Illinois Tool Works Inc (ITW) 2015 Q1 法說會逐字稿

(Operator Instructions)

The conference is being recorded, and I'd now like to turn the call over to Mr. Aaron Hoffman, the Vice President of Investor Relations.

Thank you very much.

And good morning and welcome to ITW's first-quarter 2015 conference call.

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

During today's call, we will discuss our first-quarter financial results and update you on our earnings forecast.

Before we get to the results, let me remind you that this presentation contains our financial forecast for the 2015 second quarter and full year, as well as other forward-looking statements identified on this slide.

We refer you to the Company's 2014 Form 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.

So, with that, I'll turn the time over to Scott.

Thanks, Aaron, and good morning.

Overall, a solid start to the year for the Company as we delivered earnings per share of $1.21, an increase of 20% over last year and $0.04 higher than the midpoint of our forecast.

And that was despite an additional $0.03 of currency headwind versus where rates were when we issued our Q1 guidance on January 27.

In the quarter, we were able to deliver strong earnings performance despite a challenging macro environment.

We continue to focus on executing on the things that are within our control, and our business teams around the world continue to do a very good job of doing just that, as evidenced by the 220-basis-point operating margin improvement that they delivered in the quarter.

Q1 operating margin of 20.9% matched the all-time record high for the Company set in Q3 of last year.

Enterprise strategy initiatives, good tactical cost management, and favorable mix as a result of our product-line simplification program drove the bulk of the margin increase.

Organic revenue growth for the quarter was 2% gross, 1% net including the impact of product-line simplification.

This was below our 2% to 3% forecast as weaker capital spending generally in the oil-and-gas sector specifically resulted in modest year-on-year revenue declines in our Welding, Test & Measurement and Electronics, and Specialty Products segments.

Despite the current macro challenges, we are continuing to invest aggressively in support of our strategy to position ITW to deliver solid organic growth, with world-class margins and returns on capital.

In the quarter, we invested more than $150 million in capital expenditures, restructuring, and innovation programs.

As you likely saw in our press release, we are taking our full-year EPS forecast down by $0.15 to reflect current exchange rates.

At the new midpoint of $5.10, full-year EPS growth was 9% despite a translation impact of $0.40 negative.

On a constant-currency basis, 2015 EPS growth would be 18%.

So, overall, a strong start to the year in a challenging environment.

ITW is well positioned for another year of progress in 2015, and we remain solidly on track to meet or exceed our 2017 performance goals.

I'll now turn the call over to Michael.

Michael?

Thank you, Scott, and good morning.

Starting with the financial summary on page 4, as Scott mentioned, first-quarter EPS was $1.21, an increase of 20% versus prior year and $0.04 above the midpoint of our guidance.

As expected, enterprise initiatives drove 100 basis points of margin expansion, which contributed to first-quarter operating margin of 20.9% and operating income of $697 million.

Also, good progress on after-tax return on invested capital with an improvement of 210 basis points, to 19.3%.

Revenues were $3.3 billion, up 1% organically after the expected 1% (technical difficulty) impact from product-line simplification.

Foreign currency translation reduced revenues by 7%, resulting in total revenues declining 6%.

Pre-operating cash flow was strong, at $359 million, more than $100 million higher than last year.

Also, during the quarter, we were able to efficiently access about $1.1 billion of cash outside of the US, which helped fund the buyback of $1.6 billion.

Overall, solid execution in a more challenging environment, as stronger margin performance offset currency and lower revenues in some of our equipment businesses.

Turning to revenue by geography, organic revenue was up 1%, with growth in all major geographies except South America which, as a reminder, represents less than 3% of our sales.

South America was up 1% as a result of strength in tool equipment up 7%, and Automotive OEM up 3%.

Welding, and Test & Measurement and Electronics, were flat, while Specialty Products was down 7%.

International growth was up 1%.

Q1 had a tough comparison.

You may recall that last year international was up 6% in the first quarter.

Europe was up 1% this quarter, driven by Automotive OEM up 13%, partially offset by declines in Welding, Polymers & Fluids, and Specialty Products.

Asia-Pacific was up 1% on strength in Automotive OEM and Food Equipment, both up 5%, offset by Welding, down 7%.

China was solid, up 7% in the quarter, with Automotive, Food Equipment, and Test & Measurement and Electronics all growing double digits.

Overall, 2% gross organic revenue, 1% net after ongoing product-line simplification activities reduced organic growth by 1%, and a mixed demand environment for some of our equipment-related businesses.

