Illinois Tool Works Inc (ITW) 2014 Q2 法說會逐字稿

Good morning.

Welcome and thank you all for joining today's conference.

(Operator Instructions)

Today's conference is being recorded.

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

And now, I'll turn today's conference over to John Brooklier.

Thank you, sir.

You may begin.

Good morning, everyone.

And welcome to ITW's second-quarter 2014 conference call.

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

During today's call, we will discuss our strong Q2 financial results and update you on our earnings forecast.

And as usual, we will open the call to your questions.

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

We have scheduled one hour for today's call.

Before we get to the quarterly data, let me remind you that this presentation contains our financial forecast for the 2014 third 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 our expectations.

Also this presentation uses certain non-GAAP measures.

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the press release.

With that housekeeping taking place, I will turn the call over to Scott Santi, who will make some brief overview comments on the quarter.

Scott?

Thanks, John, and good morning, everyone.

Overall, we were pleased with our performance in the quarter and with the continued progress we are making in executing our enterprise strategy in what continues to be a mixed environment.

Our operating margins in the quarter of 20.5% were up 300 basis points, and after tax, return on invested capital was also up 300 basis points to 19.5%, representing continued solid progress towards our enterprise performance goals of 20% plus for each of these metrics by 2017.

Six of our seven segment improved operating margins in the quarter with strong performance across the board as enterprise initiatives contributed 120 basis points to overall margin improvement.

The environment continued to be mixed and an overall revenues were up 4% and organic revenue up 1.4%, lower than our Q1 growth rate primarily due to more challenging comps internationally and lower auto builds.

In addition, ongoing product line and customer base simplification associated with the execution of our enterprise strategy reduced our organic growth by approximately 1 percentage point.

There were some encouraging signs in North America as our test and measurement business and welding business both grew 4%.

For the first half of 2014, total revenues are up 4% and organic up 2.3%.

Both in line with the top line guidance we've been giving since December.

EPS of $1.21 was up 32% versus Q2 of last year, slightly ahead of the midpoint of our guidance.

And as a result of performance year to date and our confidence in the outlook for the second half of the year, we are narrowing and slightly raising our guidance range today.

The new full-year midpoint represents a 26% increase on a year-over-year basis.

In closing, I'd like to thank the ITW team for the strong performance and continued progress they delivered in the quarter.

In year two of our five-year enterprise strategy, we are pleased with the progress so far and confident in our ability to deliver on our enterprise performance goals.

Now, let me turn the call over to Michael Larsen, our CFO.

Michael?

Thank you, Scott, and good morning, everyone.

Okay.

Let's start with the financial summary on page 2.

Q2 was another quarter of strong operational execution resulting in EPS of $1.21, an increase of 32% year on year.

As you may recall, last year had a $0.05 nonrecurring pension settlement charge, so on an adjusted basis EPS increased 25%.

The operating teams continue to execute well on their business structure simplification and sourcing efforts delivering record operating margins of 20.5%, a 300 basis points improvement over last year, with 120 basis points of margin expansion from the enterprise initiatives.

Total revenues were $3.7 billion, up 4% versus prior year, with organic revenues up 1.4%, below our Q1 organic growth rate, primarily as a result of more difficult comps internationally.

For the first half of 2014, our total revenues are up 4%, 2.3% organically, in line with the revenue guidance we've been giving since December of last year.

In the quarter, we essentially completed the portfolio management element of our five-year enterprise strategy with the sale of the industrial packaging business, and we're confident that our current portfolio of differentiated businesses is well positioned for growth with best-in-class margins and return on invested capital.

We also completed the share repurchase program related to industrial packaging by repurchasing 17 million shares in the quarter, bringing the total share repurchases to 50 million shares since the announcement in September of last year.

Our ending diluted share count for Q2 is 400 million shares, and since September we've spent $4 billion and repurchased 11% of our outstanding shares.

Our remaining share repurchase authorization is $2.8 billion, and given the performance of the Company and our outlook for 2014 and beyond, we fully expect to repurchase shares opportunistically in the second half of the year.

Free operating cash flow for the quarter was $500 million, and our conversion rate is tracking to be greater than 100% for the full year, in line with our previous guidance.

