Illinois Tool Works Inc (ITW) 2013 Q1 法說會逐字稿

Welcome and thank you for standing by.

All participants are in listen-only until the question and answer.

Today's conference is being recorded.

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

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

Thank you sir, you may begin.

Thank you.

Good morning everyone.

And welcome to ITW's first-quarter 2013 conference call.

Joining me on today's call is our President and Chief Executive Officer, Scott Santi, and our CFO, Ron Kropp.

Scott, Ron, and I will discuss our solid Q1 financial results, our long-term strategic initiatives, and our 2013 forecast.

As always, we will take your questions later in the call.

Now, here is the agenda for today's call.

Scott will come back momentarily and comment on both our Q1 operating results and update you on our long-term strategic initiatives, Ron will cover our Q1 financial results in more detail, I will then talk about our geographic revenue performance and detail our segment results.

Ron will then update everyone on our 2013 full-year forecast and introduce our Q2 forecast.

Finally, we will open the call to your question, questions I should say.

Per our long-held practice we ask for your cooperation on our one question, one follow-up question policy.

We have allocated one hour for today's call.

A few housekeeping items.

First, remember this presentation contains our financial forecast for full-year '13, 2013 second quarter and other forward-looking statements identified on this slide.

We refer you to the Company's 2012 10-K for more details about important risks that could cause actual results to differ materially from the Company's expectations.

Moving to the next slide.

The telephone replay for this conference call is 800-839-1334, no pass code is necessary to access the replay.

And the replay will be available through midnight of May 7, 2013.

Now let me introduce our CEO, Scott Santi.

Scott?

Thanks, John.

And good morning everyone.

In the quarter organic growth came in about 100 basis points below what we expected heading into the quarter, largely due to sluggish demand in the capital equipment components of our product portfolio, particularly earlier in the quarter.

While equipment sales were down 6% in the quarter, consumable revenues down 1% largely came in in line with our expectations.

We did see noticeable improvement in demand rates for equipment products on both a sequential basis and a comparison to prior year as we moved through the quarter, particularly in March.

Daily revenue rates for equipment products were up 13% in March versus the average for the quarter overall.

Despite some topline challenges, our profitability performance was very solid in Q1; we delivered above forecast operating EPS of $0.96, and operating margins came in at 16.5%, 60 basis points higher than the year-ago quarter.

This operating margin improvement was due to a combination of strong tactical cost management from our operating leadership, and the early-stage benefits from our portfolio management business structure simplification and strategic sourcing initiatives.

Benefits from these initiatives contributed 40 basis points to overall margin performance in the quarter.

We continue to make good progress on our three enterprise initiatives in the quarter.

With regard to portfolio management we announced the strategic review of our Industrial Packaging segment earlier in the quarter.

In addition, we've moved more than $600 million of non-core revenues to discontinued operations.

With these two moves, we have largely completed the process of identifying the core businesses that will constitute our faster growing and more profitable portfolio moving forward.

With regard to business structure simplification, we continue to drive alignment and execution across the Organization in the quarter.

During the quarter I visited a number of our newly scaled up businesses, and in each case I was extremely impressed with both the level of progress made and the level of enthusiasm for and commitment to this initiative by our on-the-ground operating leadership.

I came away from these interactions even more convinced that the strategic and operational benefits associated with simplifying and scaling up our divisional operating structure will be considerable over the medium and long term for the Company.

As to strategic sourcing, we continue to resource initiative and drive implementation.

We hired a Chief Procurement Officer early in the quarter, and her early view is much like ours -- that the potential to better leverage our direct and indirect spend is both considerable and achievable.

A number of category-specific strategic sourcing initiatives and programs are actively being worked and executed across the Company.

Finally, let me reiterate our 2017 enterprise financial performance goals.

And those are organic growth of 200 basis points above global industrial production, operating margins pretax of 20% plus, and after-tax returns on invested capital also at 20% plus.

Overall we made good progress towards these goals in a pretty challenging environment in Q1, more to come.

Now, let me turn the call back over to Ron.

Thank you, Scott.

Good morning, everyone.

Before I review our first-quarter operating results, I wanted to walk through some reporting changes in our financials beginning this quarter.

As Scott just mentioned we moved several businesses to discontinued operations.

The larger businesses moved include a transportation-related business and a construction distribution business.

The businesses moved represent more than $600 million in 2013 forecasted revenue, with an operating margin of approximately 7%.

This move to discontinued operations reduced our diluted EPS from continuing operations by $0.01 for the first quarter, and our full-year EPS forecast by $0.07.

As we discussed in January, we've also aligned our reporting segments to better match our portfolio management strategy.

The quick highlights are, that we changed our Transportation segment to a pure automotive OEM segment, and moved our automotive aftermarket business into our Polymers and Fluid segment.

We formed a new segment that combines our test and measurement business and our electronic business.

Our welding business is now a standalone segment.

And the former all other segment is now called specialty products, which primarily includes our consumer packaging businesses, as well as our appliance business.

We also modify our methodology on how we allocate Corporate-held expenses to our segments.

We previously allocated all such expenses to our segments; we are now allocating a fixed overhead charged to each segment based on each segments' revenues.

Expenses not charged to the segments are reported separately in our results as unallocated.

