Download - Illinois Tool Works (ITW) Earnings Report: Q1 2016 ... · Illinois Tool Works (ITW) Earnings Report: Q1 2016 Conference Call Transcript The following Illinois Tool Works conference

CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial

EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

IllinoisToolWorks(ITW)EarningsReport:Q12016ConferenceCallTranscriptThefollowingIllinoisToolWorksconferencecalltookplaceonApril20,2016,10:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

AaronHoffman;IllinoisToolWorksInc;VPofIRScottSanti;IllinoisToolWorksInc;CEOMichaelLarsen;IllinoisToolWorksInc;CFO

OtherPart icipants

JohnInch;DeutscheBank;AnalystJosephRitchie;GoldmanSachs;AnalystNigelCoe;MorganStanley;AnalystAndrewKaplowitz;Citigroup;AnalystDavidRaso;EvercoreISI;AnalystDeaneDray;RBCCapitalMarkets;AnalystMigDobre;RobertW.Baird&Company,Inc.;AnalystJoelTiss;BMOCapitalMarkets;AnalystAndyCasey;WellsFargoSecurities,LLC;AnalystStephenVolkmann;JefferiesLLC;AnalystSchonWilliams;BB&TCapitalMarkets;AnalystJamieCook;CreditSuisse;AnalystAnnDuignan;JPMorgan;AnalystStevenFisher;UBS;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

(OperatorInstructions)

Thiscallisbeingrecorded.Ifyouhaveanyobjections,youmaydisconnectatthispoint.

NowI'llturnthemeetingovertoyourhost,AaronHoffman.Sir,youmaybegin.

AaronHof fman (VPofIR):

Thankyou,Operator.GoodmorningandwelcometoITW'sfirst-quarter2016conferencecall.

JoiningmethismorningareourCEOScottSantiandourCFO,MichaelLarsen.Duringtoday'scall,wewilldiscussourfirst-quarter2016financialresultsandupdateyouonour2016earningsforecast.

Beforewegettotheresults,letmeremindyouthatthispresentationcontainsourfinancialforecastforthe2016secondquarterandfullyear,aswellasotherforward-lookingstatementsidentifiedonthisslide.

Wereferyoutothexompany's2015form10-Kformoredetailaboutimportantrisksthatcouldcauseactualresultstodiffermateriallyfromourexpectations.




Also,thispresentationusescertainnon-GAAPmeasures.Whileweuseveryfewnon-GAAPmeasures,areconciliationofthosenon-GAAPmeasurestothemostcomparableGAAPmeasureiscontainedinthepressrelease.Andwiththat,I'llturnthecallovertoScott.

Scott Santi(CEO):

Thanks,Aaron.Goodmorning.

OverallaprettysolidstarttotheyearforITWaswedeliveredsolidnear-termresultsandcontinuedtomakegoodprogressinexecutingourstrategytopositiontheCompanytodeliversolidgrowthwithbest-in-classmarginsandreturns.Inthequarterwecontinuedtodelivermeaningfulimprovementonallofourkeyperformancemetrics.

WegrewEPS7%,10%excludingtheimpactofforeigncurrencytranslation.Organicgrowthcameinatthemidpointofourforecastandwasup1%,2%excludingtheimpactofourPLSinitiatives.

Weimprovedoperatingmarginby120basispointsto22.1%,andincreasedafter-taxreturnoninvestedcapitalby180basispointsto21.2%.BothouroperatingmarginandourROICmetricswerenewall-timefirstquarterhighsfortheCompany.

Freecashflowwasalsostronginthequarterat90%ofnetincome.Basedoncurrentdemandtrendsandourstrongoperationalandmarginperformanceinthequarter,weareraisingourGAAPEPSguidancefor2016by$0.05atthemidpoint.

BeforeturningthecallovertoMichaelformoredetailonourQ1results,I'dliketothankallofourITWcolleaguesaroundtheworldforthegreatjobthattheycontinuetodoinservingourcustomersandinexecutingourstrategy.

Michael,overtoyou.

MichaelLarsen (CFO):

Thankyou,Scott.Goodmorning,everybody.

Asyousawthismorning,ITWisofftoastrongstartin2016astheCompanydeliveredanothersolidquarterwithexcellentqualityofearnings.

GAAPEPSof$1.29increased7%versusprioryearandexceededthemidpointofourguidancerangeby$0.04,drivenbybetteroperatingmarginasaresultofstrongoperationalexecutiononourenterpriseinitiatives.Organicrevenuewasup1%andinlinewithourguidance,asNorthAmericagrew2%andinternationaldeclined1%.

AsScottmentioned,weestablishedanumberofnewall-timehighsforourfirstquarter.Operatingmarginof22.1%improved120basispoints,withstrategicsourcing,80/20practiceexcellence,andbusinessstructuresimplificationallcontributinginaverymeaningfulway.

Giventhestrongmarginperformanceinthequarter,wenowexpectthatoperatingmarginwillexceed22.5%forthefullyear.Operatingincomeof$722millionwasalsoafirst-quarterrecord.

Thepriorrecordof$705millionwaspre-enterprisestrategyin2012,andwasachievedwithrevenuesthatwere$1.3billionhigherthanthisquarter.After-taxROICwassolid,freecashflowwasstrong,andwerepurchasedsharesfor$500million.

Justtocommentonourexternalfinancialreporting.Asyouknow,atITWweworkhardtokeepourexternalreportingsimple,consistent,andtransparent.WeonlyreportoneEPSnumberandthatisGAAP




EPS.

TherearenoadjustedEPSnumbers.Thatsaid,letmejustpointouttwoitemsthatareincludedinourfirstquarterGAAPEPSnumberof$1.29.

First,foreigncurrencytranslation,whichwasrightinlinewithourguidanceassumption,anunfavorable$0.04yearoveryear.Second,lastyear'sfirstquarterincludedanon-recurringgainonthesaleofabusiness.

Asaresultinthefirstquarterlastyear,otherincomewas$21millioncomparedto$4millionthisquarter.Excludingthesetwoitems,EPSwouldhaveincreased13%.

Westronglybelievethatinthecurrenteconomicenvironmentandoverthelongterm,ourhighlyprofitableanddiversifiedportfolioisacorestrengthoftheCompany.Weareverywellbalancedintermsofourendmarketandgeographicexposures,andwellpositionedtoperformatahighlevelacrossawiderangeofeconomicscenarios.

Ourconsumerfacingbusinessesmakeup60%ofourrevenues,andincludetheautomotiveOEMandfoodequipmentsegmentsaswellasportionsofspecialtyproductandconstruction.Thesebusinessescontinuedtodeliverstable,highqualitygrowth.

