Illinois Tool Works Inc (ITW) 2013 Q4 法說會逐字稿

Welcome, and thank you all for standing by.

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

(Operator Instructions)

Today's conference call is being recorded.

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

I would now like to turn the call over to your host, Mr. John Brooklier.

Sir, you may now begin.

Thank you.

Good morning, everyone, and welcome to ITW's fourth-quarter 2013 conference call.

Joining me this morning is our President and CEO, Scott Santi and our CFO, Michael Larsen.

During today's call, Scott, Michael and I will discuss our strong Q4 and full-year financial results, update you on our enterprise strategy progress, and provide our full-year and Q1 2014 guidance.

At the end, we will open the call to your questions for our long-standing practice, we ask for your corporation on our one question, one follow-up question policy.

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

Moving to the next slide, before we continue, let me remind you that this presentation contains our financial forecast for 2014 first quarter and full year, as well as other forward-looking statements identified on this slide.

We refer you to the Company's 2000 (sic) 10-K and Q3 2013 10-Q for more detail about important risks that could cause actual results to differ materially from the Company's expectations.

Finally, the telephone replay for this conference call is 800-570-8799.

No passcode is necessary.

The playback will be available until 12 midnight of February 11, 2014.

Now, let me introduce our CEO, Scott Santi, who will comment on our strong Q4 financial performance.

Scott?

Thanks, John, and good morning, everyone.

I will make a few comments on our fourth-quarter performance and our progress on our enterprise initiatives and capital allocation strategy before turning it back to Michael, who will provide some more detail and color on both our Q4 results and our forecast for Q1 full year 2014.

Overall, we were pleased with our Q4 performance, as we were able to deliver strong across the board operating results, while we continued to make meaningful progress in the execution of our enterprise initiatives.

Q4 revenues were up 4.8% in a modestly improving macro environment.

Our Q4 organic growth of 3% was up from flat in Q3, driven largely by North America and China, with overall organic growth of 2% in Europe.

Once again, our automotive OEM segment delivered strong growth with organic revenues up 11% in Q4, versus worldwide auto builds that were up 6%.

And our food equipment segment continued down its path of improving growth, with overall organic revenues up 4% in the quarter, driven largely by strength in North America and leveling demand in Europe.

We also saw solid improvement in demand in our test and measurement business in Q4.

Total Company operating margins of 17.7% were 260 basis points higher than Q4 of last year, and that was driven by disciplined operational performance and the continued excellent work our business teams are doing in the execution of our enterprise initiatives.

In the fourth quarter, enterprise initiatives contributed 110 basis points of margin improvement.

Q4 earnings per share of $0.92 came in $0.03 higher than the midpoint of our forecast and were up 43% versus our adjusted Q4 of 2012 earnings per share.

This shows promising momentum going into 2014 as we enter the second year of our enterprise strategy.

Finally, we remain focused on driving strong free cash flow and being highly disciplined in our capital allocation approach.

Full year free cash flow conversion came in at a strong 129% of net income.

And in 2013, for the full year, we returned $2.9 billion to shareholders in the form of share repurchases and dividends.

As was announced last year, we intend to utilize our existing share repurchase authorization to offset the full amount of earnings per share dilution associated with the upcoming sale of the industrial packaging segment.

In summary, we made meaningful progress in the execution of our enterprise strategy in 2013, and as a result, delivered meaningful improvement in all of our key performance metrics in the year, which was year one of our five-year plan.

I want to recognize the great work done by all of our ITW colleagues around the world in making it happen.

The ITW team has the Company well positioned to deliver continued strong progress towards our enterprise strategy performance goals in 2014.

Now, let me turn the call over to Michael.

Michael?

Thank you, Scott, and good morning, everyone.

As Scott mentioned, we were pleased with our fourth-quarter financial performance and the positive momentum as we continue to execute well on the enterprise strategy.

Let's start on slide 5 with the fourth quarter.

Total revenues of $3.55 billion were up 4.8% versus prior year, as organic revenues were up 3% with international and North America both up 3%.

In terms of segments, we had continued double-digit growth in automotive, and food equipment had another strong quarter up 4%.

Test and measurement was also up 9%.

John will add some more color on our segments in a few minutes.

Our recent acquisitions contributed 2 points of growth and are off to a good start.

Operating income in the quarter was $628 million, up 23% and margins expanded 260 basis points to 17.7%.

Our disciplined and focused execution on business structures simplification and strategic sourcing contributed 110 basis points on a year-over-year basis.

EPS from continuing operations was $0.92, up 43% over our adjusted 2012 EPS and $0.03 higher than the midpoint of our guidance.

Finally, we had another strong quarter in terms of free cash flow, which I will discuss in just a minute.

On slide 6, organic revenues were up 2.8% for the quarter, and the associated operating leverage was 70 basis points.

Price cost was favorable 40 basis points and the largest driver of our margin expansion, like I said, was 110 basis points from the continued strong execution of our enterprise initiatives.

