago period.

And base business contributed 120 basis points to operating margins in the quarter.

The 9.9% decline in Q4 revenues consisted of minus 16.3 from base revenues, 2.3% from acquisitions, and 4% from translation.

Industrial packaging revenues continued to show improvement as 2009 progressed with base revenues decreasing 16.3% in Q4 2009 compared to a base revenue decline of 23.3% in Q3 2009.

It's clear that underlying macro data, especially improving industrial production from the US and Europe has helped the industrial base businesses somewhat in the segment.

Notably, total North American industrial packaging base revenues declined 12.4% in Q4 compared to a base revenue decrease of 27% in Q3.

Total international industrial packaging base revenues fell 19.4% in the fourth quarter versus the base revenue decline of 25% in Q3 2009.

Moving to food equipment, segment revenues decreased 9.8% and operating income fell 22.6% in Q4 versus the year-ago period.

By comparison, Q3 2009 revenues declined 10.2% in operating income fell 5.1% versus Q3 2008.

Fourth quarter 2009 operating margins of 14% were 240 basis points lower than Q4 2008 and the 9.8% decline in Q4 revenues consisted of minus 12.5% from base revenues, 0.6% from acquisitions, and 2.2% from translation.

Food equipment's Q4 performance was clearly impacted by soft equipment sales.

Worldwide customers continued to delay equipment purchases, especially those customers in the United States.

As a result, total segment base revenues declined 12.5% in Q4 versus a base revenue decrease of 6.3% in Q3.

North American food equipment-base revenues declined 14.6% in Q4, with equipment sales down approximately 20%.

The better news was that the North American service portion of the business declined only 0.8% in the quarter.

That compares to a performance of essentially flat in Q3 2009.

Internationally, base revenues declined 10.5% in Q4, as demand for equipment in both Europe and Asia weakened, but with better than what we experienced in the US.

Moving to power systems and electronics, in Q4 segment revenues decreased 17.9% and operating income declined 23.1% versus the year-ago period.

By comparison, Q3 revenues fell 34.6% and operating income declined 41.2% versus the year-ago period.

Fourth quarter operating margins of 14.6% were 100 basis points lower than the year-ago period.

However, base business contributed 120 basis points growth operating margins in Q4.

The 17.9% decline in fourth quarter revenues consisted of minus 21.6 from base revenues, 2.2% from acquisitions, and 1.5% from translation.

Moving to the next slide, the segment's base revenue decline of 21.6% in Q4 compared favorably with base revenue decrease of 34.2% in Q3.

Worldwide welding base revenues declined 24.9% in Q4 and that consisted of North American welding down 25.6% and international welding down 23.5%.

While it's clear that the welding numbers became less negative as 2009 progressed, recall that the welding businesses are tied to CapEx spending, as well as activity in the commercial construction sector.

As a result, we expect our welding businesses, especially the equipment oriented parts of the business, to be among the last of the ITW businesses to recover as we move through 2010 and beyond.

Another significant contributor to improvement in the segment was the performance of our PC board fabrication businesses.

Base revenues declined 14.5% in Q4, as demand for consumer electronics improved.

By comparison, the PC board business base revenues fell 42.3% in Q3 2009.

In the construction products segment, revenues grew 4% and operating income increased 13.5% in Q4 versus the year-ago period.

By comparison, Q3 2009 revenues declined 23.3% and operating income fell 41.7% versus the year-ago period.

Operating margins of 9.9% were 90 basis points higher than Q4 2008 with base contributing 40 basis points in the quarter.

The 4% increase in Q4 revenues consisted of minus 5.5% for base revenues, 0.8% from acquisitions, and 8.8% from translation.

The construction products segment base revenue declined 5.5% in Q4 was a significant improvement versus Q3 when base revenues fell 16.5%.

The sequential improvement in base revenues was primarily due to easier new housing comparisons from Q4 2008 and improvement in the international construction businesses.

In North America, our residential base revenues declined 7.2% in Q4 versus the decrease of 30.4% in Q3.

Housing starts averaged 554,000 units in Q4 versus 658,000 starts in Q4 2008, and that represents a 16% decrease.

Base revenues for our North American renovation and commercial construction businesses declined 2.3% and 13.5% respectively.

Both numbers represented improvement from Q3 2009.

Internationally, our total construction-based revenues declined 4.2% in Q4, with Europe down 8.9%.

Led by Australia and New Zealand, Asia-Pacific-based revenues grew 2.4% for the quarter.

Moving to polymers and fluids, segment revenues declined 1.2% while operating income grew 18.7% in Q4 versus the year-ago period.

By comparison, Q3 2009 revenues fell 16.8%, and operating income decreased 9.7% versus Q3 2008.

Operating margins of 13.6% improved 230 basis points versus the year earlier period, with base business contributing 190 basis points in the quarter.

