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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.
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
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
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page3of22
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,
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
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,
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
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.
AaronHof fman (VPofIR):
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
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page6of22
toprogressintermsofdraggercontribution?
MichaelLarsen (CFO):
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.
JohnInch (Analyst-DeutscheBank):
Okay,butdidyoudidbeatthemidpointofyourguidebyalmost$0.05.
MichaelLarsen (CFO):
Andthatisentirelydrivenbyoperatingmargin.
JohnInch (Analyst-DeutscheBank):
Right.Iseethat,butatcurrentrateshowmuchofatailwinddowehaveincurrencytodayversuswhatwehadwhenyoufirstmarkedratesgivingthefirstquarterinyourheadguidance?Isn'titlike$0.05orsomething?
MichaelLarsen (CFO):
I'lljustsaythis,John.It'salittlebitbetterthanwhatwehadassumed,andaswesitheretodaylet'sseewhereratesgofromhere.ButlikeIsaid,itcouldbealittlebetterbasedonratesastheyaretoday.
JohnInch (Analyst-DeutscheBank):
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.
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page7of22
WhatIwilltellyouismytakeonthequarteristhatwesawprettysoliddemandthroughout.SoIthinkthingsarerelativelyfirmforrightnow,theoneexceptiontothatisobviouslyweldingwherehopefullywe'regettingclosetoabottom,butIcan'tsaythatwe'reseeinganythingthattellsusthat.
Butbeyondthat,theoveralldemandprofileinsidetheCompanywasprettysolidaswemovedthroughthequarter.Sonobigmovementandcertainlynotanyweakeningaswemovethroughthequarter.
JohnInch (Analyst-DeutscheBank):
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.
JohnInch (Analyst-DeutscheBank):
Okay.Sobasicallysignsof--verystable,butnoobviousinflectionsofsequentialimprovementonthecome,right?
Scott Santi(CEO):
No.
JohnInch (Analyst-DeutscheBank):
Again,adjustingforseasonality?
Scott Santi(CEO):
Correct.
JohnInch (Analyst-DeutscheBank):
Goodenough.Thanks,appreciateit.
Operator :
JosephRitchiefromGoldmanSachs.
JosephRitchie (Analyst-GoldmanSachs):
Thanks,goodmorning.
Scott Santi(CEO):
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page8of22
Goodmorning.
JosephRitchie (Analyst-GoldmanSachs):
SoIguessmyfirstquestionisonauto.Again,andfirstasolidquarter,butclearly,youhadareally,reallytoughcomp,especiallyifyoulookonatwo-yearstack.Istheexpectationthatgrowthstartstoimprovebeyondthefirstquarteronyourautobusiness,justbasedonwhatyouknowonproductionschedulesandtheplatformsthatyou'reon?
MichaelLarsen (CFO):
Yes,soIthinkwetalkedaboutatoughcompinthefirstquarterduetothenewprogramslaunchedinEurope.Andifyou'llrecall,Europelastyearwasup11%onbuildsof1%.
Sothatcompwillbewithusfortheyear.Butintermsoftheyear-over-yearorganicgrowthrate,aswesitheretodaylookingatthetypicalseasonality,Q1isthelowpointfortheyearandtheorganicgrowthrateonayear-over-yearbasiswillimproveaswegothroughtheyear.
JosephRitchie (Analyst-GoldmanSachs):
Okay,great.Thanks,Michael.Andmaybemyfollow-onquestion,movingontowelding,soclearlypartoftheportfoliothere'sbeenalittlebitmorechallenge.
Youmentionedhalfofthemarginperformancethisquarterwasrelatedtorestructuringactions.Doesthatstarttotailoffasweprogressthroughtheyear?
Orhowareyouthinkingaboutthatbusiness?Becauseclearlyonthefaceofitwhenyoutakealookatthedecrementalmargins,thedecrementalmarginsinthefirstquarterareprettyhigh.I'mjusttryingtogetasenseforhowthatbusinesswilltrajectfortherestoftheyear.
