Illinois Tool Works Inc (ITW) 2010 Q4 法說會逐字稿

Welcome and thank you for standing by.

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

(Operator Instructions)Today's conference is being recorded.

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

And now I would like to turn the meeting over to the Vice President of Investor Relations, Mr.

John Brooklier.

Sir, you may begin.

Thank you, Marla.

Good afternoon, everyone, and welcome to today's ITW fourth quarter 2010 conference call.

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

I'll now turn the call over to David, who will make some introductory remarks.

David.

Thank you, John.

I'm pleased to report that our fourth quarter was highlighted by very solid organic revenue growth Company-wide, as well as our continuing operating margin improvement.

Organic revenues increased 9.1% in the fourth quarter, with North American organic revenues increasing 8.9% and international organic revenues growing 9.2%.

You may recall we had initially forecasted our total Company organic revenues to grow 8% in the fourth quarter.

We're also very pleased with the double digit organic revenue growth contributions from a variety of our business platforms.

These include our welding, electronics, Industrial Packaging, and test and measurement businesses.

Notably all of these businesses produced significant operating margin improvement in the fourth quarter versus the year earlier period.

While we formally announced that the fourth quarter EPS was $0.79 a share, that was 19% lower than the year ago period, but our fourth quarter EPS would have been 30% higher than fourth quarter of 2009 if you exclude the $0.37 per share favorable discrete tax adjustment that we recorded in the fourth quarter of 2009.

For the total Company, fourth quarter operating margins of 13.9% were 120 basis points higher than the year ago period.

Our base businesses accounted for 50 basis points of operating margin improvement.

However, our fourth quarter operating margins ended up lower than our initial expectations due to price costs, inventory, and acquisition related expenses.

Ron will talk more about this in a few moments.

Finally, I want to take this opportunity to thank the women and men of ITW for a job well done over the past year.

Full year 2010 was a very strong recovery year for us, with our overall organic revenues growing 10.8%.

Our operating margins improved by more than 480 basis points and our EPS increased significantly.

These strong financial metrics were in large part due to the efforts of our people, who very capably led our many businesses around the world.

Now let me turn the call back over to John.

Thank you, David.

Here's the agenda for today's call.

Ron will join us in a few moments to talk about the financial highlights for Q4.

I will then cover Q4 operating highlights for our eight reporting segments and Ron will (technical difficulty) 2011 forecast.

Finally, we'll open the call to your questions.

As always we ask for your cooperation for our one question and one follow-up question policy.

The call will last one hour today.

First, let's cover some mandatory housekeeping items.

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding operating performance, revenue growth, diluted income per share from continuing operations, acquisition activity, restructuring expenses and related benefits, tax rates and market conditions and the Company's related forecasts.

Finally, the telephone playback for this conference call is 402-998-1344.

The replay is available through midnight of February 14, 2011, and no pass code is necessary.

Now, here's Ron Kropp who will comment on our 2010 fourth quarter financial highlights.

Ron.

Thanks, John.

Good afternoon, everyone.

Here are the highlights for the fourth quarter.

Revenues increased 11%, primarily due to higher based revenues.

Operating income was $580 million, which was higher than last year by $103 million.

Margins of 13.9% were higher by 120 basis points.

Diluted income per share from continuing operations was $0.79, which was lower than last year by $0.19.

However, as David mentioned, the fourth quarter of last year included discrete tax benefits of $0.37 per share.

Excluding these tax benefits, diluted income per share this year would have been 30% higher than a year ago.

This quarter's EPS of $0.79 was just above the midpoint of our previously provided range of $0.74 to $0.82.

Included in this $0.79 were, higher income from base revenues, which added $0.01 versus the forecast; a lower than expected tax rate, which increased earnings $0.035; and favorable currency translation, which also added $0.01.

These favorable items were partially offset by lower than expected margins, which reduced earnings by $0.03; lower contributions from acquisitions, which lowered income by $0.01; and lower non-operating income, which also reduced earnings $0.01.

Finally, free operating cash flow was $368 million or 94% of net income.

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

Our 11% revenue increase was primarily due to three factors.

First, base revenues were up 9.1%, which was lower than last quarter by 210 basis points.

As David mentioned, we have continued to see solid revenue gains worldwide, led by the welding, electronics, Industrial Packaging and test and measurement businesses.

North American base revenue increased 8.9% and international base revenues increased 9.2%, which were lower than the third quarter increases of 11.5% and 10.8% respectively, due to the tougher comparables.

Next currency translation decreased revenues by 1.4%, which was favorable by 100 basis points versus the third quarter currency impact.

Lastly, acquisition and noted divestitures added 3.4% to revenue growth, which was 10 basis points lower than the third quarter acquisition impact.

Operating margins for the fourth quarter of 13.9% were higher than last year by 120 basis points.

The base business margins were higher by 50 basis points due to the favorable impact of the higher sales volume, partially offset by the negative impact of non-volume items.

Non-volume items reduced margins by 190 basis points, which was unfavorable versus the third quarter year-over-year non-volume impact by 60 basis points.

Included in non-volume impact for the fourth quarter were, lower costs as a part of past restructuring programs, which improved margins by 20 basis points; offset by the unfavorable impact of price costs, which reduced margins by 80 basis points; inventory related adjustments, which reduced margins by 30 basis points; and miscellaneous corporate items, which reduced margins by 40 basis points.

