Illinois Tool Works Inc. (ITW) Q1 2008 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this, all participants are in a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would turn your meeting over to Mr. John Brooklier, Vice President of Investor Relations. Sir, you may begin.

Thank you, Jane. Good afternoon everybody and welcome to ITW's First Quarter 2008 Conference Call. As noted, I'm John Brooklier, ITW's Investor Relations Officer and with me today is David Speer, our CEO and Ron Kropp, our CFO. Thank you for joining us. At this point, David will make some general comments about what we consider to be a pretty good quarter. David?

Thank you, John. The story for the first quarter is really two stories. It is what happened on our operating level and what occurred for the charges that we told you about last month related to impairment and European taxes on investment transfers. But simply absent these two charges, we performed very well in the quarter, especially in light of the difficult end market conditions here in North America and a modest slowing but still positive growth internationally. Let me give you some key highlights. Our first quarter revenues totaled 11 .4% growth with 6.2% of that coming from acquisitions, 4.8% from translation. Our first quarter base revenues were modestly positive at 0.4% with international base revenues growing 4.6% and North American base revenues declining 2.5%. As reported, our first quarter diluted net income per share from continuing operations of $0.57 was 16.2% lower than the period ago... year-ago period. Excluding the $0.22 impact of the previously mentioned charges, diluted income per share from continuing operations would have been at $0.79 or 16% higher than the year-ago period. While the first quarter operating margins of 12.6% were 270 basis points lower due to impairment and acquisitions, if you exclude the impact of impairment, the operating margins would have been at 14.9% or 40 basis points lower than a year ago, while base margins actually improved 20 basis points in the quarter, the difference being the dilution from acquisitions. Finally, the company's first quarter free operating cash flow was 405 million or 133% of net income. We continued to deploy our free cash in a value-added ways. We acquired 16 companies in the first quarter representing 230 million of annualized revenues. We continue to negotiate reasonable prices for acquisitions paying less than one times revenue for those 16 transactions that we completed in the first quarter and we also remain optimistic about our acquisition opportunities ahead in 2008 based on our strong pipeline. In addition, free cash was employed to repurchase shares. During the first quarter, the company paid $386 million to repurchase 7.9 million shares. And the company's debt-to-cap moved to 23% as of the end of March 2008 from 20% at the year-end 2007. Now let me turn the call back over to John.

Thank you, David. Here is the agenda for today's call. Ron will join us shortly to review our first quarter financial performance. I will then cover operating highlights for our eight reporting segments. Ron will then adjust our 2008 full year and second quarter earnings forecast and associated assumptions. Finally, David, Ron, and I will take your questions. As always we ask for your cooperation as to the one question, one follow-up question policy. We are targeting the completion time of one hour for today's call. First, the usual housekeeping items. Please note that this call and accompanying presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including without limitations, statements regarding revenue growth, operating income, diluted income per share from continuing operations, acquisition opportunities, use of free cash, end market condition charges and the company's related forecasts. These statements are subject to certain risks, uncertainties and other factors, which could cause actual results to differ from those originally anticipated. Important factors that could cause actual results to differ materially from the company's expectations are set forth in ITW's Form 10-K for 2007. Finally, the telephone replay for this conference call is 203-369-1304, no pass code is necessary. The playback number will be available until 12, midnight on April 30. You can also access our first quarter conference call PowerPoint presentation via the itw.com web site. Once you access the Investor Information section, just look for the events tab. Now, let me introduce Ron Kropp who will cover financial highlights. Ron?

Thanks John, good afternoon everybody. As David mentioned, we had two unusual charges this quarter that had an impact of $0.22 per share. First of all, in connection with our annual impairment testing that we do each year in the first quarter it required a pretax impairment charge of $97 million related to our Industrial Software business. The after-tax effect of this charge was $0.18 per share. This impairment charge is reported in the operating income of the all other segment. Secondly, we also recorded a pretax charge of $32 million in non-operating expense related to a potential exposure for European transfer taxes related to legal entity structuring. The after-tax effect of this charge was $0.04 per share. Now moving onto the highlights for the first quarter. Revenues grew 11% primarily due to acquisitions and currency translation. Operating income was down 9% and margins were lower by 270 basis points primarily due to the impairment charge. Excluding the charge, operating income would have increased 9% and margins would have decreased only 40 basis points. The diluted income from continuing operations per share of $0.57 was 16% lower than last year. Excluding the two charges, EPS would have increased 16%. Free operating cash flow was solid at $405 million or 133% of net income. Now let me move on to the details of our operating results. Our 11.4% revenue growth was primarily due to three factors. First, acquisitions added 6.2% revenue growth, which was 450 basis points lower than the fourth quarter 2007 acquisition impact. Secondly, base business revenue grew 0.4%. This growth rate was 210 basis points lower than the fourth quarter of '07. International base revenues increased 4.6%, which was the same as the fourth quarter. We continued to see solid performance in many of the company's end markets in Europe and Asia Pacific region. North America base revenues decreased 2.5%, which was unfavorable by 330 basis points versus the fourth quarter. The North American business continued to see the effect of slowing industrial production and declines in residential construction and automotive production. Third, currency translation increased revenues by 4.8%, which was 130 basis points lower than the fourth quarter currency impact. Turning to operating margins, margins for the first quarter of 12.6% were lower than last year by 270 basis points, as I mentioned primarily due to the software impairment charge. Base business improved margins 20 basis points, which partially offset the negative acquisition impact of 70 basis points. Also lower restructuring expenses improved margin by 20 basis points. Let me turn it back over to John. He will provide more details on the operating results as he discusses the individual segments. In the non-operating area, interest expense was higher by $13 million as a result of the euro bond issued in October 2007. Other non-operating income expense in the first quarter was unfavorable versus the prior year by $36 million mainly due to the previously mentioned charge for transfer taxes. The first quarter effective tax rate of 34.6% is higher than the first quarter '07 rate of 31.1% due to the impairment charge, which has minimal tax benefit. Excluding the effect of the impairment charge, the first quarter 2008 tax rate would have been 29%. Income from discontinued operations was lower than last year by $15 million primarily due to a gain in the sales of consumer packaging business in the first quarter of 2007. Turning to the balance sheet, total invested capital increased $273 million from the fourth quarter primarily due to favorable currency translation and acquisitions. Due to acquisitions and the higher mix of international revenues, accounts receivable increased from 61.8 to 65.5 days outstanding. Inventory month on hand increased from 1.8 to 2.0 mainly due to seasonality and acquisitions. For the first quarter capital expenditures were $89 million and depreciation was $91 million. ROIC declined to 12.4% versus 15.7% last year as a result of the impairment charge. Absent this charge ROIC would have been 16%. On the financing side, our debt increased $476 million from last quarter primarily due to higher U.S. commercial paper. Our debt-to-capital ratio increased to 23% from 20% at year-end. Shares outstanding at March 31 were $522.8 million. In addition the effective options typically add 3 million to 4 million shares to the dilutive share calculation. Our cash position increased to $100 million in the first quarter as our free operating cash flow of $405 million and net borrowings of $425 million, we utilize for acquisitions of $236 million, dividends of $148 million and share repurchases of $386 million. During the quarter, we spent $386 million to repurchase 7.9 million shares under our ongoing open-ended share repurchase program. Regarding acquisitions, we acquired 16 companies in the first quarter, which have annual revenues of $230 million and an average pay less than one times revenues. The acquisitions during the quarter include Vitronics Soltec, which provides equipment and related services used in the soldering of PC boards into packaging of semiconductors. This business has annual revenues of approximately $84 million and will be included in our Power Systems and Electronics segment. In addition, in our Food Equipment segment we acquired Peerless a manufacturer of commercial mixers and other baking equipment with annual revenues of $40 million. I will now turn it back over to John who will provide more details on our first-quarter operating results.