Inthefirstquarterourconsumerfacingbusinesseswereup3%versusprioryearandup1%sequentially.Ourindustrialfacingbusinesses,suchasweldingandtestandmeasurementandelectronics,accountfor40%ofourrevenues,andasexpectedtheydeclinedyearoveryear.

Asyoucansee,thesebusinessesweredown3%butshowedsomeimprovementversusQ4whentheyweredown6%.Asyouknow,theyear-over-yearcomparisonscontinuetoeaseaswegothroughtheyear.

1%organicrevenuegrowthinthequarter,2%excludingourproductlinesimplificationinitiatives,orPLS.ByregionNorthAmericawasup2%withourconsumerfacingbusinessesup5%.

Solidgrowthcontinuesinfoodequipmentup5%,automotiveup4%,andconstructionproductswithrenovationremodelingup22%.Industrialfacingbusinessesweredown3%,withweldingdown7%andtestandmeasurementandelectronicsdown1%.

Ontheinternationalside,overalldown1%withEuropeup1%andAsia-Pacdown2%.Ourinternationalconsumerbusinessesgrew1%,andindustrialisdown4%primarilyduetowelding.

AtITWwebelievethatoperatingmarginisakeyindicatorofourbusiness'scompetitiveadvantageandtheefficiencywithwhichtheyleverageit.ItisinourviewacompellingindicatorofthestrengthandcompetitivenessofITW,anditisakeyperformancemetricforeveryITWbusiness.

Inthefirstquarter,operatingmarginimproved120basispointsto22.1%assixofoursevensegmentsimproved.Constructionproductsincreased440basispoints,specialtyproducts350basispoints,foodequipment190basispoints,andautomotivewasup140basispointstomentionafew.

Approximatelyhalfofthedeclineinweldingthisquarterisrelatedtorestructuringandothernon-operatingitems,andtheteamcontinuestodoagoodjobinachallengingenvironmentasevidencedbytheirabilitytosustainoperatingmarginsinthemid-20%sdespiteasignificantdeclineinrevenue.

Youcanalsoseethepositiveimpactofvolumeleverageinthefastergrowingsegments,whichgivesyouasenseforwhatmarginsandoverallprofitabilitywilllooklikeasorganicgrowthpicksup.

Ontherightsideofthepagewelistedthedriversofouroperatingmarginimprovementthisquarter,




startingwith130basispointsfromourself-helpenterpriseinitiatives.Giventhisstrongperformanceandpositivemomentum,wearenowexpectingmorethan100basispointsfromenterpriseinitiativesthisyear.

Price/costcameinasexpected,stableandfavorableat20basispoints.Theunfavorable50basispointsintheotherlineisprimarilyrelatedtoinvestmentsingrowthandoverheadinflation.

Overall,continuedstrongexecutiononenterpriseinitiativesandprogressondeliveringbest-in-classmarginsconsistentlyandsustainably.

Beforewegetintothesegmentresults,welistedthequarterlyprogressiononoperatingmarginexpansionsincethefirstquarterof2013--520basispointsattheenterpriselevel.Asyoucansee,constructionimproved930basispoints;780basispointsinfoodequipment.Andmorethan600basispointsinautomotiveandinspecialtyproducts.Overall,goodprogresswithmoretocome.

Turningtothesegments.AutomotiveOEMhadanotherstrongquarter,withorganicrevenueup3%and26.4%operatingmargin.

While3%organicgrowthisalittlebelowwhatwe'veseenoutofourautomotiveOEMsegmentinthelastseveralquarters,thissegmenthadaverytoughcompandQ1revenuecameinrightwhereweplannedittobe.Inthefirstquarteroflastyear,thelaunchofseveralnewprogramsinEuroperesultedinrevenuegrowthof13%versusbuildsof2%,whichiswhatcreatedthetoughcompforthebusinessthisyear.

Ourlong-termgrowthtargetforourautomotiveOEMbusinessremains2to4percentagepointsofabove-marketgrowthannually,andbasedonalreadysoldprogramsandournewprogrampipeline,weexpecttomeetorexceedthattargetbothin2016andforatleastthenextseveralyearsbeyond.InNorthAmerica4%organicgrowthcomparestoautobuildsofup5%andtheDetroit3up4%.

Chinawasup6%inthequarterdespitethefactthatbuildsatwesternOEMsweredownslightly.Asexpected,operatingmarginimproved140basispointsto26.4%,thehighestintheCompany.

AquickupdateontheacquisitionofEF&CfromZFTRWthatweannouncedlastquarter.Theacquisitionremainsontrackandweexpectthedealtoclosemid-year.

Asareminder,EF&CshouldbemodestlyaccretivetoEPSinthefirst12months,withacceleratingbenefitsin2017andbeyond.Anotherstrongquarterinfoodequipment,up3%organicallywithstrengthinNorthAmericaup5%despiteachallengingcomparison.

NorthAmericaequipmentwasup5%withstrengthinrefrigerationandcooking,andservicewasup4%.Internationalwasup1%withequipmentup3%andserviceflat.

Continuedstrongmarginperformanceasoperatingmarginimprovedby190basispointsto24.5%.Testandmeasurementandelectronicsorganicrevenuedown2%.

Testandmeasurementdown3%andelectronicsslightlybetteratdown1%.Sequentially,thissegmentwasstable,down7%comparedtotypicalseasonalityofdown6%.

Stillachallengingexternalenvironmentforourweldingbusinessasorganicrevenuedeclined9%.The9%year-over-yeardeclinebreaksdownas5pointsfromoilandgas,3pointsfromindustrial,and1pointfromcommercial.

NorthAmericawasdown7%withequipmentdown10%andconsumablesdown1%.Internationalwasdown15%primarilyduetooilandgas.

Wesawsomeslowingsequentially,withdemandtrendsdown3%comparedtothetypical3%increase,




andtheteamcontinuestotakeappropriateactiononthecostside.AsImentionedearlier,approximatelyhalfoftheoperatingmargindeclineinweldingthisquarterisrelatedtorestructuringandothernon-operatingitems.

Polymersandfluidsachievedpositiveorganicrevenuegrowthof1%,NorthAmericaandinternationalwerebothup1%,andautomotiveaftermarketimproved2%.Strongquarterinconstructionproductsasorganicrevenueincreased5%withNorthAmericaup11%.

Renovation/remodelingwasup22%,commercialwasup8%,andresidentialwasup2%.AsiaPacificwasup2%andEuropeflat.

Verystrongprogressonoperatingmargin,up440basispointsto21%.Solidquarterinspecialtyproducts,withorganicrevenueup3%withstrengthinourconsumerpackagingbusinesses.

NorthAmericawasup5%andinternationalwasflat.Andverystrongprogressonoperatingmargin,withanincreaseof350basispointsto26.1%.

