Illinois Tool Works Inc (ITW) 2012 Q1 法說會逐字稿

Welcome, and I would like to thank you all for holding and inform you that your lines are in listen-only mode during today's conference until the question-and-answer session.

(Operator Instructions).

Today's call is being recorded.

If we have any objections, you may disconnect.

I'd now like to turn over to John Brooklier.

Sir, you may begin.

Thank you, Ed.

Good morning, everyone.

Welcome to our first-quarter 2012 conference call.

As is our normal practice, our CEO, David Speer, and CFO, Ron Kropp, have joined me to discuss our first-quarter financial results as well as our 2012 earnings forecast.

Here's the agenda for today's call.

David will provide some brief commentary on three important long-term initiatives we have launched in the Company, as well as we'll discuss some first quarter highlights.

Ron will then cover our Q1 financial results in much more detail.

I'll come back and talk about our first-quarter geographic and segment results, and then Ron will cover our 2012 Q2 and full-year forecasts.

Finally, we will open the call to your question.

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

We've scheduled one hour for today's call.

A couple of housekeeping items first.

This presentation contains our financial forecast for 2012 second-quarter and full-year, as well as other forward-looking statements identified on slide two.

We refer you to the Company's 10-K for 2011 for more detail about the important risks that could cause the actual results to differ materially from our expectations.

Also, this presentation uses certain non-GAAP measures.

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the Appendix and also on our website at www.ITW.com.

Finally, the telephone replay for this conference call is 866-365-2451.

No pass code is necessary.

The playback number will be available until 12 midnight on May 8, 2012.

Now let me introduce David Speer.

David?

Thank you, John.

Before we address our first-quarter results, let me make some brief comments on three very important long-term Company initiatives that we've recently undertaken.

We've received a number of investor questions on these topics over the past few months and want to share with you what we can at this point.

The three areas of focus include our business structure simplification initiative, our strategic sourcing initiative, and our portfolio management initiative.

First of all, our business structure simplification initiative will essentially result in generally larger scale businesses within our decentralized operating structure.

These are businesses in most cases with similar customers, markets, and products, where we can improve focus while driving better operating efficiencies and lowering overhead costs.

As this process unfolds, you should expect to see larger ITW businesses, roughly $100 million annual revenues.

Internally, we are referring to this as our own [80/20] review of our business structure.

We're excited about its long-term benefits for IT, but we'll move cautiously to ensure we maintain our strong customer and market interfaces that have been a hallmark of our success.

Secondly, we have hired an experienced consultant to help us develop approaches to better leverage our opportunities for strategic sourcing initiatives across the Company.

We are in the later stages of gathering data, but we believe this ongoing initiative will add significant value in terms of how we purchase key raw materials such as steel, resins, and chemicals, as well as services such as energy, transportation, and logistics, and other major cost categories.

Finally, our portfolio management initiative is built around our long-term strategy to divest assets that we no longer consider core, and will allow us to focus on key core business opportunities, with strong growth and returns that will help us maximize our long-term returns.

The April sale of our $375 million finishing businesses to Graco is the most recent example of our commitment to proactive portfolio management.

I would like to add that our management team and Company are fully committed to all of these initiatives.

These are multiyear programs that will enhance our decentralized operating structure.

We expect the associated strategic benefits and savings from these initiatives will be significant, and we anticipate communicating some reasonable details around these initiatives before the end of 2012.

Now moving on to the first quarter.

We believe we delivered very solid results, especially in light of the uneven macro environment.

As you will see, our North American businesses produced strong results, while our international businesses reflected slower market conditions, primarily in Europe and Asia.

It's worth noting that Europe end market conditions met our expectations for the first quarter.

It's also notable that both our EPS performance and operating margins exceeded our expectations.

Congratulations to our people for a job well done in the quarter.

Now let me turn it over to Ron Kropp, who will discuss the recent quarter in greater detail.

Ron?

Thank you, David.

Good morning, everyone.

Here are the highlights for the first quarter.

Revenues increased 6.4%, due to higher base revenues and acquisitions.

Operating income was $705 million, which was higher than last year by $46 million, representing growth of 7%.

Operating margins of 15.5% were 10 basis points higher compared to last year.

Diluted income per share from continuing operations was $0.97, which was at the high end of our forecast range of $0.89 to $0.97.

On a GAAP basis, diluted earnings per share were $0.24 lower than last year, which included a one-time tax benefit of $0.33 related to a Q1 2001 Australian tax case.

Excluding last year's tax benefit, Q1's earnings per share were higher than last year by $0.09, or 10.2%.

Finally, free operating cash flow was $239 million for the quarter.

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

Our 6.4% revenue increase was primarily due to the following factors.

Base revenues were up 3.2%, but North American base revenues increasing 6.6% and mixed international base revenues that were essentially flat overall.

John will discuss the geographic mix in more detail later in the call.

Acquisitions net of divestitures added 4.4% to revenue growth.

The currency translation decreased revenues by 1.3%.

Operating margins for the first quarter of 15.5% [were] 10 basis points higher than Q1 2001 -- 2011.

Base business margins increased 120 basis points with higher sales volume contributing 80 basis points.

The positive impact of non-volume items increased base margins by 40 basis points versus last year, primarily due to price cost favorability.