Our historical P&L results and segment data have been restated for the discontinued operations, and have also been adjusted for the segment changes I just mentioned.

The appendix of our presentation includes 2011 and quarterly 2012 restated financial data for the total Company, as well as for each segment.

Lastly, as we also discussed in January, because we retained the 49% interest in a divested Wilsonart business, prior-period results will not be restated, and the ongoing equity interest will be reported as income from continuing operations.

To allow for like-to-like comparisons to 2013, we will be presenting our 2012 results on a pro forma or non-GAAP basis, which excludes the 2012 operating results of the Decorative Surfaces business, as well as the fourth-quarter 2012 gain on divestitures and equity interest.

Q1 2012 comparisons exclude the Decorative Surfaces business operating results.

As part of our first quarter 2013, we also recognize a one-time pretax gain of $30 million related to an acquisition of the majority 51% interest in a consumer packaging joint venture.

We've excluded this one-time gain when we're discussing our EPS performance for the first quarter.

Finally, onto the highlights for the first quarter.

Total revenues decreased 8%, primarily due to the impact of Decorative Surfaces.

Excluding the 2012 revenue, Decorative Surfaces revenues declined 1.8%, driven by organic revenue declines in both Europe and North America.

Operating income was $660 million, which was higher than our 2012 pro forma operating income by $8 million, representing an increase of 1.2%.

As a result, operating margins of 16.5% were 60 basis points higher than last year.

Diluted income per share from continuing operations was $1.01 on a GAAP basis.

Excluding the one-time $30 million pretax gain I mentioned, diluted EPS from continuing operations was $0.96, which represents a 7.9% growth over our pro forma 2012, and was $0.01 above our forecasted EPS midpoint.

Our 8% revenue decline in the first quarter is primarily due to the following factors, divestitures, primarily Decorative Surfaces, reduced revenues by 6.4%.

Base revenues were down 2.7% with North American base revenues decreasing 1.9%, and mixed international base revenue that overall were down 3.5% year over year.

Europe declined 6% with impacts across virtually all of our businesses.

Our Asia businesses grew 0.5%, led by strong growth in both China and India.

As we look at product mix, organic revenues were down approximately 1% on our consumable businesses while we saw a 6% decline in our equipment businesses as businesses remain cautious on their capital spending.

However, as Scott mentioned, we started to see some improvement in equipment sales as we ended the first quarter.

Acquisitions added 1.3% to revenue growth while currency translation was virtually flat.

Operating margins for the first quarter of 16.5% were 60 basis points higher than Q1 2012.

Base business margins were up 30 basis points from last year, led by 100 basis point improvement on the non-volume side.

A key driver was the 40 basis point improvement from the results of our enterprise initiatives, largely related to our business structure simplification activities, as well as some benefits from sourcing leverage.

We also had a 40 basis point improvement from strong overhead cost management.

Price cost favorability improved margins 30 basis points.

These were partially offset by a 70 basis point decline from lower sales volumes across the majority of our businesses.

In addition, total operating margins also benefited from a 20 basis point improvement due to lower restructuring costs in the first quarter versus last year.

Overall, despite our first-quarter organic revenue decline from softer North American and European end markets, our bottom line operating margin improved versus last year.

We grew our operating margin 60 basis points as we started to see some benefits from our enterprise initiatives, while continuing to manage overhead costs in a cautious macroeconomic environment.

Looking at working capital and cash flow.

Accounts receivable DSO was just under 63 days, which was a slight improvement versus last year.

And inventory months on hand improved slightly to 1.8.

ROIC for the first quarter was 14.9%, which was a 60 basis improvement versus the first quarter of last year.

Our ROIC continues to be well above our cost of capital and is a key metric for us.

As Scott mentioned, we expect the end result from our enterprise strategy will be an ROIC above 20% by 2017.

Net cash provided from operating activities was $366 million for the first quarter with capital expenditures of $89 million, resulting in free operating cash flow of $277 million.

Our cash generated was 16% higher versus the first quarter of 2012, despite over $1.7 billion in revenue divested over the last year.

For the year we expect conversion of free operating cash flow to be close to 100% of income from continuing operations.

Turning to capital structure.

We continue to focus on capital allocation priorities as follows.

Our first priority continues to be organic investments, especially focused on our key growth initiatives.

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

Our next capital priority is dividends.

Note that our normal January dividend of $174 million was paid on December 31 last year to allow our shareholders to benefit from the lower 2012 dividend tax rate.

Our current dividend yield continues to be about 2.5%.

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

We evaluate the allocation between these investments based on the best risk adjusted returns, and assess acquisition targets by incorporating our portfolio management criteria.

During the first quarter we had $366 million in share repurchases.

As we look ahead through 2013, we've increased our share repurchase forecast for free operating cash flow to at least $850 million versus the $500 million we communicated in January.

In addition, we intend to use any US after-tax divestiture proceeds for share repurchases as well.

As of the end of the first quarter, we have approximately $1.5 billion of authorized repurchases remaining under our current buyback program.

We also utilized $56 million acquisitions during the quarter, with a continued focus on our growth platforms in emerging markets.

Our portfolio strategy incorporates two key criteria as we continue to assess acquisition targets -- accelerated growth spaces and a strong differentiation potential.