Sofortheyear,basedonourmarginperformanceinthefirstquarter,weareraisingourfull-yearEPSguidanceby$0.05toanewrangeof$5.40to$5.60.The$5.50midpointis7%earningsgrowth.Ourorganicrevenuegrowthexpectationof1%to3%isunchangedandinlinewithcurrentrunrates.

We'reforecastingthatenterpriseinitiativeswilldelivermorethan100basispointsofmarginimprovementandthatfull-yearoperatingmarginwillexceed22.5%.Westillexpectfreecashflowconversiontoexceed100%,andwe'retargeting$2billioninsharerepurchases.

Forthesecondquarter,ourGAAPEPSguidanceis$1.34to$1.44,up7%atthe$1.39midpoint.Thatputs49%ofourfull-yearEPSforecastinthefirsthalfoftheyear,whichisconsistentwithprioryears.Andwiththat,letmeturnthecallbacktoAaron.


Great,thanks,Michael.Wewillnowopenthecalltoyourquestions.Pleasebebriefsoastoallowmorepeopletheopportunitytoaskaquestion,andpleaserememberonequestionandonefollow-upquestion.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

JohnInchfromDeutscheBank.

JohnInch (Analyst-DeutscheBank):

Thankyou.WhereamIfrom?FirstIwantedtothankyoubythewayfortheGAAPpresentationofearningsandfranklyfordoingacallandnotaselectivedisclosurepodcast.Somuchappreciated.

Canwe--anddon'tanswerthat.Canwejusttalkaboutcurrency,Michael?Iknowyousaiditwasinlinewithexpectations.

Itwasalittlebitmoreofadragjustbasedonwhereweweremarkingcurrenciesthatwethoughtwouldhappeninthequarter,sowasthere--IrealizeyougotalotofexposuretoAustraliandollarandIdon'tknow,justwiththepoundandsoforthmaybecouldyoutalkabout,justgiveusalittlemorecolorintermsofthecurrencyfluctuationandwhereyou'vemarkedthisfortherestoftheyearandhowyouexpectthat




toprogressintermsofdraggercontribution?


Right,John.Soyou'reheadeddowntherightpathhere.Soyouhavetolookbeyondjusttheeuro,andifyoulookatthechangesinpound,CanadianandAustraliandollar,that'swhenyougettothe3%translationimpacthereinthefirstquarteronthetoplineand$0.04ofEPSheadwind,whichwasrightinlinewiththeassumptionwehadinourguidance.

Fortherestoftheyear,thattranslationimpactwillatcurrentratesaswesitheretoday,willbelower.Andmaybeifyou'reheadeddownthepathofEPSimpactforthebalanceoftheyear,itiscorrectthatbasedoncurrentratesaswesitheretoday,notjustlookingattheeurobutattheothercurrencieswementioned,ifcurrencystaysexactlywhereitis,thingscouldturnoutalittlebitbetter.

Butasyouknow,there'salotofvolatilityincurrency.Sowehavenotincludedthatinthenumberswegaveyoutoday.


Okay,butdidyoudidbeatthemidpointofyourguidebyalmost$0.05.


Andthatisentirelydrivenbyoperatingmargin.


Right.Iseethat,butatcurrentrateshowmuchofatailwinddowehaveincurrencytodayversuswhatwehadwhenyoufirstmarkedratesgivingthefirstquarterinyourheadguidance?Isn'titlike$0.05orsomething?


I'lljustsaythis,John.It'salittlebitbetterthanwhatwehadassumed,andaswesitheretodaylet'sseewhereratesgofromhere.ButlikeIsaid,itcouldbealittlebetterbasedonratesastheyaretoday.


Okay.Somyfollowup,IwanttoaskyouandScottwhatdoyouthinkofthe--orwhatdoyoumakeoftheISM?It'sallthateveryoneseemstolookat,andifyoulookattheneworderscomponent,it'stellingyouthatabigquote-unquoterecoveryisonthecome.

Nowlastyearitwasflashinggreenandmanufacturingwasgoingtheotherway,soIthinkI'mjusttryingtogetyoursense.You'rearealtimeCompany,shortcycle,you'reintheeconomy.

DoyouthinkthattheISMisreflectingperhapssomeseasonalimprovement,somesentimentimprovement,onlyperhapsalittlebitofsystematicinventoryrestock?Orareyoujustseeingacompletedisconnect?Ijustwant,again,focusonNorthAmericapleaseandhowdoyou,basedonyouryearsofexperience,howdoyouinterprettheISMandwhyfranklywouldn'tyoubeevenmorepositiveonyouroutlook?

Scott Santi(CEO):

Yes,we'veneverfromourparticularlens,we'veneverviewedtheISMnumberashavingaterrificcorrelationtoconditionswe'reseeingontheground.Certainlynotwayout,butfromthestandpointofeitherleadingorlagging,it'snotbeenparticularlyreflectiveoftheconditionsthatwe'reseeing.




WhatIwilltellyouismytakeonthequarteristhatwesawprettysoliddemandthroughout.SoIthinkthingsarerelativelyfirmforrightnow,theoneexceptiontothatisobviouslyweldingwherehopefullywe'regettingclosetoabottom,butIcan'tsaythatwe'reseeinganythingthattellsusthat.

Butbeyondthat,theoveralldemandprofileinsidetheCompanywasprettysolidaswemovedthroughthequarter.Sonobigmovementandcertainlynotanyweakeningaswemovethroughthequarter.


WellScott,everymonthhasitsownseasonalcharacteristics;thenwehadtheseweathercompares,especiallyinthemidwestandnortheast.Irealizeit'scomplicated,butifyoutryandadjustforallthatdoyouthinkthatunderlyingdemandispickingupforyourbusinesses,orisitstillnotclear?Likeifyouat--thinkofhowthequarterprogressedandthenintoApril.

Scott Santi(CEO):

Yes,I'dsayit'sbeenprettyfirm.Ithinkit'salittleearlyinaquartertocallwithonequartersworthofdata,butIthinkagainintheaggregatethingswereprettysolidthroughthequarter.

Lookatourconsumerfacingbusinesseswheretheoveralldemandrateshavebeenprettysolidgoingbackfourorfivequartersnow.Ithinkwe'refeelinggoodaboutwherewesitintheoveralldemandpicturethatwesawinthefirstquarter.

Thatbeingsaid,it'sstillaprettychoppyenvironmentoutthere.Butthereisnonewworrybeadsbasedonourfirst-quarterperformancethatwesawacrosstheCompany.


Okay.Sobasicallysignsof--verystable,butnoobviousinflectionsofsequentialimprovementonthecome,right?

Scott Santi(CEO):

No.


Again,adjustingforseasonality?

Scott Santi(CEO):

Correct.


Goodenough.Thanks,appreciateit.

