Illinois Tool Works Inc (ITW) 2011 Q1 法說會逐字稿

Thank you and welcome to the ITW first-quarter 2011 earnings release conference call.

At this time, all participants are in a listen-only mode until the question-and-answer session.

(Operator Instructions).

Today's conference is being recorded.

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

I'd like to go ahead and turn the call over to your host for today, to Mr.

John Brooklier, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Jose.

Good morning, everyone, and welcome to all who have joined us for our first-quarter 2011 conference call.

Please note that our new 9 a.m.

Central call time represents a permanent starting time for future conference calls.

Joining me this morning is our CEO, David Speer, and our CFO, Ron Kropp.

We are all eager to discuss our very, very strong first-quarter financial results.

David Speer will now make some introductory remarks.

David?

Thank you, John.

I'm pleased to report that our 2011 first-quarter featured double-digit organic growth, solid end market demand, strong EPS growth, and substantial margin improvement.

Here's some of the highlights.

Total Company organic revenues grew a strong 11.7% in the first quarter.

While ITW's organic growth was broad-based in the quarter, we especially saw strong growth emanating from our welding, transportation OEM, industrial packaging, PC board fabrication, and test and measurement businesses.

It's clear to us that most of our global end markets continue to improve and that market penetration opportunities remain plentiful.

Excluding the one-time tax benefit associated with an Australian tax case, earnings of $0.91 per share were 30% higher than the adjusted year-ago quarter.

Q1 total Company operating margins of 15.6% were 110 basis points higher than the year-ago period.

Notably, our base businesses accounted for 90 basis points of that margin improvement.

We had a good acquisition quarter, completing six transactions representing nearly $330 million of annualized revenues.

Year-over-year, we have completed nine transactions for $435 million of annualized acquired revenues.

Finally, in recognition of what we believe will continue to be a positive macro environment, we raised our full-year earnings guidance to a range of $4.16 to $4.34.

While the new full-year EPS range includes the previously mentioned one-time tax gain, it also represents $0.20 per share of additional operating earnings compared to our initial earnings forecast guidance earlier in January.

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 shortly to talk about the Q1 financial highlights.

I will then cover Q1 operating highlights for our eight reporting segments.

Ron will then come back and detail our 2011 forecast; and then, finally, we'll open your call for questions.

And as always, we ask for your cooperation per our one question, one follow-up question policy.

First, let's cover the traditional 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 net income per share, restructuring expenses, acquisition activity, tax rates, end market conditions, and the Company's related 2011 earnings forecasts.

Finally, the telephone replay for this conference call is 402-220-6528.

The replay is available through midnight of May 10, 2011, and no pass code is necessary to access a replay.

Now here's our CFO, Ron Kropp, who will comment on our very strong 2011 first-quarter results.

Ron?

Thanks, John.

Good morning, everybody.

Before I run through the financial results, I'd like to remind you that, as we announced back in January, this is the first quarter that reflects the elimination of the one-month reporting lag for our international businesses.

All 2010 and 2011 data that we present here reflect this new reporting calendar.

Now here are the highlights for the first quarter.

First of all, revenues increased 17%, primarily due to higher base revenues and acquisitions.

Operating income was $683 million, which was higher than last year by $141 million.

Margins of 15.6% were higher by 110 basis points.

Diluted earnings per share was $1.24, which was higher than last year by $0.58.

However, as previously mentioned, this quarter's results reflect a one-time tax benefit of $0.33 per share related to a favorable judgment in an Australian tax case.

Excluding this tax benefit, diluted income per share would have been $0.91 or 30% higher than adjusted EPS a year ago.

The reported EPS of $1.24 is above the previously provided range of $1.14 to $1.20, primarily due to stronger base business performance and favorable currency translation.

Finally, free operating cash flow was $56 million, which was lower than normal due to higher working capital related to seasonality, and the timing of payroll funding and higher tax payments.

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

Our 17.4% revenue increase was primarily due to three factors.

First, base revenues were up 11.7%, with North American base revenues increasing 12.2% and international base revenues up 11.0%.

As David mentioned, we have continued to see solid revenue gains worldwide, led by the transportation, welding, PC board fabrication, industrial packaging, and test and measurement businesses.

Next, currency translation increased revenues by 1.6%.

Lastly, acquisitions net of divestitures added 4.2% to revenue growth.

Operating margins for the first quarter of 15.6% were higher than last year by 110 basis points.

The base business margins were higher by 90 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 200 basis points.

Included in the non-volume impact for the first quarter were the unfavorable impact of price versus cost, which reduced margins by 100 basis points; unfavorable inventory-related adjustments of 35 basis points; and unfavorable corporate adjustments, which lowered margins by 20 basis points.

In addition, margins were higher by 40 basis points due to higher restructuring expenses last year, and the dilutive impact of acquisitions reduced margins by 40 basis points.

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

In the non-operating area, other non-operating income expense was favorable by about $1 million versus last year, and interest was flat.

The first quarter effective tax rate was 3.3% as a result of the one-time tax benefit of $166 million related to the favorable Australian tax case.

Excluding the impact of this one-time benefit, the tax rate for Q1 would have been 29%.

The forecasted tax rate for 2011 is between 28.5% and 29.5%, excluding the first quarter one-time tax benefit.

Turning to the balance sheet, total invested capital increased $1.4 billion from the fourth quarter, primarily due to higher working capital, currency translation, and acquisitions.