Margin performance continues to be a highlight, as operating margin improved by 220 basis points to 20.9% which marked a new record for first quarter and tied for best quarterly operating margin performance ever.

The margin expansion, as you can see, is significant across every segment.

On the right side, you can see the key drivers of margin expansion this quarter, with the largest contribution 100 basis points from enterprise initiatives.

Operating leverage was 20 basis points.

Price cost was also favorable, 20 basis points.

Finally, 80 basis points of improvement from cost management and the benefits of product-line simplification, for a total of 220 basis points.

So, in summary, significant sustainable progress on operating margin in every segment through the execution of our strategy, with more to come as we work towards our 2017 goals.

On this page, you can see the significant progress all the business teams have made on margin improvement over the first two years of this enterprise strategy.

Five segments are now at or above 20%, compared to only one segment when we started, and, overall, 400 basis points of improvements.

While much work is still ahead of us, significant progress and strong execution on the enterprise strategy so far.

Also, keep in mind that the reported margins for Test & Measurement and Electronics, and Polymers & Fluids, each include over 400 basis points of non-cash, acquisition-related amortization expense that will run its course over time.

For your information, we've included a schedule with the acquisition-related amortization expense for each segment in the Appendix.

With that, let me provide some additional color about each segment's performance in the first quarter.

The Automotive OEM segment had another really good quarter as organic revenue grew 7% and significantly outperformed worldwide auto builds of 1%.

By geography, Europe stood out once again, with revenues up 13% driven by new products and strong penetration gains across all platforms.

In North America, our growth was slightly above auto builds, at plus 3%, as the Detroit Three actually declined slightly versus the prior year.

In China, organic revenues grew 14%, outperforming auto builds by 8 percentage points.

Profitability also improved, with operating margin of 25%, 170 basis points higher than last year.

In our Test & Measurement and Electronics segment, organic revenue decreased 1% in the quarter, similar to the growth rate in the fourth quarter.

Organic revenue in Test & Measurement declined 2% due to lower capital spending.

That said, the largest division in Test & Measurement, Instron, was up 5% in the quarter.

The electronics business was essentially flat with the other electronics platform up 2%, offset by a slight decline in the electronic assembly platform.

Operating margin increased 250 basis points to 14.7% in the quarter, and I already discussed the significant impact related to acquisitions.

Food Equipment is off to a good start, with organic growth of 4%.

In North America, equipment was up 10% driven by new products and penetration gains in refrigeration and cooking.

Internationally, equipment revenue was flat on a tough comparison.

Service grew 4% in North America and 1% internationally.

The segment's operating margin of 22.6% was 400 basis points higher than the prior year period, driven by solid execution and lower restructuring.

In the Polymers & Fluids segment, organic revenue declined 1%, while operating margin expanded by 340 basis points as the segment reached 20% this quarter.

Fluids and hygiene organic revenue was down 5%, driven primarily by softness in Europe.

Polymers was up a solid 4%, and Automotive after market was flat.

As I already mentioned, there is more than 400 basis points of non-cash acquisition-related intangible amortization impact in this segment's margins.

Welding organic revenue was down 3% this quarter as a result of weaker demand in oil-and-gas-related end markets.

About 15% of this segment's revenues go into oil and gas, and that particular part of the welding business -- the oil-and-gas part -- was down 30% globally.

Excluding oil and gas, Welding organic revenues would have been up about 3%.

North America was flat, with growth in commercial welding offsetting declines in oil and gas.

International was down 13%, driven primarily by oil and gas.

Nevertheless, Welding delivered 120 basis points of margin expansion as operating margin came in at 26.9%.

The Construction Products segment produced organic revenue growth of 2% in the quarter, and margin expanded 180 points -- basis points to 16.6%.

North America was up 5%, with growth in renovation and commercial, while residential was flat.

Asia-Pacific increased 1% for the quarter, and Europe was up 1% as strength in the United Kingdom was partially offset by continued product-line simplification.

In Specialty Products, organic revenue was down 6%, due to ongoing product-line simplification along with weaker equipment sales.

North America was down 7% and international down 3%.

Operating margin improved 150 basis points to 22.6%.

So that wraps up the segment discussion.

And turning to our guidance for 2015 and the second quarter, we have updated our 2015 full-year EPS guidance by $0.15 to reflect current exchange rates.

We now expect full-year EPS of $5 to $5.20, which is 9% growth at the midpoint, or up 18% on a constant-currency basis.

Full-year organic revenue growth is now forecast to be 1% to 2%, due to a more challenging capital spending environment.

As expected, PLS remains a 1 percentage point drag throughout the year and total revenue is expected to be down 5% to 6% as a result of the negative impact of foreign currency translation which creates a 7% headwind at current rates.