Thank you, Ron. Let's review our segments. Industrial Packaging, revenues increased 12.4% and operating income grew 6.1% in the quarter. Operating margin of 11.1% was 60 basis points lower than the year-ago period, primarily as a result of non-volume related issues mainly related to price of raw materials. 12.4 % increase in top line consisted of the following, 0.7% from base revenues, 4.9% from acquisitions, 6.7% from translation and 0.1% from other. Industrial Packaging segment produced Q1 base revenue growth of 1% on a worldwide basis with international base revenues increasing 3% and North American base revenues declining 2%. By major product categories, worldwide strapping consumables and equipment declined 1% and all other industrial packaging grew 6% in Q1. Internationally, Q1 strapping consumables and related equipment declined 3% and 2% respectively. Base revenue growth internationally emanated from other industrial packaging applications such as stretch film, paper-based products, and insulation products. In North America, strapping consumables declined 3% in Q1 largely as a result of the weakness in the residential construction and primary metal sector. Strapping equipment grew 11% in the quarter thanks to especially machines made for post office applications. Moving to our Power Systems and Electronics segment. In the first quarter, segment revenues increased 5% and operating income grew 7.5%. Operating margins of 21.4% were 50 basis points higher than a year ago largely due to margin improvement in our Asian businesses [ph]. The 5% growth of revenues consisted of the following, 0.9% from base revenues, 2% from acquisitions, 2.2% from translation and minus 0.1% from other. Power Systems and Electronics segment grew base revenues 1% in Q1 '08. The biggest portion of this segment is welding, which accounts for nearly 75% of total segment revenues. In the first quarter, welding grew base revenues 3% on a worldwide basis. Welding’s international base revenues increased a very robust 18% in the quarter, thanks to high levels of demand in Asia for specially consumable products especially in categories such as energy and pipeline applications as well as shipbuilding applications. Welding base revenues in Europe also grew double-digit in the quarter. In North America, welding’s base revenues declined 2% in the quarter as a result of weakening demand from customers in the construction and various manufacturing sectors. Moving to our Transportation segment. In the first quarter, segment revenues increased 12.3% and operating income grew 8.7%. Operating margins of 15.4% were 50 basis points lower than a year ago largely due to the dilutive impact of acquisitions. The 12.3% growth in top line consisted of the following, 1.1% from base revenues, 5.9% from acquisitions and 5.3% from translation. The Transportation segment grew base revenues 1% in the first quarter with International contributing 6% growth and North America declining 3%. The two primary business groups in the segment are automotive OEM tiers and auto aftermarket. Let's cover the auto OEM tier first, this group produced slightly positive worldwide base revenues in the quarter within our International revenues growing 6% in North America and declining 5%. Internationally the 6% growth in base revenues was driven by a 6% increase in Q1 European auto builds. Key contributors include Renault Group, up19%, Daimler, up 12%, GM Group and BMW, up 7% and Fiat, up 4%. Looking forward, we expect... our expectation is European builds will grow in the range of 4% to 5% for full year 2008. In North America our base revenue decrease of 5% was directly tied to the fall off in Detroit auto builds, which declined 13% in the quarter. For the Detroit 3, GM fell 17%, Ford declined 6% and Chrysler dropped 16% in the quarter. Conversely, North America new domestics increased 1% or I should say decreased 1% in the quarter. Collectively North American builds fell 9% in Q1. Looking ahead, we expect full year 2008 North American builds to be 6% to 8% lower than the prior year. Finally, our automotive aftermarket group, which specialized in fluids and polymers for maintenance and appearance purposes, produced worldwide base revenue growth of 4% in the quarter. This market continues to benefit from trends where people hold on to their automobiles for longer periods of time. Moving to the Construction segment. In the first quarter segment revenues grew 2% and operating income declined 4.1%. Operating margins of 10.4% were 70 basis points lower than the year ago period, largely due to volume declines associated with our fastener and tool, as well as truss businesses, which supply North American homebuilders. The 2% increase in top line consisted of the following; minus 5.7% from base revenues, 0.6% from acquisitions and 7.1% from translation. The Construction segment saw worldwide base revenues declined 6% in the first quarter due to weak fundamentals in North America partially offset by better performance internationally. North American construction base revenues fell 18% in Q1. Underlying this double-digit decline are base revenues associated with residential, renovation, and commercial construction all declined in the quarter. Our residential construction base revenues decreased 20% while housing starts were down from 29% in Q1. In addition, our renovation-based revenues decreased 16% of sales to the Big Box stores contracted in the quarter. Finally, commercial construction fell 8% in Q1 