Accounts Receivable DSO increased to 61.2 days versus 57.9 at the end of the fourth quarter, primarily due to seasonality, currency translation, and acquisitions.

Inventory month-on-hand was 1.9 at the end of the quarter versus 1.8 last quarter.

For the first quarter, capital expenditures were $88 million and depreciation was $83 million.

ROIC for the first quarter increased to 16.2% versus 14.7% last year, excluding the impact of discreet tax benefits and adjustments for both years.

On the financing side, our debt level increased approximately $480 million from the fourth quarter, due to higher commercial paper borrowings and currency translation.

Our debt to capital percentage increased to 24% from 23% last quarter.

Turning to cash flow, our cash position decreased $102 million in the first quarter, as our free operating cash flow of $56 million and additional borrowings of $418 million were utilized for acquisitions of $543 million and dividends of $169 million.

Our free cash flow was lower than normal due to several factors.

First of all, receivables were higher due to seasonality and acquisitions.

In addition, higher than normal payments for taxes, higher CapEx, and the timing of payroll funding at the end of March also reduced cash flow.

For acquisitions during the first quarter, we acquired six companies which have annual revenues of $329 million.

The biggest acquisition of the quarter was SOPUS, a leading automotive aftermarket business with approximately $300 million in annual revenue.

For the full year, we are forecasting acquired revenues between $800 million and $1 billion.

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

Thank you, Ron.

Starting with our Transportation segment, Q1 '11 organic revenues grew an impressive 15.1% compared to Q1 2010.

Operating margins of 15.9% were 80 basis points higher than the year-ago period.

The organic revenue increase in Q1 was mostly driven by our automotive OEM businesses, which continued to benefit from strong auto builds as well as our ongoing product penetration.

Our North American organic revenues grew 18.1% in Q1 versus a North American auto build increase of 16% in the quarter.

More impressively, our international organic revenues grew 13.7% in Q1 versus a European auto build increase of 8% in the quarter.

Looking ahead, we believe there will be disruption to Japan-related auto production in Q2, but our best information at this time is whatever auto build declines we see in Q2 will be made up in the second half of the year.

Our full-year projections for auto builds essentially mirror what we're seeing from CSM at this point in time -- North America auto builds to be in a range of 13 million to at 13.2 million units, and Europe to be in a range of 19.3 million to 19.5 million units.

If those build projections hold, they represent year-over-year increases of 10% and 3%, respectively.

In our auto aftermarket business, organic revenues showed improvement in the quarter.

Our base revenues increased 6.2% in Q1 '11 versus the prior-year period, due to improved auto repair activity as well as better consumer demand for retail auto maintenance and appearance products, including the Permatex brand.

Auto aftermarket demand could be constrained in Q2 as higher gas prices reduce miles driven, and associated auto aftermarket spending by consumers.

Moving to the next segment, Industrial Packaging's organic revenue growth of 14.2% in Q1 versus the year-ago period continued to mirror solid underlying industrial production fundamentals around the world.

Segment operating margins of 10.5% were 10 basis points lower than the year-ago period, mainly as a result of timing around raw material and price cost issues.

As you know, these consumable equipment businesses remain one of our best coincidental indicators of current day economy.

In Q1, our total North American Industrial Packaging units increased organic revenues 10.2%, while total International Industrial Packaging organic revenues grew 17%.

Our North American and International Plastic and Steel Consumable and Equipment businesses grew revenues 13.6% and 15.4%, respectively.

In addition, our Protective Packaging businesses grew organic revenues 6.7% in Q1.

Moving to the next slide, similar to 2012, the Power Systems and Electronics segment's strong organic growth rate of 16.4% in Q1 versus the year-ago period was directly tied to the Welding and PC Board Fabrication businesses.

Segment operating margins of 21% were 150 basis points higher than Q1, '10.

Our North American Welding organic revenues grew 27.4%, due to strong demand from heavy equipment OEMs and the improving manufacturing environment.

Our International Welding organic revenues increased 12.7% in Q1, with both Europe and Asia-Pacific seeing growth.

Even with difficult comparisons from Q1 '10, the PC Board Fabrication business has produced very good organic revenue growth of 16% in Q1.

You may remember a year ago their numbers were up roughly 80% to 90%.

This growth was driven by continuing strong demand for consumer electronics products.

Our other electronics businesses grew organic revenues 5.3% in Q1.

In the Food Equipment segment, they continue to see customer demand improvement in Q1 with organic revenues growing 6.4% in Q1 versus the year-ago period.

Segment operating margins of 14.3% in the quarter were 130 basis points higher than the year-ago period.

The Q1 story was simple -- equipment sales improved both in North America and internationally; organic revenues for equipment grew 9.6% in North America and 9.3% internationally, with our warewash and refrigeration products posting double-digit revenue increases in the quarter.

From an end market standpoint, chain restaurants and healthcare showed strong growth in the quarter.

On the service side of the business, organic revenues increased a healthy 2.7% internationally and 0.5% in North America.

In the Construction Products segment, organic revenues grew 8.4% in Q1 versus the year-ago period.

Segment operating margins of 9.9% were 150 basis points higher than Q1 '10.

Internationally, organic revenues grew 8.9%, with Europe leading the way with a very strong organic growth rate of 18.4%.

As in the past, Germany and France were both key geographic growth areas in the quarter.