Given the strong first-quarter results and continued positive momentum on margins, we now expect that operating margin will exceed 21% for the full year.

This includes approximately 100 basis points of margin improvement from enterprise initiatives.

On capital allocation for the full year, we now expect to allocate approximately $2 billion to share repurchases, while maintaining our target leverage ratio.

ITW's Board of Directors authorized a new $6-billion share repurchase program in the first quarter.

For the second quarter, we expect EPS to be in the range of $1.22 to $1.30, with $0.15 of negative impact from currency headwinds, which is $0.05 higher than what we saw in the first quarter.

Organic revenue growth should be up 1% to 2%, and we expect operating margin of approximately 21% which, again, includes approximately 100 basis points from enterprise initiatives.

So that summarizes our guidance.

And, as you can see, in a more challenging environment, ITW continues to be well positioned to deliver another year of strong progress in 2015.

With that, let me turn it back over to Aaron.

Great.

Thanks, Michael.

We'll now open up the call to your questions.

We ask that you please be brief so as to allow more people the opportunity to ask a question.

And remember our policy of one question and one follow-up question.

(Operator Instructions)

John Inch, Deutsche Bank.

I just want to ask about -- just kind of do a prime point on the guide.

You basically -- you sort of suggesting that the bulk of the reduction is currency, and if you look at the way that it sort of plays out, that would proportionally hit mostly in the second quarter (technical difficulty) organic growth for the year down.

And so my question is really if you could parse between what you're seeing in terms of end markets and the context of reducing guidance second quarter versus the rest of the year.

Like for instance why doesn't the rest of the year come down further if you're seeing systematic weakness as many companies are?

So I'm just trying to understand the moving parts here.

Yes.

So, John, let me try to answer that.

The way we've modeled the rest of the year is based on current run rates.

So based on what we're seeing in terms of revenues and orders in our business today.

So, we're not assuming that things improve from here or deteriorate from where we are today.

The other point around the guide, the adjustment that we've made is $0.15 reduction just for currency.

Clearly we are considering the lower organic growth rate, but given the performance in the first quarter and the positive momentum on margins as well as the slight benefit from the lower share count, we're projecting that we'll be able to offset those lower revenues with better margins.

We're guiding to 21% plus operating margin today which is an improvement from where we were in January.

And we're getting a little bit of benefit from the accelerated share repurchase program in the first quarter.

So better execution is offsetting the lower organic.

I think that's what you're --

Yes.

-- I think that's more or less what you're suggesting.

That's correct.

And then Michael the share repo for the year had been pegged last quarter at $1.5 billion, and you actually did $1.6 billion this quarter.

So the question is sort of like how are you thinking about share repurchase for the rest of the year?

Are you going to be sort of front loading that and then seeing how the rest of the year plays out, or would you even consider raising some financial leverage?

I'm just curious because you obviously want to keep powder dry, and I'm just curious how you're thinking about share repo particularly against a backdrop of what clearly is economic softening and that just may present more favorable entry points to purchase your shares in future quarters.

That's all.

So John we in line with past practice we're not going to comment specifically on the timing of the share repurchases, but we've said before that our goal is to remain opportunistic as we go forward.

I'd say in the first quarter, the ability to access the foreign cash to the tune of about $1.1 billion is what helped fund the $1.6 billion repurchase in the quarter, which was essentially the guide that we had given for the year.

We expect to do approximately $2 billion for the year, and the balance will be opportunistic, and we do not expect to increase leverage from here, certainly not to achieve the $2 billion.

But as you know, we have a strong balance sheet.

We generate a lot of cash with the ITW business model and given the diversity of our businesses, and so certainly we were open.

But given what we're seeing today we're not expecting to increase our target leverage ratio beyond the 2.2, 2.3 which is where we are right now, and we would like to be more opportunistic as we go forward for the balance of the year on the share repurchases.

Yes, sorry, Michael, just as a clarification, you took your repo for the year from $1.5 billion to $2 billion.

You're sort of suggesting based on -- that was driven by the successful ability to repatriate $1.1 billion.

Did that imply that you had thought you were going to repatriate $600 million, but you were able to do $500 million -- excuse me, but you were able to do $1.1 billion, and that's the difference or is there something else?

By the way --

That's about right, John.

That's about right.

Did you pay tax on that repatriation?

Our tax rate for the quarter at 31% as well as for the year we're still guiding to 30% to 31%, so we were able to do this in an efficient manner from a tax standpoint.

Got it.

Thank you.