The 1.2% decline in Q4 revenues consisted of minus 4.7 for base revenues, 1.1% from acquisitions, and 2.5% from translation.

The improving financial performance for polymers and fluids in Q4 was largely driven by growing end market demand for worldwide fluid products.

As noted, total segment based revenues declined 4.7% in the quarter.

Base revenues for the worldwide fluid businesses actually grew 0.6% in Q4, with North America up 4.2% and international down 1%.

Growth in the fluids category was mainly due to increased demand in North America for personal hygiene products, as well as MRO aerosol products largely used by manufacturers.

Base revenues for the worldwide polymers declined 6.9% in Q4 with North America down 14.8% and international down 4.4%.

Exposure to the end markets such as general industrial and construction dampened the performance of polymers businesses in Q4.

Moving to decorative surfaces, segment revenues declined 7.2% and operating income fell 30.1% in Q4 versus the year-ago period.

By comparison, revenues decreased 20.2% and operating income increased 1.9% versus Q3 2008.

Please note that the Q3 2009 income comparison was helped by negative pension plan adjustments in Q3 2008.

Operating margins of 9.4% were 310 basis points lower than the year-ago period.

The 7.2% decline in Q4 consisted of minus 10.3% from base revenues, and 3.1% of translation.

While the decorative services based revenues improved from minus 15.6% in Q3 to minus 10.3% in Q4, the underlying impact of very weak North American commercial construction activities continued to constrain the segments' financial results.

It's important to note that a 2009 North American accounted for 56% of segment revenues and more than half of the North American exposure directly relates to commercial construction.

Per the Dodge index, we frequently quote US commercial construction square footage activity declined 46% for full year 2009 versus 2008.

Not surprisingly, base revenues for North American laminate products fell 15.9% in Q4 versus the year-ago period.

Internationally, news was a little bit better, as overall construction environment in Europe and Asia-Pacific outperformed North America.

As a result, international base revenues declined 3.5% in Q4 versus year-ago period.

Finally, in the all other segment, Q4 revenues declined 5.5% and operating income decreased 9.4% in Q4 versus a year-ago period.

And by comparison, Q3 2009 revenues fell 15.1% and operating income declined 28.4% from Q3 2009.

Fourth quarter operating margins of 14.9% were 60 basis points lower than the year-ago period, a 5.5% decrease in Q4 revenues consisted of minus 11.9% from base revenues, 4.4% from acquisitions, and 2% from translations.

The segment's Q4 year-over-year base revenue decline of 11.9% compared favorably with the base revenue decrease of 18.9% in Q3.

Most notably, the industrial appliance based revenues declined a mere 2.6% in Q4 versus the year-ago period, with the most improvement coming from US energy efficiency initiatives in the appliance sector.

Base revenues for the consumer packaging area fell 8.5% in Q4 2009 versus a year earlier period as consumer spending was still soft in the quarter.

Our more CapEx business-driven business showed less improvement in the quarter.

For example, test and measurement base revenues declined 13% in Q4 versus a year-ago period, as customers delayed equipment orders, as they await better economic fundamentals.

Now, let me turn the call back over to Ron who will cover our 2010 forecast.

Ron?

Thanks, John.

During the first part of 2009, you may recall that due to the uncertainty in the world economies, we decided to discontinue full year guidance and only provide guidance one year out.

Since things have now become more stable, we've decided to reinstate full year earnings guidance for 2010.

For the first quarter of 2010, we were forecasting diluted income per share of continuing operations to be within a range of $0.48 to $0.60.

The low end of this range assumes a 14% increase in total revenues versus 2009 and the high end of the range assumes an 18% increase.

The midpoint of this range on this EPS range of $0.54 per share would be 157% higher than pro forma Q1 2009 and pro forma excludes the impact of impairment and discreet tax charges that happen in the first quarter of 2009.

For the full year, our forecasted EPS range is $2.43 to $2.93 per share.

Based on higher total revenues of between 10% and 14%.

The midpoint of EPS rage of 2.68 would be 39% higher than 2009.

Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues between $300 million and $500 million for the year, restructuring costs of$ 50 million to $100 million for the year, and a tax rate range between 28.75 and 29.25, with both the first quarter and the full year.

Now, back to John for the Q&A.

Thank you, Ron.

We'll now open the call to your questions.

We would ask one more time that people please adhere to the one-question/one follow-up question policy so we can get as many who want to ask questions can ask questions.

(Operator Instructions) Our first question comes from Jamie Cook.

Your line is open.

Hi, good afternoon.

Hi, Jamie.

Just a couple questions, as I look at the guidance, I recognize, it's still an uncertain economic environment out there, but I guess I just look at the guidance and I'm trying to figure out the implied incrementals I think are somewhere in the I guess 20 to 40 I think or a lower range than I would have anticipated.