In addition, margins were lower by 60 basis points, due to higher restructuring expenses versus last year, and the dilutive impact of acquisitions reduced margins by 50 basis points.

The net margins from acquisitions, excluding amortization and other acquisition accounting, were 14.5%.

Looking at working capital and cash flow, accounts receivable DSO of 62 days was slightly higher than last year, and inventory months on-hand was flat at 1.9 months.

ROIC for the first quarter was 15.1%, which was 60 basis points lower than Q1 last year.

Our ROIC continues to run at our 15% to 17% target range, which is significantly above our cost of capital of 9% to 10%.

For the first quarter, cash provided from operating activities was $323 million, with capital expenditures of $84 million, resulting in free operating cash flow of $239 million.

This was $183 million better than Q1 of the prior year.

As discussed on our January earnings call, we expect to generate more than $2 billion in free operating cash flow for 2012.

I would now like to make a few comments regarding our capital structure.

First of all, our capital allocation priorities are as follows.

Our first priority for capital continues to be organic investments, especially related to our key growth platforms in emerging markets.

Examples of organic investments include R&D spending, new CapEx projects such as additional manufacturing capacity in emerging markets, and restructuring projects which have long-term margin benefits.

Our next capital priority is dividends.

We have a dividend policy of 30% to 45% of the trailing two years free operating cash flow.

During the quarter, we paid dividends of $174 million.

Any excess capital after organic investments and dividends are used for external investments, either share repurchases or acquisitions.

We evaluate the allocation between these investments based on the best risk-adjusted returns.

During Q1, we spent $474 million to repurchase 8.5 million shares.

In addition, we utilized $481 million for acquisitions, led by the Brooks Instrument business in the test and measurement growth platform.

Brooks has annualized revenues of $210 million.

Overall, during Q1, we returned over $600 million to our shareholders through a share repurchase and dividends.

As of the end of Q1, we have approximately $3.4 billion of authorized repurchases remaining under our buyback program.

Our debt levels increased $775 million during the quarter, with our debt to capital ratio at 32% and our debt to EBITDA at 1.4 times.

We have overseas cash of $1.3 billion and plenty of debt capacity to make additional investments.

We were pleased to complete the sale of our industrial finishing businesses to Graco on April 2 in a $650 million cash transaction.

We estimate the pretax gain on the sale to be approximately $450 million, which we'll record in the second quarter as part of discontinued operations.

The finishing equipment businesses consists of paint spray systems and technologies for a variety of industrial end markets and applications around the world.

As we have said before, acquisitions will remain a key part of our growth strategy, but we will continue to selectively divest businesses that no longer fit our core platforms or our long-term growth and return objectives.

I will now turn it back over to John, who will provide more details on the operating results, as he discusses the results by geography and individual segment.

Thank you, Ron.

Before I get to the actual segment highlights, let me take a moment to review our Q1 geographic trends.

There was a not-so-surprising theme that emerged from our Q1 results.

It's clear our North American businesses were the outperformers in the quarter, producing organic revenue growth of 7%.

I should note that Q1 industrial production levels in the United States were at mid-single-digit levels during the quarter.

Given the mix of macro data we have seen from Europe and Asia-Pacific in Q1, it's not surprising that our international organic revenues were essentially flat in the quarter.

Organic revenues in Asia-Pacific increased 3%, while Europe and South America showed modest declines in organic revenues.

As David noted earlier, while European organic revenues were modestly negative in Q1, our businesses in Europe largely performed at forecasted levels.

Now, let me move to the segment data.

As you'll note from our new slide presentation deck accompanying the conference call, we have all of our segment data essentially contained on one slide now, so my comments will relate to this particular slide.

In transportation, this segment largely consists of our auto OEM businesses, with smaller revenue contributions from our auto aftermarket and truck remanufacturing business.

Segment organic revenues grew 5.1% in Q1.

As the biggest piece of the business, auto OEM auto-builds continued to be a key driver of revenue growth.

While worldwide auto builds grew 5% in the quarter versus the year-ago period, our worldwide auto businesses produced organic revenues of approximately 7% growth.

We also delivered positive organic revenue growth for all three major regions -- North America, Europe, and Asia.

And notably, even though European auto builds declined 4% in Q1, our organic revenues grew 6%.

So, while some of this outsized performance was due to favorable customer mix, it also exemplifies the strong product penetration we have, contained within the auto OEM business.

In our auto aftermarket, our worldwide organic revenues declined about 50 basis points in Q1, as warm weather impacted windshield wiper blades for our Rain-X brand.

We encourage people to go out and buy as many windshield wiper blades as possible.

In our truck remanufacturing business, our organic revenues grew 7.4%, thanks to strong energy development activity in Canada and Western United States.

Moving to our Power Systems and Electronics segment, we continue to see very strong demand from our welding customers, while our electronics businesses experienced the reverse.

Segment organic revenues grew roughly 7% in the quarter.

Covering welding first, our worldwide organic revenues grew a very strong 18.6%, with North American organic revenues increasing 19.9%, and international organic revenues growing 15%.

As in the past quarter, strong demand from global heavy equipment manufacturers such as Caterpillar and John Deere, as well as energy projects, continue to drive welding's double-digit organic growth performance, and continue to have very, very good performance.

