Illinois Tool Works Inc (ITW) 2014 Q1 法說會逐字稿

Welcome and thank you all for standing by.

(Operator Instructions)

Today's conference call is being recorded.

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

And now I will hand the call over to your host, Mr. John Brooklier.

Sir, you may now begin.

Thank you.

Good morning, everyone, welcome to ITW's first-quarter 2014 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 Q1 financial results as well as provide more detail on the $0.15 EPS raise for our 2014 full-year guidance.

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

We have scheduled approximately one hour for today's call.

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

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

Also this presentation uses certain non-GAAP measures.

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the press release which can be found on our website at www.itw.com.

A couple of other housekeeping items, conference call -- replay conference call number is 800-841-8616, no passcode is necessary.

And the playback will be available until 12 midnight on May 6, 2014.

Finally one other note, you will notice that we have updated the format of the slides which it's intended to provide a more streamlined and concise presentation while keeping the relevant content intact.

We view this as another exercise in 80-20.

So with that I'll turn it over to Scott Santi who will comment on the quarter.

Scott?

Thanks, John, and good morning, everyone.

On the whole we've had a good start up to 2014 and we continue to be pleased with the progress we are making in executing our enterprise strategy.

In the quarter, operating margins of 18.7% were up 180 basis points.

And adjusted after-tax return on invested capital was up 240 basis points to 17.2%, representing continued solid progress towards our stated goals of 20% plus for each of these key metrics by 2017.

Overall organic growth was solid at 3.3% in the quarter which we were able to achieve without any meaningful contribution from our Test and Measurement or Welding segments, two of our strongest organic growth businesses historically due to a CapEx spending environment that remains sluggish.

In addition, I'll note related to the Company's organic growth performance in the quarter is that we estimate that the portfolio actions we have taken over the past two years had roughly 100 basis point positive impact on the Company's overall organic growth rate in Q1.

Earnings per share of $1.01 were up 15% versus Q1 of last year, up 22% if you exclude a one-time gain of $0.05 a share in the prior-year quarter related to the acquisition of a majority interest in the joint venture.

As a result of our operational execution and the progress we were able to make in Q1 on our stated goal to repurchase 50 million shares to offset the earnings per share dilution associated with the divestiture of our Industrial Packaging segment, we are raising our full-year midpoint guidance by $0.15 to $4.55.

The new full-year midpoint represents EPS growth of 25% on a year-over-year basis.

Michael will provide more detail on our revised Q2 and full-year EPS forecast during his comments in a couple minutes.

Before turning the call over to Michael, let me conclude by recognizing and thanking the Executive leadership team and all of our ITW colleagues around the world for the great job that they continue to do in serving their customers and excluding on our enterprise strategy.

Michael?

Thank you, Scott, and good morning, everyone.

Starting on slide 2, ITW had a good start to the year as margin expansion and share repurchases contributed to EPS of $1.01 which was the high-end of our guidance range and a year-over-year increase of 15%.

Total revenues were $3.6 billion, up 4.4% versus prior year with organic revenues up 3.3%.

International growth was 6.3% while North America was up 1%.

In terms of end markets, Automotive OEM, Food Equipment and Construction Products all had good growth in the quarter.

As usual, John will provide some more segment detail in a few minutes.

Operating income in the quarter was $667 million, an increase of 16% as margins expanded 180 basis points to 18.7%.

Our enterprise initiatives business structure simplification and strategic sourcing contributed a combined 120 basis points on a year-over-year basis with strong execution across our businesses as five out of seven segments expanded operating margins by more than 100 basis points.

We were also pleased with 60% incremental margins in the quarter.

Pre-operating cash flow for the quarter was $246 million.

The conversion rate in the first quarter was driven by typical seasonality and we expect cash flows to increase from here, and our full-year conversion rate should be greater than 100% of net income.

The sale process for the Industrial Packaging business remains on track and we are working towards a May 1 closing date.

We accelerated the timing of the IPG-related share repurchase program and bought more 18 million shares in the first quarter.

We now expect to substantially complete the announced 50 million share repurchase program by the end of Q2.

We anticipate that the ending diluted share count for 2Q is going to be approximately 400 million shares.

We will discuss the positive impact of the lower share count in our updated guidance in a few minutes.

So in summary, a good start to the year as the team continues to execute well on the enterprise initiatives.