Even if I look at Q4 and you back out tax and you multiply by four, it gets to the low end assumption.

The top line to me seems about where I thought, but the pull-through on the bottom line is a little disappointing relative to what I got.

So I'm just trying to figure out what the main drivers are.

Is it material cost price, head winds versus 2009 seem to benefit, I'm just trying to get a better understanding why we're not getting more pull-through on the bottom line.

Well, I think we are.

I'll let Ron answer some of the specifics on the incrementals.

Certainly, as you accurately pointed out, the revenue forecasts are much in line with what we talked about in our investor day in New York in December, in that 6 to 8% range for base businesses.

I think, on the incrementals, as Ron can comment in a moment, are much stronger than what you're alluding to in the numbers you've cited.

Certainly there are someone-offs that have incurred, certainly in the third quarter on the inventory reserve category, most notably, also price cost.

Price cost was very favorable for us for most of 2009, and we do not see that same favorability occurring in 2010, as the price increases and the cost increases or decreases have latched now on a comparable period.

So I think we're looking at a relatively stable price cost environment, that meaning that we're not going to see the same kind of favorable benefits that we saw flowing through.

But if you look at the low end of our guidance, we're still talking about margins in the 13% range for the year.

At the high end, above 14%.

And clearly incrementals that you'll find are more in the 40 to 50% range.

Perhaps Ron could add more flavor to that.

Yes, if you look at margins and the midpoint of that 13 to 14 plus range, you're talking in the mid 13 to 18% versus 10% for 2009.

So you're talking about 350 basis points total, and, lot of that increase is going to come from the base businesses, but really that's based on the revenue growth.

The non-volume related impacts we've had, for instance, in the fourth quarter, it was 490 basis points.

Price cost and restructuring benefits, et cetera.

We're not going to see those kinds of contributions to margins year on year, as we have.

We will see continued restructuring benefits, although not at the same level we've seen in the fourth quarter, but price cost definitely would not be a positive contributor and is more likely to be a negative contributor to margins as we go forward.

Also acquisitions will, as usual, have a dilutive impact on margins probably in the 2 to 4% range, negative 0.2, negative 0.4 and we will have some pickup in margins from the lower restructuring cost all in.

But still, we're talking about a $50 million to $100 million spend in restructuring costs for 2010.

At the midpoint, the incrementals are in the mid-40s, Jamie.

Okay, sorry.

I had too many companies report.

But I guess even so, historically I think you guys have done a little better than that coming out.

I think that's very much in line with what we've been talking about.

Our traditional margin, incremental margins around the 30% to 35% range.

I think we said coming out of this, we expect to be in the 40% to 50% range and certainly our guidance represents that.

And then also, surprised when you think about acquisition pipelines for the year.

Still seems that we're seems like on the lower end of what we would expect.

Can you give a little more color on what's going on there and then I'll get back in queue.

We look at the acquisition pipeline as we develop these projections and certainly looking at the pipeline now, while we have seen improvement in the pipeline over the last three or four months, it's still modest by comparison to what we would expect as the year unfolds.

But that's what it is today and that's how we strike that guidance.

I would expect that if the acquisition M&A environment improves, as I would hope it would, as buyers and sellers are coming closer together on the pricing realities, we'll in fact see a better year than that, but at the moment based on the current pipeline, that's how we strike that number for acquisitions, but, again, we adjust that quarterly, so it would be my hope that as the year unfolds, we see a better acquisition environment and we'll see that range come up.

Okay, thanks.

I'll get back in queue.

Next question comes from Henry.

Your line is open.

Hi, it's Henry Kirn from UBS.

How are you doing?

Hi, Henry.

Could you talk about what you see as the big swing factors between the high end and low end of your guidance?

They're a relatively wide range there.

Relatively--

The high and the low?

Between those ranges, it's really driven primarily by the ranges of our base business is 6 to 8%.

Obviously any improvement in base businesses beyond that's going to have a very strong incremental impact.

But I think if you look at the overall impact of acquisitions and translation that's how you obviously develop the range, the overall range for the year of 10 to 14%.

The big variable in there in terms of upside would clearly be stronger end market performance and recovery.

As we've highlighted, we expect in most of these markets relatively modest recovery by comparison to what have said about some of these end markets.

As example, we have the North American auto market performing in the 10 million to 10.5 million range, there are estimates out there now that are in the 10.8 million to 11 million range, so if in fact auto builds is an example at that level, we would certainly see stronger revenue performance and therefore stronger earnings performance.

Same with housing starts and same with European recovery, et cetera.

So our base revenue range of 6 to 8% is really what's driving the range, if you will, in terms of earnings guidance, along with assumptions that Ron talked about in terms of tax and acquisitions and restructuring costs.