In addition, margins were higher by 80 basis points due to higher restructuring expenses last year and acquisitions reduced margins by 30 basis points.

The fourth quarter margins of 13.9% were below our forecasted range for margins of 14.2% to 15.2%, due to more negative price cost impact than expected; unfavorable inventory related adjustments, such as LIFO; and miscellaneous other unfavorable items.

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

Turning to the non-operating area, other non-operating income and expense was unfavorable by $2.5 million versus last year.

The fourth quarter effective tax rate of 27% was unfavorable versus last year's rate of negative 13%, as a result of the previously mentioned favorable discrete benefits last year.

For the full year of 2010, the effective tax rate was 31%.

The forecasted tax rate for 2011 is between 29% and 30%.

For the full year, revenues increased 14% and operating income was 70% higher.

Diluted income per share from continuing operations of $3.03 was 57% higher than last year.

Free operating cash flow was $1.3 billion for the full year.

For the full year, our 14.4% revenue increase was primarily due to base revenue increases of 10.8%.

Revenues were higher by 3% due to acquisitions and 0.8% due to translation.

For the full year, North American base revenues increased 10.9% and international base revenues were up 10.4%.

Full year operating margins of 14.8% were higher than 2009 by 480 basis points.

The base business margins were higher by 360 basis points, acquisitions reduced margins by 20 basis points, and lower impairment and restructuring charges improved margins by 70 and 80 basis points respectively.

Turning to the balance sheet, total invested capital increased $397 million from the third quarter, primarily due to currency translation and acquisitions.

Accounts receivable DSO was 57.8 days versus 58.9 at the end of the third quarter.

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

For the fourth quarter, capital expenditures were $91 million and depreciation was $86 million.

ROIC for the fourth quarter increased to 15.6% versus 13.9% last year.

On a financing side, our debt level decreased approximately $552 million from the third quarter and debt to capital was 23%.

Cash on the balance sheet decreased to $1.2 billion from $1.6 billion at the end of the third quarter.

Our cash position decreased $459 million in the fourth quarter, as our free operating cash flow of $368 million was utilized for acquisitions of $208 million and dividends of $169 million.

In addition, cash was used to repay debt of approximately $550 million.

During the fourth quarter, we acquired eight companies which had annual revenues of $131 million.

For the full year, we acquired 24 businesses with acquired revenues of $530 million.

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

Thank you, Ron.

Let me cover our fourth quarter segment highlights and we'll start with our Transportation segment.

In Q4 '10 total segment revenues increased 8.8% versus the year ago period.

Our organic revenues, also known as base revenues, grew 7.1% in Q4 compared to the year earlier period.

Operating margins in Q4 of 14.2% were 40 basis points lower than the year ago period.

Moving to the next slide.

Our Transportation segment, which mainly consists of our worldwide auto OEM business, produced Q4 organic revenue growth of 7.1% versus the year ago period.

Our global auto OEM business grew organic revenues 8.5% in the quarter, with our North American auto units increasing 11.1% and international units growing 6.6%.

By comparison, North American auto builds increased 8%, while European auto builds actually declined 4% in Q4 versus the year ago period.

Once, again, these numbers clearly demonstrate our ability to grow above underlying market conditions, thanks to our product innovation and platform penetration programs.

For full year 2011 we are forecasting North American auto builds to be in a range of 12.4 million to 12.6 million units and European auto builds to be in a range of 18.4 million and 18.6 million units.

The forecast of 2011 North American auto builds would represent market growth of 5% versus 2010 and a year up to 2011 forecasted auto build would represent modest market growth of 1% versus 2010.

In our auto aftermarket group of businesses, contained within this segment, Q4 organic revenues were essentially flat versus the year ago period.

We believe inventory rebalancing at retail outlets and poor December weather negatively impacted our revenues in the quarter.

Industrial Packaging.

Q4 total segment revenues increased 12.6% versus the year ago period and Q4 base revenues grew a similar 12.6% compared to the year ago period.

Operating margins in Q4 of 9.4% were 220 basis points higher than Q4 '09.

Industrial Packaging's organic revenue growth of 12.6% in Q4 was related to solid underlying industrial production fundamentals and contributions from a number of our worldwide businesses.

In Q4 our total North American Industrial Packaging units grew organic revenues 15.3% versus Q4 '09.

In addition, our total international Industrial Packaging units increased organic revenues 10.2% versus the year ago period.The coincidental indicator businesses, such as our North American plastic and steel strapping businesses and their international counterparts produced base revenue growth of 21% and 6.6% respectively versus the year ago period.

Finally, our protective packaging products, known for their protective corner board and specialty airbag products used for transport, grew organic revenues 10.8% in Q4 versus the year ago period.

Moving to Food Equipment.

Q4 total segment revenues increased 4.4% versus Q4 '09.

Organic revenues grew 5.5% in Q4 versus the year ago period, making it the strongest quarter of organic growth in 2010.

Operating margins of Q4 of 12.6% were 140 basis points lower than the year earlier period.

The Food Equipment segment improvement in Q4 organic revenue growth of 5.5% versus Q4 '09 was directly tied to better worldwide equipment sales.

While our North American organic revenues only increased less than 1%, equipment based revenues grew 3.3% in the quarter compared to Q4 '09.

We believe this is an early sign that US based CapEx spending in this category may improve as we progress through 2011.

Organic revenues for our service business actually declined 1.2% in Q4, due to both tough comparisons and higher costs in the quarter associated with consolidating our service efforts for our French cooking businesses.