In North America, organic revenues increased 7.2%, with commercial construction and renovation construction and residential construction segments all contributing to growth.

Most notably, commercial construction organic revenues grew 9.6% in Q1; renovation construction organic revenues increased 9.3%; and even our residential construction organic revenues grew 3.1% despite ongoing weakness in housing starts, which, I would note, were at 564,000 units in Q1.

In the Polymers & Fluids segment, organic revenues grew 5.2% in Q1 versus the year-ago period, and segment operating margins of 14.7% were 200 basis points lower than the year-ago period.

We think this is largely due to timing issues related to cost recovery around raw materials, especially in some of our international businesses.

The growth in first-quarter organic revenues was tied to improving worldwide industrial demand for both polymers and fluid products.

For polymers, international-based revenues grew 6.6% in Q1, due to strength in Latin America -- especially Brazil -- and in Asia-Pacific.

For fluids, North American organic revenues grew a robust 18% in Q1 thanks to better MRR activity.

Our Decorative Services organic revenues increased 7.4% in Q1 versus the year-ago period, and segment operating margins of 12.7% were 160 basis points higher than the year-earlier period.

In line with modest improvement in North American commercial construction activity, the Wilsonart North American High Pressure Laminate business grew organic revenues 3.5% in Q1.

They were also helped by new product introductions in the quarter.

Internationally, results were even better as organic revenues increased 12.4% in Q1, and this growth is largely tied to increased commercial construction activity in Asia-Pacific, especially China and in parts of Europe.

And finally, our famous All Other segment -- organic revenues grew 11.5% in Q1 versus the year-ago period, and segment margins of 19.4% [or] 240 basis points higher than the first quarter.

Organic growth was largely tied to the three major business groups in the segment -- Test and Measurement, Consumer Packaging, and Industrial Appliance.

For Test and Measurement, organic revenues increased a very strong 19.2% in Q1, as equipment orders continued to improve, particularly in Asia-Pacific, including China and Europe.

For Consumer Packaging, organic revenues grew 7.2% in Q1, due to strength in both the Decorating and Consumer Packaging businesses, which include both Hi-Cone and ZipPak.

And finally, industrial appliance increased organic revenues 5.1% in Q1 on the heels of strong demand on the industrial side of the business.

This concludes my segment-related remarks.

I'll now turn the call over to Ron, who will cover our 2011 forecast and related assumptions.

Ron?

For the second quarter of 2011, we are forecasting diluted income per share from continuing operations to be within the range of $0.99 to $1.05.

The low end of this range assumes a 17% increase in total revenues versus 2010, and the high end of the range assumes a 20% increase.

The mid-point of the EPS range would be 26% higher than last year.

For the full-year 2011, our forecasted EPS range is $4.16 to $4.34, based on a total revenue increase of 16% to 18%.

The mid-point of $4.25 is $0.20 higher than the mid-point of our previously provided range of $3.93 to $4.17.

This new mid-point would be 42% higher than 2010.

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 full year; and a tax rate range between 28.5% and 29.5% for the second quarter and the full year, excluding the impact of the first-quarter favorable tax case.

In addition, the forecast does not include any potential impact related to the pending divestiture of the finishing business.

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

Thank you, Ron.

We'll now open the call to your questions.

Once again, we're asking people to honor our one question/one follow-up question request.

I will start -- we'll open up the call to questions now, Jose.

(Operator Instructions).

Deane Dray, Citigroup.

Hey, you've got a lot of new changes here -- reporting at a new time; you've got some new slides; upbeat forecast -- it's all good.

But (multiple speakers) -- what I wanted to talk about was construction.

So a lot of optimistic data points in there on organic revenue, especially Europe, and if you could just take us through the dynamics there.

But also, within North America, both renovation and commercial upticking nicely.

And what does that say about where we are in the cycle?

Yes, Deane, as it relates to European and Asian numbers, those have shown consistent growth over the last three or four quarters, in that range.

So we're continuing to see good results.

As John highlighted in his comments, particularly in Germany and France and Europe during the quarter, and we continue to see good results in our Asia-Pacific businesses as well.

As it relates to the North American construction businesses, if you look at any of the data John noted in his comments about residential at the annualized rate, at the end of Q1 is 564,000 housing starts.

Obviously, that is a weak number.

In fact, it's lower than the number was this time last year.

So, our 3% gain in residential during the quarter was really based on some significant improvement market penetration; certainly no market recovery.

I suspect that at the levels that we're at today, that we're probably going to finish the year from a start standpoint in residential maybe in the [640 to 650] range, well below what we had originally projected in the [675] range.

So I think housing remains weak.

We continue to perform well in that market, given the conditions.

The commercial market year-to-date down just about 10% in square footage on Dodge contracts awarded -- that's Dodge data on new contracts awarded.

So, while we're seeing the rate of decline slowing, it's still negative.

And there's some hope that that number will bottom out perhaps in Q3 or Q4, but I don't think we'll see any significant recovery and start activity in commercial this year; perhaps early next year.

The renovation side -- renovation spend has continued to trend up modestly.

We would expect that the rehab/renovation market for us, which is primarily residential renovation, to probably show market growth in the 4% to 5% range for the year.

Great, thank you.

And just a quick follow-up for me, on guidance.

Could you provide color as to the base business growth rates for both the second quarter and for the full year, and your guidance, please?