Operator :

JosephRitchiefromGoldmanSachs.

JosephRitchie (Analyst-GoldmanSachs):

Thanks,goodmorning.

Scott Santi(CEO):




Goodmorning.


SoIguessmyfirstquestionisonauto.Again,andfirstasolidquarter,butclearly,youhadareally,reallytoughcomp,especiallyifyoulookonatwo-yearstack.Istheexpectationthatgrowthstartstoimprovebeyondthefirstquarteronyourautobusiness,justbasedonwhatyouknowonproductionschedulesandtheplatformsthatyou'reon?


Yes,soIthinkwetalkedaboutatoughcompinthefirstquarterduetothenewprogramslaunchedinEurope.Andifyou'llrecall,Europelastyearwasup11%onbuildsof1%.

Sothatcompwillbewithusfortheyear.Butintermsoftheyear-over-yearorganicgrowthrate,aswesitheretodaylookingatthetypicalseasonality,Q1isthelowpointfortheyearandtheorganicgrowthrateonayear-over-yearbasiswillimproveaswegothroughtheyear.


Okay,great.Thanks,Michael.Andmaybemyfollow-onquestion,movingontowelding,soclearlypartoftheportfoliothere'sbeenalittlebitmorechallenge.

Youmentionedhalfofthemarginperformancethisquarterwasrelatedtorestructuringactions.Doesthatstarttotailoffasweprogressthroughtheyear?

Orhowareyouthinkingaboutthatbusiness?Becauseclearlyonthefaceofitwhenyoutakealookatthedecrementalmargins,thedecrementalmarginsinthefirstquarterareprettyhigh.I'mjusttryingtogetasenseforhowthatbusinesswilltrajectfortherestoftheyear.


Yes,sowehadasyousaidabouthalfoftheimpactinthefirstquarterhere,themargindeclinedown9%,whichisprettysignificantorganic,abouthalfofthatwasrestructuringrelated.WeexpectasimilarimpacthereinQ2andthenimprovementinthesecondhalfoftheyearonthemarginside.

Andobviouslythecomparisonsgetsignificanttoeasierinthebackhalfoftheyear.Solastyearinthefirstquarterweldingwasdown3%,whichsoundslikeaneasycompbutactuallyit'snotwhenyoulookathowtherestof2015unfolded.

Sothecompswillgetbetteraswegothroughthisyear.Basedoncurrentsequentialtrendsthatwelookat,we'llseeflattopositiveinthebackhalfandmarginswillimprovealsointhebackhalf.Wehaveanotherslugofrestructuringtogetthroughinthesecondquarter,andthenfornowhopefullytheworstisbehindus.


Okaygreat,thanks.

Operator :

NigelCoefromMorganStanley.

NigelCoe (Analyst-MorganStanley):

Thanks,goodmorning.IjustwantedtofollowuponJohn'squestion.Hello,canyouhearme?




Scott Santi(CEO):

Yes,wegotyou.


Oh,good.Sothere'ssomechatterouttherethatMarchwasabitweakerthanJanuaryandFebruaryforindustrialmarkets.Didyouseethat?Doesn'tsoundlikeyoudidgivenyourcomments,Scott.

Scott Santi(CEO):

Wedidnot.


Okay,good.Movingontoconstruction,andconstructionwasthestandoutthisquarterwith5%and11%inNorthAmerica.I'mwonderingisthereanywaytotryandunderstandhowmuchofthisisweatherdriven?

I'massumingthatconstructionactivitydidbenefitfromweather,andhowmuchhasbeenpulledforwardfrommaybeQ2intoQ1.Andmaybejustcharacterizethatbytalkingabouthowyouexitthequarteronconstructionproductswithitprettysteadyaswell.

Scott Santi(CEO):

Theanswertoyourfirstquestionisthereisreallynowaytofactorweatherinintermsofhowitmighthaveimpactedourresultsrelativetowhateveryoumightcallanormalizedyear,whichisabigreasonwhyweusuallydon'tbiteonanysinglequartertrendsinconstructionaspredictiveorindicativeofoveralldemand.IthinkwhatIwouldsayiswecertainlyexitedthequarterinprettygoodshapethere.SoIthinkwe'renotseeinganythingslowdownoreaseup,andwewillhopeitcontinuesthroughthebalanceoftheyearforsure.


Justaquickfollow-ononconstruction,Europewasflatandwe'reseeingsomesignsofmaybegreenshootsinconstructionactivityinEurope.ButIknowthatUKisanimportantendmarket,soI'mwonderingcanyoumaybejusttalkaboutwhatyou'veseeninEurope?IstheUKstartingtoslowdownforEurope,andareyouseeingsomegreenshootsincontinentalEurope?

Scott Santi(CEO):

No,we'renotseeinganythingslowdown.Weareabitofalaggerintermsofwhenourproductsareactuallygoingontothejob.It'swellafterthestartphase.SoIthinkintermsofcolor,ouroverallmacroviewovertherefromthestandpointofconstructionisthingsareheadingintherightdirection.


Great,thanksalot.

Operator :

AndrewKaplowitzfromCitigroup.

AndrewKaplowitz (Analyst-Citigroup):

Goodmorning,nicequarter.




Scott Santi(CEO):

Thankyou.


You'refouryearsintoenterprisestrategyandQ12016appearstobeyourbestquarterreallyinthelastfouryearsintermsofmargincontributionfromtherevisedstrategy.Sowhat'ssurprisingisthatwewouldthinkthatgiventoughercomparisonsandgivenyournowobviouslymorethanhalfwaydonewithyourinitiativeyou'rehittingthiskindofperformance.

Canyougiveusalittlemorecolorastowhat'sgoingon?Isitjustthatyourteamisnowbetteratimplementingyourinitiativesthanearlierintheprogram,orisitthatyou'retacklingmorecomplicatedareasofyourbusinesssuchasEuropeanconstructionorspecialtyproducts,thatyouactuallyfindit'seasiertoimproveefficiency?

Scott Santi(CEO):

Well,whatIwouldprobablysayisthatweare--thesewerenotaseriesofinitiativesthatwereallimplementedsimultaneously.Sowearebasicallysequencingthrough.

Ifyoulookattheprogressionthatwelaidout,andwe'vetalkedaboutthis,asearlyonthatwewereheavilyfocusedontheportfolio,businessstructuresimplification,sourcingwesaidallalonghadaramp.Ifyourememberthatitwasnowfamouslyknownastheheatmapfromourfirstpresentation,andthenwehadaninitiativethatwasrelatedtowhatwecallbusinessmodelexcellence.

It'sreapplyingtheITWbusinessmodeltothescaledupmuchmorefocusedbusinesses.Sowhatweareseeingtodayismuchmorenowofanimpactfromsourcingthelaterstagestuff.Soitwasn'tnecessarilyanallatoncelevelofexecutionacrossallofthoseinitiatives.