due to double-digit declines in categories such as stores and food service, manufacturing, and warehouse construction. On the international side, base revenues increased 4% in the quarter. Asia Pacific base revenues grew a healthy 9% in the quarter. European base revenues were essentially flat, thanks to weaker construction environments in countries such as the U.K., Spain and Ireland. Moving to food equipment. In the first quarter segment revenues grew robust 30.5% and operating income increased 2.4%. Operating margins of 13.9% were 390 basis points lower than a year-ago, primarily as a result of the dilutive impact of a major acquisition that we made in France earlier in the year [inaudible] last year. The 30.5% increase in revenues consisted of the following, 6.1% from base revenues, 20.1% from acquisitions and 4.3% from translation. The food equipment segment produced worldwide base revenue growth of 6% in the first quarter mainly due to contributions from international business units. Internationally, food equipments base revenues grew 13%. Specifically, base revenues for Europe and Asia Pacific increased 12% and 16% respectively, largely as a result of demand from institutionally based customers. In North America, food equipments base revenues grew 2% mainly due to 5% growth from its service business. Food equipment’s institutional base revenues increased 1%, while retail base revenues grew 3% in the quarter. Moving to decorating services... surfaces I should say, in the first quarter, segment revenues increased 6.6% and operating income grew an impressive 17.5%. Operating margins were 100 basis... of 11% were 100 basis points higher than the year ago period mainly due to improved performance in our flooring business. 6.6% increase in revenues consisted of the following; 2.2% from base revenues, 4.5% from translation and minus 0.1% from other. The decorative services segment produced worldwide base revenue growth of 2% in the quarter with 1% coming from North American businesses and 4% coming from international units. In North America, the base laminate business produced flat base revenues in the quarter, thanks to its large exposure to less negative areas like commercial construction, as well as the successful continued roll-out of the premium price high-definition laminate product line. Flooring’s base revenues grew 10% in the quarter mainly due to new product innovations and easier comparisons from a year ago. Internationally, Europe grew base revenues 4% and Asia increased base revenues 6%. Moving to polymers and fluids. In the first quarter, segment revenues increased a very strong 27.3% and operating income grew 22.8%. Operating margins of 14.5% were 60 basis points lower than a year ago largely due to the dilutive impact of acquisitions. The 27.3% increase in segment revenues consisted of the following; 4.5% from base revenues, 17.1% from acquisitions, and 5.7% from translation. The Polymers and Fluids segment produced worldwide base revenue growth of 4% in the quarter with 7% coming from international and 1% coming from North America. This segment is divided into two major categories, Polymers and Fluids. Polymers, which provides adhesives and epoxies for industrial construction and consumer purposes grew base revenues 5% on a worldwide basis. Base revenues for polymers increased 8% internationally and grew 2% in North America. Industrial adhesives contributed 3% growth, thanks in part to strengthen the MRO, OEM, and power industries. In the second major category, fluid products, which provides an array of products, which clean or add lubrication to machines. This area grew worldwide base revenues 3%. Base revenues for Fluid Products grew 5% internationally and increased 1% in North America. The strength in the MRO, OEM categories was partially offset by weakness in the of janitorial sanitation categories. Finally, our final segment, our all other segment, in the first quarter segment revenues increased 8.3% and operating income declined 65.3%. Operating margins of 5.3% were 11.3% lower than an year-ago due to the $97 million impairment that Ron talked about earlier. The 8.3% increase in segment revenues consisted of the following, minus 1.6% from base revenues, 6.2% from acquisitions, and 3.7% from translation. This segment consist of a variety of worldwide ITW businesses. In the first quarter, worldwide segment base revenues declined 2% with North America decreasing 2% and International declining 3%. And the segment principally consist of what we determine where our four major categories, consumer packaging, test and measurement, finishing and the appliance industrial products area. Worldwide base revenues for these four majors sub categories were as follows; consumer packaging worldwide base revenues declined 1%. There was weakness in the more industrial base marking, labeling and coding businesses, which offsets strength in the Hi-Cone and Zip-Pak consumer packaging areas. Test and measurement on a worldwide basis, base revenues grew 10%, finishing worldwide base revenues were down 2% and the appliance and industrial area base revenues on a worldwide basis were down 8%. One comment on that, the appliance base revenue declined… the appliance only portion of that declined 6% on a worldwide basis in Q1 and obviously residential weakness in North America contributed to negative performance there. Let me turn the call back over to Ron, who will talk you through the 2008 second quarter and full-year forecast.