Finally, as you can see our return on invested capital on an after-tax basis was 19.5%, an improvement of 300 basis points.

In summary, the ITW team continued to make good progress on the enterprise strategy in a mixed environment and we remain on track for a strong 2014, which I'll discuss in more detail in a few minutes.

On page 3, some more color on the organic growth rate for the quarter, with North America up 1%, with continued strength in automotive up 8%, and food equipment up 4%.

As Scott said, we were encouraged by our welding segment and test and measurement business in North America, both up 4%.

International growth was 2% in the second quarter, compared to 6% in the first quarter, primarily due to tougher comps in Europe and South America.

Internationally, strength in automotive and test and measurement and electronics was partially offset by expected declines in welding.

You can see Europe up 1% in the quarter, South America down 5%, and Asia-Pacific up 7% as China and Australia performed well.

In China, automotive was up 22%, food equipment up 14%, polymers and fluids up 9%.

Since we will be mentioning product line and customer base simplification, what we commonly referred to as PLS, a few times today, let me just spend a minute and put this core element of our 80/20 management process in the context of our enterprise strategy.

And integral part of our 80/20 process and our enterprise strategy is the focus on quality of revenue, not quantity.

But through product line and customer base simplification, our segments are eliminating the complexity and overhead costs associated with smaller product lines and customers, and focusing their businesses on supporting and growing with their largest customers and product lines.

PLS is a core element of our 80/20 management process and an integral component of our ability to achieve sustainable, best-in-class margins and returns going forward.

In year two of our enterprise strategy, PLS is a natural and expected outgrowth of our business structure simplication initiative, as we now focus on reapplying ITW's proprietary 80/20 management process to our 90 new larger scale divisions.

We quantified the reduction in organic revenue to be approximately 1 percentage point, and we fully expect that focusing the Company on taking full advantage of the considerable growth potential that resides within our largest customers and product lines will achieve improved overall organic growth performance over the medium and long term.

The financial impact of product line and customer base simplification continues to be fully captured in our guidance as we continue to expect total year revenues up 3% to 4% and organic revenues up 2% to 3% in what continues to be a mixed environment.

Moving onto slide 4, operating margins were a highlight this quarter as solid execution across the board lead to operating margins of 20.5%, an increase of 300 basis points from last year.

Six out of seven segment segments expanded margins in a big way, many achieving record levels of probability as construction products, automotive OEM, polymers and fluids, specialty product, and test and measurement and electronics all put up solid margin expansion numbers.

As you can see, businesses such as polymers and fluids and construction are now approaching sustainable 20%-plus operating margins, levels that frankly seemed out of reach just a few years ago.

In a sluggish environment, welding essentially maintained their best-in-class 26% operating margins in the quarter.

On the right side of the page, we've listed the drivers, with 120 basis points from the continued progress on our enterprise initiatives, operating leverage on the topline growth was 40 basis points, and price cost was again favorable 10 basis points, and with a few exceptions, the material cost environments remains benign.

You can see the 130 basis points of margin favorability from other, which includes the nonrecurring pension settlement in the year-ago quarter.

With that, I'll be back in a few minutes to discuss the third quarter and updated 2014 guidance, but first let me turn it over to John for some additional commentary on the segments.

John?

Thanks, Michael.

On slide 5, you'll see a breakdown of total revenue and operating income per segment.

And while auto OEM and food equipment segments lead the way on top-line growth, five of our seven segments produced double-digit growth in operating income.

In particular, as noted earlier, construction products and auto OEM achieved operating income gains of 32% and 26%, respectively.

You'll see further evidence of this as we highlight significant operating margin progress for nearly all of our segments.

Now, I'll go into further detail on our operating segments on the right-hand side of the page.

In auto OEM segment produced another outstanding quarter on multiple fronts.

Organic revenues grew 8%, outpacing worldwide auto builds by 6 percentage points.

By geography, organic revenues for Europe grew 9%, North America 8%, and China was up 22%.

Our European businesses outperformed European auto builds by 7 percentage points, largely due to our fuel and powertrain product lines.

In North America, we outpaced are our auto builds by 4 percentage point, thanks to our plastic fastener and powertrain products.

And in China, we continue to gain share via multiple product lines, outperforming auto builds by 11 percentage points.