I would also add to David's comment, Henry, in that if you look at the year and you start to see our, our more longer cycle CapEx businesses recover, I think that would be suggestive of something mid to higher in the range.

I think you would probably want to track our power systems and our system measurement to a lesser degree, our food equipment, which is equipment that is probably not a classic Epic spend.

Thanks, and is it possible to talk a little bit about what you're seeing by geography and maybe your economic expectations by geographic region?

Well, Henry, I think they are pretty much in line with what we've been talking about, that and that is sort of modest recovery.

I mean if we look at GDP growth and industrial production growth in the US next year, we would expect that somewhere in the 2 to 2.5% range, industrial production slightly higher, probably closer to 3%.

The number's about 100 basis points less than that in Europe.

And that's pretty much been what the trends have shown us for the last several quarters.

Steady sequential improvement, but still coming off of obviously pretty low bases.

The China market has obviously rebounded strongly.

The other southeastern Asia markets have rebounded more slowly, but all in, I would say the kind of GDP and industrial production numbers we're expecting globally are in that 3% range.

Thanks a lot.

Next question comes from Terry Darling.

Your line is open.

Thanks, Ron.

Wondering if you could maybe give us a bit of a bridge between Q4 2009 and Q1 2010.

I think it's midpoint.

Maybe like Jamie I've had too many companies reporting today.

You're looking at revenues down 3% sequentially, probably some seasonality in there and looks like decrementals of 44%.

But can you maybe take us through the big moving pieces 4Q versus 1Q?

Yes.

Obviously there's a normal seasonality in our 4Q to 1Q sequential, right?

And that's partly driven by our international businesses having November 30 year end.

So the month of December is actually in the first quarter on the international side.

So we're down the revenue, the base revenue is down as corresponding to that.

So that's really the biggest driver.

Some of the other drivers that we did have some corporate adjustments that were favorable in the fourth quarter, not quite as favorable as they were in the third.

That won't repeat.

And clearly the tax part of it is a significant piece that won't repeat, or we don't expect to repeat in the fourth quarter.

So those are the bigger pieces of it.

The top line changes between Q4 and Q1 on a sequential basis, though, are actually more favorable than what we would normally see.

So, Ron has pointed out that Q1 is typically a weaker quarter for us than Q4.

And again, Q1 internationally represents December, January and February, and certainly December and January are two of the weaker months in international calendar.

Okay, and I'm wondering if you might put a finer point quantifying what you are assuming for price of raw material in 2010.

I think you indicated you are now assuming that that's slightly negative, but if I could give us what maybe the price assumption is and maybe what the raw material inflation assumption is.

It's a pretty narrow range built into the forecast, a range of basically plus or minus 30 basis points, which basically is about normal, sort of mimics a normal environment.

We'll see some cost increases offset by some price increases and timing will dictate how far on either side of that we might be.

That's based on input from our business units and what they have seen happening recently, that is for the last quarter or so and what they are projecting going into 2010 is going to happen with their commodity costs.

So far, that seems to be reasonably accurate.

Just to put it in perspective, in Q3, we had 260 basis points of positive price costs.

That narrowed to 170 basis points in Q4.

We would expect that to be a very small positive in Q1.

That's helpful.

Then lastly the base revenue assumption up 6 to 8, as you said, pretty consistent with the analyst meeting in December, I'm wondering, though, if you could talk about the segments and kind of what, if anything, has changed in there.

You talked about transportation obviously going to be way above that.

I think you talked about decorative with the non-res exposure still being negative no 2010, but maybe you could just talk through the segments around the 6 to 8 range.

Well, I think largely the data that we gave you in December still holds.

We've not really changed any of our views of these key markets.

What I think I had said on an earlier comment is there are now projections as an example through the North American all the to build closer to 11 million.

Our forecast is in the 10.5 range.

If it comes in at 11, certainly we'll see stronger performance.

But we haven't seen anything yet that would suggest that we should modify any of our market outlooks for the year.

For example, we still have the housing market in the 670, 675 range as opposed to what NHB and a few others have come out with, which are above 700.

We haven't viewed -- certainly as the year urn folds, we'll stay close to that and if we see changes, we'll certainly let you know what those are.

But at the moment, the end market activities that we highlighted in earlier December are still largely what we're using at the moment.

Thanks very much.

Thank you.

Next question comes from Walt.

Your line is open.

Hi, thanks.

Good morning -- or good afternoon, everyone.

Hi, Walt.

My question is on inventories.

I wonder if there was any trending that you could perceive in your business or from customers running their business for cash going into December and then getting inventory build here in January.

I can't say that we've really seen anything definitive, Walt, that would tell us whether that was a significant phenomenon.

You know, we have clearly seen some, some inventory pipeline begin to build in some markets, in areas where it had been run almost dry, if you will.