Lastly, our Q1 debt-to-capital ratio is 33%, while our debt-to-adjusted EBITDA remained constant at 1.5 times.

Our cash balance overseas is nearly $2.7 billion and we have plenty of debt capacity to make additional investments.

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

Thank you, Ron.

Let me take just a few moments to review our first-quarter geographic trends, Ron touched on these a little bit earlier.

But excluding the impact of currency in 2012 revenue from the former Dec Surfaces segment, total Company revenues declined 2% in the quarter.

As Ron noted earlier, total Company organic revenues decreased approximately 3%, with North American organic revenues declining 2%, and international organic revenues decreasing 4%.

Most notably, EMEA and Europe declined 6%, and Asia Pacific grew 1%.

The real positive for us in Q1 took place in China and Brazil where our organic revenues grew 10% and 3% respectively.

Per our Q1 segment results, please note that six out of our eight segments produced operating margin improvement in the quarter, ranging from automotive OEM's 10 basis points of improvement, to Construction products' 320 basis points of improvement.

Our 60 basis points of total Company operating margin improvement was 40 basis points higher than what we initially forecasted in January for the first quarter.

Also, as part of our portfolio segmentation we have added an adjusted operating margin metric, which excludes intangible amortization and other non-cash acquisition accounting charges from operating income.

As certain segments, primarily test and measurement and electronics as well as Polymers and Fluids, have grown largely through acquisitions, we believe adjusted operating margins show a more consistent comparability across our businesses.

Now, let's take a closer look at our eight reporting segments.

We'll start with test and measurement, electronics.

This segment was largely a tale of two different levels of customer demand.

Test and measurement's business produced worldwide organic revenue growth of 2%, and our flagship Instron business led the way in the quarter as customer demand for structural testing equipment and software were strong.

On the electronics component side, organic revenues were essentially flat as the contamination control and pressure sensitive adhesive businesses offset organic revenue decline in our electrostatic business.

Organic revenues for the electronics assembly business, formerly known as the PC board related operations, declined at a double-digit rate as the semiconductor industry slowed and customers curtailed their spend on capital equipment.

The better news was that operating margins improved 120 basis points year over year, largely due to strong management of overheads, and lower restructuring spend versus last year.

In automotive OEM, it was our fastest-growing organic revenue segment in the quarter as our innovative product penetration outperformed auto build in all, I emphasize all, major geographies.

In North America, our automotive organic revenues grew 3%, outpacing the North American auto build increase of only 1%.

And while our European organic revenues declined 2%, please note the European auto builds fell 8%.

Asia Pacific organic revenues increased a strong 24% due to ITW's growing product penetration amid a very robust auto build environment in China.

Notably our Chinese-based auto businesses produced a strong organic growth rate of 46% versus a Q1 auto build increase of 10% in China.

So, clearly very good trends going on in the automotive OEM sector.

In our Polymers and Fluids segment, organic revenues were again defined by our organic ongoing product line simplification, what we call PLS in the quarter, and weaker industrial production metrics.

Worldwide Polymers and hygiene and Fluids, organic revenues declined 8% and 4% respectively, as targeted low-volume, low-margin customers continue to [leave] the portfolio.

This sorting out process will likely continue as we implement portfolio and business structure simplification initiatives within the segment.

In auto aftermarket organic revenues declined 6% due to the ongoing impact of the loss of a major customer and other targeted PLS activities.

While operating margins declined 30 basis points, nearly all that was due to higher 2013 restructuring costs associated with PLS activities.

In the Food Equipment segment, ongoing weakness in capital equipment sales was again evident in the quarter.

Total Food Equipment North America's organic revenues declined 1% as equipment sales fell 3%.

Demand for warewash equipment for small restaurants as well as slicing and mixing equipment was soft in the quarter.

Total Food Equipment's international organic revenues declined 4% with equipment sales decreasing 9%.

A falloff in demand for cooking and refrigeration equipment in France, Italy, and the UK contributed to the organic revenue decline.

The better news in the segment continue to be our service businesses where our organic revenues in North America and international grew 3% and 4% respectively.

In our welding segment, our organic revenue decline was tied to a slowdown in worldwide industrial production and heavy equipment activity.

Please note however that welding faced a very, very difficult comparison from a year ago when organic revenues grew 19%.

Worldwide welding's organic revenues fell 6% in the quarter with organic revenues from North American and international declining 6% and 5% respectively.

In North America, the industrial portion of the business was faced with lower order rates from key heavy equipment OEMs, and internationally, our organic revenue decline was mainly due to slower than expected end market recovery in China, as well as our organic -- I should say our ongoing strategic exit from a very weak shipbuilding end market.

Operating margins declined 200 basis points, but please recall they were down from historically high operating margins of 28% a year ago.

In Construction products, organic revenues declined as major weakness in Europe outweighed modest improvement in North America.

In European Construction, our organic revenues declined 10% due weakness in our primary commercial Construction end market, as well as our residential end market.

In Asia-Pacific, organic revenues declined 2%, largely due to weak housing market.

In North America the news was better.

Total North American organic revenues grew 2% in the quarter, with both residential organic revenues up 6% and renovation organic revenues up 4%.