Total operating margins of 17.7%, up 260 basis points from last year, as every one of the seven segments delivered on margin expansion.

As you can see, construction, food equipment, test and measurement and electronics led the way.

But even in higher-margin segments, such as automotive, the team found a way to expand margins another 160 basis points.

On slide 7, a good fourth quarter rounded out a solid year for ITW.

In an environment that improved gradually as the year went on, total revenues were up 2% with organic up 0.2%.

International organic revenues were up 1% with Asia-Pacific growing 4%, while North America declined by 0.5%.

Margin expansion for the year was strong with operating margins up 110 basis points to 17.8% as enterprise initiatives contributed 80 basis points and price costs 40 basis points.

Full-year EPS from continuing operations was $3.63, up 13%, and free cash flow for the year was $2.2 billion, 129% of net income.

So, in summary, a solid year was a positive momentum on top line and operating margins that position ITW well for 2014.

On slide 8, free operating cash flow for the quarter was $597 million, or 147% of net income and $2.2 billion for the year, an increase of 28% versus prior year and a full-year conversion rate of 129%.

Our operating teams continue to make steady progress on working capital.

Return on invested capital improved towards our 2017 goal of 20% plus as the full-year adjusted return was 16.3%, 180 basis points improvement versus 2012.

On slide 9, we continue to be disciplined and return-focused in our capital allocation.

Our priorities remain unchanged in terms of organic investments and attractive dividend yield and an active share repurchase program.

In the fourth quarter, we repurchased 14 million shares, and share count for the year ended at 430 million.

In 2013, we repurchased 30 million shares for $2.2 billion, slightly higher than the 2012 repurchases in dollar terms.

For 2014, we expect to repurchase the remaining 35 million shares required to offset the EPS dilution related to the IPG divestiture.

As previously discussed, the funding for the repurchase program is the combination of free operating cash flow, proceeds from the IPG transaction, which remains on track for mid-year close, and additional financing at attractive rates.

In the fourth quarter, we increased our commercial paper program by a little over $1 billion.

Okay.

I will be back in a few minutes here to comment on the first-quarter outlook and reaffirm our 2014 guidance.

But first, let me turn it over to John for some additional commentary on the quarter.

John?

Thanks, Michael.

On slide 10, very quickly, let's look at some geographic trends.

As Scott and Michael have both noted, our reported organic revenues increased nearly 3% in the quarter, with international organic revenues growing 3.3% and North American organic revenues growing 2.6%.

In Q4, we saw some improvement of the North American economy, Europe continues to show signs of stabilization and China, along with Australia and New Zealand, continues to drive growth in Asia Pacific.

On the next slide, just a couple of quick comments.

From a profitability standpoint, as Michael noted earlier, all seven of our reporting segments showed operating margin improvement in the fourth quarter with construction products up over 300 basis points.

Test and measurement electronics, food equipment and automotive OEM produced margin improvement in ranges from 160 to 250 basis points.

As we've said repeatedly, these strong results underlie the meaningful progress we've made in year one of our enterprise strategy.

Now, moving to slide 12, let's take a brief look at our reporting segments, starting with our test and measurement electronic segments.

Organic revenues rose 1%.

In test and measurement, organic revenues increased 9% as equipment orders improved as the quarter progressed.

Electronic organic revenues declined 8% as comparisons eased somewhat in Q4.

We expect these comps to be more favorable in 2014, and in the quarter operating margins were up an impressive 250 basis points.

As we noted earlier, in auto OEM, this was once again our fastest-growing segment, with organic revenue outpacing worldwide auto builds by 5 percentage points, and that's thanks to growth in new product penetration and favorable customer mix around the world.

Breaking this down geographically, auto OEMs organic revenues grew 11%, versus a worldwide auto build of 6%.

And by geography, North America international organic revenues grew 13% and 10%, respectively.

Similar to prior quarters, European organic revenues increased 10%, even as auto builds only grew 3% in that region.

In Asia Pacific, our organic revenues grew 15%, largely due to robust China auto builds.

Our organic revenues in China grew 28% in the quarter, while auto builds there grew 18%.

In some, this was another very strong quarter of growth and profitability from all geographies of our auto OEM business.

In our polymers and fluids segment, organic revenues declined 1%, primarily due to ongoing product line simplification work in exiting low-margin businesses.

As we move into Q1 2014, comps should ease somewhat based the PLS work done in 2013.

To provide a bit of background, segment organic revenues declined 7% in Q1 of 2013 and decreased 4% in Q2, and we were flat in Q3.

The segment's operating margins of 16% improved modestly in Q4, and we anticipate additional operating margin expansion in the upcoming 2014.

Scott noted food equipment's progress earlier in his commentary, and they delivered another very strong quarter of growth, thanks to new customers in service expansion, largely North America.

Total organic revenues grew 4% in the quarter.

In North America equipment and service related organic revenues grew 7% and 6%, respectively.