Internationally, Q4 organic revenues grew 9.8% versus a year ago period with both Europe and Asia Pacific attributing to growth in the quarter.

Moving to our Power Systems and Electronics segment.

Q4 total segment revenues grew 22.8% versus a year ago period.

Notably our organic revenues increased 21.4% compared to Q4 '09 and operating margins Q4 of 20% were 530 basis points higher than Q4 '09, thanks to significant gains in operating leverage.

Similar to prior 2010 quarters, the segment strong Q4 organic revenue growth of 21.4% was directly related to the welding and PC board fabrication businesses.

Our worldwide welding organic revenues grew 18.1% versus Q4 '09 and from a geographic standpoint North American welding base revenues grew 23.3% due to on-going strong demand from heavy equipment OEMs and assorted manufacturers.

Our international welding Q4 base revenues increased a more modest 7.3% versus the year ago period, with Europe contributing double digit growth.

Asia Pacific's organic growth or organic revenues, I should say, grew at a lesser rate.

The PC board fabrication businesses produced another strong quarter of organic growth with base revenues increasing 48.9% versus Q4 '09.

And once again, growth continued to be driven by strong demand by consumers for electronic products, including familiar products such as a cell phones, PDAs, personal computers and iPads.

Moving to Construction Products.

Q4 total segment revenues grew 10.8% versus the year ago period and organic revenues increased 2.6% compared to Q4 '09.

Operating margins 11.5% were 160 basis points higher than the year ago period.

The segment's Q4 organic growth of 2.6% was driven by relatively strong demand for Construction Products in Europe.

In the quarter, European organic revenues grew 8.3% versus the year ago period and countries such as Germany and France and assorted other northern European countries were the best geographies for our construction businesses.

Organic revenues for Asia Pacific, which is primarily driven by Australia and New Zealand, were essentially flat in the quarter.

In North America the construction end markets continue to be challenging.

And for example, NAHB recently reported a Q4 '10 housing starts were actually 5% lower than Q4 '09 and Dodge reported that full year 2010 commercial construction activity per square footage declined 18% versus full year 2010.

But compared to these markets, our residential construction and commercial construction businesses out performed with organic revenue declines of 4.1% and 4.3% respectively versus the prior year quarter.

The best news in the segment was that our Q4 renovation construction organic revenues grew 1.8% versus Q4 '09 and much of this growth was due to improved performance by the large box stores, including retailers such as Home Depot and Lowe's.

Moving to Polymers and Fluids.

Q4 total segment revenues grew 10.3% versus the year ago period with organic revenues increasing 5.2% in the quarter compared to the year ago period.

Operating margins of 13.5% were 40 basis points lower than 2009 fourth quarter.

The segment's organic revenue growth of 5.2% in the quarter was tied to improving industrial demand for both Polymers and Fluid products, especially in our international markets.

Our international Polymers businesses produced organic revenue growth of 6.6% in Q4 '10 versus the prior year, due to strong contributions from our Latin American and Asia Pacific businesses.

In North America Polymers organic revenues increased a more modest 2.1% in Q4 and international fluids had strong organic growth of 7% in Q4 versus Q4 '09, with a North American base revenues declined 3% in the quarter.

Moving to decorative surfaces, Q4 total segment revenues decreased 10 basis points versus a year ago period, organic revenue growth was better with base revenues increasing 2.3% compared to the year earlier period.

Operating margins of 9.2% were 20 basis points lower than the year ago period.

Decorative Surfaces Q4 organic revenue growth of 2.3% versus year ago period reflected contributions from both North American and international operation.

In our North American laminate business organic revenues grew 6.5% compared to Q4 '09.

That represents our best quarterly organic growth rate of the year and underpins our belief that commercial construction demand, the largest category served by Decorative Surfaces is continuing to improve.

In addition, the Wilson art business continues to be a premiere innovator of high pressure laminate products, bolstering its penetration efforts.

Internationally our organic revenues grew 2.4% versus Q4 '09, thanks largely to contributions from strong businesses in China and other parts of Asia.

And finally, our all other segment.

Total revenues grew 14% versus a year ago period, organic revenues increased 11.2% compared to Q4 '09 and operating margins of 16.6% were 170 basis points higher than the year ago period.

The segment's strong Q4 organic revenue growth rate of more than 11% was mostly due to contributions from the four major business groups in this segment.

In test and measurement, our organic revenues grew an impressive 19.5% in Q4 versus the year ago period.

This core growth was largely tied to improvements in demand for equipment, in equipment products in Asia Pacific, especially China.

In finishing, organic revenues increased 16.7% in Q4 versus Q4 '09.

Both the North American and international businesses benefited from improved end market demand for our paint spray equipment and consumables.

Our industrial appliance organic revenues grew 8% in Q4 compared to the year ago period and experienced good growth in both our North American and international businesses.

And finally, our Q4 consumer packaging organic revenues increased 5% and that's mainly due to contributions from our decorating and graphics businesses.

Now, let me turn the call back over to Ron, who will cover our 2011 forecast and underlying assumptions, Ron.

Thanks John.

Before I get to the 2011 forecast, I'd like to discuss a reporting calendar change that we announced today.

As you may recall, historically our international businesses have reported on a one month lag, with a fiscal year-end of November 30.

Effective with the beginning of 2011, we are eliminating this one month lag.

Prior to the end of the first quarter, we will provide revised 2010 operating results to reflect this change.