However, commercial Construction organic revenues declined 9%, which was in line with Dodge US commercial Construction data for the first quarter.

We were very pleased however with the 320 basis points of operating margin improvement in the quarter; lower restructuring costs versus the first quarter of last year, as well as strong overhead management and BSS savings, accounted for the significant improvement in operating margins.

In specialty products, our newly named replacement for our all other segment, organic revenues were essentially flat in the quarter.

Our worldwide consumer packaging business grew organic revenues 1%, mainly due to strong growth contributions from the Vertique automated case picking system.

Our worldwide appliance business produced an organic revenue decline of 3% due to weaker European demand.

Finally in our Industrial Packaging segment, the falloff in industrial production demand in both North America and Europe serves as a backdrop for our results in the segment.

In aggregate, our total North American and international Industrial Packaging organic revenues declined 1% and 7% respectively.

The chief contributor to both organic revenue decrease was worldwide strapping and equipment decrease of 8%, and this decrease was largely driven by steel strapping volume declines, which were more in Europe, where steel strap was more prevalent, and a bit less in North America where plastic strap is a bit more popular.

In our other categories, protective packaging grew organic revenues 4%, and stretch packaging's organic revenues fell 8% due to a timing issue related to agricultural customers.

Now, let me turn the call back over to Ron who will update you on our 2013 forecast.

Ron?

Thanks, John.

Before I provide the details on our Q2 and full-year 2013 forecast, please note that the 2012 comparisons we'll be using to measure our 2013 performance.

As I mentioned earlier, we will be presenting our 2012 results on a pro forma basis, which excludes the 2012 operating results in the Decorating Surfaces business, as well as the fourth quarter 2012 gain on divestiture and equity interest.

Our 2012 GAAP and pro forma results have also been restated for discontinued operations.

Excluding the Decorative Surfaces items from our 2012 actual results, our Q2 2012 pro forma revenues $4.2 billion, with operating income of $710 million, and diluted EPS from continuing operations of $1.02.

Our pro forma 2012 full-year revenue was $16.3 billion, with operating income of nearly $2.7 billion.

Our 2012 pro forma EPS was $3.70, which will be the 2012 baseline EPS we'll use as a comparison point to our 2013 forecast.

Now, moving on to the 2013 guidance.

For the full year 2013, our forecasted EPS range for continuing operations is $4.15 to $4.35.

This range assumes at total revenue increase of 2% to 4% versus pro forma 2012.

This revenue range is slightly lower than our January forecast, as we now anticipate organic revenue growth of 0% to 2% for the year.

Additionally, we expect our full-year operating margins to be in a range of 16.9% to 17.3%, versus 2012 margins of 16.3%.

The full-year EPS midpoint of $4.25 is unchanged from our prior forecast, and would be 15% higher than the 2012 pro forma EPS of $3.70.

Our current forecast incorporates our performance in the first quarter and benefits from higher forecasted share repurchases, offset by lower expected organic revenue growth, as well as $0.07 of dilution from businesses that have been moved to discontinued operations.

Key drivers of our year-over-year 15% EPS growth include the following.

$0.32 from our base businesses, driven from organic growth as well as the net benefits of our enterprise initiatives, primarily related to business structure signification, with some sourcing benefits later in the year.

We expect the benefits from our initiatives to be more than 50% of our base business income growth.

We now expect to see $0.18 benefit from share repurchases, while shares we bought back in 2012 and our 2013 share repo forecast of at least $850 million.

We expect our forecasted share buyback to offset the dilution we have from our discontinued operations.

And lastly, we have a net $0.06 benefit from other items, including acquisitions, restructuring, non-operating cost, and a 2013 versus 2012 tax rate decline.

For the second quarter of 2013, we are forecasting diluted income per share from continuing operations to be in the range of $1.04 to $1.12, which assumes a total revenue growth of 2.5% to 3.5%.

Note that our second-quarter forecast includes nearly $30 million of additional restructuring expense versus last year, which reduces our second-quarter operating margin by 70 basis points and our second-quarter EPS by $0.05 versus 2012.

The midpoint of the Q2 diluted EPS range of $1.08 would be a 5.9% growth versus the 2012 pro forma EPS of $1.02.

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

Thank you, Ron.

We'll now open the call to your questions.

In interest of giving more people a chance to ask questions, we ask you to please honor our one question, one follow-up question request.

(Operator Instructions)

Andy Kaplowitz, Barclays.

Good morning, guys, nice quarter.

Thank you.

Scott, you guys mentioned equipment sales began to pick up their March, you had some sequential increases.

Could you talk about where that was and did you see that at all out of Europe or was Europe still decelerating throughout the quarter?

The primary businesses that we're talking about in the equipment space would be test and measurement, welding, Food Equipment.

In terms of regional color, I think there's no question that Europe remains much tougher, so in terms of the improvement through the quarter, there's no question that it was certainly more tilted towards North America.

Is it to early to ask you about April there?

It is a little early, certainly.

Based on everything we're hearing, we remain on track relative to our plan.

Okay.

If I could for the follow-up ask you about North American Construction, you guys did a great job of margins.

When I look at the revenue growth you mentioned the commercial, year-over-year decline, that's fine.

When I look at sort of your residential and renovation, it's still underperforming housing starts by quite a bit.