We are forecasting second quarter of 2008 diluted income from continuing operations to be within the range of $0.94 to $1 per share. The low end of this range assumes 9% growth in total revenues and the high end of the range assumes 12% in total revenue growth. The mid-point of this range of $0.97 would be a 11% higher than the prior year. For full-year 2008, our forecasting earnings range is $3.35 to $3.49 per share. Full-year total revenue growth is expected to be in the range of 8% to 12%. The mid-point of this range of $3.42 per share would be 4% higher than 2007. Excluding the two charges in the first quarter, the mid-point of the full-year EPS range would be a 11% higher than 2007. Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues in the range of $800 million to $1.2 billion, share repurchases for the year of $800 million to $1 billion, no further impairment of goodwill or intangibles, net non-operating expense which include both interest expense and other non-operating income expense at a range of $135 million to $145 million for the full year, which is unfavorable versus last year by $92 million to $102 million. And a tax rate range of 28.75% to 29.25% for the second quarter and 29.75% to 30.25% for the full year. I will now turn it back over to John for the Q&A.

Thank you Ron. I will now turn it... we will now open up for questions. Question and Answer

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. John Inch from Merrill Lynch. Your line is open.

Thank you. Good morning... afternoon, sorry. Hello?

Hello, we are here.

Hey. GM strike, was there any impact and do you foresee any impact?

Yes, there has been, John, an impact obviously with a number of facilities they have down and with our concentration with GM, it's clearly had an impact. We've been able to offset that with penetration gains in some places but clearly as they have built fewer and fewer vehicles with the strike being protracted, it has had an impact. I can't give you exact order of magnitude but it certainly had an impact if you look at GM's build numbers as well. GM was down, I think 13 or 17% I think for the quarter. So it reflected in their numbers.

John, we're also looking at second quarter for GM and there... we are projecting along with CSM, a decline of 19%. And I think that the impact of the strike is probably going to have, probably more impact on the second quarter than the first quarter.

And how will that compared to... okay, so how is that in comparing to your GM business, John, I mean just to try and put into a context?

I’m sorry.

How would that compare to your GM business before the strike, I mean is that any, I mean, it is obviously down a lot, is there any... there is no way to quantify it?

I don't think there is any real way to quantify that. I mean, we had some impact in March. We know that it's going to have a bigger impact for us in the second quarter of the year, we do know that GM is... represents about 30% to 35% of our total North American business, but beyond that I don't think we can quantify in dollar terms.

Okay. And then just my follow-up. So you are raising the mid-point by $0.10 and it says your exchange rates hold at current levels but obviously the dollar has weakened since then. So how much more does currency add in your annualized numbers, just a kind of get a sense of the conservative from around the $0.10.

Let me go through the $0.10. The $0.10 is really $0.04 actual in the first quarter above the mid-point.

Okay.

Which is $0.01 for translation, $0.005 for shares and the rest really operational, including some restructuring I think less than expected, that's $0.04. The other $0.06 is on translation rest of the year basically when we spread out through the rest of the year, the holding exchange rate at the end of the quarter level. So clearly, as exchange rates stay where they are at, today there is probably some upside but they are pretty high historical levels here. So who knows what's going to happen there.

So very simplistically, you are not really assuming any of the rest of the portfolio is going to improve over the course of the year as part of the upside to guidance.

That’s correct.

Okay. Thank you.

Ann Duignan from Bear Stearns, your line is open.

Hi, good afternoon.

Hi, Ann.

Hi, guys. Could you talk a little bit about your increase in your non-operating expenses, what's driven the change there? And also, can you talk a little bit more about the non-volume related impact on operating profit? There were some very big swings from industrial packaging, negative impact of 7.1% to all other positive 10.2%, could you just give us some color on what's going on there and what input cost are doing to that line item?

Okay. So we will handle one at a time here.

Yes.

First of all, on the non-op area, there’s a few big headwinds here. That's about $100 million swing between years for the full year. $32 million of it relates to this transfer tax issue in the first quarter. Another about $50 million or so relates to higher interest expense in 2007, which is… was expected and was included in our plan. And another $20 million or so relates to the former leasing and investment segment, the investment income line, which is down about $20 million, which is also expected as the portfolio winds down. That's roughly how you get to the $100 million in the total non-op area.

Okay. So the change from last quarter to this quarter is primarily the tax credit?

The transfer tax issue, yes.

Okay. Okay. Thank you.

On the raw material side, clearly we've seen cost increases in steel, as steel has been up depending on the type of steel but could be 30% to 40% in some cases in the quarter, which is... which is clearly significant. We have for the most part recovered the cost increase and some of our business have been recovered the margin as well. So if you look at the total company, the impact on margin for price cost is about negative 20 basis points all in, across all segments. But some segments have done better than others. For instance, Industrial Packaging, the price cost affect... is about $100 million... 100 basis points. And it's basically all the 80 basis point change in the volume in that segment. Transportation, it's around 30 basis points, all other is above 30 basis points. We're also seeing some increases in resins, clearly not at the levels of steel, more 6% to 8%. But we expect that to continue to go up as well. But clearly, the challenge through the year here is to make sure we're putting price increases to recover these cost increases.

We clearly continue to see significant headwinds, particularly with steel Ann and I would expect that we would be battling all the year to get price recovery on these cost. But as we have done in the past, we're actually off to a better start this year than we were this time last year. But as we have done in the past, it's about 90 days for recovery domestically and somewhere around a 120 to 150 days internationally and we are on top of it and tracking it closely.

Okay. And I'm assuming that segments like Transportation may have higher risk than other kind of end-used markets.

Yes. It's not evenly... its not evenly spread. But by and large, we're getting some level of increases across all the segments.

Okay. Okay. Thank you. I will get back in line.

Deane Dray from Goldman Sachs, your line is open.

Thank you, good afternoon.

Hi, Deane.

Could you provide us the base business assumptions in the old-fashioned way that you used to provide for both the second quarter and update us on base business assumptions for '08?

Well, we are not... remember, we are not including that as part of our forecast now, Deane.

Yes. But, you can just…

We are only giving... we are only talking about all in revenues for our formal forecast.

I understand, but last quarter you said... you thought you'd come in flattish on base business for…

You mean all in now for the whole company?

Yes.

I think we could look for basically somewhere between flat to maybe up slightly in the year.

And then for the second quarter?

That's a full-year number I gave you.

Okay. All right. And then, how about from David if you could... the quarterly update on where we stand on the construction both resi and non-resi? How far down is down on resi and then what's changing at the margin on the commercial construction outlook both U.S. and let's say Europe?