Now, turning to the forecast.

For the first quarter of 2011, based on a new calendar reporting, we are forecasting diluted income per share from continuing operations to be within a range of $0.81 to $0.87.

The low end of this range assumes a 12% increase in total revenues versus estimated 2010 and the high end of the range assumes a 15% increase.

These revenue growth ranges are based on estimated revenues for 2010 under the new calendar year reporting.

For the full year 2011, our forecasted EPS range is $3.60 to $3.84 per share, based on a total revenue increase of 11.5% of 14.5% versus estimated 2010 revenues.

Implicit in this guidance are full year margins of 15% to 16%.

Other assumptions included in this forecast are; exchange rates holding at current levels; acquired revenues between $800 million and $1 billion; restructuring costs of $30 million to $40 million for the year; and a tax rate range between 29% and 30% for the first quarter and full year.

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

Thanks, Ron.

We'll now open the call to your question.

Once, again, we ask everyone to honor our one question one follow-up question policy.

(technical difficulties) question I should say.

Jamie Cook with Credit Suisse.

Good morning,A couple of questions.

One on the material cost price headwind, can you just give a little more color on which segments it impacted most and what your assumptions are for 2011 on material cost price?

And then as we think about margin progression throughout the year, is there any -- do we expect a normal seasonal pattern or are there any -- is material cost going to be more negative in the first half versus the second half?

I'm just trying to think about how to think about the year.

Yes, Jamie, let me comment on Q4 first just overall and then Ron can add some more detail.

In terms of the cost side, the cost issues that we have seen some acceleration in input costs really revolve around steel, plastics and some chemicals.

And those impacted probably most significantly, as you would have seen, in some of the variable margin and overhead margin numbers on the slides.

The Food Equipment group, Decorative Surfaces and Industrial Packaging were probably ones most impacted.

Ron can comment a little bit more on the detail, but obviously as usual, we expect to recover these costs.

There's always some lag associated with that.

And would expect that as we move forward there's probably something on the order of a 90-day lag all-in to recover on cost.

We did see acceleration during the quarter on some of these cost increases, which were beyond what we had originally anticipated when we provided our Q4 guidance.

So, overall for the quarter price cost had an impact of about negative 80 basis points for the total Company.

The segments that had a bigger impact were -- Industrial Packaging, negative 180 basis points; Construction, negative 90; Decorative Surfaces, negative 160; and all other, negative 120.

For 2011, clearly the, based on current price levels and comparables to 2010, we'll see a much bigger impact of price cost in the early part of the year.

So the first quarter we're estimating something along the lines of 80 to 100 basis points negative and for the full year something like negative 30 to negative 50 for price cost.

Okay.

Jamie, in terms of your question on seasonality, obviously, as we report the new calendar, there will be some change in seasonality, but I think when you look at the comparables when we report those, we would expect that new norm to play out in our 2011 forecast guidance.

Okay.

Thanks.

I'll get back in queue.

David Raso, ISI Group.

The first quarter and full year, can you give any color on the organic growth baked into the total revenue growth?

Sure.

So, in the total revenue growth of -- in the 13.5% rate basis is around 7% to 9%.

And that's more skewed, a little bit more skewed toward international than North America.

North America it might be in the 6.5% to 7.5% range.

International 8.5% to 9.5%.

For the full year of the total revenues about half is base.

So 6% to 7%.

And North America is in the 5% to 6% range.

International, 7% to 8%.

The reason I ask, especially with the price versus cost comment for the first quarter, if you have that say 8% core growth in the first quarter, we have the tax rate, let's assume the share count stays the same, it's implying the incremental margins and I know the base is going to change a little bit, but the incremental margins in the first quarter have to be very strong to do $0.84, literally over 40%, 45% unless the acquired revenues coming in are uniquely profitable, which at this stage of the cycle they're usually not.

Can you help square that off?

Again 8% core growth in the first quarter, you need incrementals almost near 45%, 50% to hit the mid point of the EPS range.

David, remember the guidance we're providing for Q1 is with the new calendar, so the new calendar is obviously somewhat different than the old calendar with the new calendar being January through March, for the international units.

March is replacing December, which December traditional in our international units is one of weaker months, so there may be something wrong with the math in the assumptions there, but I think John can probably cover that in more detail with you perhaps offline.

Well, I think it's an important element because the first quarter earnings are usually only about a fifth of the year.

So if you're doing $0.80 plus in the first quarter, we're talking a $4 historical run rate, which is obviously above the full year guidance and obviously a positive development.

But again I can't --if you can at least quantify a little bit the difference of dropping off December '09 and essentially adding March of '10 into the base of the first quarter, I mean, how much can that be, $15 million?

Well, as we said, we're not ready to release the restated numbers until March, so we can't get too specific on it because we don't have it, but typically, the swing between December and March might be $50 billion, $60 billion.

Oh, it's that big, okay .

That's $0.60 per share.

So you're getting a very profitable month and dropping a particularly, particularly weak.

Yes.

Yes.Exactly.

Okay.

That's helpful.

Thank you very much.

Henry Kim, UBS.

I'm wondering if you could give a little segment color for your organic growth expectations for 2011?

Well, obviously, with the growth rates we're talking about and as I think you saw in Q4, we're talking about pretty strong organic growth across nearly all the segments.

Some of the later segments to recover that probably will show some of the more impressive growth rates will be certainly in the test and measurement and Food Equipment areas, which are just now starting to show some positive growth on the equipment side.