Base business for Q2 is about 8%.

And for the year, Ron, do you have that number for the year?

8% to 9% for the full year.

Okay.

Remember (multiple speakers) --

(multiple speakers) The comps get a little bit more difficult in Q2, as based on a year ago.

Thank you.

Jamie Cook, Credit Suisse.

It's actually [Peter Chang] in for Jamie.

Peter, you sound different.

(laughter) Thanks.

Congratulation on a great quarter, guys.

My question was on if you guys could provide updated thoughts on what material costs headwinds will be for the remainder of the year?

Should we still expect a 30 to 50 basis point headwind?

It looks like Q1 was sort of at the high end of guidance.

And what Q2 material price impact would be.

Well, clearly, we continue to see the impact of higher input costs in the first quarter.

Most of our input costs were up in the double digit range.

And as we look at what the impact was on margins overall for the whole Company, had about a negative 100 basis point impact in the first quarter on margins.

It will definitely have less of an impact -- you know, we have put price increases in place to cover the raw material costs.

As you know, even if you recover the dollars, you don't always recover the margin.

We're continuing to see more price increases go into play.

So, the difference between margins in the first quarter and the second quarter, we should still see a little bit of a negative impact of about 30 basis points from first-quarter to second-quarter, related to price cost.

Year-on-year, closer to 80 to 90 basis points.

And for the full year, should we expect it to be higher, to that 50 basis point headwind?

Well, I think -- we'll start anniversarying some of the cost increases we saw at the end of last year.

And prices seem to have stabilized a bit.

Where they were up 15%, 20%, 25% in some places, we're expecting more of a -- more moderate 2% to 4% input cost increases for both steel and resin in the second quarter, and really stabilizing after that.

Okay.

Great.

And as a follow-up, it looks like your first-quarter North America base organic growth was actually a lot higher than forecasted at 12.2%.

Should we anticipate -- are you guys expecting that to be the case for the remainder of the year?

No.

I mean, I think what I said in my earlier answer to Deane's question is we expect the base organic growth in Q2 to be close to 8%.

Obviously, North America, we were up 12% in Q1 so it wouldn't be as great.

Also, as John pointed out, the comparables in Q2 were significantly higher than they are in Q1, so that explains certainly a portion of it.

And for the year, probably close to 9% organic.

So the year -- as the year progresses from Q2 to Q4, the comparables get significantly more challenging.

So I don't expect to see in our guidance double-digit organic growth for the next three quarters.

But certainly a very strong high single-digit growth.

I'm sorry, I actually meant compared to international.

I'm sorry, compared --?

Our international?

(multiple speakers) Right.

(multiple speakers) No, North America is stronger than international.

Stronger than international?

I think that's probably likely.

And so, modestly so.

As we saw in the first quarter, international was up a little over 11%.

So I would expect it will be modestly stronger than international.

Great.

Thank you for taking my questions.

Ann Duignan, JPMC.

Good morning.

It's actually Ingrid.

I'm just sitting in for Ann.

(multiple speakers) I was wondering if we could go back to kind of the raw material headwinds.

Does that change your expectations for incremental margins on the base business?

Is 35% still the right number you've spoken about before?

Yes, I think the 30% to 35% range is what we've talked about.

Obviously, in the front end of that as we receive the increases and in any particular quarter, there's a lag in getting full price recovery.

It tends to push incrementals to the lower end of that range.

But I think, as Ron pointed out, as recovery occurs, as we expect to see that happen through Q2, we expect those ranges to narrow.

So 30% to 35% is still a good range to use.

As things stabilize, it will be closer to 35%.

Yes.

I think, built into our forecast here for the full year, our base business incrementals in that 35-plus range.

The next couple of quarters will be closer to 30% to 35%.

But it will get better towards the back half of the year.

Okay.

That's helpful.

And then I was wondering if you could just talk about your auto outlook, I guess, with auto production being pushed out from Q2 to Q3 and Q4, given the events in Japan.

Has that been reflected in your outlook?

Or are you not seeing that?

Maybe you can give a little more color on that.

No, it's reflected in our outlook.

I think what John pointed out in his comments earlier, we expect the Q2 auto build in North America to be around 3 million units.

That's down about 11% from what it was in Q1.

Some of that would be impacted, as John pointed out, by a revision to the Q2 data as a result of the anticipated part shortages, primarily with Japanese components for the Japanese production here in the US.

But for the year, the build is somewhere in the 13 million to 13.2 million range for the US, which will be up from last year's build numbers, which were just under 12 million.

So, even with the disruption in the supply line, as John pointed out, it looks like the schedules in Q3 and Q4 will pick up that modest decline in Q2.

In Europe, we expect the auto builds in Europe to be somewhere in the 19.5 million range for the year.

Q2 will go down.

Some of that is the natural trends in the build data and some of that is impacted also by some of the parts shortages.

But overall, we expect that the market for the year will be up and there'll be some displacement from Q2 to Q3 and Q4.

But we expect an auto build globally of about 75 million units for the year.

The Japanese market is the only one that we expect to see a significant impact, where the build in Japan -- that is per vehicle sold in Japan -- will, in fact, be down as a result of the recent crisis.

Ingrid, to add on to that, the good news is, if you look at sales rates, sales rates remains strong.

People are buying cars.

So to the extent the production declines, it's going to bring inventories down.