In electronics, the story was far less positive.

Total electronic organic revenues declined roughly 10%, as our businesses were hampered by weak worldwide consumer demand for products as well as some destocking related to these products.

The better news is that we continue to be involved in major capital equipment projects with Apple.

This will help our financial results for our electronics businesses as the year progresses.

Moving to industrial packaging, our business has largely reflected industrial production trends in the major geographies.

Put simply, North America was stronger and the rest of the world was weaker.

Segment organic revenues grew approximately 2% in the quarter.

In aggregate, our total North American industrial packaging organic revenues grew 8.4%, while our total international industrial packaging organic revenues declined 2.4%.

In our Signode steel and plastic strapping equipment businesses, worldwide, our organic revenues declined 60 basis points in the quarter.

By geography, international organic revenues fell 3.6%, while North American organic revenues increased 4.8%.

The better news was in our protective and stretched packaging businesses, which grew organic revenues 9.5% and 6.1%, respectively.

Moving to food equipment.

Equipment sales were strong in North America and weaker in Europe and the rest of the world.

In total, segment organic revenues grew 1.6% in the quarter.

Moving to the North American part of food equipment, organic revenues grew roughly 7% in Q1, as equipment sales increased 6.9% and service sales grew 6.5%.

Warewash and food machines for casual dining restaurants and supermarkets performed very well in the quarter.

The growth in service is largely attributable to productivity enhancements from our field technicians.

Once again, it was a different story internationally, where total organic revenues declined 3.8% in the quarter.

International equipment sales declined 5.6%, largely due to weakness in cooking products for institutional customers in both France and Italy.

Underlying this were project deferrals and lack of government spending, which impacted revenues.

On a related note, international service organic revenues were essentially flat in the quarter.

Moving to our Construction segment, it was once again a tale of two geographies.

Our construction results were positive in North America and declined in Europe and the rest of the world.

Please remember, though, that because our segment revenues are more weighted to international construction markets, segment revenues only grew roughly 1 point in the first quarter.

Total North American construction organic revenues increased 8.4% in Q1, with the renovation and commercial categories growing 12% and 7.3%, respectively.

For the residential category, our organic revenue grew 7% in Q1, and we continue to believe that 2012 housing starts will average approximately 700,000 units for the year and represent a firmer foundation for improved housing builds on a multi-year go-forward basis.

Moving to international, organic revenues declined 2.5% in the quarter, with European organic revenues decreasing 1.4% and Asia-Pacific declining almost 4%.

Once again, while Europe grabs all the headlines, the bigger issue in Q1 international construction was the weakening economic construction environment in Australia and New Zealand.

In our Polymers and Fluids segment, organic growth in polymers and hygiene was positive while organic growth for fluids was negative.

As a result, segment organic revenues grew approximately 2% in the quarter.

Very quickly, in polymers and hygiene, organic revenues were up 3.3% due to increased worldwide demand in both categories.

Polymer organic revenues grew 4% and hygiene organic revenues increased roughly 3%.

In fluids, organic revenues declined 1.4% in the quarter, largely due to reduced sales for some of our MRO-related products and the impact of recession in Spain.

Moving to our other construction-related segment, Decorative Surfaces, we generated reasonably strong organic revenue performance from our businesses in an assortment of geographies.

In this segment, organic revenues grew 4.3% in the quarter.

In North America, our Wilsonart high pressure laminate business produced solid organic revenue growth of 4.4%, thanks to innovation, new product designs, and ongoing penetration in commercial categories such as office furniture and retail outlets.

Internationally, our Decorative Surface business generated organic revenue growth of 4.3%.

In Europe, our businesses in France and Germany contributed to organic growth.

In Asia-Pacific, our Decorative Services business in Thailand and China produced strong organic revenue increase.

As you can see from this particular segment, just saying Europe is down on a more macro basis doesn't account for some of the activity we have in businesses where we can actually get good results in Europe.

I'll point you back to what we did on the auto area, where our European auto business actually outperformed the old metrics there.

Finally, in our All Other segment, we had varying levels of contributions from our test and measurement, appliance, and consumer packaging businesses.

Segment organic revenues grew roughly 1% in the quarter.

In test and measurement, organic revenues were up 5%, as CapEx infrastructural testing equipment cooled a bit in the quarter, especially on the international side.

In appliance, organic revenues increased 7.1% due to better consumer demand in the North American appliance sector.

We also increased our penetration with some of Whirlpool's top and highest efficiency washer products.

Finally, in the consumer packaging area, organic revenues declined 1.6%, due to flat performance from our multipack businesses and a decline in our decorating businesses.

So at this point, I'll conclude my remarks and I'll turn the call over to Ron, who will cover our 2012 forecasts.

Ron?

Thanks, John.

For the second quarter of 2012, we are forecasting diluted income per share from continuing operations to be within a range of $1.08 to $1.16.

This range assumes an increase in total revenues of 3.5% to 6%.

The midpoint of the Q2 diluted EPS range of $1.12 would represent a growth of 16% versus last year.

For the full year 2012, our forecasted EPS range for continuing operations is now $4.14 to $4.38.

This range assumes a total revenue increase of 5% to 7%.

EPS midpoint of $4.26 would be 13% higher than in 2011, excluding the Q1 2011 tax benefit of $0.33.