Mig Dobre, Robert Baird.

Good morning, guys.

Just looking maybe for a little more color on your CapEx comments.

I mean, we know that ag, mining and nowadays energy CapEx is under a lot of pressure.

But how do you think about CapEx trends more broadly outside of these three specific end markets?

I think we saw it certainly soften up a bit in the quarter.

I don't think it was anything overly dramatic.

But if you look at test and measurements and specialty in particular, I think welding was largely impacted by oil and gas.

Those other two segments, what I would say is in general we saw customers become a little bit more tentative about moving forward on capital expenditures.

Again, nothing overly dramatic.

Nothing that we can't -- we don't think we can power through here as we go through the year, but right now the environment is certainly choppier than it was as we ended the year.

I mean, is it fair to say that you are starting to see hesitancy beyond these three end markets?

Well, I think surely not in food equipment, so I think it's more sort of industrial CapEx.

The food equipment business is much more tied to the consumer end of the economy.

They're -- they continue, you saw their results in the quarter continue to accelerate.

They're also reaching a place from the standpoint of their work through the enterprise initiatives where they are highly focused on driving organic, and I think you're seeing some of that progress show up.

So you know, I think we're, again talking about test and measurement, specialty in terms of more generalized CapEx spending softness than in welding in particular as related to oil and gas.

That's great.

And sticking with food equipment here, as I understood from your comments, you hinted at potentially some share gains in North America.

Any color there and really kind of what drove very good results there this quarter would be helpful.

We didn't hint at any share gains, but sales were up 7% in the quarter in North America through a combination of as I said some continued -- 7%.

With equipment up 10%.

Equipment up 10%, overall up 7%.

Thank you, Michael.

And a combination of continued new product pipeline, things hitting the market as well as a -- reaching the position as I said earlier where they are much -- they're in a position to really focus on driving organic.

All right.

Thank you.

Andy Casey, Wells Fargo Securities.

On the industrial CapEx comment can you describe what you saw in North America during the quarter outside of the oil and gas sector?

Specifically was there any improvement through the quarter, or did it just remain choppy?

Yes, I think in general it was pretty flat through the quarter.

Okay.

Certainly no better or no worse in terms of January, February, March.

Right, I think this was -- this quarter's pretty -- the challenges we're talking about on the capital equipment side on oil and gas showed up fairly early in the quarter.

We were able to take, you know, some cost actions here as we prepare for not just the quarter but maybe for the rest of the year, but you can't -- certainly the pressures didn't accelerate in the quarter and didn't improve in a meaningful way from the run rates that we saw early on.

Okay.

Thank you, Michael, and then is the same true of Europe, and then I'll let somebody else ask.

You broke up a little bit but I think we saw the same trends essentially in Europe.

Europe was a little bit weaker on the equipment side, down slightly, but I think, again, the comps were pretty challenging.

You know, Europe was up 5% in the first quarter last year, so I wouldn't read too much into that at this point, but also Europe, Asia-Pacific was fairly consistent as we went through the quarter.

Thank you very much.

Sure.

David Raso, Evercore ISI.

Hi, good morning.

On the second quarter a question with the margins and also sales.

On the sales it looks like the organic growth you're expecting it to accelerate a little bit.

I'm just trying to figure out is that simply because the comp gets a little easier, or is there something you're seeing that suggests the organic could accelerate a bit?

Well, we are, sequentially -- historically we typically see an increase due to seasonality from Q1 to Q2.

If you look at the organic growth rate year-over-year, we are guiding to 1% to 2%, which is a little bit higher than what we saw here in the first quarter, but not significantly higher.

Maybe the other way to kind of -- what you're trying to get at is if you look at our EPS for the year, this positions us at the first half earnings per share at about 48% of the year and 52% in the back end of the year.

So not a back end loaded plan and very consistent with what we've been able to deliver historically.

So, again, we're not counting on an acceleration here in terms of our organic growth other than what we typically see.

We'd love to see one.

We'd love to take one.

We'll certainly take it, we're ready if it comes, but typically Q2 represents an improvement from Q1 on the top line.

Yes, I was referring more to year-over-year, and I know it's modest but I was just curious

Yes and what I would add to that is -- go back to what Michael said before, the comps move around so we were plus 5% last year in Q1 and plus 1% in Q2.

Yes that's what I was referring.

It's probably a little more comp than it is -- you're not really seeing acceleration in organic.

And last on the profitability.

The last couple quarters you have posted negative sales year-over-year, but you were able to grow EBIT year-over-year.

The second quarter you're implying sales down 7.5%, but EBIT does fall.