International equipment produced organic revenue growth of 2% and service organic revenues were essentially flat on quarter.

International growth was moderated due to weak economic conditions in France and Italy, offset by some improving conditions in the UK.

The segment's strong operating margins of 19.5% were 250 basis points higher than the year-ago period.

In the welding segment, worldwide organic revenues were flat due to soft demand in North America and Asia, offset by stronger revenue growth in Europe.

Organic revenues for international increased 4%, while North America decreased 2%, largely due to sluggish heavy equipment activity.

Internationally, organic revenue growth was due to improvements in oil and gas areas in Europe, as well as our worldwide insulation businesses.

The Asian revenues reflected end market softness in general industrial end markets across Asia.

However, segment operating margins continue to be very strong at more than 23% in the quarter.

We continue to be very pleased with the profitability progress in our construction products segment.

Talking about organic revenues first, they grew more modestly and they grew 2% in the quarter, North American construction organic revenues increased 5% with residential construction up an impressive 12%.

The North American renovation and commercial construction categories, however, were essentially flat in Q4.

I think this points to the up-and-down nature of what we've seen in the commercial sector over the last number of quarters.

Internationally, organic revenues grew 1% with Asia Pacific up 4% due to strong retail business in Australia and New Zealand.

European organic revenues declined 3% thanks to sluggish construction and remodeling activity.

As noted earlier, segment operating margins were up some 310 basis points versus the prior year, as management continues to resize the business.

Finally, in our last segment, specialty product, segment organic revenues grew 1% in the quarter.

Segment growth was driven by 5% worldwide organic growth from our consumer packaging businesses.

Our hi cone and warehouse automation businesses continue to generate organic growth in the segment.

Worldwide appliance organic revenues declined 4% in Q4 as market conditions in Europe remained weak.

Nonetheless, Q4's segment operating margins of 17.9% were 50 basis points higher than the year-ago period.

Now, let me turn the call back over to Michael who will update you on the Q1 and full-year earnings forecast.

Michael?

Thanks, John.

As you've heard today, we exited 2013 with some positive momentum that positions us well for 2% to 3% organic top line and 18% to 24% earnings growth, in line with the 2014 guidance communicated at our December 6 analyst meeting.

While we were encouraged by what we saw the second half of 2013 and the fourth quarter in particular, we think it's prudent to remain cautious on the global macro environment at this time.

We expect operating margins of approximately 19% for the year, as we continue to execute well on the BSS and sourcing plans that support our enterprise initiatives.

And we are reaffirming our 2014 EPS guidance in the $4.30 to $4.50 range, again, an increase of 18% to 24%.

And all of this is very consistent with our outlook from December.

In terms of our IPG related share repurchase program, we are slightly ahead of schedule, and if we stay on track, we could complete the program earlier than year end.

If so, you should expect a slight EPS benefit associated with the timing of the repurchase program.

For the first quarter, we expect EPS within a range of $0.93 to $1.01.

This assumes total revenue growth of 3% to 6% on some easier year-over-year comps and an organic growth rate similar to Q4.

In conclusion, the fourth quarter was a good finish to a solid year for ITW, and we are well positioned to deliver continued strong progress toward our enterprise strategy performance goals in 2014.

With that, I will turn the call back to John for Q&A.

(Operator Instructions)

Jamie Cook of Credit Suisse.

Congrats on a nice quarter.

I guess just two questions.

One, within the construction product side, the margin performance is fairly impressive.

Can you just talk about the drivers behind that and how to think about incremental margins, if you get a bit of a tailwind from the construction cycle?

And then just, two, there's a lot of optimism, I think, in 2014 with some potential recovery in non-res construction.

Just sort of how you guys are viewing that, and do you think the market is a little too optimistic?

Thanks.

In terms of the overall margin trajectory that we anticipate, we've talked before about our view that the construction business, at its current size and scale, certainly has the potential to be operating at a much higher level of profitability at a level that's accretive to our overall Company objectives.

So, from the standpoint of incremental margin performance from here forward, we expected it to be a very strong for the next four to six quarters, regardless what's going on in the macro environment.

And I think on the commercial construction question, I think we are right where you described.

I think it's, I think John used phrased choppy for the last couple of quarters.

I think we have been encouraged at times over the last two to three quarters and fourth quarter things seem to soften up again a little bit.

So, I think we will certainly be happy to see it when the recovery comes.

But at this point, I'm not seeing a whole lot of basis for a high level of enthusiasm, there.

We will see what happens.

I would just add to that, if you look at -- Jamie, if you look at the latest Dodge data through the end of the year on a square footage basis, which is the metrics we look at, construction on square footage basis is basically -- commercial construction is basically flat year over year.

So, to Scott's point, I don't think there's anything supporting better commercial construction in the near-term.

Okay.

Thanks.

I will back in queue.

Rob Wertheimer Vertical Research.

I apologize, I missed the first minute of the call.