This EPS midpoint would be $0.12 higher than our previous forecast from January, and is driven by the first quarter $0.04 outperformance plus an $0.08 benefit from completed and forecasted share repurchases.

In addition, the benefit of $0.03 from better than originally expected base business performance is offset by higher projected restructuring costs, which took away $0.03.

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

Thanks, Ron.

Now we'll open the call to your questions.

Again, please honor our one question/one follow-up question requests.

We'll start the questioning now.

(Operator Instructions).

Our first one comes from Andy Kaplowitz.

Your line is open.

State your company, please.

It's Alan Fleming standing in for Andy this morning.

Good morning, guys.

I wanted to ask you about your 2012 revenue outlook.

It seems like you did bring the top end of the range down a little bit.

I wanted to see if that's more conservative, kind of given the uneven macro environment?

Or are you seeing particular softness in some markets, if you could comment on that?

I think our comment would be what we've seen in the first quarter was clearly softer markets in Asia.

And I think that's what we're, really, as we look forward, are projecting forward, as John said earlier, the European performance was largely in line with what we expected.

I think the big delta from a geographic standpoint in our revised guidance is more about what we see happening in Asia, which has proven to be somewhat weaker in the beginning of the year than what we had anticipated.

And at this time, we don't really see any catalyst that suggest it's going to get significantly stronger during the year.

Okay.

That's helpful.

I wanted to ask one follow-up.

What are you seeing in terms of price costs?

Is there any change in your outlook from last quarter throughout the balance of the year?

Are you seeing improved price costs?

Do you still expect next quarter to be kind of the best quarter for price costs?

So as we talked about when we put out our guidance at the beginning of the year, we expected to have favorable price costs this year, assuming that raw materials kind of stayed where they were at.

So, in the first quarter, it was a little bit better than we expected.

That's 40 basis points positive.

And we're looking -- as we look out the rest of the year, that the full year would be a similar amount -- 30% to 40% -- 30 to 40 basis points positive.

From a raw materials side, it's a bit of a mixed bag.

Resin has been up significantly, especially PET and polypropylene.

Steel has been pretty stable; stable -- flat to down in the quarter, but pretty stable from an outlook perspective as well.

And chemicals has been up at 3% to 5%.

Okay, thanks, guys.

That's helpful.

I'll get back in queue.

Rob Wertheimer.

(Operator Instructions)

It's Vertical Research Partners.

Good morning, everybody.

Good to hear you, David.

Just a couple of quick questions.

Is there any issue at all from the Evonik of the CBT resin, either directly in your products or just indirectly on autobuild that you've heard about yet?

I'll take the question, Rob.

We've checked with our auto people, and what they're telling us right now is that there is no impact on our business.

We have very little to do with the actual nylon 12.

That's actually part of, I think, principally brake linings.

So, very little to do with us directly.

Clearly, we would be more interested in what's going to happen in a non-direct way with OEMs and what it does to overall production.

What we're hearing and what we're seeing currently is that the OEMs are getting together and they're trying to get additional information, trying to source additional materials.

And there doesn't seem to be any immediate impact.

We believe there is enough inventory in the channel right now to handle this, but we'll keep you posted if we hear anything differently.

Guys, that's great (multiple speakers) -- sorry.

It's really about what happens to them and their production.

It's not a material that we're using directly.

But obviously, their extent to build vehicles will impact us if the shortage ends up cutting their production.

For sure.

Okay.

And then just a quick one on food service.

I had the impression you'd lost a little bit of share.

Maybe falsely, but just from what we heard in the channel in the US over the past year or two.

Have you -- are you gaining share?

Or are you sort of up in line with the industry, you think, this quarter?

Well, I think it depends on the segment.

I mean, if you're looking at the institutional segment, which is a big segment for us, there is no question that it's been an uneven environment for the last several years, as a lot of those projects are funded by government sources and the government funding has been uneven at best.

So that's a category that's been quite volatile, if you will, from an equipment spend situation.

I would say in the casual dining category, I would not characterize what we've done or what our performance has been as a loss of any share.

But I can tell you that as that category looks at equivalent replacements and menu changes and so forth, it does impact how equipment rolls out in those categories.

So it's not an even process.

But I would say, overall, Rob, no, I don't think I would characterize us having lost any significant share positions.

Rob, I would point you back to the numbers I gave earlier when you talk about North America.

Our North America's organic revenues grew approximately 7% in the quarter, and both equipment and sales were up roughly 7%.

So I think that (multiple speakers) --

Which would have been our strongest quarter in some time.

(multiple speakers) Yes.

One of our better quarters.

So I think that that -- I think that our food equipment people are encouraged by what they see in Q1 and they're going to try to build on that.

Thanks, gentlemen.

Jamie Cook.

(Operator Instructions)

Credit Suisse.

Two questions.

One, on the lower -- slightly lower sales forecast, can you just talk about whether there's any change in your incremental margin assumptions, with and without restructuring and acquisitions?

And then I just guess my second point, just in terms of questions, longer-term, in terms of your longer-term initiatives that you talked about in the beginning of the quarter, we're hearing more and more about, can you just talk about the latest on what you're thinking about potential divestitures?