On slide 3 our international organic revenue growth was up 6.3%, outpacing North America up 1% in the quarter and total organic was up 3.3%.

We continue to see improvement in Europe up 5% with growth across the board including Automotive OEM, Food Equipment and Test and Measurement.

China and Australia are the key drivers of Asia-Pacific growth up 7% with double-digit contributions from several businesses partially offset by declines in Welding.

Brazil is still fairly small for ITW but led the way with an increase of 17% as our South America organic revenues were up 18%.

Finally, North America of 1% in the quarter with continued strength in Automotive and Food Equipment while our business that are more closely linked to the CapEx cycle, such as Welding and Test and Measurement, were essentially flat.

Weather had a fairly limited impact on our North American revenues, although sequentially we did see a slightly stronger March and April is off to a decent start.

Moving to slide 4, solid execution across our segments lead to margin expansion in the quarter with operating margins of 18.7%, an increase of 180 basis points from last year.

In particular, Automotive OEM, Construction Products, Food Equipment and Polymers and Fluids put up some solid margin expansion numbers.

The key drivers of the first quarter margin expansion are listed on the right side of the page.

Operating leverage on the top line was 80 basis points and the largest driver of our margin expansion was 120 basis points from the continued progress at our enterprise initiatives.

Price cost was 10 basis points and acquisitions are performing well but reduced margins by 20 basis points.

I'll be back in a few minutes to comment on second quarter and 2014 guidance.

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

John?

Thanks, Michael.

On slide 5 you'll see the breakdown of total revenues and operating income per segment.

Michael noted earlier, Automotive OEM and Food Equipment segments lead the way with 13% and 9% total revenue growth respectively.

Operating income for Auto OEM, Food Equipment and Construction Products produced significant year-over-year increases.

Now let me go further into each of our operating segments.

Starting with Automotive OEM, this segment once again was ITW's fastest-growing segment with organic revenues up 13%, and that's outpacing worldwide auto builds by 8 percentage points.

By geography, Europe grew 14%, North America 11% and China 28%.

In Europe, we outperformed European auto builds by 7 percentage points largely due to our successful fuel release and power train product lines.

In North America, we outpaced auto builds by 5 percentage points led by fasteners and body components.

And in China, we continued to gain share with new and existing products.

In sum, this was another very strong quarter of growth and profitability for our Auto OEM business.

And the segment's strong operating margin of 23.3% was 350 basis points higher than the year-ago period.

One thing I should note is auto builds are forecasted to moderate in the second quarter but we still expect to maintain good penetration across all geographies.

Moving to the next slide, in our Test and Measurement electronics segment, organic revenues were essentially flat in the quarter.

In the Test and Measurement side of the business, sluggish CapEx spending and order delays resulted in a 1% decline in organic revenues.

On the electronics side, revenues were flat in the quarter as our other electronics category which includes businesses in areas such as contamination control and pressure sensitive adhesives, they produced organic revenue growth of 4%.

This was offset however by our electronics assembly business which saw organic revenues decline 7% in the quarter due to weak end market demand.

Looking ahead, we expect our Test and Measurement business is to benefit from more recovery in end markets and the push out of Q1 orders into the remainder of the year.

Q1 operating margins of 12.2% down largely as a result of increased restructuring.

But I would remind everyone that our core operating margins for this segment, when you adjust for amortization and other costs, is still approximately 16%.

So the underlying profitability in this segment continues to be good.

In Food Equipment, this segment delivered another very strong quarter globally of organic revenue growth thanks to new product innovation and increased service capabilities.

Total organic revenues grew 5% in Q1.

In North America, equipment and service related organic revenues grew 6% and 5% respectively.

And international equipment produced strong organic revenue growth of 7% and service organic revenues grew 2%.

Both improvements over last quarter are driven by growth in Germany, the UK and Switzerland.

The segment continues to show strong profitability with operating margins of 18.6%, and that's 190 basis points higher than the year-ago period.

On slide 7, in our Polymers and Fluids segment, organic revenues were flat primarily due to ongoing product line simplification, which we refer to as PLS here at ITW, and the exiting of some low margin businesses.

While growth is still lower than we'd like, the comps are easing thanks to the work that was done in 2013.

Notably we did see a pick up in organic revenues in worldwide fluids and auto after market.

I would note that the Polymers category reflects most of our current PLS activity.