It's decremental call it 12%, 13%, 14%, which still would be a good performance.

But just trying to understand what's the switch from now a sales decline pushes EBIT down when the last two quarters you were able to grow EBIT on sales declines, just if there's something changes.

Yes, no, nothing fundamentally is really changing other than this is the toughest quarter from a currency standpoint.

So if you look at the impact from currency on revenues and margins as well as EPS, Q2 is the bulk of it.

When you translate this into earnings per share, and we have $0.15 of headwind here in -- $0.10 in the first quarter, $0.15 in the second quarter, and then -- the balance, $0.15 remaining for the second half of the year for a total of $0.40.

So that's really what's driving the outlook here for the second quarter.

All right.

That's helpful.

I appreciate it.

Thank you.

Sure.

Joel Tiss, BMO.

How are you doing.

A lot have been answered.

I just wondered, looks like, the margin progress in the second quarter that you imply seems to slow down a little bit, and I just wondered if you're seeing any challenges on really driving the kind of margin improvement going forward, just because the low hanging fruit has been harvested already.

Or is it more just currency and comparisons and a shaky economy?

Yes, on operating margins the things that are within our control, I think the teams continue to do a really good job, and we expect as we said 100 basis points from the initiatives in the second quarter which is in line with the first quarter and in line with our expectations for the year.

If anything, on the more tactical cost management if you like, so responding to what we're seeing in some of the equipment businesses, I think we're doing a better job maybe on the discretionary cost side.

But I also think it's important to point out that we're not reducing our investment in terms of new product and restructuring and CapEx.

So we're continuing to move forward with those investment plans, so it's really -- I wouldn't say that we are performing at any different on the margin side in the second quarter and the balance of the year than we have in the past.

But certainly if anything that the progress we've made so far on margin expansion, and we showed you the data for the last two years gives us a lot of confidence in our ability to deliver the 23% target for 2017.

So continued progress and driven by strong execution by the business teams that are focused on the things that are within our control.

Okay.

Thank you very much.

Andrew Kaplowitz, Barclays.

Good morning guys.

Can you talk about your relatively strong performance in construction?

You've talked about expecting overall low single digit organic growth for the year which you delivered in the quarter.

But European construction turned positive I think for the first time in a year.

And US commercial construction seems to be wading through energy weakness.

Can you talk about what you're seeing in both the US and Europe?

Yes, I think overall this has been certainly what we've seen over the last -- let's say three to four quarters has been kind of an up and down track record both geographically and also in terms of residential versus commercial versus remodel.

I think first quarter overall was pretty good.

We continue to be very focused on margin improvement and construction.

But I think what I would say, and I swore we weren't going to talk about the weather, but given some of the weather in North America, I think Q1 was actually a pretty solid quarter for our construction business.

And hopefully it sets up for some continued progress in terms of overall market demand as we move through the year.

And I would just add a comment on Europe, I mean I think you're right.

We did turn positive in the first quarter, and a lot of positive momentum in certain regions, particularly in the UK where we have a strong position and then offset as you'd expect by weakness in some of the other parts of Europe, maybe France.

But overall, good progress on margins as well on the construction side.

Okay.

That's helpful.

And then last quarter you talked about some expectation of price costs getting better given lower material and oil costs, and price costs did improve by 10 basis points.

Can you talk about your ability to hold price in the current environment and then whether you expect a tail wind from lower raw material costs to increase as the year continues.

Yes, so I think on price really nothing unusual in terms of our ability to realize price increases as well as announce according to the schedule we'd set out, so nothing's really changed on the price side.

On the potential savings from the lower oil prices on the direct material side and also on the indirect transportation costs, I think our business teams are working on it really hard.

We saw a little bit of benefit here in Q1, particular in chemicals and resins, but I think it may take a little bit of time to fully play itself out here.

So a little too early to call what this may be for the year.

But we did 20 basis points in the first quarter.

That's our assumption for the balance of the year and in line with what we've seen over the last three, four quarters or so.

So, no change.

Optimistic that we'll get more on the deflation side, but a little too soon to call out a number at this point.

Okay.

Thanks guys.

Evelyn Chow, Goldman Sachs.

Thanks for taking my question.

I guess first of all I just wanted to explore further your thought process on the buybacks.

I think I understand why you accelerated the share repurchase in Q1.

But looking at the rest of the year beyond what you have in free cash flow, help me understand the toggle around the decision to repatriate versus potentially lever up for buybacks.

Yes.

Like I said given our business model and given our balance sheet and how much cash we generate the current leverage ratio of about 2.2 times on a gross basis.