Theywereveryintentionallylaidoutinasequencebecausewehadtogetcertainthingsdonethatwouldallowustogettothenextphasethings.SosomeoftheimprovementthatweareseeingisjustnowsourcinginbusinessmodelexcellencestartingtotakeoverfromBSSandtheportfolioworkthatwedid.

AndtheotherthingthatIwouldsayisyou'restartingtoseesomeimpactfromincrementalcontributionfromorganicgrowthaswearestartingtomakethepivottogrowth.AndMichaelshowedyouachartearlier,butifyoulookatwherewehadthebestmarginperformanceinthequarter,itwasinthepartsoftheCompanythatweregeneratingthemostorganicgrowth.Sotheelevatedlevelofprofitabilityandtheincrementalprofitwegenerateandeverydollaroforganicisnowstartingtocontributeaswemoveintothisnextphaseofourstrategy.


Gotit,Scott.Soletmeaskyouaboutthepivottogrowth.You'vetalkedbeforeabout85%ofyourbusinessesbeingreadytogobytheendof2016from60%attheendoflastyear.

Sohowmanymorebusinesses--orevenshouldwebethinkinglikethis,didyouconvertinQ1asreadytogrow?Andwhenyoudoconvertthese,areyouseeingthegrowthprogressioninthosebusinessesthatyouexpect?

AndyoustillhaveapercentageforheadwindongrowthfromPLSinthequarter,Ithinkyou'vetalkedabout90bpsfortheyear,howdoesthatprogressionworkout?Doestheheadwindstartfallingsignificantlyjustattheveryendoftheyear?Doesitstartfallingnow?




Scott Santi(CEO):

Welltostartwiththelastpartfirst,theportfolioworkthatwe'redoingattheproductlinelevelatsomepointisgoingtodissipate.Ithinkweare--franklythere'sstillafairamountofthattodoheadinginto2016.

Wewon'tknowwhatthatlookslikefor2017fullyuntilwegetintotheplanningcycle,butIwouldsaywe'recertainlymovinginthedirectionofgettingtothetailendofthat,anditwillnotbe--itwillbesomeongoingmaintenancethatwedo,butitwillnotbesomethingwe'lltalkaboutanymore.Itwon'thaveasignificantimpactatsomepoint.

Itisaprocessthattakessometimetoworkthrough.WehavetomovecustomersfromproductAtoproductB.It'snotsomethingthatwecanjuststopsellingsomething,soitdoestakesomeworkandthere'saprocessattachedtoit.

ButIwouldexpectthatthatnumberin2017willbelowerthanitwasin2016.Andcertainlybytheendof2017itshouldbeanon-factor.

Onthefirstpartofyourquestion,weareexecutingtheplanthatwelaidout.Ican'tgiveyouanumberforhowmanyacrossthetransitionlinefrompreparingtogrowtoreadytogrowinthefirstquarter,butwe'vegotalotofplanningaroundhittingthat85%levelbyyearend.

Andatthatpointthosebusinessesstarttochangetheirfocustogrowth,Iwouldcertainlynotethatit'snotnecessarilysomethingwherewelookforanimmediateramp,butultimatelywhatitmeansisthatasignificantpartoftheirorganizationalenergyandeffort,75%plusstarttogointofocusingonfullyleveragingtheirorganicgrowthpotential.Andfromthatwecertainlyexpectachangeingrowthratevelocityinsidethosebusinesses.AndIthinkwe'vealreadyshownthatinplaceslikefoodequipmentandautomotivethathavebeenthefurthestonesdownthepath.


Thanks,Scott.

Operator :

DavidRasofromEvercoreISI.

DavidRaso (Analyst-EvercoreISI):

Thankyou.IknowyoumaintainedyourorganicsalesgrowthguidanceintotalaswellastotalCompanysales,butmaybeImissedit,butdidyouchangeyouroutlookatallwithinthebusinesssegments?Anyparticularendmarketsbeitglobalautobuilds,constructionstarts;anycoloryoucangiveusonchangeswithinthatkeepingthetotal?


No,Davidwedidn'tchangeanythingbysegment.Sowhenwelookatourinternalplanning,likewesaidautomotiveaswellastheothersegmentswererightontrackinQ1.Sowehaven'tchangedanythingintermsofouroutlookfortheyearbysegments.


Andthengiventheautoacquisitionstillhopefullygoingtobeclosedhererelativelysoon,buttheM&Afrontobviouslywasn'tthatbigadeal.Iassumeyou'restilloutlookingatotherthings.CanyougiveusanupdateonhowweshouldthinkaboutM&Aaswemovefurtherintotheyearintonext




year?

Scott Santi(CEO):

Wearestillfocusedonworkingtheplan,whichM&Aisnotabigpriority.Wehavewhatwethinkisaterrificopportunitythatwebroughtininthisautobusiness,andwe'refocusedongettingthatoneclosed.

We'vetalkedaboutwhereacquisitionsfitinourstrategy.Wewilllookatthingsthatwethinkcanfurthersupportorreinforcetheorganicgrowthstrategiesofoursevensegments,andthere'sprobablytwoorthreelittlebolt-onsfloatingaroundatanygiventime,butnotabigpriority.

Ourbigpriorityiscontinuingtomovedownthepathofexecutingtheseinitiativesinternally,gettingourselvesveryfocusedonfullyleveragingtheorganicgrowthpotentialforallthereasonsItalkedaboutearlier.Thattheincrementalprofitabilityfromeverydollaroforganicrevenuegrowthisbyfarthemostaccretivethingwecando.


Lastly,IapologizeifImissedit,butthesharerepoforthequarter?Whatwasit?


$500millioninlinewiththeplanningthatwelaidout.Sothinkofthe$2billionas$500millionperquarteristhewaywe'veplanneditout.


That'shelpful.Okay,thankyouverymuch.

Operator :

DeaneDrayfromRBC.

DeaneDray(Analyst-RBCCapitalMarkets):

Iwashopingyou'dgiveusanupdateonprice/costinthequarter,andthentheoutlookgivensomeofthechangesforsomeoftherawslikesteelforthebalanceoftheyear?


Yes,Deanesoprice/costlikeIsaidwas20basispointsforthequarter,rightinlinewithourplanningassumption,rightinlinewithwhatwesawlastyear.Andthatremainsourassumptionfortherestoftheyear.

Nothingunusualagainthisquarterbysegment,everythingisontrack.Sothat'sthecolorIcangiveyou.


Gotit.AndthenjusttogobackonthecommentatthebeginningregardingtheemphasisonGAAPearnings;andIthinkIcertainlyapplaudthat.Iknowfromaqualityofearningsstandpointthatthatgetsrecognized.