The drop through to the bottom line was very strong as segment margins of 23.7% were 310 basis points higher than the year-ago period.

Great performance by auto.

In our test and measurement electronics segment, on slide 6, organic revenues increased 1% in Q2.

The good news is that we saw improvement in the test and measurement portion of the segment in the quarter.

The T&M portion, their organic revenues grew 6%, thanks in large part to the strength from our flagship Instron business, which was up 8% in Q2.

We're hopeful that the better performance in T&M and Instron is suggestive of a more sustained pickup in CapEx spending, and we're encouraged by order activity and backlog as we move into the third quarter.

In the electronics piece of the business, organic revenues declined 3%, largely due to comps in the electronics assemblies business.

We believe this category will improve as the year progresses.

For the segment, operating margins of 15.2% were 150 basis points higher than the year-ago period.

Looking at food equipment, segment organic revenue growth was 3% and largely reflected global contributions from its equipment and service businesses.

In North America, equipment and service related organic revenues grew 4% and 5%, respectively.

Equipments organic revenue growth was driven by an increase in the sales of refrigeration and cooking products.

Internationally, equipment revenues increased 5%, thanks to strong where wash and refrigeration sales.

International service organic revenues declined 2%, due in part to some weakness in France.

And once again, the same with operating margins of 19.5%, improved with 80 basis points of improvement versus the prior-year period.

Moving to slide 7, in our polymers and fluids segment, organic revenues declined 3%, and that was largely attributable to our ongoing PLS activity.

As Michael noted earlier in his PLS comments, we continue to weed out the less profitable products and customers in this and other segments.

As a result, PLS has had the typical impact of decreasing organic revenues but improving margins.

All three of our platforms, polymers, fluids, and hygiene, and auto after market, posted declining organic revenues of 6%, 3%, and 1%, respectively.

The much better news is that segment operating margins moved up significantly to 19.6%, and that was 130 basis points higher than the year-ago period.

In the welding segment, worldwide organic revenues declined 2%, but that was largely due to specific international business as well as some targeted PLS customer backed activities.

The international organic revenue decline of 15% was due to a convergence of events.

In China, we were once again hit by comps related to the completion of the portfolio transition from a shipbuilding to an energy infrastructure focus.

We believe, however, that this comp will ease in the Q3 and beyond.

We also experienced some delays in onshore pipeline projects in China.

In Europe, we implemented PLS activity in Germany, and our Middle East business was negatively impacted by political events in the region.

The much better news came from North America, and as Michael mentioned earlier, organic revenues increased 4% in the quarter.

We saw some early signs of strengthening the equipment sales for both the industrial and commercial end markets, and continued growth in the welding gun area.

We also expect welding to benefit from easier second half 2014 comps.

I would remind you that the Company-leading operating margins of 26.3%, while they were down 20 basis points, still a very strong performance.

On slide 8, we continue to be very pleased with the dramatically improving profitability metrics in our construction products segment, despite somewhat uneven organic revenue performance.

Segment topline reflected geographic variability as Asia-Pacific's organic revenues grew 8%, thanks to our residential and commercial construction growth in Australia and New Zealand.

You'll recall we also had good performance in Australia and New Zealand in the first quarter.

Our North American construction related organic revenues declined 2% as our residential business was moderately negative, thanks in part to some ongoing PLS activity, while our renovation and commercial construction business showed modest growth.

In Europe, organic revenues declined 4% as commercial construction activity was especially soft in France.

As we have consistently communicated with our investors, at this point in time, we are chiefly focused on improving the profit profile of this segment, through both business structure simplification and PLS initiatives.

We are we're clearly on the right path as construction products operating margins of 18.2% were 450 basis points higher than the year-ago period.

And then finally, in our specialty products segment, organic revenues were flat as a pickup in the variety of our consumer packaging businesses, principally our film, gluing systems, and apparel related units, was offset by delays in projects for our warehouse automation products.

Our appliance business grew organic revenues 1% while our ground support organic revenues were flat.

Strong segment operating margins of 24.2% were 180 basis points higher than the year-ago period.

Now, let me turn the call back over to Michael who will cover our 2014 and third-quarter guidance.

Michael?

Okay.

Thanks, John.