We enjoy a solid credit rating here of AA, A-plus it gives us access to credit markets on very favorable terms.

We're very comfortable with our current leverage ratio.

We're not looking to go any higher from where we are today.

The decision on what to do with available cash flow is we really go through a thought process that's in line with the capital allocation framework that we've discussed on several occasions.

Our number one priority which consumes about 25% of our total cash flows is to invest in the business for organic growth and for productivity, so this is new products, restructuring CapEx.

We spent more than $150 million on that in the first quarter.

We're committed to secondly an attractive dividend, and so our dividend yield is competitive.

We're in the 2% range at this point.

That's approximately 25% of our total cash flows.

That leaves the balance, which is a pretty big number for external investments.

And so acquisitions which we'd love to do under the right conditions.

We've talked about what those are in the past, and/or share repurchases, some combination thereof, and the decision is really made based on where we can get the best risk adjusted returns.

And if you look at our share repurchase program over a long period of time, we generate 12% to 13% returns with very low risk.

And given the visibility that we have into the performance of the Company and given what we think over time we'll be able to deliver in terms of total shareholder returns, and so that's really what drives that decision.

We committed in December to approximately $1.5 billion and were able to do that a little bit sooner, because we were able to access some of this overseas cash, and we'll continue to look at opportunities to do that.

We're saying approximately $2 billion for the year, and let's see how it plays out, and we'll keep you posted on the earnings calls as we go forward.

Okay.

Understood and then I guess just turning to welding for a second, drilling down into your performance in the quarter, down 3% organically.

I think you said oil and gas is down 30%.

It's the easiest comp of the year.

Could you just provide maybe a little bit more clarity in your thoughts on the trajectory for the segment for the year?

Yes, I mean, we don't get too fancy in trying to forecast too much.

Like we said we're doing current run rate basis, and so if in the first quarter we were down 30% we expect that to continue throughout the year.

Maybe a little bit better in the second half of the year in terms of the declines on a year-over-year basis but not really counting on things getting a lot better or deteriorating significantly from here.

I think the 30% decrease is pretty significant and maybe a little bit of a reaction to the changing environment on the oil and gas side.

I might just add following a very strong fourth quarter in that business, and so a fairly -- maybe a little bit faster reaction level than what we expected and a little bit more than maybe expected.

But this is our assumption for the rest of the year that this run rate will continue.

I'd just add that net of oil and gas the business is up 3% in the quarter.

Yes.

On the commercial side we continue to see solid demand, which in North America was enough to offset the decline in oil and gas.

Great, thank you so much, guys.

Rob Wertheimer, Vertical Research.

Hi.

Just to follow I wanted to see if I can understand the oil and gas better.

Is international down a lot more than North America?

I don't know if you are giving the North American oil and gas number.

Is international more upstream?

Obviously it's no surprise to see down.

It's just given the mix isn't all that upstream, it's a little bit bigger than we thought.

Yes, if you're talking about the welding business specifically.

Correct.

The difference in the percentages are largely because most of our international sales in welding are oil and gas related.

We have a much more balanced portfolio in terms of that market exposure in North America.

Yes.

Participating in the same parts of the industry overall.

Okay.

So the mix international would be still more midstream, downstream than upstream?

Correct.

Just a much higher concentration of our international weldings and international welding revenues are tied to oil and gas.

Perfect.

Then if I may, is there any risk of an inventory build of equipment or whatnot as the oil/gas side of welding slows down?

Or is it contained within oil and gas?

I don't think there's much risk.

Our -- part of what's core to our methodology is for 98% of our welding product portfolio our customers order today and we ship it to them tomorrow.

So in terms of their sort of reaction to current market environments and our -- the changes that has in terms of the demand back to us, I think it's a pretty efficient system.

So I don't think we're seeing much risk around inventory build.

Great.

Thank you.

Steven Fisher, UBS.

Thanks, good morning.

Wondering --

Good morning.

-- which segment you expect to see the biggest impact from your increased internal focus on growth this year.

I mean even if it's a segment that ends negative for the year, where do you expect the biggest impact to be?

Well, I think we're -- we've talked about this before and a lot of the work that we've done over the last two years-plus is really about positioning ourselves internally to really drive and a focus in a very efficient way on organic growth.

So in terms of the organizational structure of the Company, in terms of the product line simplification work we're doing right now, that's largely about cleaning the clutter out and eliminating the distractions associated with product positions that are either not as differentiated as we want to focus on or ultimately too small to matter.

So I would point to automotive and food equipment as the businesses that are furthest down the path.