But did you get into the change in profit in discontinued operations quarter to quarter and what caused that?

No.

We did not.

I'm not sure what you are referring to.

What was the discontinued ops profit in the quarter?

I think it --

For IPG?

If you go in the appendix, you will be able to see that in the schedule.

I had just thought that it declined from $40 million to $50 million down to $1 million income from discontinued ops.

Maybe I misread it.

Part of that is related to some of the restructuring we are doing as we prepare the business for sale, and there was some tax charges related to that.

So, that's what you would've seen in the discontinued ops.

Okay, perfect.

So, it was deliberate actions rather than any degradation?

No, absolutely.

It's the legal reorganization as we get ready to separate the IPG business from ITW and proceed with the transaction.

Okay, perfect, thank you.

And if can just ask one big picture question.

Are you seeing any revenue gain or any revenue impact from the BSS initiatives?

Obviously, auto's been incredibly strong, that's a bit of a global business.

I'm just curious, obviously you talk about the [S&A] saves and the cost saves in the COGS line, what is the impression of how it's shaking out on revenue?

Are you losing any in the J curve, are you seeing more opportunities as you continue to do it?

And I will stop there.

Thank you.

Sure.

Our expectation is that BSS is very much going to drive a greatly enhanced focus, in terms of the major growth opportunities in the Company.

So, there is a big revenue component in terms of improved organic growth performance overall that's driving BSS.

That being said, I think the focus around the Company in the first year has largely been much more internal than external.

I would expect 2014 to be a year where we are still fairly heavily focused on completing some of the internal restructuring, but that we begin to start to pivot our view, if you will, from inside to outside in preparation for some accelerating organic growth in 2015 and from 2015, going forward.

Thank you.

Joe Lychee of Goldman Sachs.

Just a quick question on the cost outs.

I know that historically you've talked about the synergies that you plan to get, being linear over the next five years.

Could you just provide with the actual benefit that you received in 2013 and what your expectation is for 2014?

You are talking about the -- on the BSS side and the sourcing side combined, we saw 110 basis points of improvement in the fourth quarter.

And that buildup, really, if you go back into the first quarter, 40 basis points, then 60, then 80 in the third quarter, then 110 here.

We really expect to have leveled out here at about 100 basis points improvement a quarter, roughly, as we go forward into 2014.

Again, the way we've laid this out, we've talked a lot about the pace of execution here and not wanting to get too far ahead of ourselves and take risks that we don't need to.

So, we've really related out and a fairly linear fashion here in terms of the restructuring costs, as well as the savings associated with those.

Okay, that's helpful.

I calculated a number that was roughly $110 million to $120 million in savings in 2013, and so in 2014, it was very, very much backend loaded.

In 2014, since we are exiting at a higher run rate, you would expect there to be a benefit -- an incremental benefit in 2014 versus 2013.

Am I thinking about it correctly?

I think in terms of what you will see, is a 2014 where the BSS savings will be very much in line with what we saw in 2013 and then continued progress on the sourcing side.

Okay, great.

One last question on the incremental margins.

Clearly the margin performance across several of the segments were great.

I'm just trying to understand, trying to break up the difference between what you are getting from BSS in sourcing versus the incremental margins that you are seeing on your organic growth.

Is there any here risk that we should use or think about for 2014 and beyond?

What I will tell you is that on the -- in terms of the incrementals on the organic growth, we remain in the 35% range.

Anything beyond that is a combination really of BSS and sourcing efforts.

Great.

Thanks for taking my questions.

I look at back in queue.

Steven Fisher of UBS.

You guys are still looking for 2.5% organic growth in 2014 at the midpoint versus 2.8% in Q4.

So, just wondering if you are thinking that 2% to 3% on growth forecast is conservative at this point?

Or are the really areas you think are going to slow that you mentioned that you want to be cautious at this point, still.

I think what I'd say is, the 2% to 3% organic, we view that as a realistic assumption for 2014, based on what we are seeing right now.

So, if you look at 2013, the fourth quarter was really our first quarter of organic year over year growth at 2.8%.

And while we are encouraged by some of the revenue growth we are seeing in the -- in our segments, we think it's a little too early to call these trends and get too far ahead of ourselves, here.

The other thing I will say is, of you look at some of our more capital goods-driven businesses, so excluding the welding side and in North America, we haven't quite seen the pickup yet in the CapEx cycle.

So, I'd say very much consistent with what we are seeing today.

We've laid out the 2% to 3% organic, consistent with what we said in December.

And on a reported basis, that's about 2% to 4% revenue growth.

Okay.

And then at the Investor Day, you said if things lined up perfectly, you thought there could be some upside to the 10 million shares a quarter and 50 million total on repurchases.

I guess curious how you're thinking about that now.

And I think to give you the math, I guess it's about 49 million shares in total that you are talking about.

Yes.

So, when we announced the IPG mode of discontinued operations back in September, we also said that we would repurchase 50 million shares to offset the EPS that goes with IPG.