Are you willing to put a new number out there, now that the finishing business is officially gone?

I mean, a percent of assets at this point that you think you would potentially divest or are looking at for divestiture?

Jamie, let me let Ron answer the beginning of your question and I'll take the latter part.

Thank you.

So the question on margins, incremental margins.

So, as you saw, we've taken down the overall revenue guidance a bit, but we've taken the overall earnings out, and from a base business performance perspective, it's adding $0.03 per share.

So we are getting some incremental margin benefit from the core businesses.

The incrementals in the first quarter for the base businesses were 53%, so we had a very strong margin performance quarter from our base businesses.

We expect to see very strong incrementals continue throughout the year.

Overall, for the year, probably in the close to 40% for the full year on base business incrementals.

So, that's certainly helpful.

Offsetting that is obviously the increased restructuring.

We bumped that up a little bit, which took $0.03 out of the guidance.

And then just because I think last time, you were guiding more to like a 35% incremental versus the 40% on the base business, what's changed?

Is it the price feeling more comfortable with price costs?

Is it mix with more North America?

I just want to make sure I understand it.

It's probably a little bit of price costs, but it's really just better performance, better efficiencies, better cost reduction benefits, et cetera.

Okay.

Thank you.

And then I'm sorry, the last question, just on divestitures?

Yes.

On portfolio management, Jamie, what I would say is that, as we've said over the last probably year-and-a-half to 2 years now, we were taking a lot more aggressive look at our own portfolio of businesses, and being more proactive in looking at things that we consider to be core or non-core pieces long-term.

And as you pointed out, the finishing businesses that we sold to Graco in the first quarter, or I should say in early April, were an indication of a set of businesses that we considered no longer core.

And so we moved forward to find the appropriate divestiture strategy for those.

There are other businesses like that, that as part of our proactive portfolio management, we'll consider.

And undoubtedly, there will be more activity.

But at this stage, I wouldn't want to be in a position to quantify it because we're not far enough along to talk about those things publicly.

But we have an active program underway and you can expect that there will be other divestitures, as you'll see, come forward over the coming months and years.

Can I ask the question slightly differently then, relative to, you know, when we were talking about this, perhaps, at the Analyst Day in December, or even six months ago, is the amount of businesses potentially for divestiture larger, why you don't put a percentage up?

Or is it about the same?

Well, if you look at the pattern here, I mean, the divestiture of the finishing business was clearly a larger divestiture than the ones we've done prior.

So, there's no size range that is off limits, if you will.

And I would say that based on what we've been looking at, the size range is probably somewhat larger than what we had seen in the past.

In the past, if you go back, I think the time period from '06 to 2010, the average divestiture was more in the $50 million to $60 million range.

And clearly, this was a $375 million divestiture.

So, I would say that the size of potential divestiture will likely be somewhat larger going forward than what our past track record has been.

Okay.

Thank you.

I'll go back in queue.

John Inch.

(Operator Instructions)

Bank of America.

(multiple speakers) First on construction, now I think, John Brooklier, you called out softer construction in Australia and New Zealand.

Didn't that part of the world have some weather issues, though?

Yes, it -- there's been some weather issues, but we think it's a little bit more economically sensitive than that.

If you really look what's going on in Australia, the economy is slowing.

Some of the mineral-related exporting going on to China has slowed a little bit as China has slowed a little bit.

So, the -- I would say the service side of the economy in Eastern Australia is certainly a lot slower, as is the Western side, where it's really more natural resources; that has slowed a bit too.

Overall, has added up to a slower economy, which has impacted their housing market.

(multiple speakers) I think housing is probably one of the big key areas for them right now.

(multiple speakers)

Yes.

So then if we back up the construction lens, if you will, and look at North America -- obviously, well, you gave us the results, right, in the first quarter.

How did that play out as the quarter progressed?

And then the question really comes down to, did you see or do you think you saw a bit of a pull-forward because of the warm winter that we had, say, into December or January, February?

And I mean, the obvious question is, was March much softer?

Or has the trend still been pretty consistent?

You know, I think, John, what we've seen -- I mean, there's no question the warm months of January through March pulled some things forward.

And I don't think it's going to change the trajectory of housing starts for the year.

I think it gave us a temporary sort of lift forward.

The overlying -- underlying dynamic still remain with the inventory levels and housing prices the way they are.

So, while I think we saw some nice short-term momentum, I don't think that's something we expect to see sustained.

There are some markets where the residential builds will begin to actually go up because of the local market conditions.

You know, lack of available inventory or price points that have actually started to rise.

But I think it's still -- 2012, I think, is still a year to sort out over housing starts overall.

But if you look at the overall numbers, we're expecting housing starts for the year to be closer to 700,000, which would be a -- about a gain for the year in the mid-teens in housing starts.

So it would be a nice welcome view to see that kind of return, but I wouldn't view the first quarter as the first data point that we can draw a line from and expect that rise to continue.

Yes.

No, that makes sense.

All else equal, if your mid-teens growth rate holds, right?

I think you did [up] 7% in resi North America.

That should actually get better as the year then progresses?

Correct.

One last question on the simplification scaling up.

You did, David, raise your guidance.

You didn't just tighten the low end of the range.

I'd always sort of been under the impression these initiatives were perhaps going to require a little bit of cost on ITW's part too, you know, for a variety of different potential things.