AndsoIwasinterestedhearingthatyou'redoingsomeofwhatwecallquietrestructuringinwelding,andyou'vesizedthatforus.What'sthepaybackthatyou'reexpectingonthat?Andisthereanyotherquietrestructuringgoingonelsewhereinthesegment?





Thepaybackisontheseprojectsistypicallylessthanayear.Thisoneisactuallyquiteabitbetterthanthat.It'sprimarilyfocusedonNorthAmerica.

Andwedodisclose,thelastpageinthepressreleaselaysoutrestructuringbysegment.Andyoucanseethemostsignificantonewasweldingthisquarter.LikeIsaid,therewillbeanotherseriesofrestructuringhereinweldinginQ2,andthenwewillupdateyouaswegothroughtheyear.


Andhowmuchofthatiscash?


Thisisactuallyallcash.Butnotsignificant.Imeanyoulookathowmuchcashwegeneratethisdoesnot--don'tthinkofitashavinganimpactonourcapitalallocationstrategy.


Understood,thankyou.

Operator :

MigDobrefromBaird.

MigDobre (Analyst-RobertW.Baird&Company,Inc.):

Great,thankyou,goodmorning.Maybeclarificationformeifyouwould,lookingatslide5whereyou'retalkingaboutyourconsumerandindustrialbusinessesonasequentialbasis.Somyunderstandingisthatthesequentialnumbersthatyou'reprovidingareadjustedforseasonalityperthefootnoteonthepage.

I'mlookingatindustrialbusinessesbeingdown5%,Ithinklastquartertheywereup4%sequentially.SoI'mtryingtounderstandexactlywhat'sgoingonintheseindustrialbusinesses.

Andinweldingspecifically,becausethatappearstobethedriverhere.Arethingsgettingincrementallyworseinwelding,orwasitsimplythatwehadsomesortofapullforwardofdemandlastquarter?


No,Iwouldn'tsaytherewasanypullforwardindemand.Imeanthereasonforthesequentialdeclineisessentiallyallwelding.TypicallyinQ1versusQ4likewesaid,wewouldexpectourweldingbusinesstobeup3%,anditwasactuallydown3%.

Testandmeasurement,whichistheothersegmentinhere,wasessentiallystablefromQ4toQ1.Soit'sallweldingdriven,Mig.


Right.AndIguessthespiritofmyquestionwasthere'sasenseouttherethatmaybethingsarestabilizinginsomeoftheseendmarketsthathavebeenreallychallengedin2015.Andinweldingyou'vegotexposureinalotofthem.What'syourreadthroughbasedonthewayyourbusinessisprogressing?


WellIthink,asScottsaidearlier,otherthanweldingeverythingisfavorableandfeelsprettyfirmaswe




starttheyearhere.Inweldingwecontinuetoseetheimpactfromenergy,oilandgas,whichaccountsforthedeclineontheinternationalside.

Generalfabricationisstillchallenged,especiallygoingintomining,agriculture,heavyequipment.Sothedemandenvironmentintermsofcapitalequipmentgoingintotheindustrialeconomy,wewoulddescribeasstillsluggish.AndasScottsaid,wehavenotseenanysignyetthat--ofimprovementatthispoint.


Thelastthingiswhenyou'retalkingaboutvolumesmaybebeingstabletoslightlyupinweldinginthebackhalf,I'mtryingtounderstandhowyouthinkaboutthisbusinesssequentially,seasonallyadjusted.


That'spurelyacomparison.

Scott Santi(CEO):

Currentrunrate.


Socurrentrunrates,ifyourunthoseoutandyoulookatonayear-over-yearbasis,that'swhenyouget9%declineorganicinQ1,you'llgetanotherdeclineinQ2,andthenstabletoupinthesecondhalf,abitflattoupinthebackhalfoftheyear.Atcurrentrunrates;thatcanobviouslychange,butatcurrentrunratesgiventhecomparisonsyearoveryearthat'swhatwewouldexpecttosee.


Okay,thankyou.

Operator :

JoelTissfromBMO.

JoelT iss (Analyst-BMOCapitalMarkets):

Alright,thankyouverymuch.Ijustwonderedifwecandigalittlebitmoreintothefoodbusiness.Canyougiveusanycoloronthedifferentendmarketsandwhatsomeofthedriversintheimprovementwereandwhattheoutlookisgoingforthenextcoupleofquarters?


Yes,Joel,wefeelverygoodaboutthefirstquarter,particularlyifyoulookatNorthAmerica,up5%ontheequipmentside,up4%service.Fromaproductlinestandpoint,refrigerationandcookingarethebigdriversthisquarter.

Andthenbyendmarketit'sreallyhealthcareandlodgingcontinuedtobesolidforus.Butreallyacrosstheboardwefeelverygoodabouttheoutlookfortheyear.WehaveanumberofnewproductscominginhereinQ2,andsowewouldexpectthatbusinesstobeupsimilartolastyearinthat3%to4%rangeaswetalkedaboutonthelastcall.


Okay,canwedothesamethingforpolymersandfluids?There'ssomanydifferentendmarketsanddifferentpieces,canyoujustgiveusalittledeepercolortheretoo?Thankyou.




Scott Santi(CEO):

Yes,whatIwouldofferonpolymersandfluidsisit'sbasicallyanMRObusiness,two-thirdsofit,theotherone-thirdistheautomotiveaftermarketpiece.Theautomotiveaftermarketsideofithadaprettysolidquarter,up2%.

IthinklargelyhowIwouldcharacterizetheoverallgrowthperformanceduringthequarteristhey'vegottentotheendofaprettyextensivePLSprocessandarestartingtonow--thepipelineismuchmorestablethanitsbeenoverthelasteightquarters,andtheyarestartingtonowturntheirattentionmoretogrowth.Andsoverypleasedtoseepositiveoverallorganicoutofthatsegmentinthequarter.


Thankyouverymuch.

Operator :

AndyCaseyfromWellsFargo.

AndyCasey(Analyst-WellsFargoSecurities,LLC):

Thanksalot;goodmorning.Kindofadetailquestiontostart.Onthe50-basispointdragincomponentsofmarginthatyoucalloutonslide7,youmentionedoverheadinflation.Couldyouprovidealittlebitmoredetailonwhat'sdrivingthatinflation?


Salaryincreases.


Goodforyouguys.Thenonthefollowup,ifwelookatsomeofthemacrodatatheinventory-to-salesratiosarerelativelyhighintheUSinsomeareas.Haveyouseenanychangeincustomerinventoryactions,meaningdestock/restock,orisitjustprettyconsistentbasedonyourcommentaryaboutoveralltrendsoutsideofwelding?