Our financial performance in the first half of 2014 and the positive momentum on the enterprise initiatives gives us increased confidence in our ability to deliver on our financial commitments for 2014 and beyond.

For 2014, we're raising the EPS midpoint slightly and narrowing our full-year EPS guidance range to $4.50 to $4.62, which compares to the previous range of $4.45 to $4.65.

The new $4.56 midpoint represents an increase of 26% versus 2013 on unchanged total 3% to 4% revenue growth.

As you can tell, we're not counting on a second-half acceleration of revenues.

Our balance sheet and cash position is excellent, and we fully expect to repurchase shares opportunistically in the second half of the year.

At this point, we can't be more specific in terms of timing or magnitude, and we have not included any impact from lower share count in the updated guidance today.

With the month of July, the third quarter is off to a good start and we expect Q3 EPS to be in a range of $1.19 to $1.27.

Again, with 3% to 4% total revenue growth and continued year-over-year margin expansion, with approximately 100 basis points coming from our enterprise initiatives.

We're pleased with our first-half financial performance, with total revenues up 4%, operating margins of 19.6%, an improvement of 240 basis points, and EPS up 23%.

In addition, following the completion of our portfolio management effort, we now have seven highly differentiated segments with significant growth potential going forward.

While much work is still ahead of us, 2014, the second year of our five-year enterprise strategy, is shaping up to be a year of continued progress as the ITW team works hard to further expand margins and returns, and we continue to be redeploy our strong cash flows in a disciplined and returns focused manner.

In addition, we believe that many of the efforts that we're undertaking today are positioning the Company for stronger organic growth in the future.

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

Thanks, Michael.

We will now open the call to your questions.

We urge you once again to be brief so as to allow more people to the opportunity to ask a question.

Thank you, sir.

We'll take the first question.

(Operator Instructions)

Andrew Kaplowitz, Barclays.

Good morning, guys.

Nice quarter.

Scott, so you talked about in the past about some of the bigger CapEx markets potentially coming back, such as test and measurement and welding.

In 2Q you did see some of that improvement, so do you think this is an inflection in these large CapEx markets that we've been waiting for?

And you did mention pretty good order visibility into 3Q.

And that's despite ag being weak, which we know is part of the welding business, so maybe you could talk about that?

Andy, I don't think that we've seen enough to say it would be an inflection point by any stretch, particularly given the overall choppiness of the environment.

I think we were generally pleased with certainly a noticeable pickup in the order rates in both businesses in North America.

But I think would like to see another quarter or two before we call it an inflection for sure.

And then Scott, in terms of ag, are you worried about that affecting the welding business a little more as you go forward in the second half?

I don't think so.

I think right now, I don't expect things to get a whole lot worse there.

And again, the overall mix, ag represents 10%-ish of our revenues in North America, so I think we've got a nice mix of end market exposure there that even if it did erode further, I don't think it's going to put us off our plan at all for the year.

Okay.

Maybe just another big picture question, like business simplification through PLS, it's actually slowing down some of your businesses as you just talked about.

But you've talked about how we eventually will accelerate organic growth.

So the headwind that you mentioned was 1% in the quarter.

When do you think that headwind will turn into a tailwind?

Is that next year, end of this year, how should we look at that?

Well, I think it's a little early to tell.

I think we'll have a little bit better view for you on 2015 as we get to December and we've gone through our planning process.

What I would say is it's in our plans for the next two quarters.

As Michael said earlier, this is we are front and center on the reapplication of 80/20 across our 90 scaled up divisions and it's certainly a normal and expected part of the process.

So what I can say for sure is for the next two quarters, we expect the similar sort of impact that's fully embedded in our guidance.

And I think we need to get through our 2015 planning process to have a better view internally and what we can share externally on how that ultimately impacts our overall performance in 2015 if at all.

Thanks, Scott.

Deane Dray, Citi.

Thank you.

Good morning, everyone.

So year two of enterprise strategy and your already bumping up on the operating margin 20% and the return on invested capital targets.

So is it time to start setting the bar higher?

Should we be growing some, temper expectations for further improvement?

But just help put us in context as you get there sooner than you thought?

Well, what I would I guess offer as a reminder, is this is one quarter not a full year.