So this we think, ultimately, will get rebalanced as we move through the year.

But the underlying fundamental of strong demand is still there.

Okay, great.

Thanks.

That's very hopeful.

John Inch, Bank of America.

Just based on the re-class, could we get the 2010 quarterly base business numbers just for comparison purposes?

Ron, do you have that?

Well, we've provided the restated 2010 numbers.

We have not provided the 2009 restatements yet.

So we're still working on that.

So until we do 2009, we won't be able to restate the base business.

That's what I mean.

So you don't have the base business quarterly for 2010?

Right.

Because we haven't done 2009 (multiple speakers) yet.

(multiple speakers) [In order to compare] to it, John.

How do you -- well, how would you know what your base business is going to be up then, based on your sequential guide?

Like, what -- I mean, do you know what the base business was a year ago, for instance, in the first quarter and then for second quarter?

Yes, we do.

In dollars, yes.

(multiple speakers) We don't have the growth rates.

We don't have the year-on-year growth rates from '09 to '10 -- which I think is what you're (multiple speakers) --

We obviously have the 2010 data.

That's the comparables we're providing here, based on 2011 compared to 2010.

But as Ron points out, we won't have the data for 2009 to do the 2010 comparables.

I don't know, when will that data be available, Ron?

In a few months.

I mean, it's not due till next February, but we'll have it before then, obviously.

Okay.

So your base business estimate for the second quarter, it's sort of like there's a range wrapped around that, is that kind of the point?

No, because we know base business dollars in '10 (multiple speakers) --

All right.

-- (multiple speakers) and we have an estimate for '11, we can compute the '10 to '11.

I -- okay, I see.

You just don't know the compares.

Right.

Precisely.

Okay, that much I understand.

All right.

Sorry for the clarification.

What -- just all else equal, could you talk a little bit about Asia-Pac, what you saw there?

Say, China specifically and maybe any other emerging markets that might have been noteworthy.

And just overall, what actually, to get to the $0.20 in your guidance, what actually strengthened versus your expectations?

Maybe is there one or two things or is it broad?

Just a little more color.

Thanks.

So let me cover that last question first.

So our original guidance mid-point back in January was $3.72; however, we had the tax benefits of $0.33 so that was a new mid-point of $4.05.

It's now $4.25.

So it is $0.20 from that.

$0.07 of it is from the first quarter results versus the mid-point.

The other $0.13 is the rest of the year; $0.11 is translation; base business is around $0.03; lower tax rate is $0.02 and everything else is a negative $0.03.

Regarding the geographic Q1 data, John, China was up nearly 20%.

Latin America was up about 12%; Europe, 12%; and the Australia/New Zealand region was up about 6%.

And how would that have trended through the quarter just kind of sequentially?

And was there any -- obviously, these are very good numbers -- was there any noticeable or discernible change anywhere?

No.

No, not -- you mean throughout the quarter?

No.

Yes, and even versus kind of what the trend had been.

Yes.

No, I wouldn't say there was any -- I mean, obviously, what we've seen and I think what John highlighted in his comments, the auto build came in stronger than the original forecast for the quarter.

Clearly, the activity in the Welding and the Electronic segments were quite strong, stronger than the initial estimates we had in our Q1 data.

So those would probably be the ones I would highlight as being significantly stronger.

And on the construction side, the construction market data was weaker than what we had anticipated.

So that's sort of the puts and takes.

And then one last one -- just David, other than translation, do think the weak dollar is having some sort of a business impact on ITW anywhere?

No.

Nothing significant.

Okay.

Thank you.

Nigel Coe, Deutsche Bank.

I just want to go back to the comment about the trends in the quarter, because you did, I think, 9% organic in the two months ended February.

And you did 11.7% for the quarter.

So it implies that March was probably closer to 14%.

Is that right?

Yes.

Okay.

March also was a 23-day month, so it was a significantly bigger month in terms of days than the other two months.

Yes, but if I could go back to last year, I mean, it would have been the same days in March, wouldn't it?

I couldn't tell you that without looking at the calendar.

It might have been.

Okay.

And so (multiple speakers) --

(multiple speakers) I was just talking about -- Nigel, I was talking about relative to January and February, if I misunderstood your question.

March was clearly overall stronger than January and February.

If you look at it on a daily average basis, it was only modestly better than February.

Okay, I understand that.

And okay, switching gears to the sale of the finishing business, I mean, does this signal -- I mean, I understand that that might be a bit of a [special] consideration, but does that seem a little bit more of an active management of the portfolio?

And secondarily, some of that -- going back to Decorative Services, that's a business that you were looking to sell back in 2008.

I mean, is that back in the cards the next 12 months or so?

Well, I think what we said, Nigel, is that we've been looking at and continue to look at our portfolio of businesses as part of our strategic planning process.

The finishing businesses, we have had that platform, if you will, around now about 20-plus years now.

It was a question in those particular groups of businesses as to whether we could grow significantly out of the base businesses that we had, and make it to a much larger platform than that.

And to do that, we would really needed to have expanded significantly into the liquid pump category.

And after looking at that over a number of period of time, it became apparent with the large players that were in that market space that that probably was not likely.

And we obviously were approached and held discussions about a business that, while it had good returns, didn't have strong growth characteristics in and of itself, and wasn't going to offer us the opportunity to significantly scale that platform.

So I think that's a pretty good model as to how we would look at looking at various parts of our portfolio.