I'dsayveryconsistent.Andy,you'reseeingalittlebitofseasonalityinQ1,butifyoulookatthefirstquarterrelativetothefirstquarterlastyear,reallysolidworkingcapitalperformanceandnothingunusual.Andjustlookatthefreecashflownumber,90%theaverageisabout--thelastfewyearshasbeen65%.

Soreallystrongcashflowperformanceagaininthefirstquarter.Andkeepinmindthatwetypicallyrampupfromhere.

Sofromaconversionstandpoint,thisistypicallyourlowestquarterandthenwewillgoupsequentiallyaswegothroughtheyear;justtypicalseasonality.Sonothingunusualintermsofworkingcapital;continuedstrongperformance.


Okay,thankyouverymuch.

Operator :




StephenVolkmannfromJefferies.

StephenVolkmann (Analyst-JefferiesLLC):

Hi,goodmorning.Scott,Ithinkyoumentionedthatthebestreturnthatyoucouldcomeupwith,I'mparaphrasinghere,wasbasicallyincrementalmarginonorganicgrowth.AndI'mwonderingifyou'vechangedthewaythatyou'rethinkingaboutthat.

Anditseemslikein2017maybewe'llgetalittlelessPLSheadwindandmaybewegetalittleorganicgrowth.Ifweweretohaveacoupleofpointsoforganicgrowthin2017,mynumbersnotyours,buthowdoyouthinkaboutincrementalsagainstthatbackdrop?

Scott Santi(CEO):

Well,whatIsaidwasthatincrementalprofitfromeverydollarofincremental--dollaroforganicrevenuewasthehighestvalueopportunitythatwehadandreallywhatwewerefocusedonleveragingtoitsfullpotential,notthepercentage.We'vetalkedaboutincrementalmargin,soourtargetisroughly35%goingforwardintermsofconversiontothebottomlinefromeveryincrementaldollaroforganicgrowth.

Thatwillvaryupordownalittlebitdependingonthesegment.AndifanythingIwouldexpectwewouldcomfortablydothatorbeevenalittlebitbettergiventheelevatedlevelsofprofitabilitythatwe'renowoperatingat.


Okay,great,that'sexactlywhatIwaslookingfor.Andthenjustontestmeasurementonelectronics,theabsolutelevelofmarginthereisstillnotquiteinlinewithsomeofyourothers.

AndIknowthere'safairamountofacquisition-relatedintangibles,etcetera.Butisthatanokaylevelinyourmindforthatbusiness?Isthatjustwhatthatbusinesscando,oristheresomesortofbiggerpicturethingthatyoucandotogetthatmoreintothemid-20%s?


WhatI'dsayis15.5%operatingmarginincludes,asyoupointout,the420basispointsofnon-cashamortizationexpense.Soyouaddthatback,it'sabout20%,it'sstillonthelowerendinsideofITW.

Weexpectallofourbusinessestocontinuetoimprovemargins.Somewilldosomorethanothers,andIwouldprobablyputtestandmeasurementinthatcategoryofmoremarginpotentialthansomeoftheothersegments.Soweexpectthatsegmenttocontinuetoimproveonthemarginsideincludingin2016.

Scott Santi(CEO):

Astheseamortizationchargesalsobleedoffovertime.


Amortizationchargesaswellastheenterpriseinitiatives.

Scott Santi(CEO):

Underliningoperatingperformanceimprovement.


Exactly.





Great,thankyouverymuch.

Operator :

SchonWilliamsfromBB&TCapitalMarkets.

SchonWilliams (Analyst-BB&TCapitalMarkets):

Hi,goodmorning.


Goodmorning.


Wonderifwecouldjustmaybegobacktofoodequipment.Certainlythemarginimprovementwithinthatsegmenthasbeentremendousoverthelastseveralyears.

Ijustwonderifyoucouldtalkalittlebitaboutwheredowegofromhere?ObviouslyI'dexpectmaybefurtherimprovementinthebackhalfoftheyearseasonallyspeaking,butIdon'tknow,canyoujusttalkaboutwhatarethebigpictureopportunitiessofarforfoodequipment,giventhatyou'realreadyapproachingbest-in-classmarginsthere?


LikeIsaid,Ithinkweexpectallofoursegmentstoimproveincludingfoodequipment.Certainlygoodprogress,butalsomoretocome.

AndIthinkwe'llgiveyou--ifyoulookatthescheduleonthebackofthepressrelease,youcanseethevariouscomponents.Andsothemarginexpansionnowishalfisoperatingleverageandtheotherhalfapproximatelyistheenterpriseinitiatives.

Scott Santi(CEO):

You'retalkingaboutwithinfoodequipment.


Withinfoodequipmentspecifically,yes.Weexpectthatto--wewouldexpectthatbusinesstocontinuetoimprove.


Alright,that'shelpful.Andthencouldwejustmaybecomebackandmaybeyourthoughtsonsomeoftheoverseasmarkets?CouldyoujustmaybetalkgenerallyindustrialversusconsumerfacingforAsia-Pacific?

Iknowthatlookedlikesequentiallyitwasdown.Ididn'tknowifthatwasatoughcomp,butjustwhatyou'reseeinginAsia-Pacific,andthenanygreenshootsinEuropeaswell?


We'renotgoingtoparseitmuchmorethanwhatwedidinthepreparedremarksandwhatyoucanseeonpage6.AndtheoutlookfortherestoftheyearinAsia-PacificisgrowthratesverysimilartowhatwesawhereinQ1.




CertainlyencouragedbyChinaautomotiveof6%aswellascontinuedprogressinconstructionproducts,whichasyoumayknowisprimarilyAustraliabased.Sothat'showwe'ddescribedthat.


AndthenanythoughtsonEurope?


EuropefortheyearweexpectverysimilaragaintoQ1,soupintheverylowsingledigitsbasedoncurrentrunrates.


Alright,thanks.

Operator :

JamieCookfromCreditSuisse.

JamieCook(Analyst-CreditSuisse):

Hi,goodmorning.Twoquickclarifications.One,IthinkwithinautoyoutalkedaboutinyourpreparedremarksbeingabletogrowIthink2to4pointsbetterthanwhateverthemarketisdoing.

Justintermsofaclarification,doesthatincludetheautoacquisitionoristhatexclusiveoftheautoacquisition?Andthenlast,justanotherquestionontheguide.

I'msortofstrugglingwithhowyoudon'tgettothemidorhighendgiventhefirstquarter,givenFX,givencommentary,industrialisverystableoutsideofwelding.Imean,I'mjusttryingtofigureoutwhatinyourrepo,wouldpricecostsbethebiggestrisk?I'mjusttryingtogetasenseofwhatyou'remostconcernedabout.Thanks.

