Illinois Tool Works Inc (ITW) 2012 Q2 法說會逐字稿

Good morning and thank you for standing by.

(Operator Instructions).

This conference is being recorded.

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

I would now like to turn the call over to John Brooklier.

You may begin.

Thank you, Kathy.

Good morning, everyone, and welcome to ITW's second-quarter 2012 conference call.

As is our normal practice, our CEO, David Speer, and CFO, Ron Kropp, have joined me to discuss our Q2 financial results, as well as update us on our longer-term strategic initiatives.

Here's a quick agenda for today's call.

David will shortly provide a brief update on our ongoing long-term initiatives, as well second-quarter highlights and commentary on our second-half forecast.

Ron will cover our Q2 financial results in more detail.

I will then talk about our Q2 geographic performance and segment results.

Ron will then come back and provide a detailed update on our Q3 and full-year forecast.

Finally, we will open the call to your questions, and per our practice, we ask for your cooperation on our one question, one follow-up question policy.

As normal, we have scheduled one hour for today's call.

This presentation contains our financial forecast for the 2000 [sic -- see Presentation, "2012"] third quarter -- full year, as well as other forward-looking statements identified on this slide.

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

Moving to the next slide, let me remind everybody that our telephone replay for this conference call is 888-566-0396.

The playback number will be available through midnight of August 7.

Now, let me turn the call over to David, who has some brief introductory comments.

David?

Thank you, John.

Before I comment on our strong second-quarter results, let me update you on our three long-term initiatives that we introduced to you all last quarter.

To remind you, our three key areas of focus going forward are business structure simplification, strategic sourcing, and portfolio management.

We continue to make good progress in all three categories.

For business simplification, we have been actively developing and communicating our plans to key internal and external constituents.

Internally, a host of our businesses have reviewed and are in the midst of announcing organizational changes to support our larger revenue base businesses, consolidated organization structure where appropriate, and focused on similar customers and end markets, while maintaining the intimate customer and market interfaces critical to our innovation initiatives and business agility.

In strategic sourcing, we have made key decisions regarding the sourcing approach in our organization, as well as identified the first and second phase of direct and indirect sourcing activities.

As to portfolio management, part of our strategic plan process is the identification of non-core businesses that no longer fit our long-range plan, a number of which could likely be divested in the future, as we have done recently with the finishing businesses and two consumer packaging businesses.

We will continue to develop and implement these plans as we move forward.

As promised, we intend to provide some enterprisewide data by December that will begin to quantify the financial impact of these initiatives over the next several years.

Now let's move to our second-quarter results.

We were very pleased with our strong second-quarter operating performance, despite end market slowing in a variety of international end markets and the significant currency headwinds we faced in the quarter.

Thanks to our differentiated 80/20 operational focus, our businesses produced very strong operating-margin improvement in the second quarter, due to excellent management of input and overhead costs.

We also continued to return significant levels of cash to our shareholders through our share purchase program, as well as our strong dividend payout.

Looking ahead to the second-half 2012, we lowered our EPS forecast range, given the ongoing negative impact of currency translation and the expected continued sluggish demand in international end markets, as well as additional restructuring expenditures that will now total over $100 million for the year.

Ron will cover our forecast in more detail later in the call.

Now let me hand it over to Ron, who will talk about the strong second-quarter performance.

Ron?

Thank you, David, and good morning, everyone.

Here are the highlights for the second quarter.

Revenues increased 0.9% due to higher base and acquisition revenues, offset by the unfavorable impact from currency.

Operating income was $770 million, which was higher than last year by $59 million, representing income growth of 8%.

Operating margins of 16.5% were 110 basis points higher compared to last year.

Diluted income per share from continuing operations was $1.11, which was close to the midpoint of our range.

Finally, free operating cash flow was $409 million for the quarter.

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

Our 0.9% revenue increase was primarily due to the following factors.

Base revenues were up 2.3%, with North American-based revenues increasing 5.3% and mixed international-based revenues that overall were down slightly year over year.

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

Acquisitions, net of divestitures, added 3% to revenue growth and currency translation decreased revenues by 4.5%, largely due to a weaker euro.

Operating margins for the first quarter of 16.5% were 110 basis points higher than Q2 2011.

Base margins increased 150 basis points, with higher sales volume contributing 60 basis points.

The positive impact of non-volume items increased base margins by 90 basis points versus last year, primarily due to 60 basis points of price/cost favorability.

In addition, margins were lower by 40 basis points due to the dilutive impact of acquisitions, and net operating margins from acquisitions, excluding amortization and other acquisition accounting, were 14.4% for the quarter.

Overall, despite uneven market demand we had a strong second-quarter earnings performance, reflecting our decentralized operating model, which allowed us to react quickly to market conditions, as well as our established 80/20 operating discipline.

Looking at working capital and cash flow, Accounts Receivable and DSO of 61 days was lower than last year, and inventory and month on hand declined to 1.8 months.

ROIC for the second quarter was 16.3%, which was 70 basis points higher than Q2 of last year.

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

The second-quarter cash provided from operating activities was $509 million with capital expenditures of $100 million, resulting in free operating cash flow of $409 million, which was $184 million better than Q2 of the prior year.

On a year-to-date basis, we have generated $648 million in free operating cash flow and we expect to generate close to $2 billion in free operating cash flow for full-year 2012.

Turning to capital structure, our capital allocation priorities continue to be as follows.

Our first priority is organic investments, especially related to our key growth platforms in emerging markets.