Last year, we completed 14 -- in the fourth quarter, we completed 14 million shares, slightly ahead of the 10 million planning assumption.

So, we have 35 million shares to go, and we -- if we remain on track here, and as I said, we are slightly ahead of schedule, we could see that program get completed earlier than year end, and if that happens, we should expect to see a slight EPS benefit associated with that.

But, I really can't comment much beyond that in terms of the actual timing and number of shares being repurchase by the Company.

So, it's a timing upside, not a number of shares upside?

That's correct.

Okay.

Thank you.

Nigel Coe of Morgan Stanley.

The performance of the auto OEM businesses continues to impress.

And I'm just wondering, do think you can maintain that going into 2014?

And I'm just wondering how the new platform launch calendar looks for this year versus last year?

Nigel, I think we are in pretty good shape there for 2014 and probably several quarters beyond that, based on what we have visibility of right now.

Okay.

I think, Michael, you mentioned 14 million shares, was that actually in the quarter, or does that include what you did -- what you've done in January, as well?

That was in the fourth quarter.

Okay.

Can you talk about what you've done in January?

If it's material?

No, no.

What I can tell you is that we have an active program here, and we are committed to repurchasing the 35 million shares, and we are slightly ahead of schedule at this point, like I said.

Okay.

I know you address the question on disc ops, and sounds like there is one or two discrete surcharges there.

But if we look at the underlying performance of the IPG business, did it grow EBITDA in 2013?

You remain confident that you're going to close this deal by mid-2014, indicating there should be an announcement very soon.

I'm just wondering, can you maybe provide a little bit of color as to timing?

And will you expect it to be the exits, or could there be something along the lines of a structure that we saw with [expenses]?

Here's what I will say.

We are targeting, to answer your last question first, a complete sale of the business and not a joint venture.

We are very pleased with the auction process that we are running.

The business, to your earlier question, is performing in line with, if not a little bit better, than expectations.

And so we are on track to complete a transaction at closing of a transaction by the middle of this year.

So, if you back into that, you would expect an announcement in the not too distant future.

Okay.

Thank you very much.

Ann Duignan, JPMorgan.

Could you give us just a little bit more color on the food equipment business?

Where you saw the strength of the small businesses, was it institutional?

Was there any buying at the end of the year for tax reasons, do you think?

Just a little bit more color on what's going on there.

I think overall, what is driving of the overall acceleration in growth is a much more active new product pipeline there that we've been working on for the last couple of years, and we've been commercializing steadily over the last three or four quarters.

The overall environment here is, I would say, okay at best.

It's largely driven by, again, new product development in North America and it's also had an impact in Europe, offset somewhat by much more sluggish macro environment there.

Is it more products -- depending on the product breadth, or is it products into new customers?

It would be much more about product enhancement.

So, innovation associated with water savings, energy savings, et cetera

Okay.

That's helpful.

And the same question on the construction side.

Are any of your customers buying into year-end for tax reasons?

We haven't found anyone yet buying for tax reasons.

Certainly not on the commercial side.

(multiple speakers)

Not on the commercial side, obviously (laughter).

Okay, most of my other -- go ahead, sorry.

I was just going to say, we didn't see a lot of acceleration in terms of year end buying.

I would say from a standpoint of test and measurement, that business strengthened up to the extent that it was a bit of use it or lose it there.

In terms of capital budgets, we really can't say, but that that would be the one area that would maybe be a bit subject to some year end buying patterns.

But across-the-board, it was pretty minimal.

Okay, good.

That is good color.

I appreciate it.

I will get back in line.

Thanks.

Deane Dray of Citi.

On the residential side, up 12%.

Can you give us a split between how much of that is new builds versus renovation and how you expect resi overall to play out during the course of 2014?

Yes, that is all new build, so when we give you -- it's really the housing number.

The renovation would really go into our renovation category, which is represented by the box stores, largely, for us.

The number you saw for 2012 is really housing, single-family housing and some multi in there.

But it basically, that's a number that you wouldn't want to track along with housing starts.

So, your expectation for the balance of the year?

For 2014?

Yes, sorry.

For 2014, housing starts right now are running at about 1 million.

I don't think we're seeing a projection that's dramatically higher than that for 2014.

But I think you should expect us to probably, from a growth standpoint, to run at numbers that are consistent with what you are seeing right now, probably low double-digit on the housing side.

I think the renovation in the commercial side, commercial side in particular is too difficult to call right now, in terms of what improvement we might see there.

Got it, and then I also wanted to ask about M&A.

We know the new look ITW is, a third of top line is coming from M&A on a go forward basis.

So, maybe some observations, color on what the funnel looks like, the size of deals, pricing and so forth.

Well, I think what I would say for now is I would expect 2014 to look a lot like 2013 looked like.

We had three really nice, very tight fit, highly strategic deals that we did, and I think the revenue contribution in Q4 was about 2% from those.