Is this still a share issue that you could improve over time?

And maybe you could talk about nonresidential in general in the US, it's certainly been more sluggish than we would like.

Can that get better over time?

In terms of the non-res in terms of the market or are you talking about our particular performance?

The market on the non-res and maybe the share on the res?

I'll take those in sort of reverse order.

I think from a commercial construction standpoint, obviously there's been -- the environment there overall has been pretty sluggish for some time, our expectations are for some sort of reasonable sequential improvement perhaps later in the year, but that's going to be very much predicated on how the overall economy progresses from here.

And on the resi side, I think we're still in the mode of sort of lagging the start recovery just from the standpoint of when we participate, and also there's some sort of differences on a regional basis with where some of the hotter sectors are relative to our positions, but overall we expect this business to continue to improve in terms of our overall organic rates, given the trends that we're seeing in housing starts continue.

Okay, thanks, Scott.

Jamie Cook, Credit Suisse.

Hi, good morning.

Two questions.

Not to split hairs but when you talked about operating leverage on your base business, I think you said more than 50% would be related to some of the internal initiatives that you have.

Which sounds a little better, I mean I think last quarter you said 50%, but I'm just wondering if some of the initiatives you have in place are returning results a little bit quicker than you had anticipated.

And then I guess my second question is, Scott, I think last quarter in the Q&A session you talked a little bit about constraints on craft labor and construction in North America, if you continue to see that or if you've seen the markets get a little tighter relative to where we were a couple of months ago?

Thanks.

So on the operating leverage question, if you remember we talked about as you said 50% of the benefit in the original plan was related to initiatives.

Yes.

What's happened since is we've brought down our base revenue forecast, so as a result the income from our base businesses from our normal operations has gone down, but our initiatives are largely on track.

So the initiative benefits are now a bigger portion of the overall base income increase.

And related to your question on construction, our understanding is that labor remains tight in the construction market, and that it is still having some effect on the pace of the recovery.

Okay, but no material change since last quarter?

No.

Okay, great, thank you.

John Inch, Deutsche Bank.

Thanks, good morning, everyone.

Morning guys.

Is there any sort of an update to your targeted number of businesses from simplification?

I think you have sort of talked to 150 in the past, just remind us if that's still about the number?

I still realize it's still early days but --

We originally gave you a number that was closer to 151 we were in New York.

Right.

The more current number that we have, that we've been sharing with shareholders is really in the 110 to 120 range.

I think that that number is fluid, and you'll probably see that number move; my sense is it's probably going to move down a little bit as opposed to move up, but not a lot from where it is.

So the implication of this, if you sort of think of taking several hundred businesses and streamlining them down to fewer businesses and leveraging scale economies for purchasing and overhead savings, if you are actually moving to a significantly fewer count, shouldn't that provide for, obviously maybe not in '13, but significantly improve sourcing and scale leverage on overhead over time?

In terms of the difference between but 150 and 120?

To John's point maybe ultimately progressing closer to 100, it seems like a significant count difference to me.

I think the big move is obviously the 600 plus down to 150 to 120.

I think the sort of change between 150 and 120 is not so much a function of sort of scale, but more from the standpoint of the planning execution within the businesses as we actually start to work this initiative, the 120 is just a place that we're landing not as a target but as the place that makes the most sense from the standpoint of the markets that we serve and how we want to structure ourselves to best operate and execute in those markets.

Okay, that makes sense.

Can I Scott then follow-up here with a question on share repurchase?

I see that you've upped your target for purchases for the year.

So applaud you for that.

This widely propagated negative investment thesis is this whole pending dilution from the sale of Signode, and you guys have a great balance sheet, strong cash flow, I'm just wondering what are your thoughts toward -- and I realize you're going to deal with Signode later in the year -- but what are your thoughts toward perhaps even more meaningfully upping share repurchase just to close what seems to be a dilutionary gap in this at least hurdle in the minds of investors toward future dilution?

What are your thoughts there?

Well I think it's a little early in the process, but I would say that all options are certainly on the table.

And it's a process that we will certainly focus on and work our way through as we go to the year and get some better definition around the actual structure of how that's going to all take place, I'm talking about the Industrial Packaging divestiture.

But it's an active discussion with our Board and with our Management team, and it will continue to be so, and we will update our shareholders at the appropriate time.

And in fact as we looked at it this quarter, that's one of the reasons we bumped up the share repurchase forecast for the year from $500 million to $850 million.

And that's really just from operating cash flow.

What we also have said to the extent we get US after-tax divestiture proceeds, that will be on top of the $850 million.

So certainly as we moved six businesses that are held for sale in the discontinued operations, as we start selling those or get close to selling those, we'll add to the share repurchase there.

And then certainly as we move with Industrial Packaging over the next year plus we'll have to make a decision on share repurchase related to that and again what the ultimate outcome is.

With interest rates so low would you consider or at least not rule out raising some debt to perhaps get a bit of an advanced jump on the sale of Signode through offsetting the dilution?

All options our on the table.

Thank you.

Deane Dray, Citi Research.

Thank you.

Good morning everyone.

Good morning, Dean.