Examples of organic investments include R&D spending for new product innovation, additional investments in manufacturing capacity, and restructuring projects which have long-term margin benefits.

Our next capital priority is dividends.

During the quarter, we paid dividends of $172 million, and our current dividend yield is almost 3%.

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

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

During Q2, we continued our robust share buyback activity with $526 million in repurchases, which brings us to $1 billion in share repurchases through first half of 2012.

As of the end of Q2, we had approximately $2.9 billion of authorized repurchases remaining under our buyback program.

In the first half of 2012, we returned over $1.3 billion to shareholders through share repurchases and dividends.

In addition, during the quarter we utilized $106 million for acquisitions, over 80% of which continues to focus on our growth platforms in emerging markets.

Our debt level increased to $141 million during the quarter, with our debt to capital ratio at 33% and our debt to EBITDA remaining at 1.4 times.

Our cash balance overseas is $1.7 billion, and we have plenty of debt capacity to make additional investments.

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

Thank you, Ron.

Before I get to the actual segment results, let me take just a moment to review our Q2 geographic trends.

Our total revenue growth, excluding currency impact, was 5% in Q2, with organic revenues growing approximately 2% versus the year-ago period.

And our Q2 results were similar, geographically, to Q1.

North America businesses delivered relatively strong performance in Q2, producing organic revenue growth of 5%.

Overall, international organic revenues were down modestly in the quarter.

Europe's organic revenues declined roughly 2%, and Asia-Pacific's organic revenue growth of 2% -- while it grew 2%, it still lagged our expectations, and that's mainly due to China's flat organic revenue performance in Q2.

Moving to South America, organic revenue declined 4%, and that was largely driven by softness in the Brazilian economy.

Now let's move to our segment results, and as previously noted, total Company organic revenues increased roughly 2% in the quarter.

The biggest organic growth contributors were produced by our Power Systems & Electronics, Transportation, and businesses in our all-other segments.

Nearly all of our segments contributed to operating-margin improvement of the 110 basis points Ron talked about earlier.

And notably, we saw the most operating-margin improvements in our Food Equipment, Decorative Surfaces, and Industrial Packaging segments.

Now, let's move to the next slide and let's do a -- let's drill down deeper into our segments.

Please remember that our Transportation segment largely consists of our auto OEM businesses, with smaller revenue contributions from our auto aftermarket and truck remanufacturing businesses.

Total segment revenue -- organic revenues grew 3.4% in the quarter versus the year-ago period.

In our flagship auto OEM business, again that was a key contributor to organic growth with worldwide organic revenues increasing 6%.

Notably, our North American organic revenues increased 8% and Asia-Pacific grew 24%, thanks to our growing presence with Chinese auto OEMs.

Our most notable example of strong product penetration was in Europe, where our organic revenues grew 1% even as auto builds declined 7% in Q2 on a year-over-year basis.

Moving to auto aftermarket, organic revenues fell 2% as consumer spending slowed in Europe and China, which resulted in negative organic revenue performance in those areas.

In North America, the auto aftermarket business produced modest organic revenue growth, as discretionary consumer spending continued to be soft.

And finally, in our truck remanufacturing business organic revenues grew 4%, largely due to strong energy development activity in Canada and the western United States and the need for our retrofitted specialty trucks.

In our Power Systems & Electronics segment, we continue to see very strong demand from our welding customers, while our electronics businesses saw real improvement in the equipment and assembly side of the business.

Total segment organic revenues increased 5.2% versus the year-ago period.

In welding, our worldwide organic revenues grew 9%, with North America organic revenues increasing 11% and international organic revenues growing 2%.

While our Q2 organic numbers were down from our -- what I'll call our red-hot and unsustainable Q1 performance levels, they still represent very solid growth metrics.

We continue to see relatively strong demand from global equipment manufacturers who serve end markets such as oil and gas, mining, and agriculture.

In electronics, the story was one of improvement.

As noted earlier, worldwide organic revenues for electronics increased 2% in the quarter, with electronics equipment assembly growing 14% due to strong order rates from key electronics customers.

Organic revenues for our other components businesses, what we'll call all other in the electronics piece, declined 5% as consumer demand for basic cell phones and computers was weaker.

Let's move to our Industrial Packaging segment.

Our businesses once again essentially reflected industrial production trends in the major geographies.

Our North American performance was stronger and the rest of the world was weaker.

Segment organic revenues were essentially flat in the quarter.

In aggregate, our total North American Industrial Packaging organic revenues grew 4%, while our total international Industrial Packaging organic revenues declined 2%.

In our bellwether Signode steel and plastic strap and equipment businesses that provide end-of-the-line packaging for finished goods, worldwide organic revenues declined 1% in Q2.

And by geography, international organic revenues declined 4%, while North American organic revenues grew 3%.

Finally, in our stretch packaging business, trends were better.

Worldwide organic revenues grew 3% in Q2, largely based on better equipment sales.

Moving to Food Equipment, it was once again a tale of two geographies with North America outperforming the international businesses.

Segment organic revenues increased a little bit over 1% in the quarter.

In North America, organic revenues were up 3% with equipment sales increasing at a similar level.

Equipment sales benefited from an uptick in demand for cooking and slicing products to private-sector accounts, including casual dining restaurants and supermarkets.

Institutional accounts, such as government, schools, and hospitals, continue to be constrained by limited budgets.

On the service side, organic revenues grew 2% as the service organization continued to focus on key customers.