Okay. Well, let's start with the residential numbers, which are freshly out today the permanent data for March showed a drop of 41% versus the same period a year ago and down 6% versus February, at 927,000 permits and the start data for the same period was an annualized rate of 947,000 starts, so, we're now below the million mark, 37% down from March of last year and 12% down from February. So, clearly on the housing side we are still seeking the bottom. The numbers that... that we're looking at is we look forward are probably finding the bottom somewhere in the 800,000 to 900,000 range would be my guess. But, obviously there is lots of data out on resale values, housing inventories etcetera that would continue to say that the market is going to be challenging. And I think as we have said in the past, we think this is a probably a market that doesn't hit the bottom until perhaps the second half of the year and probably stays at a reasonably depressed level for four to six quarters after reach its bottom. So, I don't see any near-term prospects that we are going to see any significant improvement in housing. And David, just on commercial construction, the latest Dodge Construction award data through March shows that the total construction awards on a square footage basis for non-residential building for the first quarter is down 22% and the key categories of note there... the overall commercial category is down 27% and the key sub categories in there are retail, which is up 40%, warehouse is up 39%, and office construction, up 17%. Some other notable categories as well, manufacturing down 37%, education is only down 4%, and healthcare is down 20%. So, clearly the non-res numbers continue to show the trends that we saw last year as the construction award data began to go negative and I think for the last... for the year it ended up above negative 5% on a square footage basis and obviously it has taken a much more dramatic decline during the first quarter. As it relates to the international side, we have begun to see softness as John highlighted in his comments earlier in the housing markets in the U.K., Ireland and Spain. The non-residential markets still at reasonably good there, we would expect as our earlier numbers indicated growth in the non-res categories in Europe to be somewhere in the 1% to 1.5% range which is a pretty normal range for them.

David, just to clarify on the residential picture in North America where you did better or not as bad as starts. Is any of that effect of destocking or restocking within the home centers and the lumberyards and so forth or is that a real flow through?

No, I think it's probably reasonably close to a real growth rate. Most of the destocking has already occurred. So, I would expect that as we see pockets of activities in different regions we will see some move. But overall the numbers we're looking at, I think are fairly reflective of, we are doing slightly better than the market.

Thank you.

You're welcome.

Jamie Cook from Credit Suisse. Your line is open.

Hi, good morning.

Hi, Jamie.

Hi, I guess my first question. Can you just give the... you guys touched a little bit about non-res or your construction outlook for Western Europe? But can you just remind us the sort of what your updated thoughts on Western Europe and how we should think about the international business I guess over the next 12 months to 18 months?

Sure. I think from an overall standpoint as we highlighted earlier, the residential construction market overall in Europe is probably going to be down slightly on the basis of those three countries that we highlighted Ireland, the U.K. and Spain, which have got dramatically lower numbers. Overall, the commercial numbers are still at reasonable, I think we talked earlier about our expectations in the auto build in Europe and up in the 6% range, which would be a very good year in European auto. The general industrial markets there, we see operating at a slower pace than 2007 but still at reasonably positive areas probably in the 2.5% to 3% range. So we don't see anything so far in Europe that would indicate that we're far-off of what our original forecasts for the year were for construction.

For the back half of the year, and your numbers, we shouldn't assume any deterioration. That is sort of stage where we are today.

No.

Okay.

Exactly, where we built in and what we think is going to happen based on where we are today into the balance of the year forecast.

Okay. And then, can you just talk about some of the other industrial companies that have reported so far have talked about... when you think about the quarter January was okay but they talked about notably more weakness perhaps in February, March. Can you just talk about whether there was any changes we look at the months throughout the quarter and how things are in April or sort of trending relative to expectations?

Well, I don't have any April data yet, so that would be premature for me to comment on that. But I can tell you that, we've been consistently talking about at least here in North America. We have well-wedded the numbers as it relates to construction, we've been seeing a retraction in construction particularly the non-res area, probably somewhat ahead of what others have been commenting on, but the data is clearly there and it’s real and if you're earlier in the cycle in non- res, you've clearly already seen a decline. The general industrial markets we have seen continue to decline, if you have seen in the industry production numbers, they have gone negative now. They have been bouncing around zero to slightly positive. They now went negative for the March numbers, very reflective of what we've been seen going on for the last probably three quarters now. So I wouldn't say that they trends we saw in March were much different than what we had anticipated. It's... the weakness is continued and I'm not surprised by the negative industrial production numbers overall. So, it is pretty much in line with what we would have expected. March, would clearly have been notably weaker on a year-to-year comparable than say January was but the trends are still in line with what our expectations where we developed our view of the year.

Okay. But you are... in your forecast for North America, are you assuming some sort of a recovery in the back half of the year?

No, not really. No.

Okay. Thanks. I'll get back in queue.

Daniel Dowd from Bernstein. Your line is open.

Good afternoon. Daniel. How are you? I actually first based on acquisition pipeline... one of the things you talked about in the last downturn was that as you got into the downturn a lot of the sellers thought, why don't I drag my feet a couple of years and there will be a better multiples down the road. Are you starting to see any indications of that?

Actually, Daniel, what I think... we're probably seeing is people who have already drugged their feet but probably more because of what happened with the credit issues that occurred beginning probably mid second quarter last year and obviously we are in full bloom now. I think people pushed back and said well this is probably not a good time to sell because there aren’t as many private equity folks in the market. So, if I can wait, I should wait to let this storm pass before I try to sell my business. Well, as you would imagine the storm hasn't passed, so those that they have a serious need and interest to sell their business, some of those sellers in fact are private equity firms. They have shown probably more of a interest now in the selling than they were say three or four quarters ago. So we are definitely seen some early indications of more activity in terms of people interested in selling and certainly more of that coming from the smaller to medium-size private equity shops that have been pretty large acquirers over the last four or five years.

Okay. So even from private equity you actually still see an accelerating their desire to sell?

Our pipeline today is quite good and it's represented with some deals that if we are able to complete them would be once again deals of larger in size that we will have bought from private equity owners.

Okay. One other thing, so we’ve talked a lot about North America and Europe, is it safe to say that you're continuing to see nothing but growth in Asia or are there any signs of even incremental slowing there?