Scott, would like to get some more color on the point in the release and what you talked about this morning on the call here that you've reached the decisions as to when you draw the line between what are core businesses, the keepers versus those for potential divestiture, the commoditization.

Just seems like you've reached this conclusion earlier than what we had been thinking.

So how did you end up reaching it probably earlier than what people were thinking?

And then what was the decision-making, and especially with regard to some of the businesses and Polymer, Fluids, and specialty products?

Well, we talked about it from the outset, the sort of primary strategic driver was really around the whole issue of sort of level of differentiation that resides in the businesses, to really focus on the Company on areas that could fully maximize the benefit that the ITW business model.

And one of the key elements of that is the ability to operate in spaces where we could innovate.

And we talked about from the get go that ultimately as a result of the implementation of this portfolio strategy that roughly 25% of the Company's revenues as we started the process were ultimately under some review related to that.

So the front end we had a pretty good sense of the issues -- where some of the issues were around sort of executing the strategy.

We took the last, we've been working this for a couple of years; we spent a lot of time really looking deeply at each of those businesses and understanding what the options were long term.

And ultimately with the things we've announced and/or executed on already, we're coming out at about 26% of revenue.

So ending up right where we communicated we would be at the beginning.

I'm not sure that I can sort of comment on what you were thinking relative to what we were thinking, but this is not early or late, this is pretty much in line with our game plan around executing this.

Okay, that's helpful.

And then just to clarify on second-quarter guidance, the implied organic revenue growth in the range?

It's 1.2%.

At the midpoint?

Yes.

I would add onto that as you look for the remaining quarters what's left, clearly we had a negative coming into Q1, one less day and some tough comps, but if you look at the rest of the quarters in aggregate, our Qs two through four would average slightly over 2% organically.

So clearly we see better organic growth as we move ahead in the next three quarters.

Got it.

And last one for me, if I look at capital allocation I think we've gone through the buyback strategy for the balance of the year, but one of the numbers that jumps out at me is M&A $56 million in the quarter.

Are you shying away from assets?

I know you said there'd be fewer in terms of what the appetite would be, but are you passing on businesses or are there just not attractive assets out there?

No, I wouldn't say we're passing.

What I would repeat is what I said at the last quarterly call, which is that acquisitions are not a priority for us this year, given the sort of multitude of initiatives that we are executing, that does not mean that we wouldn't look very seriously at something that was a really strong fit and a great opportunity, but ultimately from a standpoint of how much time we are spending looking at acquisitions, it is a low priority this year.

Got it.

Thank you.

Ann Duignan, JPMorgan.

Hi, good morning, guys.

Can you talk a little bit more about the CapEx related businesses that you said were trending up in March?

I mean, you got I think you said test and measurement, welding, and Food Equipment?

Those are very disparate businesses.

Could you just dig a little bit deeper and tell us what you're seeing there in those businesses?

I can't give you any -- a lot more depth other than the fact that it was sort of very clear to us in January and the early part of February that overall capital spending was starting the year very sluggish, and that we saw some pretty nice improvement across all the parts of the business, the capital goods related product portfolio part of the business as we move in the March.

So I can't tell you whether it was sort of fiscal cliff concerns or there was a whole multitude of things, but the overall environment that we saw was a lot of hesitation on capital related spending early in the year, and that seems to be moderating quite a bit as we got later into the quarter across all three businesses.

So nothing in particular, no customers stepped out.

Is that what you're saying, customers kind of stepped aside in January, February and just are coming back in now?

That's what it felt like.

Okay.

Thank you.

And then given your divestitures and your strategy for divestitures, can you talk a little bit about what the environment is like out there for purchases of some of these businesses?

Are you finding a lot of appetite, a lot of interest, are companies hesitant to step in and make acquisitions?

Just a little bit about what you're seeing in terms of the environment out there on the --?

I think we're seeing a pretty good environment.

If you think about where the interest rates are, it's certainly a good environment especially for the sponsor side of the buyer universe.

And that's where we've gotten a lot of interest from some of the assets we have currently held for sale.

Okay.

I'll leave it there.

Most of my questions were answered.

Thanks.

Joe Ritchie, Goldman Sachs.

Good morning, everyone.

So you had really nice growth out of China this past quarter and you're pretty well diversified across your businesses in China.

It'd be helpful to get some more color, clearly auto OEM was up significantly and perhaps maybe there was some pressure on the electronic side, but any more color you can provide on the trend in China, that would be very helpful.

Yes, what I would like to say is we saw broad-based improvement in China, but that's not necessarily the case.

And clearly, most of our growth in China was driven by very, very robust over-performance on the auto OEM site.

There were a few businesses that sequentially did a little bit better, but I would say that it's much more tied to what's going on on the auto side than anything else.

Okay, and areas of weakness?

Specifically in China?

Did you see any end markets that were decelerating?

No, I don't think we saw anything decelerating, but I don't think we -- we clearly saw big, big improvements out of our auto business; the rest of them were -- did okay, sequentially a little bit better.

But nothing dramatic.

Okay.

I think the arrow is pointing to better performance in China as we move through the year.

How much better remains to be seen.

Okay, that's helpful.

And then, as it relates to the divestiture in Industrial Packaging, can you remind us again what the timing, what your expected timing is?

And then as it relates also to the proceeds that can be used for buyback.