The segments' profitability continues to improve with operating margin of 16.6% in the quarter and that's an improvement of 200 basis points versus a year ago.

In Welding, worldwide organic revenues declined 2% due to ongoing portfolio repositioning and slower pipeline activity in China as well as sluggish CapEx spending in North America.

International organic revenues declined 10% in the quarter and that's mainly due to previously noted factors in China.

And in North America, organic revenues grew only 1% and that was largely a result of weak CapEx spending from key customers in key sectors such as heavy equipment.

However segment operating margins continued to be very strong at 25.7% and remains our most profitable segment Company wide.

Moving to slide 8, we continue to be very pleased with the top line of profitability progress in our Construction Product segments.

Organic revenues grew 5% in Q1 and that was led by Asia-Pacific where organic revenues were up 14%.

This was due to strong new housing, retail and commercial construction in Australia and New Zealand.

European revenues grew a modest 1% in the quarter.

North America construction organic revenues were flat as improvement in residential construction were offset by declines in the commercial construction category.

Let me make a quick comment on our North American commercial construction business.

While there's been talk of industry growth in the sector by both peers and investors, our Dodge commercial data for Q1 on a square footage basis showed 13% less activity versus the year-ago period.

We do however think we'll see better commercial construction growth as the year progresses, so stay tuned.

Profitability continues to improve as we execute our enterprise initiatives across the segment.

Q1 operating margin of 14.8% showed an impressive 310 basis point improvement over the year-ago period.

And in our final segment, Specialty Products segment, organic revenues grew 2% and was largely due to our consumer packaging businesses.

Ground support grew 10% in appliance, sector was flat.

The segment continues to be very profitable with operating margins of 21.1%, that's 120 basis points higher than the year-ago period.

Now, let me turn the call back over to Michael who will update you on our Q2 and full-year forecast.

Michael?

Okay.

Thanks, John, and as a result of our first quarter performance and lower share count, we're raising our full-year EPS guidance by $0.15 to a range of $4.45 to $4.65.

The midpoint of our updated guidance, the $4.55, represents an increase of 25% versus 2013 and we now expect full-year operating margins in the mid-19's.

We tightened the range for our full-year revenue growth rate assumption by raising the low end from 2% to 3% and we now expect total revenue growth to be in the 3% to 4% range.

The organic revenue growth that goes with this assumption is unchanged at 2% to 3%.

For second-quarter guidance, we expect EPS within a range of $1.16 to $1.24.

And this assumes total revenue growth of 3% to 5% and 100 basis points of margin expansion on a year-over-year basis from the initiatives.

So in summary, a good start to 2014.

We're raising our full-year EPS guidance by $0.15 to a range of $4.45 to $4.65 and the midpoint being a 25% increase year over year.

With that, let me turn the call back over to John.

Thank you, Michael.

Now we'll open the call to your questions.

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

We're targeting to complete this call at the top of the hour.

We'll take our first question.

Andrew Kaplowitz.

Nice quarter.

Scott, maybe you can step back and talk about your geographic markets from the perspective that in the beginning of the year you said North America could grow in the 3% to 4% range and you're growing a 2% range.

1Q performance was basically the opposite.

Should we look for more growth in Europe from you this year, and maybe less in North America, or do you expect it to normalize over time?

We noticed that you said weather wasn't that much of an impact in 1Q.

Well, I would say that based on our first-quarter results from our -- relative to our expectations heading into the year I would say Europe has been a slight upside positive at 5% growth in the quarter.

North America, certainly, at 1% was a lag.

I don't know that that completely shifts our expectations for the year.

I think we do see again, based on some modest improvement in March and how April is tracking at North America at 1%, probably we wouldn't expect that to be the number for the year.

So some -- we would expect some incremental improvement in North America from here.

And again I think the overall demand levels out of Europe are -- that we're seeing are pretty broad-based across our businesses and I would consider that to be pretty encouraging at this point.

Okay, that's helpful, Scott.

And I think a follow up to that really is around the Construction business overall.

Asia really got stronger in the quarter.

I think it was 4% year-over-year growth last quarter to 14% this quarter.

Is it fair to say that you're actually seeing a nice recovery in Australia now?

And you did mention some expected improvement in 2Q in North America, and you mentioned that April was starting off well.

Are you really -- are you seeing that improvement as the weather has gotten better here in the US in April?