This is the first quarter for that in Food Equipment and the second quarter in test and measurement.

But across the whole spectrum of the segments we expect to see at least strong mid digit organic growth and some of those later segments that I just spoke about double digit organic growth, so it's pretty broad based growth across the portfolio.

And on Food Equipment, you touched on earlier that the CapEx transition looked more favorable.

Are we in an inflection point at this point in CapEx across Food Equipment?

Well, it's hard to just use one quarter of data to call it a trend but it certainly has moved in the right direction.

Quotation activity is up.

We saw some positive actual shipment comparisons in Q4.

So our belief is and our forecast implies that we're going to see steady improvement in the CapEx spending on equipment in the Food Equipment segment throughout 2011.

Thanks a lot.

Ann Duignan with JPMorgan.

I just have one point clarification on David's question earlier.

I do think it would have been helpful if in the press release you had noted that the Q1 revenue growth range of 12% to 15% was off an adjusted base, because I think that's where a lot of us actually backed into the same math as David presented, so I just wanted to make that clear.

My question is, just on the Construction business versus the Decorative Surfaces business.

You noted that in Construction Asia was flat to down a little bit, but in Decorative Surfaces Asia was up.

Can you just talk about the differences between those businesses and why one might have been flat to down and why one was up.

Yes, the difference in Construction Products, Ann, is that we have a pretty large concentration in the Australia, New Zealand markets and that was flat, as John highlighted in his comments.

And we have very modest penetration in those markets in our Decorative Surfaces businesses.

Our Decorative Surfaces businesses are almost all Asian based, so we did see much stronger growth in those businesses than we did in the Construction businesses.

Okay.

I was kind of hoping that that was the reason, because it sounded at first like maybe parts of the Chinese market were slowing, but that is not what you're saying.

No.

Not at all.

Okay.

And then as you look to offset input cost with pricing, which of the businesses do you think are going to face the most challenge or the most push back on pricing?

Well, I think, pricing is never easy, but I think if you look at the areas we've seen the strongest increases, it's been most recently in steel prices, which obviously impacts our Industrial Packaging businesses, some in our Automotive businesses and certainly in our Construction businesses, and then more recently in some of the plastic and the films, PT film in particular.

So all of those will be areas where we'll have to push hard to get cost recovery, but I expect again it's more a question of timing, not whether we'll get it, it's when we get it.

Okay.

In the interest of fairness I'll get back in line.

Thank you.

Stephen Volkmann, Jefferies & Company.

I guess versus my model I was really kind of surprised, mostly by the margin on Food Equipment, which was quite a bit lower than what I was looking for and maybe I just modeled it wrong.

But I noticed you didn't call that out on your price cost, Ron, when you were talking about where the impact was there.

So is there something going on there that we should be aware of margin-wise and how we do think of the trajectory going forward?

There wasn't much price cost there this quarter.

Some of the bigger items included in the non-volume part of margins, inventory related adjustments, cost us 130 basis points.

That's things like reserves for LIFO and inventory reserves and standards, et cetera.

Mix played a factor.

Also we had some overhead increases, specifically around things like fuel in the service business.

Also some higher employee benefit costs in France and also there was some reserve adjustments for things like warranty.

So a lot of one-off type things that all happen to be negative in the quarter against the Food Equipment segment.

You'll remember that I noted that in the quarter there were associated costs with the consolidation of service to France.

How much of those things do we think were kind of fourth quarter issues versus what's going to continue to be there going forward?

I think the majority of the items are non-recurring type of items.

Obviously, the overhead increases will still be there, but there's plans in place to recapture some of that through price increases.

Okay.

Great.

And then just to make sure I understand this right, the guidance that you have given in terms of growth rates is against an adjusted base as if you had made this change a year ago in calendar quarter or against the actual reported numbers that we have in front of us?

This is against the -- an adjusted 2010, which re-calendarized the results.

So for instance, the first quarter revenue increase that we forecast is against January through March of 2010 revenues.

Great.

That's helpful.

Thank you.

Deane Dray, Citi Investments Research.

Just to clarify on the -- we understand the first quarter impact on the calendarization, which we do appreciate getting these back in sync now, but for the year is it fair to say there's really no impact on the change in calendar?

Typically there wouldn't be, we have not rolled up December international results yet, so once we get it all rolled up we'll have the restatements out sometime before the end of the first quarter.

Okay, and then --

Fair answer to that, Deane, is that it would be unlikely there would be any significant changes by just reformatting the calendar.

Obviously, by comparing the new restated 2010 to the new quarters to 2011 would not be significant.

Great.

And then on the M&A outlook, I know back in December Ron talked about in that ballpark of $1 billion in acquired revenues we saw the SOPUS deal come through, which interestingly was in that $300 million range of medium sized.

So, David, if you could just calibrate for us how the pipeline looks?

Is SOPUS, these medium size, are there more to come like this, pricing and private equity.

I know there's a lot there.

Maybe that uses up my questions, but --

Yes, well obviously, our range at $800 million to $1 billion is significantly higher than what we actually completed in 2010.

That's almost double and we certainly have seen improvement, steadily improvement in the pipeline throughout the year.

We're entering the year with a solid pipeline.

As you mentioned, the SOPUS deal, which was announced in December will -- we expect it to close during Q1.

And that is a significant deal and there are a number of other deals in the pipeline.