But I wouldn't say we've seen any specific unusual activity in December.

That's sort of been a phenomenon we've seen over the last three or four months.

It clearly has had somewhat of a positive impact.

But I wouldn't say that I expect any big consequences, if you will, in January and Q1 as a result.

Okay.

Do you have any numbers yet for January?

No.

Okay, and the, follow up with the acquisition, you're assuming $300 million to $500 million of acquired sales.

Is there a profit number that you have put to that acquired sales number?

Is that in your guidance?

Well, yes.

We do build something into our guidance.

I think as Ron said it's largely dilutive.

At 400 million, the midpoint, it's a relatively de minimus number, but we do put the impact of that in our guidance, yes.

Especially in the first year, there is extraordinary amortization charges too, that really dilutes the income contribution.

Okay, got it.

So the acquisition dilution.

Okay, thanks, guys.

Next question comes from Deane Dray.

Your line is open.

Thank you.

Good afternoon, everyone.

Questions on the food equipment business this quarter, and looks like that was one of the softer spots and be interested in hearing any color as to what was unique about this quarter.

I know sometimes seasonally you'll talk about rebates and bundling programs that customers may be engaged in and just want to know how that played out this quarter.

Well, I don't know that I can make a whole lot of definitive comments around that, Deane, some level of purchase rebate programs, which generally impacts their purchases in Q4.

I can tell you we did not see that same level of activity this year largely because a lot of those rebate levels were such that very few would have been able to qualify with incremental purchases in Q4.

So I think there is some impact there certainly, because normally we would expect to see some pull-through on that basis.

I think probably the best sort of overall comment on Q4 in the equipment side is that customers have pulled back on some orders and are really waiting to see how things unfold.

And I expect that as you know, in many of those markets we deal through a distribution channel and certainly the distributors are going to want to feel more positive about the projections into 2010 before they look at rebuilding inventories to any significant level.

So I think there's some impact of that.

The end market activity levels seem to be pointing in the right direction in terms of activity levels at food outlets and restaurants moving upward.

I would expect that ultimately that's going to lead to an improvement in equipment sales.

I think as John pointed out earlier, I think that's something we would expect to see as an early indicator.

The service business has held up well, which still gives us a strong look into the end markets and the activity levels, so I think we're probably close to an infection point on the equipment side, but we'll have to see what unfolds in the first quarter.

That's helpful.

And then a follow-up question regarding the rebuilding of the pipeline of potential M&A, and can you address what's different this time as you rebuild the pipeline?

I know it comes from the field.

It's not a headquarters-driven acquisition list, but how might it look in terms of valuation, geographies?

Are you trying -- at one time you were trying to ratchet up the potential internal growth a couple percentage points and what kind of businesses, but how do you expect that pipeline to refill?

Yes, I would expect the pipeline to refill much like it was as it headed down in activity levels.

The areas we had the strongest activity levels in heading into this town down were in the food equipment area -- welding space, and our polymers and fluids businesses.

That's were the four that were most active -- as those are areas that continue to be of strong interest and are globally that allow us to significant opportunities going forward.

The pipeline given the dramatic decline in the pipeline over the last 18 months, it will take time to rebuild.

I think what we saw in the fourth quarter was our best quarter in terms of deals closed and we've seen the pipeline begin to show positive momentum in terms of rebuilding.

What we're talking about is a level significantly below what it was 18 months ago.

18 months ago, we're talking about a pipeline that we could measure in the 1.2 to 1.3 billion range.

We're -- 300 or 400 million range and that's got four or five months of visibility.

It's better than it was three months ago, but still not strong enough to put a bigger number in our guidance--

Implied valuation?

Yes, not a lot of change in valuation.

Slightly below one times revenue is what the experience base was in 2009.

And I don't think, when we looked at the pipeline we see much of a difference in what we expect at least going into 2010.

Great, thank you.

Next question comes from Mark -- your line is open.

Hi, thanks.

It's Mark Koznarek.

I assumed that was you, Mark.

Thanks.

The question here about the restructuring actions in 2009 and benefits that are going to be delivered in 2010, looks like just the absence of the lower restructuring costs are about a 50 basis point improvement.

And then how much do you guys expect to get in actual year-over-year benefits from productivity or whatever?

Well, I think as we think about the incrementals on that, I'll let Ron comment on some of the changes in the non-volume, which is where we've been seeing the improvements all year.

That's where the restructuring benefits will be flowing in the margin line today.

I think if we look at the overall volume of restructuring in 2009 at about 160 million that generally drives somewhere around 25% more in terms of benefits.

So somewhere in the 200 -- not all of which would have been realized during 2009.

Generally it takes about six months to realize the benefits in North American restructuring and closer to a year on the international side.

So we still have some flow-through coming in 2010.