Is that true?

And is that in your numbers?

Or is that -- a lot of this is still kind of in a fact-finding stage, and the more cost saves coupled with the cost spending or so forth is really about ['13] versus ['12]?

Well, I would say, John, it's both.

But primarily, the costs that would be associated with some of these larger initiatives have not been fully represented in the guidance, because we don't have all the data yet.

Some of it is represented in some of the restructuring that we've obviously put forward, which is higher than we had originally anticipated.

But I think the best way to look at this is that we're still gathering the data, and there will be some investment involved in achieving some of what we think will be some significant savings along the way.

And I expect that, towards the latter part of the year, we'll have enough data to be comfortable giving some reasonable direction as to the size and significance of what we think will be happening.

But it's a longer-term sort of a process.

So we're talking about things that would happen in 2013 largely and beyond, with, I think, some reasonable quantification towards the end of this year.

Yes.

That makes sense.

Thanks very much.

Ann Duignan.

(Operator Instructions)

It's Ann Duignan, JPMorgan.

(multiple speakers) Just on the back of John's question, when I look at initiatives like strategic sourcing, I can't help but think that down the road, the consulting firm comes back and says, gee, now you need an ERP system; you need people analyzing data.

How do you balance, David, investing in some of these initiatives in the near-term versus the kind of SGA creep in centralization over the long-term?

Well, I think it's like any major initiative.

You evaluate what you think the benefits are.

And, obviously, benefits of significance across the enterprise will require some level of investment in talent and resource.

But, you know, we'll have to balance that in terms of what we think makes sense, where we think the biggest payoffs are, and the ones that we think will drive the greatest benefits in the organization.

So as we assess those, we'll have to determine what investments will be required to achieve what we think will be reasonable and significant savings.

So, hard to answer the question until we have more date.

But, clearly, we'll be in a position to be making more investment around that.

And from a centralization standpoint, there's no question we'll want to do more coordination around some of these larger areas of spend, where we can be certain that we're taking advantage of our scale opportunities, and in a much more formal way than we've done in the past.

And I will add that we are -- we do feel the decentralized business model is the right model for us.

And we're not changing that because of strategic sourcing.

So, the focus of the study has been, how do we do a better job of approaching sourcing throughout the Company in our decentralized operating model?

So, we shouldn't be concerned that down the road, you'll be building a new corporate headquarters somewhere?

(laughter) You've seen our old one, Ann.

We might paint the existing one.

(laughter)

Oh, that's one of the things we love about you.

So we don't want that to change.

But just building on that a little bit, I know you said that you will communicate the costs and the benefits of all of these changes late in 2012.

Can you just talk about -- I mean, that's a year of data analysis.

Can you just talk about why it will take you until late 2012 to assess the opportunities and the costs?

Well, because I think, first of all, if we're going to give you any indications with numbers, you're going to want those numbers to be reasonably solid.

And those numbers are going to involve, as you accurately pointed out at the beginning of your question, some investments in both people and systems.

And so we want to be certain that before we start signaling what we think some of the potential savings are here, that we're pretty solid on what the approach is going to be and the timeframe associated with that.

So I don't think we're trying to hedge our bets.

What we're trying to do is be thoughtful about what we communicate and what we think is realistic.

And I think for us to digest that, it's going to take that kind of time.

And also, as David said, these are multiyear long-term initiatives.

So, as we figure out how to approach these major initiatives within the Company, we want to make sure we do it the right way, and make sure we -- at the same time we're doing all this, continue to deliver on our results that you'd expect.

Okay.

Well, I wish you guys luck because I know it's kind of a cultural change.

So we'll check in at the end of the year, I guess.

Well, it is somewhat of a cultural change, but, Ann, as you know, you've followed us a long time, we've been through several cultural nuance changes that have been successful.

And I'm quite confident that we will deal with this as well.

Okay.

Good.

I'll get back in line.

Thanks, guys.

Deane Dray.

(Operator Instructions)

It's Deane Dray with Citi.

David, be interested in hearing more about your thoughts -- we've discussed how you're thinking residential plays out, but how about the non-res cycle?

Just in terms of the indicators that you think are important to ITW, what kind of visibility and how you think it plays out the balance of the year?

You're talking about non-res here in the US?

Yes, first.

Well, the data, certainly, from a storage standpoint, for commercial, has finally begun to show some improvement numbers.

Year-to-date, the commercial construction square footage awards is up 7%, with some notable categories up that have been down for a while.

Retail is up 28%; warehouses are up 80%, so, I think we're beginning to see the turn.

However, it is still regional.

There are some markets where we still have a lot of overbuilt and vacant space.

The two big exceptions to improvement in commercial remain offices and education.

So, I'm of a view that we've begun to turn the corner, but I don't think we're going to see a breakout in commercial construction until probably sometime in 2013.

But it would appear, based on the data, the numbers, and the activity in some of the major markets, that we're quite close.

And then how about outside the US?

Sorry?

Outside the US?

Outside the US?

Well, that's a mixed bag.

Europe, reasonable numbers in the north of Europe in Germany and in France.

A lot of the European commercial construction, as you know, still has government financing tied to it.

So, some of this is going to play out based on what happens with their budgets and how they view deficit spending.