No, we have seen some slowing in Asia but the rate is still high. I mean if you talk about some areas in China going from say a 10% growth rate to 7%, I mean, yes, that is a noticeable decline but 7% is pretty strong. So, yes, we are seeing some pockets in some areas where the growth rates are not as strong as they were, but clearly strong single digit and in some case it's still double-digit growth.

Okay. Thank you.

Rob Wertheimer from Morgan Stanley, your line is open.

Good afternoon everybody. I had two questions really on financing and the first is just broadly and generally, have you seen customers or competitors or potential targets run into trouble from not being able to finance and does that changed your acquisitions any?

It has not changed our acquisitions any... if anything that we have, that we have been looking at. I will tell you though that there is no question that some of the things that are... that are in the early stages is sort of coming out of portfolio, there is no question they are coming out as a result of, at least in my view issues around financing and the variable rate of financing that some of those portfolios have. Their cost of funds have clearly gone up and they are clearly looking for exit strategies that are probably different than the exit strategies that exist when they entered the asset.

Well that's interesting. I guess, I was also partly asking just if there is anybody who has run into the stress just not necessary from the business being bad but from being unable to finance and whether you are you ready to jump in if that started to happen?

Not from an acquisition standpoint, we have seen some signs of that in the customer base with the customers are concerned, particularly the small to medium-size customers that have in some cases been somewhat marginalized by this credit crisis there, their access to funds and their cost to funds have gone up, not because necessarily of their credit worthiness but because the overall risk profile that they are lenders, the banks have taken in the last several quarters.

Thanks. And then just a quick follow-up. Is there any reason why when you levered up this quarter as you've said you'd be doing, you talked more short-term rather than long-term financing?

No. In fact our primarily way to finance our day-to-day needs is the short-term commercial paper and that did go up. But the other reason for the increase in the short-term debt line is that some of our long-term debt has now become current, because of the new end market in 2009. But still long-term debt but just classified as current.

Okay. Thanks much.

Eli Lustgarten from Longbow Securities, your line is open.

Good afternoon.

Hi Eli.

Just one clarification, you did say that $0.06 in the next couple of quarters of the earnings increased of the $0.10 comes from translation?

That's correct.

Okay, just to make sure. And just following to that question, you levered up... you levered up your short-term debt coming, how high are you willing to take the balance sheet up in the leverage at this point. Then I guess I'm not used to seeing ITW 23% in a long time. And just a question, whether you have any targeted goals or limitation for you and how high do you take the debt levels at this point?

Well, as you know, we've been looking at our capital structure over the last couple of years and we put out a formal target of... a range of 20% to 25% debt-to-cap, which clearly, we're now in the middle... right in the middle of that range. But we also said that the... the primary use of our debt capacity and free cash flow will be acquisition. So to the extent we could find the right acquisition targets, we're willing to go higher than 20% to 25% clearly. But right now we're seeing, normal level of acquisition activity, we're still repurchasing shares. So right kind of where we want the net with 20 range.

And, can you give us some color on the two specific businesses I'm interested in. One, I guess the power electronics, welding is three quarters of it. North American welding is the biggest piece of that. That's down 2% and it's the most profitable business. Should I worry, can you give us some color what's going on there? And two can you give us some detail forecast for the second quarter in the year for your automotive outlook for North America, big three new domestics in overseas particularly I mean, we just saw a big weakness in margin in European automotive sales, were down 9.5%, so…

Let me comment on the welding markets and then John has got the data on the auto builds that he can share with you Eli. As it relates to the welding market, what we've seen in the welding market, the weakness has really come from two primary areas. On is construction, which we would have expected. Their construction is largely related to commercial building construction. Some infrastructure but largely commercial building and obviously we would've expected to see those declines and they have now come forward and that the same would be true in their general industrial markets. Here in North America, the markets remain... continue to remain strong for the welding business are largely related to the energy infrastructure and the heavy equipment sectors. Those still remain very good markets but what we see in the first quarter is reflective of weakness in a number of the other end markets that have now caught up if you will with the welding organization. And that's pretty much in line with what we had expected when we developed our forecasts.

So will it get worse all year or stay the same or what do you expect?

No, we expect to see some probably some prudent decline in the second quarter and then probably a leveling effect from there forward.

And no profitability impact it seems at this point.

No, I mean we're... clearly overall in the group, we are growing nicely in Asia and the profitability in Asia has improved, so it helps dampen some of the decline in revenues here. The margins are associated with that. So I think what we are out looking for the balance of the year is some continued decline here in North America in some of their later cycle businesses, but continuous strong growth internationally, particularly in Asia.

Eli on the auto side, Detroit 3 for the full year is looking for auto production to follow 11%, New Domestics are looking for builds to be flat on a year-over-year basis. I guess your combined number of minus seven for the year, that's certainly more negative than we thought three, four months ago.

And you have a second quarter number…?

Second quarter number Detroit 3, down 17% and New Domestics, plus 2%. I remember that down 17% is exacerbated somewhat by what we're talking about earlier with this actual strike.

And the General Motors impact. That would put the build for the year you, Eli at about 14.1 million vehicles which is 1 million vehicles less, more than 1 million vehicles less than last year.

Yes.

So, we have clearly, we've built those number into our forecast then we are clearly not expecting any real-time improvement. We are expecting the second-half to be a little bit better only from a comp standpoint as it relates to builds.

And GM will help that if they go back into business.

Right.

[inaudible] I think that would help.

Okay. Thank you.

Martin Sankey from Neuberger Berman, your line is open.

Okay. Thank you. Can you hear me?

Yes, we can hear you.

Okay, I got a couple of questions. First, in the prepared remarks you commented that as part of the guidance that tax rate is going up in the second half of the year up to I guess 31% since the first half rate is 29%?

So to be clear the rate in the first quarter was 34.6%. That is higher than last year which was 31% all due to this impairment charge which has little tax. So...