MichaelLarsen (CFO):
Yes,sowehadasyousaidabouthalfoftheimpactinthefirstquarterhere,themargindeclinedown9%,whichisprettysignificantorganic,abouthalfofthatwasrestructuringrelated.WeexpectasimilarimpacthereinQ2andthenimprovementinthesecondhalfoftheyearonthemarginside.
Andobviouslythecomparisonsgetsignificanttoeasierinthebackhalfoftheyear.Solastyearinthefirstquarterweldingwasdown3%,whichsoundslikeaneasycompbutactuallyit'snotwhenyoulookathowtherestof2015unfolded.
Sothecompswillgetbetteraswegothroughthisyear.Basedoncurrentsequentialtrendsthatwelookat,we'llseeflattopositiveinthebackhalfandmarginswillimprovealsointhebackhalf.Wehaveanotherslugofrestructuringtogetthroughinthesecondquarter,andthenfornowhopefullytheworstisbehindus.
JosephRitchie (Analyst-GoldmanSachs):
Okaygreat,thanks.
Operator :
NigelCoefromMorganStanley.
NigelCoe (Analyst-MorganStanley):
Thanks,goodmorning.IjustwantedtofollowuponJohn'squestion.Hello,canyouhearme?
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
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Scott Santi(CEO):
Yes,wegotyou.
NigelCoe (Analyst-MorganStanley):
Oh,good.Sothere'ssomechatterouttherethatMarchwasabitweakerthanJanuaryandFebruaryforindustrialmarkets.Didyouseethat?Doesn'tsoundlikeyoudidgivenyourcomments,Scott.
Scott Santi(CEO):
Wedidnot.
NigelCoe (Analyst-MorganStanley):
Okay,good.Movingontoconstruction,andconstructionwasthestandoutthisquarterwith5%and11%inNorthAmerica.I'mwonderingisthereanywaytotryandunderstandhowmuchofthisisweatherdriven?
I'massumingthatconstructionactivitydidbenefitfromweather,andhowmuchhasbeenpulledforwardfrommaybeQ2intoQ1.Andmaybejustcharacterizethatbytalkingabouthowyouexitthequarteronconstructionproductswithitprettysteadyaswell.
Scott Santi(CEO):
Theanswertoyourfirstquestionisthereisreallynowaytofactorweatherinintermsofhowitmighthaveimpactedourresultsrelativetowhateveryoumightcallanormalizedyear,whichisabigreasonwhyweusuallydon'tbiteonanysinglequartertrendsinconstructionaspredictiveorindicativeofoveralldemand.IthinkwhatIwouldsayiswecertainlyexitedthequarterinprettygoodshapethere.SoIthinkwe'renotseeinganythingslowdownoreaseup,andwewillhopeitcontinuesthroughthebalanceoftheyearforsure.
NigelCoe (Analyst-MorganStanley):
Justaquickfollow-ononconstruction,Europewasflatandwe'reseeingsomesignsofmaybegreenshootsinconstructionactivityinEurope.ButIknowthatUKisanimportantendmarket,soI'mwonderingcanyoumaybejusttalkaboutwhatyou'veseeninEurope?IstheUKstartingtoslowdownforEurope,andareyouseeingsomegreenshootsincontinentalEurope?
Scott Santi(CEO):
No,we'renotseeinganythingslowdown.Weareabitofalaggerintermsofwhenourproductsareactuallygoingontothejob.It'swellafterthestartphase.SoIthinkintermsofcolor,ouroverallmacroviewovertherefromthestandpointofconstructionisthingsareheadingintherightdirection.
NigelCoe (Analyst-MorganStanley):
Great,thanksalot.
Operator :
AndrewKaplowitzfromCitigroup.
AndrewKaplowitz (Analyst-Citigroup):
Goodmorning,nicequarter.
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
©2014TheStreet,Inc.Al l R ightsReserved Page10of22
Scott Santi(CEO):
Thankyou.
AndrewKaplowitz (Analyst-Citigroup):
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.
AndrewKaplowitz (Analyst-Citigroup):
Gotit,Scott.Soletmeaskyouaboutthepivottogrowth.You'vetalkedbeforeabout85%ofyourbusinessesbeingreadytogobytheendof2016from60%attheendoflastyear.