Internationally, total organic revenues were flat in Q2 as strength in sales to Asia-based customers in Japan, China, and Thailand was offset by the weakness in France and Italy.

In particular, businesses associated with cooking products for both institutional and government-related customers remained weak in the quarter.

Moving to our Construction segment, the decline in demand in Europe and Asia-Pacific was enough to offset the better end-market metrics associated with the North American recovery in the residential and renovation construction categories.

As a result, segment organic revenues declined about 0.5% in the quarter.

Internationally, organic revenues declined 4% in the quarter as Europe and Asia-Pacific organic revenues fell 6% and 1%, respectively.

In Europe, which was the hardest hit, construction end markets were hit by a lack of spending by both private- and public-sector customers, especially in the commercial construction category.

For example, according to EUROCONSTRUCT, commercial starts declined 23% in Q2.

In Asia-Pacific, Australia and New Zealand experienced modest improvement in the residential construction category, compared to prior quarters.

Now the better news was in North America as organic revenues increased 8% as the residential, commercial, and renovation categories were all positive in the quarter.

Residential construction organic revenues grew 13%, while both commercial and renovation construction organic revenues increased 5%.

For residential construction, we continue to be more optimistic about additional recovery in housing starts in 2013 and beyond, based on the most recent [HP] housing start numbers of 760,000 units.

Moving to our Polymers & Fluids segment, organic revenues were essentially flat as North America produced positive organic-revenue growth, while internationally, our European, Asia-Pacific, and Latin American businesses all experienced and had to deal with slowing end-market demand.

In our polymers and hygiene category, our organic revenues were flat on the quarter, and that's due to positive organic revenues resulting from China transportation and appliance market, as well as the North America and military-industrial end (inaudible) markets were offset by slowing market activity in Europe and Brazil.

In our fluids category, organic revenues declined roughly 1%, and that once again was due to Europe offsetting revenue gains from our businesses in North America, Russia, and India.

In our Decorative Surfaces segment, we generated very strong organic revenue performance from businesses in a variety of geographies.

Segment organic revenues grew approximately 5% in the quarter.

In North America, our Wilsonart high-pressure laminate business produced very solid organic revenue growth of 6%, due to ongoing product innovations largely targeted to commercial construction-related customers.

Notably, Wilsonart continues to be an industry leader through its premium high-definition, higher price-point product that simulates natural stone.

And internationally, our Decorative Surfaces businesses generated organic revenue growth of 4%.

In Europe, both our UK and French business contributed to our organic growth, and in Asia-Pacific, China grew organic revenues mid-single digits, so all in all, a very good performance by this segment.

Finally, in our all-other segment, we had positive organic-revenue growth contributions from both our test and measurement, as well as our appliance businesses.

Segment organic revenues grew 2.6% in the quarter.

As noted, test and measurement organic revenues grew a strong 8% in Q2 due to still reasonable CapEx spending for structural testing equipment in North America, Europe, and China.

Instron's ElectroPuls environmentally-friendly equipment continued to have strong market acceptance in the quarter.

In the appliance category, our organic revenues grew 3%, mainly due to key energy-efficiency programs with major North American customers, such as Whirlpool.

The only downside in the major categories in this segment was in consumer packaging, where organic revenues declined 1%, and that was largely due to ongoing softness from key multipack beverage customers in North America and Europe.

Our decorating businesses produced strong organic revenue growth in Q2.

So this concludes my remarks on this segment, then I'll now turn the call over to Ron, who will talk about the 2012 forecast.

Ron?

Thanks, John.

For the third quarter of 2012, we are forecasting diluted income per share from continuing operations to be within a range of $1.03 to $1.11.

This range assumes total revenue growth of negative 1% to plus 1% largely related to currency, as well as softening international end-market conditions.

The midpoint of Q2 diluted EPS range would represent a growth of 7% versus last year.

For the full year of 2012, our forecasted total revenue growth is now between 1% to 3%, which is lower than our April forecasted midpoint by 400 basis points.

Our forecasted EPS range for continuing operations is now $4.03 to $4.19.

The EPS midpoint of $4.11 would be 10% higher than 2011, excluding the Q1 2011 tax benefit related to the Australian tax matter.

This EPS benefit is $0.15 lower than our forecast from April and is driven by an $0.08 reduction from lower base business revenues, largely due to slower international end-market demand, as well as a 7% impact due to expected declines from weaker foreign currencies.

An increase in expected restructuring costs took away $0.02, but was more than offset by a $0.04 benefit from year-to-date forecasted share repurchases.

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

Thanks, Ron.

We'll now open the call to your questions.

Please honor our one question, one follow-up question request.

We're now ready take questions.

(Operator Instructions).

Stephen Volkmann, Jefferies.

Hi, good morning, guys.

I wonder if you could comment, please, on the acquisition pipeline.

Given what's going on in the global economy here, is it sort of less likely that we're going to get things over the goal line over the next few quarters, and whatever other commentary you might have in that regard?

Steve, I think I would characterize the acquisition activity as -- from our standpoint entering the year, we viewed this as a year that we were going to be challenged from a valuation metric standpoint, and that certainly has been the case.

Those properties that are out there that we're interested in have had fairly high expectations in terms of valuation.

That hasn't stopped us from continuing our work in those categories, but I would say the way I would describe the acquisition environment for us right now is it's modest.

We have concluded through Q2, I believe, about $500 million in acquired revenues, and don't expect the second half to be significantly more boisterous, if you will, than what we've seen because I think valuations are the primary concern.