So I think where we are sets us up certainly for us to be able to at least hit those two metrics in 2015 given the progress that we're making, and I think what I would say is we still have plenty of work to do across all of these initiatives.

We are not done with BSS, not done with sourcing, so we would expect continued progress as we move forward, but we haven't boxed the upper end of this point and we're really managing the Company quarter by quarter, and ultimately, we'll talk about where we think we can get in 2015 late this year.

Scott, I probably should have added a congratulations within that question because you did get there faster and those are impressive numbers.

And then, the second question is on capital allocation.

So just in terms of how you've couched buybacks to be opportunistic, other uses of cash, maybe the M&A environment, the target has been a third of your revenue growth to come from M&A, but it's been pretty quiet there.

So maybe put that in context for us, please?

Yes, Deane, so this is Michael here.

So what I would start with is that our capital allocation strategy remains unchanged.

As you know, we've been very disciplined and returns focused.

And we generated a significant amount of cash and priority one is reinvesting in our businesses.

Whether those are CapEx projects or new products, given our innovation efforts, as well as BSS our restructuring efforts.

And so all of those projects are fully funded.

The second priority is our dividend.

We have roughly a 2% dividend yield at this point.

The dividend continues to grow in line with our cash flows and has done so for a little over 50 years and we certainly view that as an important component of our capital allocation strategy.

And so, that leaves the balance approximately 50% of our total cash flows for what we've called external investments.

And really, that encompasses acquisitions, which under the right set of conditions and financial criteria would take priority over share repurchases.

Given where we're at in terms of the M&A environment, and also given our strong balance sheet and cash position and our view of where the Company's going to be, not just in 2014, but really as we continue to execute this five-year strategy, we have a preference for repurchasing shares.

And so, that's what we alluded to in the second half of the year is that we will rather than in an announced program, like the one we just completed for associated with the IPG divestiture, is an attempt to be more opportunistic as we go into the balance of the year, and also as we start to think about 2015 and putting together the plans for next year.

That's how I'd position it for you, Deane.

That was real helpful.

Thank you.

Ajay Kejriwal, FBR Capital Markets.

Ajay, you there?

We'll take another question.

Jamie Cook, Credit Suisse.

Hello, this is actually Andrew on behalf of Jamie.

Just a quick question on construction.

So you guys spoke about there's still some uncertainty I think in some mixed commentary on housing and commercial construction.

Would you guys say you have changed your stance on this segment at all in terms of becoming more cautious of recovery?

Or what's your view at this point as it relates to how it was six months ago when the year started?

I don't think it's changed at all.

I think what we've been saying for the last year, for our business in the construction arena, our focus that we had the business that have the potential to generate a significantly greater level of earnings at the current revenue base than what we had been performing to.

So our focus for the last four to six quarters has largely been on getting our construction business up to margins and profitability levels that we could see in terms of their potential.

And I think that's been the focus.

From the standpoint of topline and the market dynamics right now, you all read what's going on there.

It's pretty up and down.

I think on the year-to-date basis from an overall organic standpoint, we are largely tracking various industry metrics.

We're not looking for a lot of out performance there yet because we are so focused on driving these internal improvements, and we've got a lot more work to do there, particularly in Europe, and we're on it.

So I don't think our view has changed --

Okay.

-- at all other than I think we're on track.

We're pleased with our progress and clearly there is no momentum right now on the ground in terms of any significant recovery building, particularly in the housing market in the US.

Okay.

That's helpful.

And then just switching to food equipment, margins there were pretty impressive and are looking pretty good relative to historical levels.

How sustainable do you think those are?

Are there any initiatives underway or that you could talk about that you think you can get those, keep those margins at current levels or even go higher?

I think they're very sustainable and would expect that as we continue to grow that business, given historical levels of incremental profitability that we generate in organic growth, let alone the continued impact of some BSS and sourcing initiatives there, that we'll continue to move those margins up as we go forward.

All right.

Thanks, guys.

(Operator Instructions)

John Inch, Deutsche Bank.

Thanks It's Karen Dahlen on for John, good morning.

So could you talk about the progression on the quarter, some companies called out your Europe fading and Latin America seems to be really soft, especially in June.

Did you see any of that?