But Europe, for us in the first quarter, proved to be fairly good in commercial.

So, hard to get a long-term read based on what's going to happen with their budgets longer-term.

Clearly, the south of Europe is going to be troubled for some time.

Spain and Italy, in the public spending there around construction, that's going to be troubling for some time to come.

The Asian construction numbers remain reasonable and I think we'll continue to see some boost there, more around commercial than around residential.

And then just on the business update on welding, we're back into some eye-popping numbers there.

How much of that is true end-market demand?

Or might there be some restocking going on?

Well, there's probably some restocking going on, but frankly, the end-market demand in the heavy equipment and the energy-related sectors, oil and gas, has been robust.

And I mean, I can tell you that in some of our channels, particularly in North America, there's not a lot of stock in the channel.

So, it really is -- these are markets that are performing well and have what looks like a reasonable runway, at least for the next couple of quarters.

The oil and gas -- the energy-related infrastructure will probably be longer than that.

So, I think we're still pretty -- we were obviously surprised by the strength overall that we saw in Q1; but if you go back and look at Q3 and Q4 of last year, we were also surprised by the strength there.

So I think these trends are trends that have some reasonably good legs to them for at least the next couple of quarters.

Okay.

Thank you.

Henry Kirn.

(Operator Instructions)

It's UBS.

Sorry to beat the initiative horse again, but what drove the decision to go forward today?

What's different now versus five years ago or two years ago?

Well, let's see.

What's different now than five years ago, about $5 billion of acquisitions (laughter) and a whole host of businesses that had really not participated in some of these larger-scale opportunities to see what kind of benefits might be available.

It had been probably eight to possibly 10 years since we had done something similar on a sourcing level.

And most of that had been around three or four significant raw material categories.

As we began to look across the total spend, it became apparent that there was more out there than just what we had looked at in the past, and that the size and scale of the Company had changed enough that this really required a fresh look.

I mean, an $18 billion company looking at this as opposed to an $11 billion company, and obviously, there's some significantly different scale opportunities.

So we thought it was time for a fresh look.

That's helpful.

And then, on electronics, how much did the destocking hurt the segment results?

And how much more is left on destocking?

Oh, that's a hard one.

A lot of the electronics is related to consumer products, and it's hard to get a read on how much of that is channel destocking.

But certainly, a significant portion of that has been.

And it has been a volatile market for some time up and down.

I mean, we were talking about that as being a tough market for us in 2010.

And in the first quarter of 2011, we were comping things that were [above] 50%.

So, hard to say with that market.

It is clearly a volatile market and we're talking about cell phones, PDAs, computers, so you've got a mix of different products -- flatscreen TVs.

You've got a lot of different consumer products in there with different demand cycles right now.

So we expect that that's going to still be volatile for a while.

Henry, I think we believe that the destock -- larger level of destocking took place in Q4 or later last year.

And there was some element of destocking into Q1.

But again, to David's point, it's very hard to get precision around those numbers.

But I think on a -- from conceptually, we think more of the destocking is probably taking place.

That's helpful.

Thanks a lot.

I'll head out to buy some wipers.

Please.

Please.

And the Rain-X.

And the Rain-X, please.

(laughter)

Andy Casey.

(Operator Instructions)

Good morning and right to Henry's last comment.

Never thought I'd hear windshield wipers called out on the call.

(laughter)

You just never know, do you, Andy?

Never.

Never.

Next it will be the doughnut machines.

Hey, you never know.

Yes.

A couple of quick questions.

A lot has been covered.

What was the end of quarter share count?

I'm not sure I have that handy.

(multiple speakers) [485], I think is what comes to mind.

We can follow-up a little later (multiple speakers) for you, Andy.

Okay, thank you.

And then I guess I'm searching for a little bit more granularity on the international construction markets.

Was there any heartbeat as the quarter progressed in those markets, Europe and Australia specifically?

Well, you know, Europe performed actually reasonably well.

But as I said earlier, it's a tale of two stories -- the northern part of Europe versus the Southern.

I think the one that was the weakest that probably told the story for us was Australia.

And I think John talked about that earlier, some of the economic issues there, the housing market has slowed significantly.

The economy there is slowing significantly.

And they have some currency translation issues down there as well, as they are buying a lot of their imported goods in US dollars.

So that's probably the one that -- Australia is probably the one that caught us with the biggest surprise.

And in the retail segment down there, where we have a reasonable presence, this is where we expect to see some pretty good retail activity.

And that just hasn't picked up at this stage.

Okay, thanks.

And then just one last one, a question on the strategy.

When other companies have talked about starting transformations, strategic pricing is typically discussed.

I wouldn't imagine that you're a [multiple] of cost type business, but is that part of what you're investigating?

Or is it all strategic sourcing?

Let me understand the question.

Strategic pricing versus --?

No.

When you go after the strategic sourcing and try to leverage what you have, just steps that are taken to make sure that you don't have any price leakage.

Oh, yes, that is definitely part of what we are talking about.

Yes.

And that is linked to some of the work that we're doing on a commercial side that we're going to bring back together on the sourcing side.

So, yes, I would expect that we're going to see some changes coming out of that as well.

As you know, we have a number of global platforms where we already do a fair amount of strategic pricing across the platforms.