And I think our -- my expectation for 2014 would be that we look very similar to that.

I would -- I'm not sure how to comment on the pricing environment, other than to say --

You walked away from deals because of pricing?

No.

It's much more about the strategic filter right now than just the pricing, and so the things that we got really interested in an 2013, we were able to close.

I would expect we'd have the same ability to be successful in 2014.

Great.

Thank you.

Steve Volkmann of Jefferies.

Just a couple quick follow-ups.

Any update on your price cost assumptions for 2014?

Yes.

We are still tracking -- if you look at 2013, we had about 40 basis points of favorable price cost.

That's a difficult number to forecast.

We are not seeing a lot of significant cost pressure at this point, so we are basically going with the 20 to 30 basis points for 2014.

Great, and then can I just ask about test and measurement in electronics?

The margin obviously was up nicely, there, and I'm wondering if that is mix related with more test and measurement, or if it's more enterprise initiatives.

Or, just any commentary there.

It's really a combination of all of the above, including the flow-through on the 9% organic growth in the test and measurement business.

Really, a combination of all of the above.

Okay, great.

Thanks so much.

Alley of Longbow securities.

Just a follow-up on Steve's question.

Can you talk a bit about, are you seeing any effect from the strong dollar, and what's going on pricing across your market?

Is pricing benign?

Is there any areas of price improvement taking place?

On the dollar euro, our rate that we are using for the year on average, is about $1.34, consistent with last year.

So, we are not seeing a -- in our forecast, but that is kind of what we are planning for.

Because we have manufacturing in the international markets that -- on cost associated with that, we don't see large swings in earnings per share in terms of changes to the euro dollar rate.

On the price side of things, what I would say is that we've historically done a good job offsetting inflation with price, and we continue to see that.

I think some of the highlights for the fourth quarter, if you look at our welding business in particular, we were able to continue to see favorable price cost dynamics.

But really no change in terms of the pricing environment.

And just a quick follow-up.

Your three businesses -- two businesses you highlighted were automotive equipment and food equipment, and welding was flat.

Are those three high margin businesses a goal in 2014 to sustain margins, or are you still -- areas of improvement needs to take place, given a little bit of different kind of demand trends in 2014 versus 2013?

Well, we expect all of our operating segments, operating margins in 2014 to be better than 2013.

All right.

Thank you.

Next question comes from Andrew Kaplowitz of Barclays.

Good morning, guys.

Nice quarter.

Scott, your international welding business led pretty dramatically in terms of growth in the quarter.

You mentioned strength in Europe, but it really was a pretty big change.

Was this the new product penetration something different that happened there?

I think it went from negative 11 to 4?

Something like that?

Our European welding business is largely centered on oil and gas.

And so what really is going to drive most of the swing quarter to quarter as much more about projects and the timing of those projects.

So, --

Is that sustainable, though, Scott, going forward then --?

We remain very bullish on the oil and gas play in our welding business.

For the long haul, I think the -- we expect our oil -- the oil and gas component of our welding business to be a strong organic grower for at least the next three to four years out, as far as we can see.

I think whether you are going to see it consistently grow quarter to quarter in Europe, given that it's a relatively small business, I can't say.

But overall, we expect the demand environment there to continue and improve.

We're very active in that space with new product development, product innovation, and that will help drive the overall growth rates there.

Okay, that's helpful, and maybe just stepping back.

I think we all understand the need to be conservative when looking at organic growth for 2014.

But maybe you could talk about the pieces of your forecast that you gave at the Analyst Day.

If you look at 2 to 3 North America, 1 and 2 in Europe, 4 to 6 in Asia-Pacific and other, I guess what I see is Europe is maybe trending toward the higher end of expectation.

You've had really strong growth in South America, maybe you could talk about that and any risk you see a slowdown in the emerging markets.

Well, I think the overall framework, and we talked about this in New York in December, was -- our model is we are going to forecast based on demand rates that we are seeing now.

To the extent we saw some slight uptick in a couple parts of the Company in the fourth quarter is certainly something we'd rather have than not.

But ultimately, to over-react too much to some relatively short-term trends in an overall macro environment that's been pretty choppy for eight quarters or more, I think we are in a wait and see mode.

We have got a business plan set up where we are going to deliver between 18% to 24% earnings growth at the revenue forecast that we have right now.

Could things be better next year?

Sure.

Could they be worse?

They could.

But I think we are going to try to walk down the path of reasonable expectations in a solid business plan where we can grow earnings in a significant way, regardless of the macro environment.

I think that's fair, Scott, but is it fair to say that Europe at least has been tracking better than your expectations, or am I putting words in your mouth?

I think it's become firmer.

More stable.

Industrial production in Europe is still negative.

I think the last equivalent of the PMI index in Europe is still running negative.

It's -- I think there's plenty of reason for wait and see.

We saw 2% organic growth here in Europe in the quarter, and our guidance for the year assumes 1% to 2%.