I wouldn't say of that size, but certainly larger than the average that I expect will continue to give us strong optimism this is going to be a better year.

Valuations are still, from an historic standpoint, somewhat challenging, but they're -- we're able to make, I think, headway and we've proven that, I think, in the last several quarters with the improvement in the actual closed transactions.

So the pre-pipeline activity remains strong and I'm optimistic as we head into the year that we are going to continue to see improvement in the acquisition environment for us.

The private equity change in, is it normalized in terms of their bidding?

I'd say it hasn't changed remarkably in the last couple of quarters, but I think you'll also recall that my expectation as the year unfolds is that we're going to see private equity in a position where they're going to be selling assets that they acquired between '05 and '08, which we really haven't seen that change yet.

But, I do think that will happen and I think that will be a good solid indication for us in terms of improved activity.

All right.

Thank you.

Eli Lustgarten, Longbow.

Two quick question.

One, you were kind enough to give us the margin impact of a major sector that was the 80 basis points.

Do you have a similar breakdown for how the inventory affected these divisions and the, I assume, the corporate items are below the line or are they also in a breakdown where it affected each division?

So, in the fourth quarter of each year, typically there are some inventory adjustments for standards change and LIFO calculations, et cetera.

We had a greater than expected negative impact of that.

The segment that had the biggest impact, Industrial Packaging, has about 60 basis points; Transportation, 100 basis points; Food Equipment, 130 basis points; Decorative Surfaces, 50.

Those are the biggest segment that had an impact.

Some of the corporate items, those are considered part of operating income and typically what we do is we spread those on allocated basis so they would have an equal impact across all the segments.

And second question I'm allowed, you talked about most of the operating groups showing good revenue growth, giving a good revenue outlook, can you give us some color on your profitability expectations for 2011.

Should we expect margins to be up in every sector where there are problems or can you give us some idea of what to expect among the profit -- ?

Eli, I think you can certainly expect across the segments we would expect to see improved margins.

Certainly, those businesses that are later in the recovery, like Food Equipment and Test and Measurement, we'd expect stronger margin improvement in those businesses, but all of the segments have built into their plans margin improvement during the year.

As Ron highlighted, the margin range for next year is between 15% to 16% overall margins for the Company.

And I think if you look at the first quarter as an example, you'll see the margins back in the high 14% range.

So I think we would expect to see margin improvement and continued growth in margins reflected on the strong organic base revenues that we expect to see as well.

All right.

Thank you.

John Inch, Merrill Lynch.

Guys, if you adjust for all of these items, where do you expect variable contribution margins to be first quarter and 2011?

So if you look at the forecast and where we expect to be on margins, overall incrementals for the year are in that 35% range, which is pretty typical for our base businesses.

And they are what in the first quarter, Ron, because that's when -- you're still not getting the price recovery yet.

So what is the first quarter?

It will be less than that.

We don't have an expect number, because we haven't fully restated 2010.

But it would be slightly less than the 35%.

But it seems like it will be over 30.

Is that a fair statement?

Yes, I can't say with any specificity around that, but that's a reasonable approximation.

Okay.

So that implies variable contribution margins from first quarter, which are -- can be higher than the 25% you just put up appear like they're going to be accelerating throughout the year?

Yes.

Yes.

No, I just want to clarify that.

Second thing is around divestitures.

I think, David, you, meaning ITW, have been stepping this up a little bit.

Could you talk about what you did in terms of total divestitures in 2010 and what your plans are for, say, pruning businesses, maybe whittling down the number of reporting segments or something heading into '11 and '12.

Yes, I don't have the exact number of business units that we divested during the year.

My guess is it's somewhere around 8 or 9 businesses in total.

Yes.

The largest of which was the cigarette stamp tax business that we talked about back in Q3.

Probably all-in with all those businesses it was probably $60 million to $70 million of revenue, something like that, that we divested.

I think as I've indicated in past discussions, we have, in fact, built into our planning process a review of our portfolio of businesses and at any given time we clearly have a number of businesses that we're active in the divestiture mode.

Obviously, we don't report those until they're actually divested, but that process continues and I would expect we'll continue to see some acceleration of that as we head into 2011 just looking at what we've been working on.

Great.

Thank you.

Andy Casey, Wells Fargo Securities.

Can you comment on the channel inventory actions you're seeing.

Is there any destocking at this point?

And where would you potentially be seeing the most restocking?

Yes.

Andy I can't say, you said we're seeing, did you say destocking to start with?

Yes, I'm wondering if there's anything like that going on?

We've not seen any evidence that I'm aware of, of any significant destocking.

Certainly, as the channels have rebuilt their inventories most of the destocking for us was gone early in 2010.

At the same time, I would say that we've seen in some businesses some modest level of restocking, but it's still fairly modest.

I think as the channel adjusts perhaps to maybe some more favorable forecasts and outlooks for 2011 maybe we'll see more of that in the coming quarters, but nothing that I could highlight as being significant at the moment.

Most of the above market gains, as John pointed out, we've seen thus far have been more related to market penetration than to restocking.

Okay.

Thanks for that, David.

And then lastly I guess on the fourth quarter cost side, was that all raw material driven or are you incurring other costs like labor add-back or something like that?

Well there's some labor add back.

There's some overhead costs but, as Ron pointed out, between the price cost and the inventory adjustments, some of which are driven by cost increases that, probably represented 60% or so of the negative impact.