Okay.

In the first quarter the rate is at normally high because of the impairment charge.

Right.

Absent that the first quarter rate would be 29%.

Right. Then you have second quarter rate at 29%?

Right. And so if you average out the range for the second, third, and fourth quarters with the mid-point being 29%, with the 34.6% from the first quarter, you get to an average of around 30% for the full year.

Okay.

Basically holding the tax rate at... in that 29% range for the rest of the year.

Okay. So, then the European legal restructuring doesn't really have any practical effect on the tax rate in the near-term?

No, the transfer tax issue because it's... those related to structuring around taxes, tax planning because it's not a tax based on income under the given quarter in the tax line gets reported in the non-operating expense line?

Okay. The second question I would like to ask is when you walk through the increase in your guidance basically you said that absent the first quarter and foreign currency effects that there is really no change in the outlook for the year. How ever, I suspect that there are some gives or takes within that. Could you sort of walk us through that in little bit more granularity, please?

Well, I think, we have given you some free high-level detail already, you may recall that when we provided our guidance for the year in December of last year, we were, I guess by comparison to many seen as fairly pessimistic. So, we started the year with a forecast that was already based on what we saw as a continuing weakening economy here in North America probably across the industrial markets and we've talked a lot about the transportation area and certainly that residential and commercial construction market. So, I don't know that there is much more flavor that I could provide other than to say our expectation in terms of how the year unfolds is pretty much as we had planned which continued weakening in the industrial economy here in the housing market not to find bottom yet. Probably, the only change of any significance has been this first quarter number in the auto market and the second quarter decline based on what's happening at GM. But even though as John pointed out in his earlier comments, we've been able to offset most of the impact of that thus far. So I think that's probably the best flavor I can provide at a high level.

Okay. But would it be fair to say that you pushed up the share repurchase somewhat than versus the original plan?

The original forecast, share repurchase for the year was $800 million to $1 billion and we left the same. Clearly, we've done more than 25% of that in the first quarter. So, we get a little bit of the benefit from doing some earlier rather than later standpoint in the first quarter about $0.05 per share in the first quarter. And we also look at that repurchase activity regularly and you know as we look at our acquisition activity but, I think the ranges that we provided for the year we are still very comfortable are realistic ranges and we update those every quarter. So if there is a change, you'll know about it.

Okay, so…

[inaudible] to move on. Can we move on to the next question please.

Robert McCarthy from Robert W. Baird. Your line is open.

Good morning or good afternoon gentlemen.

Good afternoon, Rob.

David, you talked earlier optimistically about your ability to manage steel and other input cost increases with price increases, talked about lags etcetera. But, the environment of course today a little bit different than it was the last time we went through this drill. Could you talk about managing this process in an environment where I would presume you're running into greater resistance?

Well, first of all, yeah Rob that we are certainly getting greater resistance. This is... I would not describe this as a drill, I would describe this now as a continuous part of the way we have to run our businesses. We have been at this now since 2004 in almost all of our steel related businesses and 2005 in almost every other business. So, we track the cost and price moments across all of our businesses regularly, we have a regularly quarterly roll up of the data so we know where we stand, we know what needs to be done. Our business units make this a regular part of the planning activities. So, this is not a one-time event, this is something that we have become accustomed to doing based on the dramatic changes in input costs. With that said, it is not an easier, in fact there is more resistance now. There is no question. But, we also understand that there is no alternative with the kinds of increases we're talking about other than to get recovery. The option of facing a 40% increase in steel costs across a quarter and not getting on effective price increase just as in there. So the days where you had a 4% or 5% raw material input costs you could offset somewhat the productivity improvement and press dampen any increase you might have if any at all are clearly behind us. So it's not easy. Perhaps I sounded too optimistic but I know we have a process for managing this. It's an important thing we pay attention to and our managers are centered around making sure this happens.

So you are better organized to manage it today than you were four years ago and I, may be, hear you saying that customers have gotten more accustomed to having to face this.

Yes. Exactly. I mean, when you talk about input costs that are rising at these levels there. I mean, they are not seeing, it just from us who are seeing it across the board. So, it is... knock on effect that we all have to face, there is no question. Nobody is rolling over and saying, please give it to us. But, we've got the process down and I think the customers respect the way we're doing it and how we're trying to give them also advance notice. but at the end of the day nobody wants to pay more but we all face the same kinds of issues.

Thank you for that. My other question had to do with the margin improvement that you saw in the Power Systems and Electronic segment, during your prepared remarks, John, you made the comment that most of the improvement there was related to the Asian welding business?

It’s correct. Yes.

Of course you'd be facing steel price increases that would be of some magnitude. So, can you talk about... what's changing there to make this stand out and is this kind of improvement sort of a one off deal or are you looking for it to extent through the year?

Let me take that one John. The... in this segment, in the non-volume section of the margin change…

Yes.

It's favorable about a 90 basis points and operationally, it's up about a 130. So, offsetting that is the 40 of price cost negative.

Okay.

In the 130, you have the... the Asian business performing better form a margin standpoint, you also have some better margins in Europe because of the... some of the equipments that Europeans sell or just coming from the U.S. The currency benefit built in, the margins there that the... they are benefiting from. And also there was some lower margin sales in our food equipment area in the first quarter of '07 that we got a favorable comp on.

Okay. And the source of the improvement in Asia, I mean, is this... it’s non- volume related so I am curious, what is it?

It's more efficiency in the manufacturing process.

We have upgraded in our welding organization the consumable business the capacity and the equipment that we have there which has increased our productivity. So, we're in… our margin improvement there is part of what we would have expected to have seen.

Okay. Very good. Thank you.

Andy Casey from Wachovia. Your line is open.

Hi, good afternoon everybody.

Hi, Andy.

First, a question on the decorative part of the portfolio, well, it had a very good year-to-year margin improvement, it's still a lot below what it was a few years ago, what do you think you need to do to get back with the prior levels?