Scott Santi(CEO):

Wellonthefirstquestion,thatgrowthtargetwetalkedaboutdoesnotincludetheacquisition.That'scoreorganicandthat'sourexpectationbothfor2016andourlonger-termgrowthtargetfortheautoOEMsegment.

Withrespecttothebalanceoftheyear,Michaeltalkedaboutitbefore.Thecurrencyisthereisnowinintryingtoforecastwherecurrencygoes.Sowe'vealwaysusedcurrentrunratesoncurrency.

Weuseobviouslyatthequarterlyleveltheymovearound,sowe'renotgoingtoforwardforecastwherecurrencyisgoingtobe.Michael'scommentwasthatifeverythingstayedexactlywhereitwas--twocommentsthatI'llrepeat.

Oneisthatwe'reimpactedbymorethanjusttheeuro;Aussiedollar,Canadiandollaralsoreasonablymaterialfactorsasisthepound.Andthentheotherpartofthatisifeverythingstayedexactlywhereitis,Idon'tknowifyou'remarkingthemarkettoday,Michael,butaroundrightnowthatthere'sprobablyafewpenniesofupsideonafull-yearbasis.


That'sexactlyright.

Scott Santi(CEO):




Whoknowsifthatwillhappen.Anditmaygotheother--maybeaheadwind.


Ijustwantedtogetasensemoreontheendmarketside,becauseagainconsumerisprettygood.Outsideofwelding,industrialisprettystable;doyouknowwhatImean?I'mjustmoreonanendmarketorgeographywhereyou'remostconcerned.

Scott Santi(CEO):

Well,Ithinkgenerallyspeakingwe'refeelinglikethefirstquarterwasprettysolid,prettyfirm.We'vetalkedaboutthisbefore.

Wearebasicallytakingcurrentrunratesandprojectingthosethroughtheyear,andthat'showwederiveourgrowthandearningsforecastfortheyear.Soifthingsstaywheretheyaretoday,weareinprettysolidshape.


Okay.Thankyou.

Operator :

AnnDuignanfromJPMorgan.

AnnDuignan (Analyst-JPMorgan):

Hi,goodmorning.

Scott Santi(CEO):

Goodmorning.


Mostofmyquestionshavebeenanswered,butmaybetakingJamie'squestionandaskingitaslightlydifferentway.WhatwouldhavetohappenforyoutocomeinatthelowendofyourQ2guidanceandthenthehighendofyourQ2guidance?Whatareyoucontemplatinginthoseranges?


Wellthedriverswouldbeavariancefromcurrentrunrates,eitherbetterorworsethanwhatweseetoday.Sothatwouldbetheprimarydriver.

Ithinkonthethingsthatarewithinourowncontrolintermsoftheso-calledself-helpenterpriseinitiatives,wefeelverygoodaboutcontinuingtoexecutethewaywehaveforthelast--sinceweembarkedontheenterprisestrategy.SoIthinkthoseareonthemarginsideverysolid.

Scott Santi(CEO):

Thedeltaisthedemandside.


Right.





Yes,butwithinwhichsegments?Whenyou'reputtingyourplantogetherwheredoyouthinkthedownsideriskis,wheredoyouthinktheupsideriskis?

Scott Santi(CEO):

Ithink--hereiswhatI'dsay.I'dsayoneoftherealstrengthsoftheCompany,andwetalkedaboutthis,isthisreallywellbalanced,diversified,highqualityportfolioofbusinesses.

AndsoifcertainthingsarebetterthanrunratesinonepartoftheCompany,itwilloffsetinother[pre-existing].SoIwouldn't--Ican'tgodownthepathofbysegmenthowwethinkaboutthis.


Okay.Andmaybeasafollowupthen,withinweldingitdoesseemtobetheonesegmentwheremaybeyou'renotasupbeataboutwherethingsare.Canyoujusttalkaboutalittlebitaboutthedifferenceyou'reseeinginoilandgasatthispointversus--youdidtalkaboutfabricationformining,ag,heavyequipment.Haveanyofthoseendmarketsgottenincrementallyworse,orisitjustthey'rebadandthey'renotgettinganybetter?


Well,Ithinklikewesaidearlier,weldingdiddecelerateinQ1versusQ4.Andwhenyoulookattheyear-over-yeardecline,morethanhalfofthatorganicdeclineisoilandgas.

Sothatisthemaindriver.Andlikewesaidearlier,wehaven'tseenanysignsthatthingsaregettingbetterthereyet.


Andontheindustrialside?


Thosearefairlystable.Thedeclineisprimarilyontheoilandgasside.


Okay,thankyou.I'llleaveitthere.

Operator :

StevenFisherfromUBS.

StevenFisher (Analyst-UBS):

Great,thanks.Goodmorning.Ijustwanttocomebacktotheprice/costthatDeanewasaskingaboutbefore,becausethecostshaverisenasthequarterhasgonealong.

SomaybehowarethepricingdiscussionsgoingatthestartofQ2?Arethoseadjustinginrealtimetomorethanoffsetthehigherinputcosts?Howdoyoukeepthatprice/coststable?


Well,I'mnotsurehowI'dansweritotherthanwhatIsaidearlierinmypreparedremarksandinresponsetoDeane'squestion.Price/costwasfavorable20points,nochange,andweexpectittoremainat20basispointsaswegothroughtheyear.




Andifthatchangeswe'llletyouknowonthenextearningscall.Butwedon'texpectitto.


Basicallyitsoundslikeyou'reabletoraisepricestooffsetthecostasit'sincreased?


IfyoulookatourhistoricalperformanceandwhatIjustsaid,thatwouldbetheconclusion,yes.


Andthenjusttosummarizethis,Iknowit'sbeendiscussedbefore,butdoesyourbasecaseassumethattheindustrialfacingbusinessesexittheyearneutralorpositive?Orwillitstillbedeclining?

Scott Santi(CEO):

Wellthebasecasestaketheorderrateswearegettingtodayonadailybasisandprojectthemthroughtheendoftheyear.Thecompsgeteasier,asMichaelsaid,butweareprojectingnoaccelerationorfurtherdecelerationfromhere.

Andwe'vetalkedaboutthatbefore,weareafastreactor.We'renotapredictorofthefuture.SoembeddedinbothourorganicnumbersandourEPSforecastisanassumptionthatdemandstaysexactlywhereitistodayacrossallsevensegmentsprojectedoutthroughtherestoftheyear.


Sowillthecompsgetyoutoneutralinindustrialfacingbyexitingtheyearthen?

Scott Santi(CEO):

Maybe.Close.


Okay,thankyou.


Great.Andthattakesustothetopofthehour.Weappreciateeverybody'stimethismorning,andhaveanoutstandingday.

Operator :

Thankyou,speakers.Andthatconcludestoday'scall

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