Also included in overhead is things like transportation costs going up, really the fuel and other things.

Okay.

Okay.

Thank you very much.

Ajay Kejriwal, FBR Capital Markets.

Just couple end market questions.

First on Transportation.

Clearly you're getting some nice product penetration, so maybe share some thoughts on what the contribution could be on top of the end market growth rates this year and then any thoughts on what you're seeing in Asia and your expectation there?

Well, I think if you're talking about primarily automotive OEM business, which I assume that's what you're question's directed toward.

Right.

We would expect in 2011 to see penetration gains overall in the portfolio between 4% to 5% above market growth rates, which is fairly similar to what we've seen in 2010.

In terms of how that plays out, obviously, it does vary somewhat by platform and geography, but in overall that's a pretty good estimate.

We clearly are driving higher penetration gains in Asia at the moment, as we're entering platforms that we've not participated in the past, particularly that is true in China and to somewhat of a lesser extent in Korea.

Good.

David, and maybe if you can update us with your thoughts on commercial construction markets and overall construction markets in North America.

You'd given some good color in December, but any update you have there.

Yes, I don't know that I have much additional color to add from December.

Obviously, the 2010 housing numbers were less than what we predicted and certainly less than I think what everybody predicted.

While we expect to see some modest recovery in the housing number in 2011, it's certainly, after we see that, it will be the beginning of a turnaround.

I wouldn't want to call that until we see it, but we'd expect to see some modest improvement.

The fourth quarter number, as John pointed our in his segment highlights, was actually down year-on-year.

So I can't say we could call the turn yet in housing.

In the commercial side, commercial was down 18% last year on a square footage basis.

The forecasts for 2011 are modestly negative, but frankly, until we see a quarter worth of data, I'm not sure that I'm ready to feel like that's turned the corner yet either.

We still have large or high vacancy rates in a number of those categories, though.

While we expect to see an improving environment, I guess my sum for North America would be probably a back-end loaded improvement, latter half of 2011, before we see any solid signs that things are really improving.

Thank you.

Terry Darling, Goldman Sachs.

I had just a follow-up, Ron, I guess, the concept of 35% incrementals kind of typical yet on the other hand full year 30 to 50 basis point headwind from raw materials, which I don't recall being typical, but maybe that's my problem there.

Is there a stronger productivity offset or something else in the mix or is it just kind of hard to calibrate because of the change in the reporting period and so we should be thinking of these 35% incrementals more as a ballpark or I'm just trying to put those pieces together?

Yes and it is a little bit hard to gauge until we fully restated everything and re-calendarized.

But 35% is really kind of the long-term average.

It does bounce around quarter to quarter.

There's always a variety of issues in each quarter and sometimes it's what happened in the prior year that matters when you're talking about incrementals.

For instance, we've had some unusual corporate items in third and fourth quarter of this year that pulled down margins that will have a beneficial incremental impact next year.

Terry, I think the other thing to remember is that we do have several businesses that we expect to see even stronger incrementals as they're later to recover and certainly some of the businesses, like Transportation, that have been at the recovery longer than Industrial Packaging, we'd expect those incrementals not to be as strong.

So, if you look at the individual segments there will be certainly a range there, but I think as we look at these numbers 35% seems like a very plausible number for 2011.

Maybe another way of asking it is if we go back to could be '04 to '07 period, the typical year-over-year raw material impact that you would have absorbed during that period was it in that negative 30 to 50 basis points range?

Well, certainly for the first two and one-half years of that, yes, because we saw dramatic increases, particularly in steel and to a lesser extent in plastics, but as an example between 2004 and 2006 our steel costs went up by more than double.

We did not get full recovery on that, certainly, on a margin basis and in some cases we struggled to get it on a cost basis.

So, we certainly don't see that as a kind of cost inflation environment we're in today, but certainly what we saw in Q4 was accelerated from what we'd seen earlier in the year in 2010.

Okay.

And then just try to understand better the visibility that you guys have on your own raw material position.

I guess, I'm wondering, a little unusual, I think, across the group here to -- I've had a meeting in mid December and I think it surprised this much on raw materials and I'm just wondering if that's really a function of the year-end and you've got an unusually high amount of accrual adjustments and so forth into year-end to where on a normal Q1, Q2, Q3 basis that the chance that you get surprised like this would be a lot less?

Yes, I would agree with that.

It would be a lot less.

Certainly at the end of the year there are a lot of accrual true-ups, particularly LIFO, as Ron mentioned, and a lot of that is driven by what happens with cost.

So while we were talking with you in early December, we were really using data through October.

We did not have November data when we were talking with you at that point.

It became clear to us by late December that clearly the cost increases were higher than what we had anticipated and as we went through the LIFO calculations in January with the year-end numbers, the numbers, obviously, came out more significant.

But those are items that we would expect, obviously, not to recur at that level, particularly as we note these cost increases and look to make adjustments and also price increases as we now see the sort of trajectory.

That's helpful.

Thanks very much.

Nigel Coe, Deutsche Bank.

Could we just pick up on that last comment you made, Ron, about pricing.

How much price do you need to get to get that 30, 50 bps pinch from raw materials and to what extent have you already gone out with price increases and any color you can give by business would be very helpful.

Well, so I think, have we gone out with price increases that reflect the higher costs we have seen in the fourth quarter, absolutely.

And the challenge is, you can continue to try to stay ahead of that and prices or costs have continued to rise even in the first quarter for things like steel.