Yes.

Yes to both of your questions.

I think Australia and New Zealand clearly we're seeing some very positive overall demand improvement there.

We had made a commitment not to talk about the weather as part of our results in the quarter, but what I would say is certainly North America for Construction, along with the service business and Food Equipment, were probably the two areas where it would be hard not to conclude that we had some pretty material weather impact on those businesses.

And I think March and what we're seeing in April in Construction in North America would suggest things are improving there, for sure.

Okay.

That's helpful, Scott.

Thank you.

David Raso.

On the guidance increase of $0.15, can you quantify the way you're thinking about how much was from repo and how much was from essentially margins?

Yes.

So what I'll tell you is that of the $0.15 approximately half is shares and the other half is better operational performance which you're seeing in the operating margins that we now expect to be in the mid-19's versus our previous guidance of 19%, squiggle 19%.

So about half and actually if you -- I want to talk about the first quarter for a second, the performance in the first quarter versus the guidance, the better performance was driven equally about half from shares and the other half from better operations.

That's what I was thinking, as well, until you mentioned the more exact target on the margin saying 19.5%?

We said mid-19's, yes.

Okay because before we were thinking 19%, correct?

Was that --

Correct.

Yes, so roughly if you just add the 50 basis points there, basically it looks like that alone adds $0.10 plus.

So, I'm making sure I'm not doing something wrong here in the sense of the margin improvement plus the repo would actually maybe be a little more than $0.15?

I'm trying to make sure I understand, the 50 -- that 19% and 19.5% alone.

Yes.

I can't really comment on your math.

The math we're doing here internally is about half of the improvement here is for margins and the other half is from lower share count.

Okay, great.

I appreciate it.

Thank you.

(Operator Instructions)

Rob Wertheimer.

I had a question about Brazil.

There's been some mixed data in the economy and machinery end markets, anyway, coming out of there.

I was curious where exactly you were strong, if it was content, if it was share, if it was -- what was going on there, and your thoughts on China as well?

You mentioned the auto, but just generally.

Well, I think Brazil -- our position in Brazil is pretty concentrated in the Polymers and Fluids area and also with Welding and a few other businesses.

And so, what I would say about our own results in Brazil is it's much less about the overall economy.

We are transitioning from a period going back two or three years where we did a fair amount of acquisition activity to get ourselves positioned and are now starting to operate.

We're starting to operate these businesses, and I think get focused on the areas of opportunity in terms of growth.

China for us I think is -- right now clearly Automotive is the leading business over there.

We're seeing what I would describe as more moderate overall economic activity across a number of our businesses.

And the Welding business in the first quarter on a year-on-year basis was Michael, or John talked about it in his comments, a net negative, primarily as a result of lower large oil and gas pipeline activity over there on a -- versus what was going on there last year.

That was helpful, thank you.

If I can ask one follow up on Auto you mentioned in China, can you talk a bit in principle about how the design curve works on your content wins?

You've done a great job, obviously, outgrowing auto markets.

Is that something you can see reliably two years out in three, or is it more that since your products aren't terribly complex they can be engineered in faster?

I am curious about how far out you can see that?

We talked about that before.

This is the one part of the Company where we have a fair amount of forward visibility.

We are working on things today that are going into model redesigns that are going to be executed three years out typically.

And you're still seeing content growth throughout that three-year period?

Yes.

Great.

Thank you.

Jamie Cook.

A couple quick questions.

To clarify, you increased your margin targets to mid-19% or so.

Are you still expecting all the segments to show margin improvement in the quarter?

Because some of the results within the quarter were mixed with some segments showing very strong improvement and some still showing declines.

And then my second question, if you could give a little more clarity on what you saw in the Test and Measurement on the order trend side, the trends you're seeing there and when you expect that to pick up and translate into revenue growth?

Thanks.

Okay, why don't I do the margin expansion question and then Scott, if you want comment on Test and Measurement?

So yes, we do expect all of our businesses to expand margins in 2014 versus 2013.

And I think you will see that progress again in the second quarter here we'll continue that.

We talk about Test and Measurement, a little bit of an outlier in terms of some increased restructuring spend.

But we fully expect that business to be back on track in terms of margin expansion as we move forward from the second quarter and into the rest of the year.

So now your second question was on --

The second question, because you noted in the slides the order trends in Testing and Measurement, it sounds like there were some delays or something like that.