Certainly for those restructuring projects.

And given that most of the restructuring to heavy volume restructuring was in Q2 and Q3, we would expect that by mid year those comparables will be pretty much back in line.

Maybe Ron, you could add flavor to the restructuring benefit.

The way we look at it is in the base business margins, we try to -- how much is the restructuring benefit.

And so we've seen that benefit going down a bit as we've gone.

The third quarter was 160 basis points.

140 in the fourth.

And it will be less than that in 2010, probably in the 100 basis point range for the full year.

Primarily as David said in the first half of the year.

Okay.

So that, that 100 that you're talking about includes both less restructuring costs and the flow-through from the actions?

Yes, that is actually incremental.

In total, 140, 150.

All right, great.

And the North America versus international, do you expect an appreciable difference in the revenue trends next year between the 10 to 14?

I mean adjusted for currency, of course.

Well, as you know, we had much stronger declines this year.

I think our overall base revenues this year in North America were down in the 21-plus percent range and internationally 15.

I would expect that as the year unfolds, particularly around some of the key end markets in North America, we'll see the growth rates to North America trend above the growth rates we've seen in the international markets, at least the European markets for sure.

And that should have a positive impact on margin?

Well, generally our margins in North America are somewhat higher than those of international.

That's not true in all segments, but it is in most.

I would expect on the basis of stronger revenue mix, we would see that.

In fact, that's reflected in the guidance that we've prepared.

Great.

Okay, thanks.

Your next question comes from [Robert Morzimer], your line is open.

Hi, good afternoon, everybody.

Hate to beat a dead horse, but I want to circle back to acquisitions and M&A -- dramatically across the sector and a little less dramatically for you.

I wanted to ask if on the formal pipeline, if the conversations have picked up in a dramatic way or whether the increase in the pipeline, which is gradual, is mirrored in the less formal conversations you're having.

Well, I think what you're asking is what's the pre-pipeline activity.

We count pipeline as things that are actually being worked on that are somewhere beyond the letter of interest stage all the way up to due diligence.

So the activity pre-pipeline has certainly picked up in the last six months and most notably in the last three.

There's a lot more activity going on, lot more discussions under way, particularly in the number of cases of deals that were under way when the market tanked in late 2008.

So I think -- I'm encouraged by the level of activity and I'm encouraged by what our people are telling us.

But as we strike our acquisition numbers for the year, we look at what's actually in our pipeline when we develop that.

So if the precursor activity of the pipeline is an indication of what we would expect, then we will likely be in a position to do better than what we put in the guidance here.

But we're not at a point to be able to say that given it's not in the pipeline yet.

Okay, great.

And then for Ron, the balance sheet question, deferred income taxes went from around $81 million last quarter to $670 million this quarter.

I'm not sure I understand that.

Just wondering if you can explain it.

Yes, the biggest piece is I talked about this tax benefit of $85 million related to foreign tax credits related to a legal entity transaction during the quarter.

And as a result of that, we're recording significant foreign tax credit assets that will carry forward on a go-forward basis and utilize.

So that's the biggest piece of it.

Some of the other things that had impact on that, the settlement of the German tax audit also increased tax assets as well.

How will that flow through the income statement, and is it embedded in guidance?

It -- both of those things went through the income statement this quarter, so that's why it's on -- that's why it's having an impact on the balance sheet.

From a cash perspective, the cash will be realized on a go-forward basis.

Okay.

It will not impact the P&L as we realize the cash.

Okay.

Next question comes from Eli Lustgarten.

Your line is open.

Good afternoon.

Hi, Eli.

Just a couple quick follow-up ons before 2010, in December, I guess you had a 9.5 to 10 million forecast in North American auto -- and you've gone up a bit.

Can you give us what your European forecast, any other area, any other area that you actually changed that much, because that is a material change in forecast that you in in the North American auto build.

Eli, if you look at the North American auto build, we basically said it would be around 16 million at our meeting in December.

Yes, and I don't think that's going to change appreciably.

The current CSM, David, for Europe is still in that range.

It's actually at 15.9 at the moment.

Right.

I understand you changed automotive North America by 5%.

Is there any other place that you've changed your outlook?

No.

That's the only one?

Yes, that's really the only significant, only significant change.

And we're still, at that level, we're still below what some of the newer estimates are at -- that's the only one of any note that we've changed since December.

Okay, and could you give us insight on what other income will look like, but that's always been one of the wild cards we have to go through in the quarter.

Yes, I would estimate it, it's reasonably close to what it was this year, probably in the 160 to 200 expense range, including interest.

Interest is the biggest piece of that.

No real change in that number.

All right, thank you.

Our next question comes from Shannon O'Callaghan.

Your line is open.

Good afternoon, guys.

Hey, on the miscellaneous items that you mentioned in the quarter, what was the total benefit from those on a margin basis for the full year in 2009?