In terms of getting things done, I think the early -- any of those that have significant European or Asia-Pacific concentration require a fair amount of due diligence at the moment to really determine their go-forward positions in those geographies and obviously factoring in the weakness that those geographies have seen this year.

But I don't think it will have a major impact on us closing deals that we have agreed upon.

But I do think the market environment for us will remain challenging from a valuation-metric standpoint.

That's probably our primary issue, rather than being able to look at specific geographic concerns.

And I will add that we are targeting our strategic growth areas for acquisitions.

As an example, we talked about last quarter we acquired in the first quarter Brooks Instrument in our test and measurement segment, which is $200 million-plus in acquired revenues.

Okay, that's helpful, but, David, just to clarify, do you think you can get anything like $500 million done in the second half?

That sounds like a stretch to me.

Oh, no, I'm sorry.

I didn't mean that, no.

No, I wouldn't be able to predict a second-half number at the moment.

I mean, just looking at the pipeline, there's a lot of what-ifs in that pipeline that are not fully qualified at the moment, so no, I would not suggest we could do $500 million in the second half.

I mean, it's not impossible, but certainly not what I would call likely at the moment, based on what we see in the pipeline.

Okay, that's what I thought.

And then, just on the other side of this, as a follow-up quickly, the Dec Surfaces business has been for sale at some point.

Other people think maybe it's on the short list now, but boy, a strong performance from that business, and I'm wondering if that's sort of changed your view of how that fits into the portfolio.

From a strategic standpoint, we've maintained our position on Dec Surfaces since 2008 when we had made the decision then that we didn't think, long term, it fit our portfolio in terms of long-term growth opportunities.

But I will tell you that they have performed very well in terms of operating characteristics along the way.

They did better during the 2008-2009 downturn than most businesses, and they clearly are doing quite well this year.

But strategically, it hasn't changed my view of the long-term fit of that business in our portfolio.

Thanks very much.

I'll pass it on.

Ann Duignan, JPMC.

Can you give us a little bit more color on the restructuring charges, on the $100 million, to the best of your ability, at this point?

Where might that spend be most used?

Is it on the strategic sourcing?

Is it in one particular business?

You know, just a little bit of color on where that money is going to be spent?

Well, I'll give you a high-level flavor, and then Ron may have some more detail to add, but I would say that the bulk of this is based on additional restructuring based on the weakness we've seen, and more internationally and more European as a result.

There is some of that that is based on a view of our business simplification, but not a lot.

Most of this so far is based on reacting to the slower market conditions internationally, particularly in Europe, so it's obviously a step-up and a way of us getting ahead of what we think are some continued weakening conditions that we want to be able to address.

And Ann, as you know, the ability to do that in some of the international markets is much more -- much longer impact to get the result, particularly in Europe, so we've tried to stay on top of these things and push them forward as we look at the weakness or the underlying performance of some of these market segments.

But I would say that using that wonderful 80/20 term we like to use, 80% of this is focused on existing businesses and maybe 20% is focused on a combination of looking at what structural changes we're looking at making, along with some of the strategic sourcing initiatives.

The segments that have a bigger restructuring spend this year, in the first half of the year it's been Construction, especially in Europe.

In the second half of the year, the Polymers & Fluids segment will have a bigger restructuring spend.

You mentioned strategic sourcing.

That -- any cost -- additional cost or investments there to do the sourcing initiative is not part of restructuring.

That would just be additional headcount or consulting costs, et cetera.

Okay, that's great color.

And actually, that leads me to my follow-up question, which I think, David, that you probably just answered.

And that is, given how well the construction business has held up in Europe, despite the starts that you talked about and the industrial packaging business, are you seeing further weakness in those businesses as we speak?

Is that what's led to the restructuring?

And should we anticipate an accelerated decline in those businesses in the back half?

No, I think, as I tried to point out, it takes longer to initiate these, so there's a lot more planning that goes into the implementation of those.

So, many of these restructuring projects have been in the planning stages for several quarters and are just at the front end of implementation, so it's really a question of trying to stay on top of what we see as the longer-term trends there.

I think we've done a good job of managing the cost portfolio there, but at some point when you look at the market conditions and you project forward, you begin to get into the tougher, longer-term issues that restructuring brings, which is a lot of headcount and, in some cases, facilities.

So those take longer to implement.

So it's more a question of timing, I would say, Ann, than any different view of how we see those markets at the moment.

I do expect European construction, as John pointed out in his comments, it's going to remain a tough environment for some time.

A lot of it is based on government spending, and as we know, what's going on in Europe is a lot of rationalization of where the government is going to spend their money.

And I think construction will continue to have a cloud over it in Europe for some time until that becomes more clear.

Okay, I'll get back in line.

Thanks.

I appreciate the color.

You bet.

Rob Wertheimer, Vertical Research Partners.

Good morning, everybody.

Just a general question on sentiment as you continue to work through the process of identifying where you can streamline, cost save, et cetera.

How are your managers feeling?

Have you had any employee turnover start ahead of it?

I mean, your margins are pretty good.

I don't know whether this is getting people to be more engaged.

So, if you could just comment, David, on how the organization is adapting to the process?

Thank you.

Sure.

Let me separate that into two pieces, and I'll actually answer your second piece first.

I think the margin performance is really not due to any advanced movement, if you will, on some of that.

I think the margin performance is we recognized, going into the year, this was going to be a challenging environment, and if we didn't see the kind of revenue growth that we'd expected, that we were going to have to have some ability to react.