My recollection was that approximately 50% of the business was international, 50% of the business was US, so approximately 50% of the proceeds could potentially be used for buyback, is that correct?

So as we announced in February, what we're doing is a strategic review of the Industrial Packaging business, so there's been no formal decision to divest it via sale, spin, or whatever.

So that's currently what we're working through internally within the Company and at the Board level.

And once we get to a decision on the path that will be announced, and we'll work through that across the appropriate timing.

I wouldn't expect it to be sold or spun off or anything to happen in 2013, it's probably likely a 2014 event if something does happen.

From a proceeds perspective, you're correct, about 50% the business is overseas, although a lot of the intellectual property is owned in the US.

So part of the process we're going through is evaluating how much of the proceeds would be in the US, how much would be available for share repurchase if it was a sale process, so that's one of the things that we are looking at currently.

But likely greater than 50% would be in the US.

Okay, great.

Thanks for answering my questions.

Ajay Kejriwal, FBR.

Thank you, good morning.

Good morning Ajay.

Maybe just a couple of clarification questions on the '13 guide.

So you're discontinuing about $600 million in res, it's a $0.07 impact, is that in your guide?

Is that baked into your guidance?

And then you had a $0.05 one-time or my sense is not -- it's excluded from the guide, but if you can clarify both that would be helpful?

Yes.

So our original forecast in January included these discontinued operations in the numbers, because at that point they were part of continuing operations.

So one of the changes we've made here is we pulled out these six businesses, and they have a $0.07 earnings for the year.

So that comes out of the original forecast.

So if our midpoint was $4.25, the adjusted forecast really becomes $4.18.

And then we're adjusting for the first-quarter outperformance was $0.06, including the one-time gain, another $0.06 positive from higher share repurchase, a negative $0.04 from lower base business revenues the rest of the year, and then a negative $0.01 for everything else, primarily translation.

Gets you back to the $4.25.

So at the end of the day what we've done is we've held our guidance at $4.25, even with $0.07 coming out for discontinued operations.

Got it.

So the $0.07 included, but the $0.05 also included, the $0.05 gain?

Yes.

But then you're not baking in for any additional share buybacks from the proceeds as you sell those businesses?

Right?

Right.

It's based on the $850 million, which is coming out of free operating cash flow.

Got it.

And then maybe on the auto aftermarket, I know you mentioned some PLS activity kind of hurting revenues, but if you exclude PLS, what's the trend there?

It's kind of a little surprising, I thought it was a steady eddie business.

Is it related to miles driven?

Or any trends you're seeing there?

I think some of it is miles driven, some of it is weather related.

I think one of the bigger things we pointed out when we talked about the auto aftermarket was the loss of a key customer in one of the bigger retail outlets.

So that certainly carries over quarter to quarter as we compare year over year.

But I would say it's sort of the market itself is in North America is doing -- it's probably certainly not robust, maybe growing; if it's growing, it's growing at a very, very low level, and the European side that's probably the reverse of that, where it's probably negative market activity.

Got it, thank you.

Andy Casey, Wells Fargo.

Thanks, good morning, everyone.

Question on the Construction products margin performance, it was good margin improvement in difficult markets for the quarter.

But it's still kind of trailing the new adjusted average 18.5% by a little less than 600 basis points.

Can you kind of give us a roadmap over what timeframe you'd think the gap can be closed, and then is that dependent on the corporate initiatives, or are there segment specific initiatives that we should contemplate?

Our plan for Construction is that we will get to ITW level margins there within two years.

And that will be a combination of enterprise initiatives, but probably much more weighted to things going on in the business right now.

The overall color is, I think we've been is structuring the business to participate in the recovery, and have been kind of hanging in there with a cost structure that was much more relevant to conditions five years ago, and as the recovery was delayed things didn't necessarily play out under the sort of normal recovery scenario.

We were just -- we took too long to sort of readjust our thinking and our cost structure, and we've got a real aggressive Management team in there now, we're getting after.

And this business absolutely has the potential to perform at or above our expectations for the overall enterprise.

And some nice improvement is a starting point; we've got a long way to go to get there, but we are absolutely committed and we have no doubt the Construction business can perform at a level that's accretive to the overall Company.

Okay, thanks.

And if I could sneak in one more, just returning to the Industrial Packaging timing question.

Is it still likely if that business is going to end up being separated that the business results will be moved to disc ops ahead of the potential transaction?

And ballpark what -- is the timing still the end of the year for a decision, or is it somewhere in the second half?

Well I think as I said we're working through the decision, right, so we can't disclose what we expect the timing to be at this point, but we had expected to be a decision certainly by the end of the year.

The discontinued ops reporting really depends on the outcome of the strategic review process.

If it's a sale process, then there's certain criteria you have to meet, including actively marketing and for sale before you can put it into discontinued ops, but it would go into discontinued ops in advance of the actual closing of the sale, unlike the Decorative Surfaces.

If it's a spinoff, then that doesn't go into discontinued ops until the date of the spend.

So it depends on the ultimate vehicle for divestment as far as discontinued ops reporting goes.

Okay, thanks a lot.

Rob Wertheimer, Vertical Research Partners.

Good morning, everybody.