The full year, I'm not sure I have that number.

I know for the quarter the benefit on the margin side, inventory-related items were about 50 basis points positive.

Other corporate reserve type items were about 30 basis points positive.

Okay, and I mean when you're thinking about that non-volume-related next year, I mean you're sort of saying plus or minus on price cost, restructuring is a fairly big tail wind.

I mean is this item negative?

Seems like net-net, you would have some non-volume negatives.

What's the total non-volume assumption for next year for margins and what are the components for miscellaneous?

We don't have the details on the various components specifically, but in total the non-volume will have very little impact in the midpoint of our range.

Obviously when you range the price cost, it will have different impacts, but it's about flat in the midpoint.

Okay.

Just last one for me, SG&A kind of jumped up sequentially.

Was there anything unusual in that?

So the biggest items in that, first of all, you have the impact of the international fourth quarter having a bigger contribution because they are basically a lot of the businesses are shut down the month of August and therefore have very little SG&A costs.

So that's one impact.

Also translation had a fairly significant impact, both on revenues and office-related costs.

And acquisitions also had an impact.

Okay, thanks, guys.

Our next question comes from Ann Duignan.

Your line is open.

Hi, good afternoon, guys.

I just want to step back on the restructuring charges for -- we're fairly long into this downturn and you're beginning to see some of your end markets pick back up.

Just a little bit surprised that you would have such a large amount of continuing restructuring going into 2010.

Could you just give us some color on what businesses generally require restructuring, what kind of restructuring?

And I think last quarter you said you had closed a total of 10 to 12 facilities.

Could you update us on the total fixed costs versus kind of semi variables?

Sure, Ann.

First of all, $50 million is about our traditional range, so on a normal year we're in that $40 million to $50 million range.

So if you think about $50 million, that sort of describes a normal sort of restructuring environment.

Part of that, part of that designated towards base business, part dedicated towards acquisitions.

The $100 million would be reflective of if we don't see a rebound, particularly in some of the later cycle businesses, we may well spend more restructuring dollars in 2010, so the range is broader than what it would normally be and it's based on just a little bit of uncertainty around some of those later cycle businesses and what it might hold with them.

Relative to actual complete facility closings, no real change since our last discussion.

Most of our restructuring dollars have been spent actually right sizing facilities, not actually closing them.

So that's really what we saw more of occurring during the fourth quarter and certainly the early indications what we've seen in the pipeline of restructuring are largely in line with that as well.

Okay, and businesses traditionally -- might have less visibility.

Which are the ones and what are some of your concerns?

It's really only a question of when do these markets really start to turn and at what capacity levels will we need to be operating as those markets turn around?

So it's really I think based more on the level of uncertainty because we haven't seen some of those markets have not hit trough yet or in some cases may have hit the trough, but we haven't seen improvement in capital spending.

So it's our error of caution that says we'll have to see what unfolds in those markets.

But clearly if they respond earlier and stronger than I would expect, we would be spending a lot less in restructuring.

Okay, thanks.

That's great.

My other question has been answered.

(Operator Instructions) Our next question comes from Andy Casey.

Your line is open.

Thanks, good afternoon, everybody.

A lot of the questions have already been answered, but wanted to go back to some of the trends that you're seeing in distribution type businesses, specifically in industrial packaging.

Are you seeing any significant improvement in the consumable side of that yet?

Well, the consumable volumes clearly have trended up since the troughs that we saw at the beginning of 2009, but I wouldn't say that we're seeing any great burst of activity.

Equipment side continues to be depressed, which is clearly an indication that people are not replacing equipment, nor are they adding capacity, which is not unexpected given the environment.

The consumable volumes have in fact improved, but I would not say that we're at a point yet where in a number of their end markets that we could say we expect to see any strong improvements.

I mean most of what we built into the industrial packaging outlook and what we've seen is, again, steady sequential improvement, but this is one of the businesses that was impacted the greatest by the downturn, given some of their core end markets, like the metals market, the construction buildings materials markets, the general industrial markets.

So they have been really in a pretty deep state of decline in many of their end markets here for the last almost 18 months.

But the consumable volumes have shown better activity on a sequential basis.

I would expect we're going to continue to see that as we trend forward.

It's probably not in our estimate until sometime after mid year where we'll really start to see any improvement in equipment volume.

Okay.

Thanks for that.

And then while overall price net of cost was good, are you seeing any pockets where there's still seeing any competitive pressure?

Not as much competitive pressure, Andy, as what we're seeing probably around cost increases, which might indicate or dictate later what we might have to do on the price side.

We had some early indications of increases that we talked about in December around steels and plastics.

Some of those have abated.

Some of those are beginning to materialize, but at lower levels.

So I would not describe what we're seeing right now as anything that is particularly onerous.