So, I think, again, we are right in line.

Okay.

Thanks, guys.

Next question comes from and Andy Casey of Wells Fargo.

I just want to make sure I am getting this correct on the combined margin impact of anticipated BSS, global procurement and restructuring.

If I'm doing the math correctly on the restructuring, it seemed like you incurred close to $140 million in 2013.

I'm wondering, is any of that related to IPT, or is that ongoing ops?

No, the correct number is $114 million, I think you said $140 million.

It's $114 million, was our spend in -- or investment, if you like, in 2013.

That excludes IPG.

And our assumption for 2014, right now, is $100 million of restructuring, and we've laid that out as approximately $25 million a quarter.

Okay, great, thank you, Michael.

And then if you take a little bit smaller gap than I was looking at, the $14 million decrease, does that mean we are emerging from the heavy lifting period related to setting the foundation for the enterprise strategy?

I wouldn't say that.

I think we are 1.5 years into the restructuring, the BSS efforts, and we have at least another year to go here, with some significant work to be done, including in places like Europe that can be a little bit more challenging.

So, I wouldn't say it's getting easier from here.

Okay, thanks.

Then there have been some questions around this next one.

Could you give us the end of fourth quarter diluted share count?

430 million, I believe.

Okay.

And then lastly --

Sorry, hang on.

The 430 million is the basic number.

So, 440 million is the diluted number.

433 million.

433 million, sorry.

Okay, great.

And then what sort of issues would cause you to change the repurchase pace for the balance of 2014 from what you actually realized in Q4?

Well, I think the pace is going to be dictated, to some extent, by the three things that I laid out, which is our ability to continue to generate strong free cash flow, which we had another good fourth quarter.

That would be typically seasonality.

We're going to be little bit lower than that here in the first quarter.

We are funding some of these repurchases with short-term debt.

And so in the fourth quarter, that was predominantly through our commercial paper program.

We've got some things coming up here in the first half of the year that we want to refinance at some very attractive rates.

The timing around that needs to be aligned.

And then I would say, the last piece here is really the transaction and the closing of the transaction for IPG.

The proceeds, of which will be, to some extent, used to buy back shares.

I think those are the things that -- along with, obviously, we continue to look at the cash on hand in North America and therefore, what's available for repurchase.

So, those are kind of the three variables that would determine the timing.

Okay.

Thank you very much.

John Inch of Deutsche Bank.

Did you give a range of organic expectation in the first quarter?

I think you said it was going to be comparable to the fourth quarter, right?

So, that's around 3%?

Is there a range talked about?

You gave a range of 3% to 6% for -- in the press release.

I'm just wondering what you think in terms of organic growth in the first quarter vis-a-vis range?

Yes.

I think it will be similar, the 2.5% to 3% range, is what we are projecting right now.

Similar to what we did in the fourth quarter.

The comps year over year are a little bit easier.

We were actually down in the first quarter last year.

Well actually, Michael, the comps are a lot easier, and -- I'm sorry, what is the 2.5% to 3%?

Is that -- I'm asking, what do think -- you gave a sales range for the first quarter of 3% to 6%.

Is that consistent with -- would that spread be the organic range?

No, that's the reported range.

Right.

That still has some of the acquisitions from 2013.

So, you just -- you are just making a point estimate for organic growth in the first quarter?

I mean, I can tell you 2% to 4%.

And so that would be a midpoint of about 3%, which is what we did in the fourth quarter.

Okay, so 2% to 4%.

This gets to the heart of my question.

Your organic growth for the year is only about 1 point of difference, 2% to 3%.

Yet, your first quarter, if you just think of the time value of risk, should be -- you clearly have visibility into the first part of January in the business trends in your Company.

Why would you have a 2 point spread in the organic growth in the first quarter and only 1 point for the year?

Isn't the year a little bit more harder to forecast around than the first?

John, I think we are splitting hairs, here.

I think we discussed the point earlier.

And you are free to do your own forecast.

Okay.

I'm not disputing your methodology.

I'm just trying to understand if there's anything implicit in the way you've provided for first quarter that we're supposed to be recognizing, either because of something specific to the compare, which is obviously very easy, or some other aspect.

Just to make sure that we've got our I's and T's dotted and crossed.

We've built an organic forecast that is predicated on same number of days for the quarter.

We are projecting Q4 daily demand rates into Q1.

Into Q1, with an easier comp gives us a number that's --is in that range that Michael talked about.

Okay.

When you give the 2% to 3% for the year, if I go back to the December outlook meeting, I think, if I'm not mistaken, pretty much the 2% to 3% was predicated, considering you have pretty easy compares in 2014 on no business change or cadence sequentially.

Yet, it does appear the quarters actually ended better on an organic note.

So, am I still reading that right?

So in other words --

I think, John, we are back to where we were before.

If you really want to bite on these Q4 trends as strong momentum building trends, you could absolutely have a more optimistic view of 2014.