I think the welding business certainly net of some of the current challenges in oil and gas is very well positioned.

That's been a business that's grown organically at 9%-plus for us since the mid-1990s when we got in the business.

Certainly we expect that one to start to accelerate as we go forward.

And then all of the others are at various stages on the path in terms of the preparatory work needed to focus on really driving organic.

Construction is continuing to make progress, still some big restructuring going on in Europe there.

Polymers and fluids was probably the most fragmented complex structure.

We're I think getting to the back side of what they needed to do to get in position to drive organic growth.

I think we're coming along as we've talked before.

This is the transition year.

2016, the PLS impact starts to drop considerably, and I think we're in a position to really step on the gas pedal heading into next year.

That's the plan.

Great, and then automotive tends to be a business where you have a bit more visibility so the 14% growth in China in the quarter, I know you said two times that you were thinking about the rest of the year, run rate (technical difficulty) increased visibility.

I mean how do you think that 14% in China tends to go the rest of the year?

Hey, Steve could you re-ask that question?

You dropped out in the middle of it.

I just want to make sure we hear your question properly to answer it properly.

I was just saying that your automotive business tends to be one where you have a bit more visibility, and the 14% growth in China in the quarter.

I know you've said a few times today that as you think about the rest of the year for your businesses you tend to sort of just run rate.

But because you have that more visibility in automotive, how do you think about that 14% growth in China over the rest of the year?

Yes, I think we're well set up there as you -- as you described it, the automotive business, what we're selling today, really across the world, is a function of penetration gains that we engineered and invented and sold in going back two and three years.

So I think the run rate is really solid running going through the rest of this year.

The pipeline is terrific in terms of future years, and we continue to be very bullish in terms of what we think we can do with this business long-term.

Okay.

Thank you.

Jamie Cook, Credit Suisse.

Hi, good morning.

Just two quick questions.

One, I mean I know the focus largely has been more on internally igniting organic growth and share repurchase, but can you talk at all about just sort of the -- is the deal pipeline at all becoming more attractive, your interest in larger versus smaller deals and what you're seeing in terms of valuation?

And then I'll get back in queue.

Thanks.

Sure nothing's really changed.

We I think we're pretty clear in our December Investor Day meeting around where we see M&A fitting in terms of our overall enterprise strategy.

Largely focused on bolting on businesses to our existing segments that we think can either help support or further accelerate the organic growth rates.

No magic from a size standpoint but certainly something that's comfortably in the $100 million to $500 million range in that regard, so, and ultimately that's opportunistic.

We will access those opportunities as we find them and they become available to us.

We are certainly focused right now on getting this pivotal organic growth firmly in place.

So from the standpoint of pipeline, it's -- you know, we've got a few things out there that absolutely fit that we're working in terms of bolt-ons to some of our existing businesses, but I don't expect a particularly robust year from the standpoint of overall deals done.

But just to clarify, do you feel any more I guess pressure -- look the story -- you've far exceeded everyone's expectations on margins and how successful you've been, and the macro obviously has been a bigger headwind to most all companies and you've done a great job, but do you feel like you could be more opportunistic?

Do you know what I mean, to help the organic growth by doing a deal at this point?

I don't think there's any change in posture or aggressiveness.

It's ultimately about how does it fit.

How does it help us do what I just described, and we're certainly not going to react on a short-term basis.

This is as we've laid out a five-year plan to position the Company to generate 12% to 14% TSR on a consistent basis, and the big lever on that is really driven by an organic front end, so that remains our focus right now.

And this is -- this is also a five-year plan, not a five-quarter plan.

It's all about positioning the company coming out of 2017 to be able to perform like we think it can.

And so we're focused on making that happen, and we've made a lot of progress, and you're kind to note that, but we've got a lot more work to do to get where we think we can get over the next 2.5 half years.

All right.

Thanks.

I'll get back in queue.

Ann Duignan from JPMC.

Hi, good morning -- from JPMorgan.

Most of my questions have been answered.

Maybe just back to your comments on CapEx spending and being kind of like ho-hum through the course of the quarter.

Are any of your customers in any of the segments growing concerned about the strong dollar and what that's doing to exports, or do you think it's just general uncertainty out there?

Any color you could give us is great.

No, I think the impact on export competitiveness is in my view probably largely driving some of the softness in CapEx, particularly obviously in North America.

So I think there are some shifts and some adjustments that our customers are making around how this change in relative currency rates are impacting their competitiveness from an export standpoint.

So I think as they're sorting out what is likely to happen to whatever business they're exporting from North America given this change in structural geographic competitiveness, I think that's in large part driving some of the softness around CapEx.