There are plenty of concerns, as an example with oil at $80 plus per barrel, are we really going to see plastics rise any more than what people have indicated?

That's all speculation.

I think I would describe the price cost environment as we see it in 2010 as more of a normalized environment where there will be some cost increases and we'll have to offset those with a combination of price and productivity and it's sort of the normal operating mode.

So unless there's some dramatic changes in the demand level, which might drive prices up, or costs up higher, I don't expect we're going to see as much volatility as we saw, say, in 2007 and 2008.

Okay.

Thank you very much.

We'll take one more question.

Your last question comes from Robert McCarthy.

Your line is open.

Good morning, or it is one of those days?

Good afternoon.

Are you in Hawaii?

In my mind, I am.

The first thing I wanted to ask you about, Dave, is just the general posture towards forecasting.

You reinstated your full year guidance now, you're forecasting 6 to 8 organically with, I think industrial production forecast was a lot like what we experienced in 2004 when you came out of the funk period with an 8.5% organic.

So is there something different?

We're also talking about factoring in 25% incrementals.

So have you sacrificed some organic growth in the early part of the cycle to get more pop, or are you just trying to not get the timing wrong here?

Well obviously we're coming out of a period of great uncertainty.

We can't say the number of end markets that they have turned the corner.

So obviously there's some uncertainty how we look at the year unfolding.

Clearly the incrementals are going to be strong on a comparable basis.

I don't know that I could really compare what we're talking about in 2010 to what happened in 2004, but I would certainly exactly as things materialize and these markets do strengthen, there's no doubt in my mind we're going to see incrementals much stronger than what we saw in 2004.

I think the variable for us is when do some of these later cycle markets really begin to respond?

I don't think the trajectory of growth is going to be nearly as dramatic in 2010 as it was in 2004.

So I think there are some differences, but all in, I think we feel comfortable with where we're positioned and we would be happy to have the opportunity for revenues in our end markets to exceed the 6 to 8% range that we've got here.

And if they do, we're certainly going to respond with some pretty strong incrementals.

But at the moment, although we're reinstating annual guidance, as you pointed out, I would still describe visibility in end markets in terms of the overall impact in some of these markets as not great still.

So hard for us to make a call on, on how strong and when some of these markets will actually begin to show some real growth.

Thanks for that, David.

The other thing I wanted to ask about was the -- this came up once before.

The business you have that seems to have lost the most momentum in the fourth quarter, which is the food equipment business.

As you plan out, there's a channel there.

I wonder if you've got any information you can share with us about maybe inventory levels in the channel, what might be happening with used equipment or prices down there significantly perhaps.

You forecast up for 2010 led by service, but I would be interested in what kind of a split you embed for the 2 to 4 for the year that you talk about in December between service and equipment, since service -- business.

Yes, well, service overall represents about 35% of the segment.

That's both in North America and internationally, so it's pretty consistent.

It's certainly the overall revenue base 2 to 4% would imply that probably mid year is when we begin to see the equipment business improve and I think on a go forward basis, we expect that the normal sort of service revenues grow in that same kind of range, but I think this is more mid year in terms of the equipment growth opportunities.

So I think we're at a point where I can't explain necessarily in great detail some of the questions you asked about inventory in the pipeline or other factors in used equipment, so forth.

That's clearly something that we're looking at, hopefully get better insights into, but I don't think there's anything unusual in what we would expect to see unfold here, except that, again, we wouldn't expect to see significant demand change on the equipment side until perhaps mid year.

The first half of the year, I expect we'll still have equipment businesses that will be maybe down slightly to flattish on a comparable basis.

Remember, this is a business that performed fairly well the first part of 2009, but I expect that by mid year, we'll start to see the equipment revenues begin to rise and the service revenues typically operate in a range of 2 to 4%, which is what we've embedded in the forecast for 2010.

This is a business that you believe was impacted last year by destocking in the channel, right?

Yes.

Yes, we do, yes.

But the stocking, the destocking in this business is probably not at the same levels we would have seen in other businesses, but it would have been certainly a factor in the Q1, Q2 timeframe.

Let me squeeze in a real short one here and then I'll say thank you.

Okay.

What happens to employment at ITW in 2010 if your forecast is at the high end of your organic range?

I would expect to see a modest increase in total head count.

Most of our businesses are sized to handle the range of forecast that we've already provided without making any significant additions, and I would expect that would be the case overall.

Obviously that may vary by individual business or segment if the growth rates are stronger, but overall, I would expect that even at the high end of our range at 8%, base business growth, it would be modest increase in employment.

Okay, thanks very much.

Thank you.

I want to thank everybody for joining us and we'll be talking to you later.

Thank you very much.

Have a good day.

Thank you.

This concludes today's conference.

You may disconnect at this time.