I apologize, I did miss the first minute of the call, but it looked to me like the increase in the op margin from Jan guide to now is largely the $600 million of divested business is lower margin, is that correct?

Or is there something else bridging that op margin improvement?

For the full year forecast, the majority, about 30 basis points of the full-year margin increase is related to removing the discontinued operations businesses, which have a 6% overall margin from continuing moving into discontinued.

Perfect, I got that right, thanks.

And then second, the non-operating, the bridge from the last guidance to now non-operating was a $0.09 headwind and now is a $0.05 tailwind.

You may have just touched on this -- I'm sorry, $0.03 tailwind.

Could you just go through that again?

So in the non-operating area for the quarter, there was a $0.06 benefit, $0.05 of that was this JV gain, and $0.01 is normal non-operating kinds of things.

In the guidance though?

So in the guidance, that includes -- the majority of the change in the guidance for non-op is the first-quarter non-op change.

Got you.

Okay.

I'll leave it there.

Thank you very much.

Eli Lustgarten, Longbow Securities.

Good morning, everyone.

Just a quick question on the operating margins as we learned, the new segment in the numbers.

Is there anything in the first-quarter operating results, are any of those margins under more pressure as we go through the rest of the year?

And we understand welding had a big number last year, but the year -- I guess the year was about 25.4%, so we're actually still above that.

Is there any of those segments that you look out the rest of the year that the first-quarter operating margins would had difficulty being sustained for the rest of the year?

In fact, it's actually the opposite; the first quarter because it's our lowest revenue quarter is typically the lowest margin quarter.

I realize that.

So across all the segments we'll see increases in operating margins the rest of the year.

Part of that is just normal seasonality and base business improvement, growth versus negative revenue growth, but also a lot of the initiative benefits come in the back half of the year as well.

So there's nothing -- I realize -- I just want to make sure it was nothing that we're seeing particularly with some of the weakness in welding, or some of the weakness in Food Equipment business, all those are expected.

And as you look out for the rest of year, particularly in those two businesses, welding and Food Equipment, are you expecting overall demand to improve, so the negative revenue comps turn positive?

Yes.

I think the answer is yes.

If you go back to what we talked about, Eli, in terms of our quarters relative to organic revenue, we think Qs two through four will average slightly over 2%, so I think that underscores both equipment recovery and probably some consumable improvement too.

Alright, thank you.

Joel Tiss, Bank of Montreal.

Hey guys, how are you doing?

Did I hear you right, about apart from the Industrial Packaging business that you're mostly done with the divestments?

Yes.

And does that mean as we look into '14 and beyond that we are going to see more of a shift away from share repurchase toward acquisitions again?

Not necessarily.

Okay.

We're going to allocate capital as Ron described as part of his comments, which is ultimately we're going to allocate capital between our two external options based on where the best risk-adjusted returns are, we're certainly not going to shy away from good acquisitions that really fit tightly with our core strategy and that fit the accelerated growth positions in our portfolio.

But we're not also envisioning a day when we're acquiring 50 companies a year and adding 5% to 7% of our sales in acquired revenue every year.

Okay.

So this new framework will be kind of an ongoing --

Yes.

And can you just give us the roughly even a range number of shares outstanding at the end of the year?

Or that's too fluid at this point?

At the end of this year?

Yes, at the end of 2013.

We can give you the end of the quarter.

Yes.

The end of the quarter is about $450 million, and typically there is about $4 million to $5 million in dilution on top of that.

So you can do the math around the rest of the share repurchase at average price and come up with an end of the year estimate.

Right.

Okay, thank you very much.

Jim Krapfel, Morningstar.

Thank you.

Good morning, everyone.

I'd like to hear what your largest two or three challenges and successfully executing your strategic initiatives are, and what unforeseen obstacles have come about in early stages of your evolution?

Well I think from our standpoint, the biggest challenges are really managing the pace of execution, that we've got across all these initiatives I think things that we are very committed to, very enthusiastic about, but at the same time this is not a broken Company.

This is a Company that's performed very well.

These are initiatives to further improve an already strong Company, and so from the standpoint of the challenges that I and the rest of the Management team, the thing we talk about more than anything is making sure that we've got a good plan, that that plan is paced appropriately.

We've got to deliver the baking quarter by quarter, I think this is a good example of some pretty terrific execution in the environment.

And at the same time moving the needle and making progress on these initiatives.

And we've got to have a good balance on both as we move through the process, so I think that's the challenge that we continue to focus on internally.

As it relates to the initiatives and any surprises, I don't think we've had any.

If anything I think the deeper we get into them the more convinced we are that we are on the right path, and that these initiatives are absolutely going to make a big difference in terms of the overall performance of the enterprise on a long-term basis, so I think that's where I'll leave it.

Okay, thank you.

And second question, how do you see Europe tracking throughout the year?

Are you expecting a similar degree of weakness, or do you think an inflection to improvement or worsening is more likely?

No improvement is in our planning scenario.

Okay.

Alright.

Thank you.

I think we're going to leave it right there at the end of the hour, we hit the end of the hour.

So we thank everybody for participating in today's call, and I'm sure I'll be talking to a number of you later today.

Have a good day.

Thanks.

Thank you, this does conclude the conference.

You may disconnect at this time.