Sohowmanymorebusinesses--orevenshouldwebethinkinglikethis,didyouconvertinQ1asreadytogrow?Andwhenyoudoconvertthese,areyouseeingthegrowthprogressioninthosebusinessesthatyouexpect?
AndyoustillhaveapercentageforheadwindongrowthfromPLSinthequarter,Ithinkyou'vetalkedabout90bpsfortheyear,howdoesthatprogressionworkout?Doestheheadwindstartfallingsignificantlyjustattheveryendoftheyear?Doesitstartfallingnow?
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
EventDescription:Q12016EarningsCallMarketCapasofEventDate:38.15BPriceasofEventDate:104.83
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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.
AndrewKaplowitz (Analyst-Citigroup):
Thanks,Scott.
Operator :
DavidRasofromEvercoreISI.
DavidRaso (Analyst-EvercoreISI):
Thankyou.IknowyoumaintainedyourorganicsalesgrowthguidanceintotalaswellastotalCompanysales,butmaybeImissedit,butdidyouchangeyouroutlookatallwithinthebusinesssegments?Anyparticularendmarketsbeitglobalautobuilds,constructionstarts;anycoloryoucangiveusonchangeswithinthatkeepingthetotal?
MichaelLarsen (CFO):
No,Davidwedidn'tchangeanythingbysegment.Sowhenwelookatourinternalplanning,likewesaidautomotiveaswellastheothersegmentswererightontrackinQ1.Sowehaven'tchangedanythingintermsofouroutlookfortheyearbysegments.
DavidRaso (Analyst-EvercoreISI):
Andthengiventheautoacquisitionstillhopefullygoingtobeclosedhererelativelysoon,buttheM&Afrontobviouslywasn'tthatbigadeal.Iassumeyou'restilloutlookingatotherthings.CanyougiveusanupdateonhowweshouldthinkaboutM&Aaswemovefurtherintotheyearintonext
CompanyName:IllinoisT oolWorksIncCompanyTicker:IT WSector:IndustrialGoodsIndustry:Industrial
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year?
Scott Santi(CEO):
Wearestillfocusedonworkingtheplan,whichM&Aisnotabigpriority.Wehavewhatwethinkisaterrificopportunitythatwebroughtininthisautobusiness,andwe'refocusedongettingthatoneclosed.
We'vetalkedaboutwhereacquisitionsfitinourstrategy.Wewilllookatthingsthatwethinkcanfurthersupportorreinforcetheorganicgrowthstrategiesofoursevensegments,andthere'sprobablytwoorthreelittlebolt-onsfloatingaroundatanygiventime,butnotabigpriority.
Ourbigpriorityiscontinuingtomovedownthepathofexecutingtheseinitiativesinternally,gettingourselvesveryfocusedonfullyleveragingtheorganicgrowthpotentialforallthereasonsItalkedaboutearlier.Thattheincrementalprofitabilityfromeverydollaroforganicrevenuegrowthisbyfarthemostaccretivethingwecando.
DavidRaso (Analyst-EvercoreISI):
Lastly,IapologizeifImissedit,butthesharerepoforthequarter?Whatwasit?
MichaelLarsen (CFO):
$500millioninlinewiththeplanningthatwelaidout.Sothinkofthe$2billionas$500millionperquarteristhewaywe'veplanneditout.
DavidRaso (Analyst-EvercoreISI):
That'shelpful.Okay,thankyouverymuch.
Operator :
DeaneDrayfromRBC.
DeaneDray(Analyst-RBCCapitalMarkets):
Iwashopingyou'dgiveusanupdateonprice/costinthequarter,andthentheoutlookgivensomeofthechangesforsomeoftherawslikesteelforthebalanceoftheyear?
MichaelLarsen (CFO):
Yes,Deanesoprice/costlikeIsaidwas20basispointsforthequarter,rightinlinewithourplanningassumption,rightinlinewithwhatwesawlastyear.Andthatremainsourassumptionfortherestoftheyear.
Nothingunusualagainthisquarterbysegment,everythingisontrack.Sothat'sthecolorIcangiveyou.