So, we have put price increases in place.

Our goal is to recover not just the cost, but also the margin and there is a 60 to 90-day, lag like we talked about.

It's hard to quantify it by business, because even as I went through the actual price cost impact in the quarter, it's all over the place depending on what's their input and where they were in the prior year as well.

So it's hard to do that especially in a forecast.

Sure, but the effective price increase you need to get to that range is it 2%?

No it's about a little over 1%, 1.25%.

Okay.

That's very helpful.

Just a follow on, I'm surprised you didn't talk about Polymers and Fluid as a area of (inaudible) inflation given what's happening with oil prices, are you seeing any pressure there that maybe might come through in the first half of the year.

Yes, I did mention that.

I mentioned that.

I mentioned that in the category of chemicals.

Most the products input materials we use would fall in that chemical category.

A lot of it is based on oil prices and we have definitely seen some rise in raw material content or pricing there.

We have got, obviously, price increases already underway in some of those businesses as well.

And the impact overall in materials in that segment is not as significant as it is in some of the higher material content segments, like Industrial Packaging, but we've definitely seen cost increases in resins and chemicals.

Just to give you a little specifics on that.

In our bid to chemicals that we use in our polymers business were up about 10% to 12% in the quarter.

And the price cost impact in Polymers and Fluids was negative 60 basis points.

Okay.

Thanks helpful.

Thanks.

[Hawes Gloverson], Barrington Research

Hello, Walter Liptak with Barrington.

I wanted to ask about the leverage is, operating leverage is extremely good in Industrial Packaging and Power, is it that some of the ones with the lower operating leverage, it's just that they've got lower organic growth rates and their mid or later cycle and that you'd expect to get similar sorts of operating leverage or is the Power segment and Industrial Packaging just extremely good segments that have been able to perform well because of restructuring, whatever?

Yes, I think if you look at the Power Systems Electronic segment, Walt, you'll see that some of the best revenue increases were in that segment, so clearly I believe the welding component section of that was in the 20% plus range and the PC board businesses were close to 50%.

Obviously, those kind of revenue growth drive extremely strong incrementals and they would force others that would with only revenue growth rates in the 10% to 12% range, obviously, to pale in comparison.

So that is, obviously, a segment that traditionally has very strong margins at the last peak.

The margins in that segment were above 25%, so certainly those incrementals there are, will continue to be impressive with those kinds of incremental growth rates or I should say revenue growth rates.

Okay.

And some at Food Equipment or construction, as those start to recover, whenever it is, back part of 2011 or 2012, can you see the same sort of higher than 35% operating leverage?

Yes.

I think particularly that would be the case, particularly in the Food Equipment group.

I think if you look at the traditional margins in Food Equipment, I think our last peak was above 18% and as we reported in Q4, it was 12.5%, I think, 12.6%.

So, obviously, growth in that segment's going to power some pretty strong incrementals.

The same is true in Construction.

I think in Construction it's going to be more a story of when we see strong improvement in the North American market from an incremental standpoint because we're certainly poised and ready to see some significant growth in that segment.

We've already seen reasonable growth in Europe and we certainly continue to see it in Asia, so in construction it's probably more a story of North America.

Okay.

Great.

Okay.

Thank you.

We'll take one more question.

Robert Wertheimer, Morgan Stanley.

I'm sorry if I'm beating a dead horse a little bit here on the materials cost.

I think you were negative 90 bps last quarter and 80 this quarter and I understand LIFO, but do you think you've seen it all or was it -- I guess the question is it potentially going to be more negative in the 1Q or do you think you've got it covered?And then second and I'll just ask them both and let you respond.

On a more happy note, your cash flow should be more than ample to allow you the sort of acquisition level that you are talking about next year.

Are you thinking about keeping some in reserve in case steels come in higher or are you prioritizing buybacks.

Wow, that's a lot there.

Let me start with price cost.

You're right, our price cost headwind for Q3 was in that negative 80, negative 90 range.

I would expect, as Ron pointed out, that we'll catch up in 2011 as the year unfolds.

We expect for the year, probably, to be closer to negative 50 for the year.

This year you may recall we started off with a very strong positive number and we ended with, obviously, some headwinds.

So, it's not a straight line environment.

We have at the moment got price increases in place to cover what we know are the current cost increases.

But I do believe that we are probably going to continue to see, at least in some category, some ongoing cost increases which will require further pricing actions.

So, I think at this point our view of the year being negative 50 basis points is probably realistic based on what we know, but we'll take further action as necessary should costs escalate beyond where they are today.

In terms of the cash flow question, obviously, we would expect, as we signalled in our acquisition range, a stronger environment next year for doing acquisitions.

And as we did in 2010, we'll do the same in 2011.

We'll evaluate as we approach the mid-year to see if that activity that we expect materializes and if we do, we certainly would expect to see the opportunity, perhaps, to have even stronger acquisitions than what we've embodied in our initial guidance.

But, we'll wait and see and if in fact that doesn't materialize, there are other options we obviously can use for utilizing that strong free cash flow.

As you noted this year in 2010, we did do that review mid-year and in Q3, we re-purchased $350 million of shares.

So, we've shown, I think, willingness and a discipline to look at cash flow on a ongoing basis and make appropriate adjustments.

Thanks.

Thank you, Rob.

Thank you, everyone.

This concludes our call.

Thanks to all who joined us today and we look forward to speaking to all of you throughout 2011.

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