In our view, it's a little early for that.

I think we will talk to you at the end of the first quarter, and if we see two quarters in a row, we are going to be much more comfortable ramping as we go forward.

But given the environment over the last eight quarters, and, like Michael said, some of the things we are seeing in parts of the business where we are still very sluggish in welding, still very sluggish in a number of the capital goods sectors.

I think we are comfortable with where we sit.

That is fine, Scott.

I just want to make sure the framework is consistent and there's nothing else that's been adjusted in some matter that still gets you to the same output.

But that's great.

Appreciate it.

Thank you very much.

Mircea Dobre, Robert W. Baird & Company.

Your line is open.

Thank you for taking my question, guys.

A lot has been covered, but if I go back to the welding segment, maybe you can provide us a little bit of color on consumables versus equipment demand and how you are thinking about that, maybe going forward and the potential impact on incremental margin on the segment in 2014.

Well, I guess where I would start, is where we are really seeing the drag, the demand drag right now is really in the heavier equipment sector.

Take a lot of what you are hearing about from the mining exposure in other heavy equipment industries, and we are a major supplier in that space, and that's really been the headwind.

We've had reasonably good performance in the commercial end of the business from the standpoint of organic growth.

It's not really a consumable versus equipment mix issue, it's really more of an end market exposure issue.

And in our equipment business, with improved results in this heavy equipment space, it's -- the overall business is certainly highly profitable for us, but that segment -- that sector in particular is a very strong one for us.

If we get some reasonable recoveries as we go through 2014 and start to see growth again in this heavy equipment space, it should be favorable to the overall margin profile of the business.

I see.

But you haven't seen -- maybe wishful thinking on my part, a uptick in consumables or anything like that as of yet?

Not yet.

Okay, and then my last question is going back to the construction segment.

It was good color on North America.

But I am wondering, could you talk a little bit about what you are seeing outside, (technical difficulty), Australia specifically.

I think Australia has actually performed pretty well.

If anything, it was a slight upside in terms of our own projections in Q4, up, I think 4% or so.

So, some reasonably good performance in Australia.

Europe remains slack, but as we've talked before, we've got a lot of work on the cost structure in Europe that's in front of us.

Not super worried about the demand side in Europe right now.

But I think Australia, we actually were modestly surprised on the upside in terms of the overall demand.

It's not just the easy comps issue, you are saying, it's more than that?

Right.

Thank you for taking my questions.

[Shivanchi Vitness] Global Hunter.

Most of it is already covered, but I just want one question on the margin.

So, you are expecting more 90% for 2014, so that's about 120% -- it's about 120 bps improvement.

Considering the long-term goals of 20% plus for the margin in ROIC, which is actually a quite impressive improvement, should we expect this 20% marked across in only 2015 or so?

Maybe like it would still be about 2016, 2017.

I think we're -- if I understood your question correctly, we are not giving guidance for 2015 today.

We're -- we've said that, you are right, that it's about 120 basis points of margin improvement in -- assumed in the guidance for 2014, and that puts us right on track with the targets that we laid out 1.5, 2 years ago almost, at the -- for the 2012, 2017 strategy.

And so we would say we are right on track to achieve the 20% plus operating margins.

Okay, sounds good.

And then just one last question on the organic mix with China.

It's about, it looks like about 43% of your international revenue were organic, that's about like 3% of the 7% sales growths.

And much of it was from South America and China.

Do you expect this batch to continue in 2014, or we should expect a change of the mix due to M&A?

Or maybe the other thing would be like China's stagnant GDP growth, the inflation pressures and the recent of PMI, which was below 50.

Does that concern you for China's organic 2014 growth?

No.

Our China business is driven mostly by our auto OEM business, which has been, as John commented earlier, a very strong performer, and we expect that to continue for a while into the future.

We will take one more question, thank you.

Our last question comes from Mr. David Raso of ISI Group.

Yes, I will be quick.

Two of the deltas for 2014 versus 2013 that help organic, you hope to be having a lot easier comps than maybe some growth in electronics and then the absence of the PLS drag that you had an polymers this year.

Can you quantify those?

For example, what are you forecasting electronics to be in 2014 after being down 10% to 15% drag in 2013?

And again, what is the quantification on a PLS drag that you had in 2013 that I assume goes away in 2014?

We are really expecting an electronics business in 2014 that is largely flat with 2013, so not expecting significant improvement.

I think on the PLS side, I don't think we don't think we've broken that historically by business.

But I think we would say, in the polymer fluids business, that the majority of that activity is behind us at this point, and so we would expect to see a slightly better 2014 than 2013.

Can you help us a little bit on the size of the PLS drag in 2013?

Not really, no.

All right.

Thank you very much.

Thanks, everyone, for joining us today.

We look forward to talking to you again, and stay warm.

Thank you, sirs.

That concludes today's conference call.

Thank you all for participating.

You may now disconnect.