And I think this one obviously led to a significant transaction that will occur sometime either late Q2 or Q3.

Okay.

And then on the price rules, I mean, you're looking to really catch up the second half of the year.

It looks like Construction Products, Industrial Products, and Polymers & Fluids were the three most impacted.

Can you maybe just talk about some of the pricing actions you're taking in those businesses?

And how the raw materials kind of comp year-over-year in those three businesses?

Yes, I think in -- the three you said were Construction, Industrial Packaging?

(multiple speakers) Industrial Packaging and Polymers.

Yes.

In Construction, I think it's simply a question of lag.

The biggest input cost in Construction that drives that is steel, and we had significant increases in late Q4 and into mid-Q1.

The increases slowed during the latter part of the quarter, but a significant recovery is already underway and expect to see the impact of that during Q2.

Similarly, on the Industrial Packaging side, largely driven by steel and, to a lesser extent, by plastic prices.

Those are the two key inputs for them in the steel strapping and plastic strapping.

And a similar sort of answer there, in that price recovery, price actions have been taken.

We'd expect to see the benefit of that occur during Q2 as well.

On the Polymers & Fluids, it's basically chemicals and resin costs that have increased significantly.

And much of that occurred during the quarter.

So, significant increases that were not fully recovered during the quarter.

We'd expect to see a significant change in that during Q2 as the pricing actions take hold and we begin to recover from some fairly dramatic cost increases.

Some of the cost increases, in terms of their input chemicals, were up in the 30-plus percent range during the quarter.

So, a pretty dramatic increase; but I think with the pricing actions in place, we'll see a significant improvement during Q2.

Now are these first round price increases or are these second or third round?

Most are second and third round.

Right.

Okay.

Thanks, guys.

Ajay Kejriwal, FBR.

So, Dave, to me, the comments on the outlook sound a lot more confident and, obviously, raised your guidance.

So, I imagine some of that relates to your CapEx-related businesses that are coming back.

So maybe you could talk a little bit about that and where those businesses are versus previous peak?

Yes.

Well, if you look at, Ajay, the businesses that have really shown strength in Q1, coming off of some probably weaker growth numbers from the second half of last year, certainly in the welding space; strong growth in Q1.

We had good growth in Q3 and Q4, so those businesses clearly have solid traction now.

Test and Measurement showed good numbers; good improvement in Q4 and a nice quarter in Q1.

So, obviously, those businesses have traction.

Both of them, obviously, fall into that Capital Equipment category.

And then, finally, the Food Equipment group, which we saw some strong equipment numbers during Q1, as John pointed out in his comments, 9% overall organic growth rate in the Equipment businesses in Q1.

That's really the first strong quarter we've seen in the Food Equipment group.

So the later cycle equipment businesses have clearly shown some good strength during Q1, building on what had been some earlier good quarters with two of the three; but with the Food Equipment group, really the first strong quarter we've seen in some time.

In terms of relationship to peak, I wouldn't have the exact data, but based on their participation in this recovery, we wouldn't be any more than perhaps 50% recovered in the welding space and probably close to that in Test and Measurement, but well below that in the Food Equipment space.

Good.

Nice color there, sir.

Dave, one more question, if I could, on capital allocation.

So, very solid and under-levered balance sheet on many metrics, so -- and given that the macro environment is stabilizing, I would submit you have capacity to do both acquisitions and a sizable share buyback.

And the stock, obviously, having a nice run today but very cheap, at least in my book.

So maybe share your thoughts on the sizable buyback -- what would be the reasons not to do that?

Well, I think, as we've said all along, it's not either/ or; it's we have the opportunity to do both.

We announced -- when we announced the transaction with the finishing businesses, that we intended to use all those proceeds for share repurchase.

So we certainly would expect it to be doing that.

And we also have said independent of that, that looking at our acquisition profile for the year -- and we do that during the Q2 time period -- that we would expect to see where we think the year will trend.

We did not change the guidance on the acquisition profile for the year, but I would expect that, based on where we are today, that we will certainly be active in doing share repurchase.

Good.

I like to hear that.

Thank you.

Terry Darling, Goldman Sachs.

Just a couple of clarification questions.

First, Ron, on the material headwind discussion, I got confused between a 30 basis point number you threw out and an 80 to 90 basis point number you threw out, and just wonder if you could clarify.

The 80 to 90, the 2Q year-over-year?

Yes.

The 80 to 90 2Q year-over-year; 30 is from the first quarter of '11 to the second quarter of '11.

Okay, so sequentially.

And then back to this comps issue.

I think what -- just trying to understand is the -- what's really changed with regard to your organic growth outlook for the year?

And I guess the question simply is, is it symmetrical with where the out-performance was in the first quarter?

Which, to me, looked largely in the power systems area.

Or have you changed your forecast in some other areas as well?

Well, we've certainly changed in other areas.

You're right in pointing out that we had a very strong quarter in power systems, but we also had very strong quarters in several other businesses -- as John highlighted, in the Transportation segment, Industrial Packaging, Test and Measurement, the Food Equipment group.

So, clearly, the profile of what we have seen and the change in the organic numbers is based not solely on what we've seen in welding, but fairly broadly across the board.

If you look at the overall number at 9% roughly for the year, that's about 1.5% higher than the original forecast we provided in January.

So we expect the continued strong performance in organic to be above our original guidance.