DeaneDray(Analyst-RBCCapitalMarkets):
Gotit.AndthenjusttogobackonthecommentatthebeginningregardingtheemphasisonGAAPearnings;andIthinkIcertainlyapplaudthat.Iknowfromaqualityofearningsstandpointthatthatgetsrecognized.
AndsoIwasinterestedhearingthatyou'redoingsomeofwhatwecallquietrestructuringinwelding,andyou'vesizedthatforus.What'sthepaybackthatyou'reexpectingonthat?Andisthereanyotherquietrestructuringgoingonelsewhereinthesegment?
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MichaelLarsen (CFO):
Thepaybackisontheseprojectsistypicallylessthanayear.Thisoneisactuallyquiteabitbetterthanthat.It'sprimarilyfocusedonNorthAmerica.
Andwedodisclose,thelastpageinthepressreleaselaysoutrestructuringbysegment.Andyoucanseethemostsignificantonewasweldingthisquarter.LikeIsaid,therewillbeanotherseriesofrestructuringhereinweldinginQ2,andthenwewillupdateyouaswegothroughtheyear.
DeaneDray(Analyst-RBCCapitalMarkets):
Andhowmuchofthatiscash?
MichaelLarsen (CFO):
Thisisactuallyallcash.Butnotsignificant.Imeanyoulookathowmuchcashwegeneratethisdoesnot--don'tthinkofitashavinganimpactonourcapitalallocationstrategy.
DeaneDray(Analyst-RBCCapitalMarkets):
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?
MichaelLarsen (CFO):
No,Iwouldn'tsaytherewasanypullforwardindemand.Imeanthereasonforthesequentialdeclineisessentiallyallwelding.TypicallyinQ1versusQ4likewesaid,wewouldexpectourweldingbusinesstobeup3%,anditwasactuallydown3%.
Testandmeasurement,whichistheothersegmentinhere,wasessentiallystablefromQ4toQ1.Soit'sallweldingdriven,Mig.
MigDobre (Analyst-RobertW.Baird&Company,Inc.):
Right.AndIguessthespiritofmyquestionwasthere'sasenseouttherethatmaybethingsarestabilizinginsomeoftheseendmarketsthathavebeenreallychallengedin2015.Andinweldingyou'vegotexposureinalotofthem.What'syourreadthroughbasedonthewayyourbusinessisprogressing?
MichaelLarsen (CFO):
WellIthink,asScottsaidearlier,otherthanweldingeverythingisfavorableandfeelsprettyfirmaswe
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starttheyearhere.Inweldingwecontinuetoseetheimpactfromenergy,oilandgas,whichaccountsforthedeclineontheinternationalside.
Generalfabricationisstillchallenged,especiallygoingintomining,agriculture,heavyequipment.Sothedemandenvironmentintermsofcapitalequipmentgoingintotheindustrialeconomy,wewoulddescribeasstillsluggish.AndasScottsaid,wehavenotseenanysignyetthat--ofimprovementatthispoint.
MigDobre (Analyst-RobertW.Baird&Company,Inc.):
Thelastthingiswhenyou'retalkingaboutvolumesmaybebeingstabletoslightlyupinweldinginthebackhalf,I'mtryingtounderstandhowyouthinkaboutthisbusinesssequentially,seasonallyadjusted.
MichaelLarsen (CFO):
That'spurelyacomparison.
Scott Santi(CEO):
Currentrunrate.
MichaelLarsen (CFO):
Socurrentrunrates,ifyourunthoseoutandyoulookatonayear-over-yearbasis,that'swhenyouget9%declineorganicinQ1,you'llgetanotherdeclineinQ2,andthenstabletoupinthesecondhalf,abitflattoupinthebackhalfoftheyear.Atcurrentrunrates;thatcanobviouslychange,butatcurrentrunratesgiventhecomparisonsyearoveryearthat'swhatwewouldexpecttosee.
MigDobre (Analyst-RobertW.Baird&Company,Inc.):
Okay,thankyou.
Operator :
JoelTissfromBMO.
JoelT iss (Analyst-BMOCapitalMarkets):
Alright,thankyouverymuch.Ijustwonderedifwecandigalittlebitmoreintothefoodbusiness.Canyougiveusanycoloronthedifferentendmarketsandwhatsomeofthedriversintheimprovementwereandwhattheoutlookisgoingforthenextcoupleofquarters?