And are you seeing that in any specific segments?

I think we go back to T&M, probably a little bit on the industrial side of welding, in our specialty business where we're -- which is -- the equipment there is largely packaging -- automated packaging equipment.

Yes.

Okay.

That's helpful.

And then just on share repurchases.

I mean your stock is trading at the significant premium to the S&P and trading in line with the large cap conglomerates, what kind of analysis do you do internally to either decide to accelerate your repurchases or hold on to the cash for a better opportunity?

Yes, I think, Ann, I'll go back to what I said earlier is that you know, these are long-term decisions that we make and they're really based on a highly disciplined approach and being very returns focused.

The share repurchase program has been a terrific program for the Company and certainly for the shareholders.

The alternative, which is holding on to the cash, as you know is not very attractive today and certainly relative to the share repurchase program given our -- given our recent performance and given we're where we believe the Company's headed which we've been very public about in terms of the goals we've laid out for 2017 and beyond, we are confident that this continues to be a great way for us to allocate capital.

And so we're committed to the share repurchase program, and we expect it to continue to be an active program going forward.

I would add to that embedded in the target leverage ratio you talked about earlier there's plenty of flexibility in that should the odd opportunity come along.

Correct.

Yes.

Okay.

I guess I was thinking more would you ever consider a special dividend rather than the share repurchases?

I think we look at all the options, Ann, and we have not in the past done special dividends, but we'll certainly continue to look at all the options.

Okay.

Thank you.

I'll leave it there.

Appreciate it.

Steve Volkmann, Jefferies.

Just one quick fill in Scott, you mentioned that the BSS headwinds should start to go away in 2016.

I guess I'm assuming that's not really a cliff event.

When do we really see that start that fade?

Could it be in the second half of this year and accelerate in 2016 or am I just being a little optimistic there?

I think the question was around -- and correct me if I'm wrong, either BSS or PLS headwinds?

I think it's PLS.

Whatever headwinds you've got, I'll throw them in together, how about that?

I think the game plan, believe me believe me there's a lot of planning around this.

We've got a full year of PLS activity in 2015 that's going to represent the 1% headwind to our organic growth rate.

You know we're not in the 2016 planning mode yet.

But order of magnitude it probably drops off by half in 2016, and then we're fully done in 2017 and beyond.

You know, this is a pretty big one-time event, and it really is linked to our portfolio strategy, so we did a lot of work at the front end of this strategy around really building a portfolio that can sort of deliver this organic growth front end that we've talked about.

Sold 30 businesses, divested over $3.5 billion of revenue.

This is really stage 2 of that which is now working inside all our divisions to basically take the same approach from a product line standpoint.

We are now pruning product lines that don't meet our differentiation standards or that are too small to ultimately matter.

So that's -- this is sort of phase 2 of portfolio management, but we worked really hard on it last year.

We're working hard on it this year.

I think we're going to start to get on top of it and it will be a lesser issue certainly in 2016 and should be fully complete by 2017.

Great.

That's perfect.

Thanks.

Walter Liptak, Global Hunter.

All right.

Thanks.

Congratulations guys on getting the margin (multiple speakers) again.

Thank you.

I've got a couple of follow-ons.

One is just I wanted a little clarity on the oil and gas in North America.

Basically how much is that down?

I would think it would be -- could be down 30%, but doesn't sound like it is, and excuse me.

Second thing is on pricing.

Are the O&G customers looking for price declines?

Your margins don't suggest it, but are you trying to help your customers with lower prices?

Yes.

Oil and gas in North America was down at the rate we talked about earlier in the 30%-ish range, and from a pricing standpoint we're not really playing in that space in a way that's -- we're a big enough sort of component of what they're having to buy.

We're not really seeing a lot of pricing pressure.

It's more a big slow down and obviously the project work there that's impacting their demand for our welding products.

Okay.

Got it.

And then a follow on to the construction question.

Is North American construction trending ahead of where you thought it was through the first quarter, or is this in line?

Because I mean even your comments (multiple speakers).

I think largely in line the resi business was flat.

We'll see how that plays out in the second quarter depending on whether you're a weather theory proponent or not.

Remodel was up 3% and commercial was up 2% to 3% in North America.

So a reasonable bit of growth there.

But I would say largely in line with expectation.

Okay.

Great.

Thank you.

There are no further questions from the phone.

Great, well, thank you all for joining us this morning.

We appreciate that very much, and we'll look forward to speaking with everyone again soon.

That concludes today's conference.

Please disconnect at this time.