Okay.

And then, David, on the 8% for the second quarter, I was wondering what you're assuming for seasonal inventory builds in construction -- which, last year, I think, drove stronger organic than we all thought and maybe that came back in, in the back half.

What are you seeing so far in April, second half of March there?

It sounded like you were indicating that was a little weaker than you thought; but maybe you could just take us through what you're also assuming for the second quarter there?

In Construction North America?

In Construction, yes.

Yes.

I don't anticipate a significant uptick in Construction North America, anything related to inventory.

I think at the current levels, both in housing and in commercial, that we're not going to see any significant uptick, in my mind.

The market is weaker today in housing than it was this time last year, so there's no reason for anybody to consider building any significant inventory levels.

And the weakness in starts on commercial projects would indicate a similar trend there.

So I don't expect we'll see any significant change in inventory profile during the quarter.

Okay.

Then just lastly, David, I wonder if you'd comment on where you think market shares are moving either up or down across the portfolio?

In construction again?

No, just across the portfolio now.

That's a pretty broad question.

I mean I (multiple speakers) --

(multiple speakers) Tough one, I know, with all the businesses you have, but an important one too, right?

Yes.

I think if you look at the growth rates across the portfolio compared to the market growth rates, I think with almost no exceptions, the growth rates for us have been higher than the growth rates in the underlying markets, which would indicate at least some level of market penetration gain.

Share numbers in markets across our businesses obviously vary widely but I would suggest that we clearly have seen penetration gains in nearly every segment.

Probably strongest in Construction in North America, because the market is weak and we've continued to show signs of growth.

But we also saw it obviously in the numbers that we showed in Transportation.

In some of the other markets, it's harder to get a precise measure, if you will, of share; but relative to market growth rates, I think, overall, we probably comped growth rates that are probably 1.25 to 1.5 times the market growth rates.

Okay.

Thanks much.

Mark Koznarek, Cleveland Research.

Good morning.

(multiple speakers) Nice to say good morning to you guys.

A question for Ron.

On slide six, there is the VM and OH cost.

And that's where the raw material price versus cost bucket is, is that correct?

Yes, that is the changes in margins and revenue related to non-volume items.

So that would include higher or lower overhead; changes in variable margin; benefits of restructuring, that kind of stuff.

Okay.

So that was -- you said in the quarter that raw material price cost was 100, (multiple speakers) so there's 100 of something else going on here as well.

(multiple speakers) Is there a budget that you have for that overall category for the year?

Do you expect it to -- are you going to be able to work that thing down as we go through the year?

Then you've already commented on the price cost with raw materials, but what about the other piece here?

Well, there's not really a budget, but clearly, we expect the impact to mitigate as we move throughout the year -- partly as we start to anniversary some of the cost increases that we saw towards the end of last year.

Mark, I would just add that, obviously, this includes overhead costs.

And clearly, we did budget increasing overheads.

So we would expect these are, again, year-on-year comparables.

So we would expect, based on our budgets, that you are going to see continued negative numbers on a comparable basis, as overhead costs have been budgeted higher.

I think the half of this that is related to raw material, I think what Ron has tried to put in perspective is we'd expect that headwind for the year to be probably 50 basis points, not the 100 that we saw for the quarter.

Okay.

So that's going to be the only drop out of that particular line item?

There's nothing else that you're working on sort of behind the scenes?

No, but obviously, the change in overhead costs are already built into our margin forecast for the year.

So, these year-on-year comparables, to the extent we had overhead, you'll obviously see a negative number in that line.

Okay.

And in the fourth quarter last year, we had some -- also some one-off corporate adjustments that don't necessarily repeat.

It could go the other way.

All right.

The next question I had here was the acquisitions that you did in the quarter, the price is a lot higher than what you're averaging for 2010.

It's about 1.7 times sales rather than 1.0.

And hopefully, that means it's more profitable businesses that you're buying.

So I guess that's question number one -- are you just outright paying more?

Or are you -- you know, this is the same kind of hurdle rates are being achieved, just you're buying more input profitability?

Yes, it's all of the above, Mark.

Clearly, you're right.

For the quarter, the comparison of revenues acquired to purchase price is higher.

We've also bought businesses, notably SOPUS, which come with much stronger growth, organic growth in that business in the 8% range and much higher margin profile.

So if you look at it on a EBITDA basis, I think year-to-date, we're probably slightly north of eight times EBITDA in what we've purchased.

Though, from an earnings standpoint, higher growth businesses with stronger earnings characteristics obviously lead to higher revenues to acquisition price relationship.

But I think it's better to look at it on a return basis.

So the answer to your question is the return profiles are very similar, but the growth rates and the margin profile, particularly of several of the acquisitions, were definitely different.

Okay.

Well, if that's the case, then, David, if you're starting out at the higher margin, it seems like there's less opportunity to work the 80/20 magic, and discover additional savings and opportunities as there would be when you're buying your standard kind of single-digit margin stuff.

So, is it going to be longer before we see a return flowthrough in the income statement for these businesses?

No.

I think the formula for getting there is different.

We don't expect to see the typical doubling-plus of margins in a business that already comes with high margins.

We'll see some improvement.

80/20 will, in fact, yield some improvement in those margins; but obviously, it's more based on strong growth with higher margin businesses.

And, yes, we would fully expect to see those returns beginning to come through in the latter half of the year.