And more importantly, did you see any of those geographic markets improved since the end of the quarter?

We didn't see any unusual trends as we went through the quarter.

June was our best month, but it usually is.

So there was really nothing unusual.

Europe, as you noted, was, and South America, which is primarily Brazil for us, was weaker in the quarter, but weakness, we didn't see increased weakness or strength as we went through the quarter.

Like I mentioned, July for us is off to a good start and we feel good about the guidance we've given here for the third quarter and for the total year.

Okay.

Got it.

Thanks.

And then on price costs, you realized 10 basis points in the first half.

I believe you implemented some pricing increase, maybe towards the end of 1Q.

Did those prices increases stick and are you still expecting 20 to 30 basis points for the year?

Yes.

So, as you mentioned, we did increase price in several of our segments, and so positive price in the majority of our segments.

The 10 basis points is slightly but slightly below the 20 to 30 that we were expecting for the year.

And we're probably going to be at the lower end of that range as we look at it today.

Nothing structural and there's a little bit of FX impact here.

But, as I mentioned, the environment in terms of direct material inflation remains benign at this point and the businesses are doing a good job taking advantage of price opportunities as we continue to add value to our customers.

So, that's how I'd describe it.

Okay.

Understood.

That's very much.

Nigel Coe, Morgan Stanley.

Hello, guys.

This is Jane filling in for Nigel.

We just wanted to dig a little bit into SG&A.

It has been pretty flat, in the range of 680 to 690 for the past few quarters, so I wonder whether this is a good run rate going forward?

And also, if we look at the sales end of the G&A portion, how has the G&A expense been trending over the past few quarters and what's your expectation there?

If you look at SG&A this quarter, it was down $70 million on a year-over-year basis.

About half of that is the pension charge that I mentioned in my comments.

So approximately $35 million, and we did have slightly lower restructuring costs this quarter versus the same quarter last year.

But beyond that, it's really continued good cost controls and discipline in our segments.

And so with those caveats I just mentioned, I would think this quarter is a pretty good run rate on a go-forward basis.

As a percentage of sales, 18.2%.

And so, we don't expect it to differ much from those levels.

And actually, as we continue to implement our BSS efforts across the Company, we should expect to see overheads come down.

Like I said, as we exit smaller product lines and discontinuations just with customers that, and take out the overhead associated with that, you should expect to see overheads and SG&A to improve.

Great.

That's really helpful.

And another question for the 120 bps contribution from enterprise initiatives, can you maybe just give us some color?

Which percentage of this is driven by the PLS?

And what percentage is driven by the other initiatives?

Yes.

So we, historically, we have not broken out the impact from the enterprise initiatives in much greater detail.

And we're not going to go down that path.

And so, the 120 basis points was really strong execution by the operating teams on our BSS efforts as well as on the sourcing side.

Okay.

So the PLS benefits, you're already seeing that during this quarter, right?

So all the things you are doing, you are already reaping the benefit?

It's not a benefit you're expecting to see in 2015?

Right.

The benefit you're seeing now is the lower overhead costs and the improved mix of our product portfolio.

What you don't see today is what we talked about, which is as we focus on the larger product lines and customers, we fully expect that we will take advantage of the full organic growth potential with those customers and product lines.

And so, what we're doing is positioning the Company for accelerated organic growth in the future.

I see.

That's fair.

You have not -- in the short term, you're seeing the reduction in the revenues, but you're not seeing the medium- to long-term impact yet.

I see.

Cool.

That's very helpful.

Thanks very much.

You're welcome.

Jim Krapfel, Morningstar.

Hello, good morning.

Thanks for taking my questions.

So you had a couple quarters now of 120 basis point margin benefit from your strategic initiatives.

Just wondering what the run rates of improvement rate of improvement you expect going forward here next couple quarters?

And at what point would you expect maybe some strategic sourcing benefits to max out?

Would that be end of 2015 or 2016 period?

So, to answer to your question, we are expecting approximately 100 basis points of margin expansion from the initiatives in the third quarter and again in the fourth quarter.

And that's on a year-over-year basis.

And that's what I just described is very consistent with the guidance that we have previously provided.

And we have, as we develop the plans for 2015 and 2016, we don't see any reduction in the sourcing savings.