MichaelLarsen (CFO):
Yes,Joel,wefeelverygoodaboutthefirstquarter,particularlyifyoulookatNorthAmerica,up5%ontheequipmentside,up4%service.Fromaproductlinestandpoint,refrigerationandcookingarethebigdriversthisquarter.
Andthenbyendmarketit'sreallyhealthcareandlodgingcontinuedtobesolidforus.Butreallyacrosstheboardwefeelverygoodabouttheoutlookfortheyear.WehaveanumberofnewproductscominginhereinQ2,andsowewouldexpectthatbusinesstobeupsimilartolastyearinthat3%to4%rangeaswetalkedaboutonthelastcall.
JoelT iss (Analyst-BMOCapitalMarkets):
Okay,canwedothesamethingforpolymersandfluids?There'ssomanydifferentendmarketsanddifferentpieces,canyoujustgiveusalittledeepercolortheretoo?Thankyou.
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Scott Santi(CEO):
Yes,whatIwouldofferonpolymersandfluidsisit'sbasicallyanMRObusiness,two-thirdsofit,theotherone-thirdistheautomotiveaftermarketpiece.Theautomotiveaftermarketsideofithadaprettysolidquarter,up2%.
IthinklargelyhowIwouldcharacterizetheoverallgrowthperformanceduringthequarteristhey'vegottentotheendofaprettyextensivePLSprocessandarestartingtonow--thepipelineismuchmorestablethanitsbeenoverthelasteightquarters,andtheyarestartingtonowturntheirattentionmoretogrowth.Andsoverypleasedtoseepositiveoverallorganicoutofthatsegmentinthequarter.
JoelT iss (Analyst-BMOCapitalMarkets):
Thankyouverymuch.
Operator :
AndyCaseyfromWellsFargo.
AndyCasey(Analyst-WellsFargoSecurities,LLC):
Thanksalot;goodmorning.Kindofadetailquestiontostart.Onthe50-basispointdragincomponentsofmarginthatyoucalloutonslide7,youmentionedoverheadinflation.Couldyouprovidealittlebitmoredetailonwhat'sdrivingthatinflation?
MichaelLarsen (CFO):
Salaryincreases.
AndyCasey(Analyst-WellsFargoSecurities,LLC):
Goodforyouguys.Thenonthefollowup,ifwelookatsomeofthemacrodatatheinventory-to-salesratiosarerelativelyhighintheUSinsomeareas.Haveyouseenanychangeincustomerinventoryactions,meaningdestock/restock,orisitjustprettyconsistentbasedonyourcommentaryaboutoveralltrendsoutsideofwelding?
MichaelLarsen (CFO):
I'dsayveryconsistent.Andy,you'reseeingalittlebitofseasonalityinQ1,butifyoulookatthefirstquarterrelativetothefirstquarterlastyear,reallysolidworkingcapitalperformanceandnothingunusual.Andjustlookatthefreecashflownumber,90%theaverageisabout--thelastfewyearshasbeen65%.
Soreallystrongcashflowperformanceagaininthefirstquarter.Andkeepinmindthatwetypicallyrampupfromhere.
Sofromaconversionstandpoint,thisistypicallyourlowestquarterandthenwewillgoupsequentiallyaswegothroughtheyear;justtypicalseasonality.Sonothingunusualintermsofworkingcapital;continuedstrongperformance.
AndyCasey(Analyst-WellsFargoSecurities,LLC):
Okay,thankyouverymuch.
Operator :
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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.
StephenVolkmann (Analyst-JefferiesLLC):
Okay,great,that'sexactlywhatIwaslookingfor.Andthenjustontestmeasurementonelectronics,theabsolutelevelofmarginthereisstillnotquiteinlinewithsomeofyourothers.
AndIknowthere'safairamountofacquisition-relatedintangibles,etcetera.Butisthatanokaylevelinyourmindforthatbusiness?Isthatjustwhatthatbusinesscando,oristheresomesortofbiggerpicturethingthatyoucandotogetthatmoreintothemid-20%s?