Automotive is certainly an example of that, as is appliance, and certainly, across some of our welding markets as well.

But yes, that's clearly something that has opportunity with it.

And also a benefit of the business simplification initiative, when we have scaled up businesses that are larger, we have a better opportunity for coordinated pricing across bigger businesses.

Okay.

Thank you very much.

Ajay Kejriwal.

(Operator Instructions)

Ajay, FBR Capital Markets.

Thanks for providing color on longer-term initiatives.

And maybe just to follow-up on the scale-up of businesses, could you maybe talk about what that could mean in terms of combining businesses?

I thought I heard $100 million average revenues.

Does that mean the number of subsidiaries get cut in half?

Is that something that could happen over the next couple of years?

Clearly, it means that the number of business units will be fewer.

And as I said in my comments in the beginning, the ones that would be consolidated are largely ones where they have similar customers, markets, and products already.

But yes, it would result in fewer business units, and obviously, better operating efficiencies inside those business units, and lower overhead costs.

So, hard to predict exactly how many business units, how many fewer business units, but it would be a significant number.

If you look at the average business units that we had and average business unit size that we had in 2010, it would have been closer to $30 million.

So, if you just take that math and look at $100 million, it would suggest perhaps one-third -- two-thirds less business units.

We're not far enough along to predict that, because we're not doing it just as a math exercise.

But there will be a significant reduction in individual business units as we've called them.

And a lot of those services and approaches will be consolidated under one umbrella in those cases.

Good.

That's helpful.

And then on strategic sourcing, I thought you had mentioned steel resin chemicals, a couple other items.

Maybe if you can talk about the total buy or the spend that you're looking to target?

And any sense on the size of the opportunity there?

I know it's a very, very early but --?

Yes, I think, certainly, as we've said, when we're ready to start getting into some specifics around numbers and benefits towards the end of the year, that will be part of what we talk about.

We're not ready to get into that at this point.

Well, as you can imagine, I mean, the size is significant in terms of the spend in these categories.

But as Ron says, until we've got better data, we really don't want to get too far ahead of ourselves and communicate data here that is premature.

But these numbers are big, obviously.

And you're looking at the total spend across these broad categories you've mentioned?

Yes.

We're looking at total spend.

Excellent.

Thank you.

Nigel Coe.

(Operator Instructions)

Nigel Coe from Morgan Stanley.

David, hello, as well.

Just wanted to kind of dig into what you were just talking about, taking down the number of business units by, let's say, two-thirds.

Can you just maybe remind us what level of G&A overhead you have in each of these operating companies?

You know, be it finance, HR, et cetera.

And then maybe if you could then talk about, as you go through this process, where you see the most opportunities in terms of gross margin versus SG&A overhead?

So -- and the first question, the typical business unit is run as a stand-alone business, which means it has a general manager, a controller, typically HR support, and any of the other functional disciplines you would need to run a business.

They typically would have a stand-alone system, although in some cases, we do have business units that share systems across multiple business units, especially when they're located in the same general area.

So that's the -- kind of the SG&A profile of a business.

We've generally been pretty efficient at running.

So these are pretty lean overhead structures.

If you look at our overall overhead levels versus our peers, we certainly compare favorably.

But as we scale up, there certainly will be some opportunities to leverage some of these overhead functions across a bigger business unit.

And therefore, result in some cost reductions.

Right.

I mean, look at your SG&A as a portion of sales is about 18% or thereabouts.

It's pretty -- compares very favorably to your peers.

But I'm wondering, as you drive joint procurements, do you think there's more opportunity on procurement versus G&A?

Or do you think the two are pretty even?

Yes, again, it's hard to say.

I mean I think there's big opportunities in both.

And certainly, as we move through this and figure out how to approach this in detail, and we'll be ready to share that with you towards the end of the year.

Okay.

I think we'll clearly see significant opportunities in both.

Okay.

That's clear.

And then just quickly on the -- coming back to the portfolio.

I mean -- I don't know, I mean, that there are obviously some numbers out there in the market in terms of what you could do, in terms of proportion of sales.

But how do you feel about reallocating the capital?

Because let's say you realize $3 billion, $4 billion proceeds from this process.

I mean, do you wish to replace that with more of an emphasis on acquisitions versus buybacks?

Or is that pre-disposed?

Well, it's certainly to be decided, right?

I mean, we don't have that kind of capital to put to use right now.

If we did, we'd have to go through our capital allocation strategy and figure out how we utilize that.

So we've, I think, clearly laid out our capital allocation priorities.

In fact, we've got a slide in the deck today that lays that out.

Organic investments is our first priority, then dividends, and then external investments.

And external investments, share repurchase versus acquisitions, is really based on the specific opportunities at a point in time, which has always -- has the best risk-adjusted return.

So, for instance in the finishing, say we have some proceeds from the finishing divestiture.

We intend to use those to repurchase shares.

That's one of the reasons that our share repurchase forecast went up for the year.

Okay, that's very helpful.

Thanks, guys.

I think we will end it there with that question and answer.

We want to thank everybody for joining us on today's call.

And we look forward to speaking to you at some future point in time.

Thank you very much.

At this time, that will conclude today's conference.

You may disconnect and thank you for your attendance.