Can you talk about -- give a little more clarity there and what we expect that to translate?

What I would say about that is on the ground we're certainly seeing better overall activity levels in terms of quote activities levels.

Backlog is up and from a timing and release standpoint, we're still seeing some fairly choppy customer demand from that standpoint.

But I would say the people in our business are feeling generally like things are heading in the right direction, overall conditions are improving.

I would say we're not in that mode with Welding at this point.

Okay.

Great, thank you.

I'll get back in queue.

Ann Duignan.

I know there have been a lot of questions but Automotive, but is the right way to think about that business going forward that you'll be able to sustain growth at roughly the 2.5 to 3 times global automotive build?

Is that the right way to think about it for the next 12 to 18 months?

2 to 3 times?

I don't think so.

I think what we would be expecting on a longer term basis would be 300 to 400 basis points of market out performance on an annual basis.

Okay, that's helpful.

Thank you.

And then on the enterprise initiatives, the 120 bps to margins.

Can you break that out sourcing versus product line simplification or the different initiatives that you're undergoing?

They both contributed significantly to the 120 basis points.

That is equal at this point?

We have said consistently we're not breaking this out.

Okay.

But to Scott's point, they both contributed significant.

Okay.

And on the same follow up then, price cost added 10 basis points, it added 40 basis points in Q4.

Is there anything we should be watching out for on the price cost side, or is it just tougher comps?

No, there's really nothing unusual there.

I think the 10 basis points was a little bit lower than our assumption for the year, which remains at 20 to 30 basis points of improvement.

And so there's a little -- there's some timing of some FX headwind.

But overall we continue to feel very comfortable about the 20 to 30 basis points for the year.

Okay.

Thank you.

Deane Dray.

Question for Michael.

Post the close on Industrial Packaging you said May 1, and the accelerated buybacks, where do you expect leverage to come out on the second quarter, and then a run rate exit for the year?

Yes, you're talking about debt to EBITDA leverage, right?

Yes.

Yes, so we're currently a little on the high side at 2.4 times as we accelerated the repurchase program, in part because we saw the transaction closing sooner.

Our target leverage ratio remains in the approximately 2.2 to 2.3 times EBITDA on a go forward basis.

And are you at all constrained, and this maybe -- this is more directed to Scott also, but the idea on M&A, I know there's going to be -- we've shifted two thirds core revenue growth, one third M&A, how are you thinking about M&A for the balance of the year or might you be a bit constrained on the balance sheet?

Well, I don't think given the cash flow of the Company, the balance sheet isn't really the issue.

Where I would describe our position near term is similar to what I said I think a couple quarters ago on the call, which is given that all -- given all that we are currently executing inside the Company around these initiatives and also our focus on organic acceleration, M&A doesn't -- isn't a near-term priority for us.

But that being said, we did three really nice medium-sized deals last year that were really strong strategic fits, and should similar opportunities emerge this year, we would not hesitate to pull the trigger.

Great.

Thank you.

Stephen Volkmann.

I think you called out some POS headwinds on the top line for both Welding and Polymers and Fluids.

I'm curious if you have visibility into how long that lasts and when that simplification gets anniversaried and the growth rates might start getting a little better?

Yes, I don't think we said that was an issue in Welding.

In Polymers and Fluids, definitely.

And what I would say is, we're probably looking at in terms of drag, another quarter or two maximum.

And John pointed out, you're seeing a couple of businesses inside of Polymers and Fluids that are coming out the other end of that, and the Fluids platform that was up 4% organically.

Auto after market also up.

Okay.

And on Welding I thought you were trying to get away from shipbuilding or something.

Well I think that's really more of the portfolio repositioning we've done and that's been going on for the last couple years there.

So, that's becoming less and less of the portfolio.

I think that they think they're going to probably be through most of that by the end of the year.

This has been a two plus year transition in the portfolio.

Got it.

Okay, that's helpful.

Thank you.

Eli Lustgarten.

Very nice quarter.

One clarification on share count.

You said you're going to finish the program at the end of second quarter.

You'd be at roughly 400 million shares at the end of the quarter.

Is that the number we should use of the second half of the year, or do you intend to have some more normal share repurchases after that?

So that is -- the 400 million shares is the projected share count at the end of the second quarter.