So we put in place, I think, some strong cost-control programs at the beginning of the year, and we also counted on some significant improvement in our price costs, which we have been chasing, as you may recall, for a couple of years, and we were able to achieve that as well.

So the strong operating margins, I think, are a result of the detailed planning and controls that were put in place at the end of the year, which allowed us in the quarter to get the 16.5% return, so great incrementals as we experienced much weaker revenue performance than we thought, headwinds and currency and so forth.

So, that was independent of any of the work we've done in business simplification.

I would say in the business simplification area, any time you talk about consolidation, you talk about a change in structure, you get people concerned.

At this stage, we really have not lost any significant number of people, and I think people have embraced the fact that this starts with looking at the strategic approach and looking at how we streamline our structure to be reflective of where we see our growth opportunities.

And we're doing this in a rational fashion, and the operating managers are heavily participating in every step of this along the way, so we're not dictating from the corporate office that these five units should be combined into one.

These are the operating people that are looking at what makes sense, given the new economic environment, given the global nature of a number of our end markets and customers, and let's march through this in a logical fashion.

We're not going to make wholesale decisions that would impact their ability to serve their customers and markets.

So, I think given the level of change, which always brings with it some level of angst, we've done a good job of managing that and involving our key managers.

And so, I would say that as we approach the end of the year, we'll be in a better position to quantify some of what that will mean and we'll be able to give some examples, and you'll see, I think, the level of involvement or participation will help us ultimately come up with the right solution and with the right metrics that we can maintain going forward.

Jamie Cook, Credit Suisse.

Hi, good morning.

Two questions.

One, in terms of price costs, you called out what it was in the quarter.

I just want to get a sense of the benefit that you're assuming in the back half of the year, and whether you're seeing any pricing pressure from your customers.

And then my second question, just to follow up on, I guess, M&A and divestitures, one, do you anticipate -- if the macro continues to decline and valuations come in, as we look out to 2013, is there a chance that you shift your focus more towards trying to do some bigger deals to take advantage of the market?

And then, I guess my other question is I guess I'd be concerned how easy it will be to get divestitures done in this market, given the performance of your businesses and just prices people are willing to pay.

Thanks.

I'll let Ron talk to price/cost, and then I'll come back and talk a little bit about acquisitions and divestitures.

So as I said earlier, we had a pickup in margins of 60 basis points from price/cost.

That was better than the first quarter, which was 40.

And really, that was driven mostly by raw material costs going down as opposed to prices going up.

We've still been able to hold onto price increases that we put in place towards the end of last year in response to cost increases in most of our segments, but costs have come down significantly, especially in the resin area, which has been bouncing all around during the year.

For instance, recycled PET was down 37% in the quarter, but it was up 48% last quarter.

Steel was also down, but to less of an extreme, so we see raw material costs continuing to go down a little bit as we move through the rest of the year.

So we'll continue to see a benefit price/cost, probably a little bit higher in the third quarter than it was this quarter, but about 60 basis points for the whole year, if things hold where we expect.

Okay, and that's versus the 30 to 40 you were expecting before, right, I think?

Yes, yes.

Okay, sorry, and then, sorry, David, on the acquisitions and divestitures, thanks.

Yes, let me comment on acquisitions first.

As I commented earlier, I think the environment has been one where valuations, frankly, in the first half of the year have been more challenging than I would've thought, given the market conditions, so I don't see that really changing.

We have a number of nice target opportunities that we think fit strategically.

The question will be, do they fit with us from a valuation standpoint?

It's too early to answer some of that, but (multiple speakers)

But if you did see the valuations more compelling, would you be more aggressive again on the M&A front?

Absolutely, absolutely.

In fact, there are several assets that we're looking at that, given the right circumstances, we will clearly be more aggressive.

There's no question.

Especially in those areas that we've identified as strategic growth areas or emerging markets.

Yes, so I -- it's hard to predict, as you know, acquisition activity because these are competitive processes.

They involve buyers whose expectations change during the process, so a part of our caution in not putting numbers out as we may have in the past is that the environment has changed a lot and it's hard to predict.

Our [hit] right now, or pipeline, used to be 60% to 70%, and for the last two years it's been well under 50%, so hard to predict.

It could be in the pipeline, but for me to be able to predict whether we can actually close it is a lot more difficult than it used to be.

But on the divestiture front, are you concerned you're not going to get the price, you know what I mean, that you should, given the performance of your businesses in the (multiple speakers) market?

No, I'm not concerned at all because we aren't going to sell them if we don't get the right price because most of these are businesses that make good margins and make contributions to the Company, so there's no point in rushing to a sale.

These are not fire sales, so the metrics should work properly for us in terms of what we think are reasonable prices, then we'll transact.

If they don't, we won't.

And we've walked away from proposals in the past we've had on assets held for sale that we haven't transacted.

Some of them have come back, one of them being a consumer packaging business that we sold earlier in the second quarter.

So if the price isn't right, there's no reason for us to transact.

That's part of our evaluation process is, really, what are the minimum price that we should be targeting and what, given the market conditions, is the ideal price?

We generally end up somewhere between those two, but rarely would we be in a fire-sale situation where we have to transact.

As you know from our balance sheet, we've got strong operating cash flow.

We don't need the cash at any particular moment in time as a result of divesting something, so we can be patient.

And we've seen it's a pretty reasonable market for divestitures.

Strategics are still looking for acquisitions, and private equity has a lot of capital that they're looking to put to work as well.