Andy, I'm not sure I heard, decorative services

Yes.

Okay. You know, the primary reason that the margins have deteriorated there is because of acquisitions. You may recall we made a large acquisition in Europe, in this category, actually two acquisitions, one in '05 and one at the tail end of '06. Polyrey in France came with essentially no operating margins when we acquired it. So as we marched those margins up we expect to see obviously those improvements. The margins in the base businesses both in Europe and here in North America are actually quite in line with what they were over the last several years. So it's really more an acquisition impact. Even though they are not reported in the acquisition category any longer because they have been businesses we've owned for more than a year.

Okay. So that should be their normal three to five year?

Yes.

Okay. Now, in within the construction products, the monologue that John went through there was a pretty sharp drop offs in the renovation and I am wondering if you could kind of delineate similar to Jamie's question if that was similar throughout the quarter or if it progressively got worse during the quarter?

I think our data have shown us that the follow-up in the box stores is really related more to volume put traffic. The activity there as opposed to managing inventories up or down? I mean they are clearly feeling the effect of the economy, less same-store sales for the big boxes. So we are feeling it too.

Most of the adjustments generally in the big box stores would occur early in the quarter as their year-ends are at the end of January. But I don't have specific data to answer the question with any better data than that Andy, other than it’s weak and expected at least in our case we expect to continue to be weak for some time.

Okay. Thank you very much.

Barry Haimes from Sage Asset Management . Your line is open.

Yes, hi. I just had a question on acquisitions. I wonder if you could as you're looking at things and I know there is a broad range but in general characterized. what sort of returns on investment improvement you might be looking at as you transfer all deals now compared with 6 to 12 months ago when we were in a different financing environment into private equity competition and so on once you've seen any real pricing difference here. Thanks.

Sure. I would say that the difference in terms of what we are acquiring and the rates of return we expect is not significantly different. The difference is that if you look back over the last several years, notably absent was the ability to do a whole lot of deals that were on the $100 million plus basis, a result of private equity driving valuations up. But our valuation discipline has been intact for a long period of time that. The difference between our EBITDA multiple last year in terms of acquisitions what we have paid for those in the year before essentially virtually the same at 7.5% times EBITDA. Our return on investment expectation are the same as they were, I think the difference now is that we would expect with private equity more on the sidelines to see more deals that are affordable and therefore hopefully the opportunity for us to do more acquisitions than we've done perhaps in the past.

Great. I appreciate it. Thanks.

Mark Koznarek from Cleveland Research. Your line is open.

Yes, thank you. I just... first of all I just want to clarify the based outlook for both the year and the upcoming quarter is flat to up slightly, is that….

We do not give you a number for the quarter. We typically don't give out... remember, when we started giving our forecasts we're including total revenues now and we are not specifying but I think generally speaking for the year, we are looking at flat to slightly up.

Okay. And that I think the guidance that we got after the fourth quarter was that the base would have been more in the range of 2% and so it does look like the outlook overall has weakened a little bit and clearly we've touched on some of the key issues construction week or the auto strike.

I think we said originally 0 to 2 yes, go ahead Mark

Okay so what I am wondering is what is the offset, because we raised guidance for the year principally because of the current quarter beat and then simply currency beyond that. So, there is no further deterioration in your core earnings outlook because of the weaker base, so what is the offset? Raw material seems to be more difficult, how are you executing better, is it more emphasis on acquisition integration, is it mix, what... can you point to what is actually better in terms of your execution?

Well I think there are number of things that are better in terms of execution. I mean we've been... we have been restructuring and sizing our businesses here in North America throughout this protracted down turn certainly on the housing and the construction categories, as we have another business. In addition, we have nearly $3 billion of businesses we have incurred over the last 24 months, that the margin improvement in those businesses clearly help us during this kind of a time periods. So, we are not relying just on the traditional margins in a mature business that's fighting to get cost recovery. We also have the opportunity to see margins go up in some of those acquired business where we have been part of work applying the ITW Tool Box. So, really is... collection of things that would have the numbers if you will come out the way they are but I will say you that what's happened so far this is largely in line with our expectations consider a few changes here and there. But overall what we've seen is largely what we were projecting when we met in December. So I haven't seen anything that has told me that our outlook is going to change much differently than that. So I think we are reasonably comfortable, we've factored into our guidance as we've began the year, most of the weakness that we're seeing today.

Okay. And then a follow up on the intangible write-down that's I guess mostly if not all click commerce. And I'm just wondering, 18 months ago the business was bought for just under $300 million here. 18 months later we've written off a third of it. Is that simply a one off or is this something that ITW is reaching for some growth in a different area. You've kind to got your fingers burnt a little bit and are you changing the way you approach non-core, non-standard kind of acquisition opportunities going forward because of this?

Well, this is certainly a special category if you will, software that is. And certainly the write-down would recognize that the value of the business today as you accurately point out is a third lower than it was when we acquired it. So there is no question that this space doesn't have the same attraction it did when we acquired the business. We've not grown as we had planned when we acquired the business, which is one of the challenges. And primarily because we've not been able to find the right kinds of acquisition with good strategic fit. And that also have reasonable evaluations. So the growth that we'd expected to be able to do here, the continuation of acquisitions is clearly the biggest variable that has led us to look at the space and whether we are really able to grow in this space, the way we had anticipated when we made the acquisition. So that's clearly... we've clearly recognized that and this impairment would obviously suggest that we're dealing with that [inaudible]. You pointed out we did the acquisition 18 months ago. We got the business focused on the areas we think it can grow and execute them profitably. And we think that unless there's a change in the evaluations in this space in the near term, it'll be a difficult space for me to see us doing a lot of acquisitions in because evaluations just don't at the moment makes sense to us.

Okay. David, Thank you.

At this time there are no further questions.

We thank everybody for joining us and we look forward to talking to you again. Have a good day.

This concludes today’s conference, thank you for attending.