And so our focus Eli, right now is on completing the IPG-related share repurchase program to 50 million shares that we announced back in September.

And then we'll reassess where we're at the end of second quarter and we will be able to give you an update on the next earnings call.

But what I will tell you in terms of our capital allocation strategy, it has not changed and so we remain focused on internal reinvestments in the business for future growth and margin expansion.

We will continue the dividend, obviously, and then we'll balance acquisitions and share repurchases based on the best risk adjusted returns for our shareholders, and so that hasn't changed.

[Yes, I was asking whether the guidance to $4.45, $4.65 assumes that the shares stay at [400] (number not designated) for the rest of the year is what I was -- I was just checking on that.

Okay, yes, that is correct.

And from an operation, Welding has obviously been a problem child, do you have any forecast for any improvement in Welding for the rest of this year, or you have to wait to 2015?

Well, let me first of all Eli disagree with your characterization of Welding as a problem child.

Well, the top line is what I was talking about.

Yes, so --

More recently.

Yes.

So those of you that follow the Company know that Welding has been one of our, historically one of our strong organic growers, high-single digit through the cycle.

The big thing that's going to get Welding going again is North America, honestly, that we are still in the midst of a pretty significant contraction in the heavier equipment segments of the market that we serve.

In our view that's not a structural issue, that's a cyclical issue.

We expect that to turn around, hopefully, sometime this year.

And at least our experience in Welding is once things do turn, we have six, eight quarters of really solid organic growth.

All right.

Thank you.

Andy Casey.

A couple clarifications.

On the mid-19% operating margin guidance, is there any change to the anticipated restructuring, or is that all driven by better operational performance?

That's all better operational performance.

So, the restructuring for the year at approximately $100 million has not changed.

Okay, thanks.

And then back on the sluggish CapEx trends, specifically North American Welding, I'm curious, and Scott you answered this, but can you comment on whether you saw any month-over-month improvement in that business in quoting or orders during Q1?

Maybe some modest sequential improvement towards March, but nothing that I would say gives us any sort of enthusiasm at this point that we're seeing a real turn there.

Okay, all right.

And that typically, how closely aligned would that be with an increase in Construction activity?

I realize heavy equipment can be used in other stuff, but if there's an improvement as John indicated on the Construction Products business in the second half, would that normally drive up Welding, as well?

Commercial Construction would have some positive impact, although the place of real softness again is more ag equipment, mining equipment, et cetera.

Okay.

Thank you very much.

John Inch.

Mike, what are the expected proceeds, net cash proceeds from the completion of the IP sale expected to be?

The gross price as you know is $3.2 billion and we anticipate that the after-tax will be in the low $2 billions.

Okay, in the low $2 billions?

And then what exactly are you planning to do with the cash, because obviously you've completed this?

I realize what you just said to Eli, you're going to evaluate share repurchase at the end of second quarter.

But help me, is there some obvious earmark for in excess of $2 billion?

Because in theory, you can get your leverage target simply by growing EBITDA as the outlook for the economy and your businesses continue to improve, and you still get benefits of simplification.

So I'm curious on your thoughts toward deployment of the $2 billion.

Right.

So a little bit more than half of that will be utilized for the share repurchase program, and get that completed by the end of the second quarter.

And the balance will essentially be to reduce our outstanding commercial paper, and get our debt to EBITDA leverage back into the 2.25 range that we discussed earlier.

Are there thoughts then, because interest rates are still very favorable toward, again, as you grow your EBITDA, perhaps a more permanent swap of some of the commercial paper into term debt?

Because otherwise you're going to have leverage that's -- financial leverage that's too low if you continue on this track.

So, I'm trying to understand how you're managing the process.

Yes, but as I think we've actually -- we've been fairly opportunistic here in terms of locking in rates and what we think is an attractive low interest rate environment, and extending the duration of our debt portfolio.

And so, as I think you may be aware, we issued $2 billion worth of bonds here in the first quarter with an average duration a little over six years, and a coupon that's on average in the low $2 billions.

And we have some additional plans here for the rest of the year.

I think if you look at bigger picture, if you take a step back and look at where we were three years ago, so the average rate on our debt is about 200 basis points lower today than it was three years ago.

The duration has been extended from fairly short term in the 3- to 4-year range to well north of 10 years.

So I think we've been fairly opportunistic here in terms of our capital structure and our taking advantage of the current rate environment.