Thank you.

Andy Kaplowitz, Barclays.

Can you talk about the visibility you have into your welding business?

It's obviously been the highlight of your global business, I think, for the last couple of quarters.

What are the major OEMs telling you?

Sometimes we get questions about how long can construction and ag, with the drought, hold up, and mining.

What are you guys seeing?

Well, we don't have lots of visibility.

Our typical visibility is more the order book that we get from those types of customers, which is not a lengthy order book.

On the equipment side, our order book runs in the two-week to four-week category, not three or four months, so we don't have great forward visibility.

The consumables side is probably even a little bit less than that.

So, I can't say we've got great visibility.

But when we talk to those customers, particularly in the mining category, oil and gas, and even the ag category, we continue to get reasonable forecasts in terms of forward demand.

And as I think Ron pointed out, or John, in his comments earlier, we had a barn-burning first quarter, we had a very good second quarter, but not nearly as good as the first quarter, and we could not have predicted either one of those in advance of what we actually achieved because the increase in demand from our customers occurred during the quarter, not before.

So we're well positioned with those customers, but I can't say we've got any particularly good forward visibility.

I would just add, Andy, that if you remember, to David's point, that first quarter our organic revenue for welding was in the high teens.

This quarter, it was more like nine.

I think we're looking, on a go-forward basis, at numbers that are high single digits, as opposed to something that's double digit.

That's helpful, John.

Just looking at global construction, there's obviously a lot of moving pieces here.

We understand the European weakness.

It was interesting, your comments on Asia may be getting a little bit better.

You've talked about Australia in the past.

I guess my question is, you know, how much can US residential improvement help offset European weakness?

And how do we look at this -- I know it's a balanced business, but how do we look at the balancing act that's going on here between improvement in North America, maybe Australia stabilizing, and Europe getting a little bit weaker?

How do you look at it?

First of all, let's look at the statistics.

We've been on a five-year dramatic decline in North America, to the point where 70% of our revenues in construction now are international.

So there's not enough size in the market, no matter what the housing start numbers look like in the near term or projects, if you're doing commercial, in North America to offset major declines in Europe when Europe represents 50% of the business today.

So I think unlikely we're going to see that offset.

I would say, long term, that what we see emerging here in the US will be very favorable, obviously, to our construction business.

We're not as wrapped up here in government financing in construction as they are in Europe and even in, obviously, Asia-Pacific, particularly in China.

So how these governments decide to finance construction going forward as part of their overall rationalization of their fiscal policies is going to be an important determinant in how those markets recover.

But the US markets are not big enough to cover for any significant decline in the European or Asia-Pacific markets.

That's fair, but have you seen stabilization in Asia-Pacific?

I think you kind of alluded to it earlier.

How is that region (multiple speakers)

I think John's comments were Asia-Pacific, but largely in Australia, which represents about 70% of our Asia-Pacific construction business.

So China, I would say, continues -- it's going to depend on, in my view, in China more what they determine they're going to do with the infrastructure spending there over the course of the next several years as to how that plays out.

They have been aggressive in the past; the question is, how aggressive are they going to be in the future?

But as you know, most of the major construction activity in China is financed by the government.

Deane Dray, Citigroup.

Thank you.

Good morning, everyone.

Some questions on base business.

Can you comment on the progression in the quarter versus expectations?

It looks like the overall you came in below the low end of your range, but how did the months play out?

There was no particular trend.

I think if you look at things on an equalized day basis and you look at things on a seasonality basis, no particular --

It was very uneven.

It was -- June was stronger than May, April was stronger than May.

May was weaker.

Clearly you didn't see any deceleration -- big deceleration in June, Deane.

Okay.

Which probably, I think, a lot of people would've expected, so I think the numbers, to David and Ron's point, the numbers are very, very uneven.

And we're heading into a quarter right now, into the third quarter, where numbers coming out of Europe are going to be not only what's going on with end-market demand, but they're always typically all over the place in the summer.

The seasonality in Europe in third quarter is obviously a wild card, on top of what are already some weak markets.

But no, I wouldn't say we saw any particular trends in Q2 that we could highlight.

And then, how about what's embedded on base business for third quarter for the range, as well as for the year?

The third-quarter range is a revenue -- base revenue growth of minus 1% to plus 1%.

So that's total revenue.

(Multiple speakers).

That's total, yes.

So what's the base?

The base is in the 2.5% to 3% range.

Positive?

Yes.

(Multiple speakers).

So obviously, the big vertical (multiple speakers)

(Multiple speakers) to ask.

Yes, there is a plus in front of that number.

Okay, just checking, and then, how about for the year?

(Multiple speakers) big variable in Q3 will be, again, currency.

Understood, and then for the base business for the year, the updated guidance?

2% to 3%.

Good, and just -- and then, last one for me, other income came in higher as a benefit.

Was there any one-timer in there, any adjustment?

Can you just flesh that out, please?

We had a few one-timers, the biggest one being a sale of a building.

And so, how much -- so were there other gains in there?

Yes, there was a gain of about $6 million.

That was the biggest item.

Okay, thank you.

Walt Liptak, Barrington Research.

Hello.

Nobody there.

One moment for the next question.

(Technical difficulty)

Do we have any more questions?

One moment for the next question.

(Technical difficulty).

Walt Liptak, you may ask your question.

Okay.

Sorry about that, guys.

The phone was muted.

(Multiple speakers)

Walt, did you go out for a cup of coffee?