You may recall that, obviously, in the first year of any acquisition, we don't get a lot of -- you don't get a lot of earnings impact in year one, because of all of the amortization, step-up in inventories, and so forth.

But we fully would expect to see the profile in those businesses to yield very strong results in 2012 and ahead.

Great.

Thank you.

Mark, remember we've done nine deals thus far, the SOPUS deal being the biggest, which we paid more for.

But I think if you look at the other deals, they are at more traditional ITW what-do-we-pay levels.

Okay.

Great.

Thanks.

Robert McCarthy, Robert W.

Baird.

I'd also add my compliments on a sterling performance.

I wanted to follow-up on the Food Equipment group.

There are a couple of data points in there that I wonder if we could get a little bit of color on -- the lack of any growth in the North American service business.

Is that just an odd comp or something seasonal?

Or does it reflect something going on in end market activity?

And this is the one segment where your variable margin overhead cost contribution impact was negligible.

And I wonder if that means that costs versus materials is actually under much better control there?

Or if that is just simply a function of some unusual adjustments that offset the drag from the materials headwind?

Yes, I think on the latter, their primary input materials are stainless steel.

And while they have risen, they haven't risen nearly as much as what we've seen with the carbon steel materials.

So clearly, you're seeing a much more modest impact on their input costs as a result.

Their price increase plans covered what they have seen thus far in raw material increases.

So we haven't seen much of headwind price cost in that group of businesses.

(multiple speakers) Terrific.

Regarding the service, yes, I don't draw a whole lot of conclusions from that modest 0.5% growth in North America.

We'll see as the year unfolds, but typically, in these businesses, we expect to see organic growth in these businesses somewhere in the 2% to 4% range in a -- in sort of a normal environment.

Last year, clearly higher, as people were servicing equipment and not buying new equipment.

So, we'll probably see some trends unfold here as the year progresses, but I don't expect that it's going to be radically different than what we had budgeted.

Okay.

And then I wanted to ask about any impact that you've seen or more or worried that you will see as a knock-on effect from Japan outside of the auto industry -- more specifically in electronics.

And realizing that you don't do a lot of business there, I'm probing for knock-on concerns.

Yes.

We've done a pretty good look at our supply chain.

We're not done with it, as you might imagine; it's fairly dynamic.

The areas of highlight for us in terms of supply chain impact outside of the auto industry, as you pointed out -- because we've covered that already -- clearly, the Electronics category, that has more of an impact on our customers.

It's not a significant supply chain issue for us, but it is for a number of our customers, particularly with some of the higher end performance products that Japan is still a significant producer of -- you know, silicon wafers and so forth.

We expect there will be some knock-on impact there as things flow through the supply chain.

Hard to predict right now.

We haven't seen any significant change in the demand profile, but we expect as we hear more about this from customers, there will be some impact in our Electronics businesses.

We have some modest impact on availability of some raw materials.

Some of the high performance printed papers that we use in the Decorative Services category are sourced from a number of Japanese suppliers, and there has been some modest disruption in supply chain there.

We carry a fairly hefty amount of inventory in those products, so we don't expect there are going to be any significant impact.

But we are clearly looking at supply chain across our businesses.

And I expect that what we've seen so far is probably more of an impact on our customers than our direct supply chains.

And probably, at this point, I would say primarily in the Electronics-related category.

David, just to confirm the obvious, you've factored some kind of a haircut into your forecast for that?

Yes.

Okay.

Thank you.

We have.

And we do about $200 million a year in Japan in revenues and we've obviously factored a haircut into that as well.

Okay, good.

Thank you.

Bill Tess, Buckingham Research Group.

It's Joel Tiss and this is Alex in for Joel.

Can you just talk about some of the sequential improvements in power systems?

How sustainable is that and what the largest drivers are?

Well, obviously, we saw strong performance, as John pointed out in his comments, particularly in the Welding portion of Power Systems.

And the other big one, obviously, is Electronics.

As John noted, the Consumer Electronics category was up about 16% during Q1.

That's coming off of a very strong comparable to last year.

I expect we'll see that comparable dampen down because we also saw strong growth in Q2 and Q3 last year in the Electronics segment.

So I don't expect it to maintain a mid-teen growth going forward.

In the Welding segment, very strong performance in North America driven by heavy equipment in the manufacturing environment.

And I expect that we'll continue to see improvements there.

But as John also pointed out, the comps, as the year unfolds, get more difficult, particularly the latter half of the year.

(multiple speakers) The second half of the year we saw some reasonable increase in the welding equipment space in 2010.

So, those comps clearly won't continue at the 20-plus percent numbers that John was talking about.

Right.

And on the margin improvement side?

Margin improvement side, I expect to continue to see strong margins as we begin to see the incrementals unfold in those businesses.

Based on some pretty strong demand against a fixed cost base, it will not increase nearly as rapidly.

So I expect we'll continue to see strong margins there.

The welding business margin peak, just to put that in perspective, is close to 28%.

So we're not close to that number yet, but we'll continue to see, I think, margin improve there as well as the Electronics segment.

Thank you.

Jose, we'll take one last question.

There are actually no other questions in the queue at this time.

Well, then we won't take the question.

(laughter) Thank you very much.

Thanks to everybody who joined us and we look forward to talking to you again.

Thank you, Jose.

This does conclude today's conference call.

You may go ahead and disconnect at this time.