That's fair.

And then Scott, if you take a look at simplification enterprise initiatives, clearly this is paying pretty handsome dividends to ITW.

Could you remind us or give us your perspective, what -- which of your segments are ahead of where you would have expected maybe a year ago?

And which still seem to have work to do?

Because I don't think just the print of margins or performance alone gets at the underlying, so I'm very interested in your perspective of which of your segments are ahead and which are behind.

Well, I think where I would start on that is I think the scope of work, if you will, that we had to do certainly varied at the front end by segment and I would point to -- if you look at the simplification initiatives as one example within Food Equipment and Welding, which were businesses that were -- the starting point was at a much larger overall division structure relative to the rest of the Company, they had much less work to do.

The other end of the spectrum was Polymers and Fluids that was 130 odd divisions.

So I haven't really thought about in terms of who's ahead or behind but what I would say is I think overall the level of progress and execution remains robust and risk.

And there's a fair amount of runway left.

This isn't something we're wrapping up in the next couple quarters as we've talked before that we've got another couple years easy of some continued work to do that is both accretive to our overall numbers.

You know what our performance goals are.

And [outsource] is going to result in a Company that's much more focused and much more effective on -- in terms of the growth agenda that we have going forward.

Right, but for instance Polymers and Fluids obviously it still has issues, but it might actually be ahead which could in theory give us a lot of operating leverage as the business starts to see better fundamental top line for example.

Or the [crawler] -- it could be Welding might be a little bit behind which might help to explain a little bit of the margin?

I don't know, I'm just -- is there any other parsing that you might call out, Scott?

I don't know.

We've talked about Construction before in terms of big margin improvement opportunity there.

I think the progress -- I think we're up 250 basis points.

Even the Auto business that I think is the template for the organic growth we want to build on all of our businesses has still got a pretty rigorous business structure simplification and sourcing agenda in front of it.

So a lot of leverage in terms of revenue growth, but margins up in the first quarter year on year, a significant percentage of that was related to the initiatives, as well.

So, it's hard for me to think in terms of who's ahead and behind.

I think because the specific to do list in each of the segments is pretty unique to those segments.

But in general, I don't think we've got anybody dogging it.

I think everybody's getting after it pretty good.

Got it.

Okay, thanks very much.

Ajay Kejriwal.

Wanted to drill into the organic growth rate a little bit.

Clearly a positive surprise, as far as our model is concerned.

And Scott, I know you've spent some time talking about China, Brazil and other markets.

So the 6% that you're seeing in the international markets 1Q, is there anything, as you analyze the performance there, that jumps out as either channel related or anything that suggests that 6% may not be sustainable for the year?

Nothing that I can think of Ajay.

That's good, short and sweet.

So international continues at say around 6%, and maybe better in the North America based on what I heard early in the call, picks up.

So we should -- we could expect growth rate to be better than what you printed in 1Q, right?

Yes, I think we've talked about this before.

Our forecasting approach in terms of forward looking is that we're going to use run rates that we're seeing in the businesses today.

You're certainly free to analyze the upside and downside opportunities and risks around that.

But we've talked before about the fact that in our business model we have no incentive to get ahead of ourselves.

We have a very fast reaction, fast cycle time supply chain and manufacturing approach.

And so from our standpoint, the most prudent planning assumptions for us are really deal with what we're seeing on the ground today.

Of course, conservative is better as far as we are concerned.

So good organic.

Now maybe on the incremental margins, real nice performance there.

Talk a little bit about Construction Products.

So, obviously was an okay quarter, but margins picking up.

How should we think about incrementals in that business as revenues start coming back?

Well, I think the end game there, as I've talked before, a number of us have talked, is in terms of the raw material in that business from a performance standpoint we expect that business to perform from a margin rate standpoint at or above the Company goals on a long-term basis.

Given where they are today despite a significant amount of improvement in the first quarter is there's still some room to improve further between where they are and that 20% plus goal.

So the answer to your question is incremental margins for the next eight quarters ought to be really good, and accelerating top line helps us get there faster.

Excellent.

Thank you.

Shivangi Tipnis.

One of my questions is pricing.

Sorry, say that again.

You talked -- sorry, can you hear me now?

Yes.

My first question is on pricing.

So you commented that it was about 10%.

Was in linear across all segments?

No, the 10 is really an average and there's --

And it wasn't 10%.