(Laughter).

Sorry.

Okay, I just wanted to quick follow on to Deane's question about -- I wondered what your Europe assumptions were for the third quarter and for the full year.

It's down 1.5% organic.

It's obviously negative, but not as bad as I would've thought.

Yes, what we're seeing by region is pretty similar to what we saw in the second quarter where North America is going to be stronger, Europe's going to be down 1% to 2%, Asia-Pacific flat to plus 1%, so pretty similar demand rates from a base side from what we saw in the second quarter.

We don't really (multiple speakers) catalyst, Walt, that's going to change the profile of what we saw in Q2 in Q3, or for that fact -- for that matter, going forward for the balance of the year.

Okay.

And I wonder if you could just talk a little bit about what you're seeing in Europe, specifically in the welding business?

You know, demand trends, pricing, profitability?

Welding Europe, let's see.

We have --

Yes, organic internationally, you said was up 2, but I presume that Europe was probably down.

No, Europe was up.

Yes, Europe was up.

We have (multiple speakers)

Europe was up 3, I think?

No, Europe was up more than that.

It was more Asia-Pacific that was down in international.

Remember, Walt, we have a smaller European presence, so our Europe numbers were actually growing at a rate of double digit, at least for the month of June.

Yes, for the whole quarter it was up 3.7%, welding Europe.

Okay.

Thanks, guys.

Henry Kirn, UBS.

If our math is correct, the midpoint of total revenue guidance for the full year, in using midpoint at the third quarter, implies fourth-quarter revenues up 4% year on year.

Is it possible to discuss factors that could drive sequential acceleration in the third quarter to the fourth quarter?

Yes, that's not what we have, so I'm not sure how you backed into that.

But we're looking at the third-quarter overall revenues being basically flat, driven by currency, but from a base side, as I said, we're up -- we've got 2.5% to 3% up, and it's a little bit weaker in the fourth quarter, partly due to the comps.

Okay, I'll check offline.

So we don't have the granular detail of the fourth quarter here to talk about, obviously, but I would say from a goal perspective, we don't see any significant change from Q3 to Q4 in market -- or demand activity.

So there may be some nuances based on comparables, as Ron pointed out, but no significant acceleration, if you will, in demand as part of our current full-year outlook for Q4.

Currency is a little bit less of a factor in the fourth quarter.

Okay, that's fair.

As a follow-up, is it possible to talk about how customer and channel inventory levels look right now, and any stocking or de-stocking embedded in your updated guidance in front of 2013?

No, none that is worthy of any note, for sure.

We would have expected, had our original demand forecast materialized, to see some of that occurring in Q2, which obviously did not happen, and given the current demand forecasts that we see across these markets, we don't see any real stocking, restocking, or, for that matter, any significant de-stocking at this stage.

We haven't experienced it and we haven't heard a lot about it, let's put it that way.

That's helpful.

I'll pass the baton.

Thanks.

Robert McCarthy, Baird.

John, before I ask my question, would you mind repeating what the growth figure was for North American construction sales into residential?

Was that a double-digit number?

13% (multiple speakers)

13%, thank you.

My first question has to do with share purchases.

Could you tell us how many shares you've repurchased, either year to date or in the second quarter, and could you comment on full year?

You know, in the past, you've commonly talked about a range for targeted spending on repurchases.

I wonder where you're at.

So as I said earlier, I don't have the exact share number, but for the first half, we spent about $1 billion.

And embedded in the forecast, which is included in the $0.04 EPS benefit that we've bridged on the slide, embedded in the forecast is a total year spend of $1.3 billion.

So you can back into the shares based on the share price over the year, but I want to say it's something like close to $20 million.

I think it's $18 million, somewhere in the $18 million to $20 million range.

For the full year?

No.

No, that's the year-to-date number.

So far.

Year to date.

So far.

So far, yes, okay.

Thank you.

And you commented, John, when you were talking about industrial packaging that in the stretch business, equipment sales led the growth.

Does that mean consumables was down?

And can you talk about what Signode saw in consumables versus equipment comparison?

The (multiple speakers) -- stretch consumables would have been lower -- it was growing at a lower rate than the equipment, but clearly the equipment was much stronger on the stretch side.

I think you've seen the same dynamics on the Signode side, too, where --

So I'm guessing, then, the implication would be that the weakness in response to macro fundamentals hasn't shown up as much in the equipment business yet, maybe because of order backlog, and then that is what we should expect for the second half.

Again, I think it's really more geographical, Rob.

I think North America, we're seeing trends that are more consistent with consumable and equipment sales.

You know, we were up 3% to 4%, North America, and we were down at a rate of about four-ish on the European side.

So I think it really has more to do with more macro trends in the geographies we're seeing as opposed to the specific categories.

Rob, the other thing I would note is about 80% of their equipment sales are replacement, so I think it's probably an indication that people reached a point which some of these pieces of equipment need to be replaced or upgraded for productivity reasons or cost reasons, and the fact that they haven't canceled orders or delayed orders is an indication that there is a reasonable long-term view of the need for this type of equipment.

Normally, the equipment would precede a big increase in consumable volume, so it's a typical pattern that we see equipment rise, and then a consumables rise secondly.

And it's the same thing true on the way down.

Equipment drops off first and consumables afterwards.

Thank you, David.

That's helpful.

And lastly, in the Power Systems & Electronics segment, John, you talked about high single-digit expectations for the welding business in the second half.

Second quarter, electronics was up double digit.