We really continue those, expect to see those continue as we go through at least through 2017, which is the fifth year of our enterprise strategy.

So we're not seeing a decline in sourcing savings.

If anything, we're probably seeing a little more of an improvement this year versus last year, in year two of our strategic sourcing efforts.

Great.

Thank you.

Walter Liptak, Global Hunter.

Hello, thanks.

Good morning, everyone.

Wanted to ask about the welding business.

Especially North America, the 4% organics was a little bit better than we were expecting.

Can you talk about how the quarter trended and how things are doing in July?

I don't know that we saw any major inflections month by month.

The improvement was in the capital equipment area, which again, we thought was positive development, and also on guns, so it does speak to a little bit more investment by our welding customers.

But as I said earlier, it's basically a one-quarter trend, so while hopeful it will continue, we'll wait and see.

The only thing I'd add is we are, if you look at the comps on a year-over-year basis as the comps do get easier here in the second half of the year, so on a year-over-year basis, we should be seeing improved growth rates out of the welding business.

Walter, I'd also add that we talked about welding before.

We specifically talked international.

That's the comps on the international side relative to this portfolio transitioning in China, we should start to see better comps on that as we move into the third quarter and beyond.

I think that we'll will be helpful to the overall segment performance.

Okay.

Great.

That sounds good.

And if I can switch over to electronic assembly and the decline there, there are some new mobile devices coming out in the second half.

And despite the decline there, I wonder what the outlook is for your second half?

So Walt, this is Michael.

We're not expecting significant improvement for the electronics business here for the balance of the year.

You are right that there are some encouraging potential order activity going on in that segment.

And that would be slight upside to our current expectations for the second half.

But again, we're not counting on it at this point.

Okay.

Thanks very much, guys.

(Operator Instructions)

Ajay Kejriwal, FBR Capital Markets.

Thank you.

Good morning.

On PLS, Scott, we've seen actions in a couple segments here, polymers fluid, welding, construction.

I guess the question is, is there more opportunity in PLS either within these segments or maybe on the segments where we haven't seen that initiative being played out?

So just if you can talk a little bit about what we expect on PLS in the next, say, 12 to 18 months?

We've talked, I think, throughout our description of the what the business structure simplification initiative means is that there's a structural element to it in terms of generating better scale and leverage and focus in terms of the division structure.

And the second part of that is then the opportunity to reapply 80/20 to all of those businesses.

So I think what I would say is we've moved -- it's largely a function of who's ready to get to that second stage more so than there's a particular, there's a differential impact as you go segment by segment.

So the polymers and fluids business was got to that place earlier than some of the other segment.

We are now at a place where pretty much across all seven segments it's an active part of, let's call it, stage two of the BSS process, so I think it has just become moved again from a couple of segments to pretty much being implemented across all seven.

It's a normal part of the process.

Polymers and fluids is going to get to the end of it sooner than the other segments because they started it first, but I think overall that opportunity to reapply 80/20 is a real significant and meaningful part of the overall impact on BSS.

And it's an impact that is just starting to show up in terms of overall margin and profitability performance.

I guess expect more PLS in the other segments where we haven't seen that started yet?

Well, it's been started.

I think it's, what would you say, pretty much from at a minimum the beginning of this year, everybody I think across the Company has been in a pretty heavy seen around starting to focus, getting the structural stuff out of the way and really starting to focus on reapplying 80/20 across the Company.

As we said earlier, we've got another couple quarters where clearly it's going to be an active part of what we're up to and I think we need to get through the planning process and see how much what the 2015 agenda looks like business by business in that regard.

Got it.

And then China, you're seeing really good growth in auto.

And then overall, that 8% number, is that reflecting the impact in welding or is there anything else going on in that 8% number?

Yes.

That's the largest decline in revenue in China is indeed the welding segment, as we've talked about, as we exited the shipbuilding market and really are focused on the energy side.

And we believe that's where not just the better margins reside, but also the better growth potential.

So in the quarter in China, strong performance in automotive and polymers and fluids and the food equipment.

And then declines primarily focused just in the welding segment.

Excellent.

Thank you.

And gentlemen, I am showing no further questions at this time.

Okay.

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And we look forward to talking to you later.

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