No, the 10 basis points.

Yes, sorry, the 10 basis points.

Okay.

So the 10 basis points is really an average, and I wouldn't read too much into it, in terms of we have different timing around price increases in the various segments.

We had some FX impact in one business that we didn't see in other businesses.

And so, I would say this was -- we're still holding to the 20 to 30 basis points for the year, and we're comfortable with that assumption.

Yes, but then what was the most pricing pressures, and in what segment did you see the most headwinds that contributed to the lower expected EPS from the pricing?

I think you're expecting at least 20 basis points even in the first quarter and you got about 10.

Can you talk about the headwinds?

Yes, again there was really nothing unusual in terms of head or tailwinds here in the first quarter other than what I described.

And so, fairly normal quarter, in terms of price costs for us.

Okay, okay.

And one question on the auto build rates.

Can you talk a little bit about the near-term moderation in the auto build rates that we're talking about?

Is it going to be globally, including China?

We expect auto build rates in the second quarter to be in the 1% to 2% range.

That's a worldwide number.

We would expect that virtually all of the geographies to be down sequentially from where they were in Q1 into Q2.

China looks like it's going to be roughly about the same.

I don't think we see much of a change in China, but Europe looks like it's going to have a lower build rate based on the data we're seeing right now.

North America looks like it's going to be a lower build rate.

But remember, we continue to add our penetration numbers on top of that.

So builds --

So, as a clarification, you mentioned that you would comfortably be able to outperform the auto build rates, even with the moderation.

Is that correct?

That's correct, but I think what we're basically trying to say is, don't expect double-digit growth in auto for next quarter based on a foundation of lower build rates.

Okay.

Sounds good.

Thank you.

Joel Tiss.

One quick question.

On -- can you talk about some of the successes, and maybe some frustrations on the organic growth, and what you're seeing?

You've done a great job of pointing out the gas cap, not having a gas cap anymore.

Those sorts of things, but a little bit of color there?

Thank you.

Sure.

One of the things I would point out to is I would go back to the comment I made at the outset of the call, which is we've worked very hard on shaping the portfolio so that we are in a collection of businesses that we have a lot of conviction about their ability to grow at a healthy clip organically.

And again, those actions resulted in an overall organic growth rate for the Company of 100 basis points better in Q1 that it would have been if we were still in some of the businesses that we divested.

I wouldn't say -- characterize our progress in organic as frustration at all.

I think we're just getting in the position, we've talked before about the fact that we've got a lot of activity inside the Company.

We're trying to be very deliberate.

I'm talking about simplification and sourcing.

We're trying to be very deliberate about making sure that we're focused on the right things at the right time.

This year is a year we start turn our attention more to the organic growth agenda.

But keep in mind, we still have a fair amount of -- more than a fair amount of activity going on internally.

But I think some of the accelerating -- acceleration in organic growth we've talked about Auto, Food Equipment, now Construction.

Test and Measurement looks like it's going to get going.

And then we've got a couple of other businesses that are not where we want them to be.

We talked about Welding.

That's much more of a situation relative to the current market environment.

In Polymers and Fluids, we've got to get through this period of reshaping and refocusing, but expect that business to certainly contribute from an organic standpoint.

So, I think we feel much better about the quality of the portfolio that we are going forward with, in terms of its organic growth potential and certainly expect continued progress as we move down the road.

All right.

Thanks very much.

Jim Krapfel.

So, you're still expecting a run rate of 100 basis points of margin improvement from your initiatives through the rest of 2014, is that right?

That's correct.

On a year-over-year basis, we expect 100 basis points a quarter from BSS and from sourcing.

And how much do you think you have left in the tank then for 2015?

I think the way we'd answer that question is similar to what Scott talked about earlier, as we've laid out our goals very clearly for 2017, which is 20% plus operating margins and 20% plus return on invested capital on an after-tax basis.

And so we're not going to give guidance for 2015 today, but the trajectory and the targets we've laid out as we continue to progress on this enterprise strategy we're very confident that we'll be able to achieve those targets.

Okay, great.

Thank you.

Thank you.

At this time there are no further questions on queue.

Great.

Okay, so we thank everybody for joining us on today's call and we look forward to talking to you again.

Have a great day.

Thank you.

Thank you, sir.

So that concludes today's conference call.

Thank you all for participating.

You may now disconnect.