Is that something that you expect to be sustained in the second half?

Well, we know that in our electronics assembly segment of total electronics that we have orders in place that are, I'll call it, significant with a key customer, so we have a relatively high level of confidence.

But I think the other -- what I call the other electronics category, which is more legacy, more component related, that will continue to be under pressure.

Yes, I would say that we have a nice Q3 runway in that category, but beyond that it's hard to see.

As John pointed out, it's based on some significant orders with a handful of key accounts.

But the general electronics category, and particularly that based on computers, is really challenged, and will remain so.

Nigel Coe, Morgan Stanley.

So we've covered a lot of ground already.

Can you just clarify, Ron, I think you mentioned the overseas cash balance was $1.7 billion.

Is that right?

That's correct.

So all your cash is overseas right now?

That's correct.

Okay.

Just wondering, how does that play into your repurchase plans for the second half of the year?

I mean, you've got about $1 billion this year.

You've done $1 billion so far.

Do you plan to do more or do you plan to rebuild that US cash balance?

The way our capital structure works, like most US companies, is we had to do share repurchases and dividends out of the US.

So when we put together our plans for dividends and share purchases, we do that based on where we expect to generate the cash and how much US cash we expect to have and what the appropriate debt level that we want to maintain in the US is.

So the $1.3 billion in share repurchases that I talked about, which is the current full-year forecast, that's a reflection of all those inputs.

It does not consider that we would repatriate any of that $1.7 billion at this point.

We certainly could if we needed to, but there would be a tax cost of that at the time we did it.

So, that assumes that we continue to reinvest that cash overseas in emerging markets and other ways, but not bring it back to the US.

And obviously, the other thing is it looks at, as Ron said, where is the cash coming from?

And from our forecast, you could tell we're talking about stronger performance in the US than we are in international markets, so all these things are factored into how we look at the overall capital allocation.

But with a $2 billion expectation of free cash flow for the year, that would indicate, obviously, the second half of the year's cash flow is much stronger than the first half, which we would expect.

We wouldn't expect to see any significant change in our US debt levels as a result of this, and certainly, as Ron pointed out, no plans to do any significant repatriation.

And I will point out, as we've had divestitures, for instance, the finishing business, to the extent we get net cash proceeds after tax in the US, we're redeploying that and buying back shares to offset some of the EPS (multiple speakers)

I mean, US cash generation is not a problem at all, but I'm just wondering.

The surplus cash you generate in the second half of the year, you seem to have a bit more cautious tone on M&A.

Do we use that surplus cash to repurchase shares or do we rebuild US cash balances?

Well, we typically would not run in US cash balances.

We're going to be (multiple speakers) or overseas.

That's fair.

And then, just a quick one, what euro rate are you using for second half of the year?

We are using $1.23.

Okay, great.

Thanks, guys.

Eli Lustgarten, Longbow Securities.

Just one clarification, the actual shares outstanding at the end of the second quarter is something like [468] or [470] or something like that?

Just the averages.

I'm not sure I have that handy.

(Multiple speakers)

(Multiple speakers) that number at our fingertips here.

(Multiple speakers).

We'll get back to you.

Okay, and can we talk a little bit -- two questions.

One, your guidance speculatively talked about relatively flattish sales.

You just gave us a little bit gain in base, offset by currency.

Could you see anything that's changing the profitability that we saw in the second quarter at this point?

In other words, with all the change going on, will you be able to -- do you expect to be able to hold most of the profitability in the second quarter at this point?

Ron, why don't you talk about the [margin]?

As we talked about, we had very strong operating performance in the second quarter.

Our base incrementals were significantly higher than even 50%.

Typically around 35% range.

And as we look out the rest of the year, we expect to continue to perform north of 50%.

So there's nowhere -- none of the business -- everything looks like it's holding together.

Can you talk specifically in the transportation sector where with the decline in European auto and probably not going to get better, are you seeing any changes in demand?

I mean, is the US market able to sustain itself in this crazy environment through the second half of the year and you're seeing greater weakness in Europe, or is it continuing in any change in China?

I think that, as we reported in Q2, we saw good performance in North America, Asia-Pacific continues to be strong, China is still good.

India is still relatively good.

You're right, Eli.

The major weakness in Europe.

I don't think our auto people are expecting significant deterioration beyond the numbers they're seeing right now.

I mean, it could go down a couple more points in Europe, maybe seven turns into eight or nine on a decrease on builds.

I think the bigger story for us, Eli, in Europe has been penetration gains.

As John pointed out, in the quarter, Q2, the European build was down in the 8% range.

We were up 1. So we have had significant penetration gains, and obviously as those platforms continue to roll out, we will enjoy that penetration gain in subsequent quarters as well.

China is our organic growth story.

We've been aligned with more of the domestic manufacturers now, so we have more content there, so that's really new growth for us, if you will, to a large extent in China.

And here in North America, we have continued the normal penetration process, and it pays off obviously, and North America car business in terms of sales and production has been clearly more robust than what we thought it was going to be entering the year.

So I think the transportation outlook for us is reasonably solid going forward on the OEM basis.

Do you have a forecast for builds in North America and Europe at this point (multiple speakers)

The latest forecast we have is Europe is roughly the same and North America is still growing at high teen numbers.

We're going to end it there.

We're at the top of the hour.

We thank everybody for participating in the call, and I look forward to talking to a number of you later today.

Thank you.

Thank you.

Thank you.

This concludes today's conference call.

You may disconnect at this time.