MichaelLarsen (CFO):
WhatI'dsayis15.5%operatingmarginincludes,asyoupointout,the420basispointsofnon-cashamortizationexpense.Soyouaddthatback,it'sabout20%,it'sstillonthelowerendinsideofITW.
Weexpectallofourbusinessestocontinuetoimprovemargins.Somewilldosomorethanothers,andIwouldprobablyputtestandmeasurementinthatcategoryofmoremarginpotentialthansomeoftheothersegments.Soweexpectthatsegmenttocontinuetoimproveonthemarginsideincludingin2016.
Scott Santi(CEO):
Astheseamortizationchargesalsobleedoffovertime.
MichaelLarsen (CFO):
Amortizationchargesaswellastheenterpriseinitiatives.
Scott Santi(CEO):
Underliningoperatingperformanceimprovement.
MichaelLarsen (CFO):
Exactly.
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StephenVolkmann (Analyst-JefferiesLLC):
Great,thankyouverymuch.
Operator :
SchonWilliamsfromBB&TCapitalMarkets.
SchonWilliams (Analyst-BB&TCapitalMarkets):
Hi,goodmorning.
AaronHof fman (VPofIR):
Goodmorning.
SchonWilliams (Analyst-BB&TCapitalMarkets):
Wonderifwecouldjustmaybegobacktofoodequipment.Certainlythemarginimprovementwithinthatsegmenthasbeentremendousoverthelastseveralyears.
Ijustwonderifyoucouldtalkalittlebitaboutwheredowegofromhere?ObviouslyI'dexpectmaybefurtherimprovementinthebackhalfoftheyearseasonallyspeaking,butIdon'tknow,canyoujusttalkaboutwhatarethebigpictureopportunitiessofarforfoodequipment,giventhatyou'realreadyapproachingbest-in-classmarginsthere?
MichaelLarsen (CFO):
LikeIsaid,Ithinkweexpectallofoursegmentstoimproveincludingfoodequipment.Certainlygoodprogress,butalsomoretocome.
AndIthinkwe'llgiveyou--ifyoulookatthescheduleonthebackofthepressrelease,youcanseethevariouscomponents.Andsothemarginexpansionnowishalfisoperatingleverageandtheotherhalfapproximatelyistheenterpriseinitiatives.
Scott Santi(CEO):
You'retalkingaboutwithinfoodequipment.
MichaelLarsen (CFO):
Withinfoodequipmentspecifically,yes.Weexpectthatto--wewouldexpectthatbusinesstocontinuetoimprove.
SchonWilliams (Analyst-BB&TCapitalMarkets):
Alright,that'shelpful.Andthencouldwejustmaybecomebackandmaybeyourthoughtsonsomeoftheoverseasmarkets?CouldyoujustmaybetalkgenerallyindustrialversusconsumerfacingforAsia-Pacific?
Iknowthatlookedlikesequentiallyitwasdown.Ididn'tknowifthatwasatoughcomp,butjustwhatyou'reseeinginAsia-Pacific,andthenanygreenshootsinEuropeaswell?
MichaelLarsen (CFO):
We'renotgoingtoparseitmuchmorethanwhatwedidinthepreparedremarksandwhatyoucanseeonpage6.AndtheoutlookfortherestoftheyearinAsia-PacificisgrowthratesverysimilartowhatwesawhereinQ1.
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CertainlyencouragedbyChinaautomotiveof6%aswellascontinuedprogressinconstructionproducts,whichasyoumayknowisprimarilyAustraliabased.Sothat'showwe'ddescribedthat.
SchonWilliams (Analyst-BB&TCapitalMarkets):
AndthenanythoughtsonEurope?
MichaelLarsen (CFO):
EuropefortheyearweexpectverysimilaragaintoQ1,soupintheverylowsingledigitsbasedoncurrentrunrates.
SchonWilliams (Analyst-BB&TCapitalMarkets):
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.
MichaelLarsen (CFO):
That'sexactlyright.
Scott Santi(CEO):
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Whoknowsifthatwillhappen.Anditmaygotheother--maybeaheadwind.
JamieCook(Analyst-CreditSuisse):
Ijustwantedtogetasensemoreontheendmarketside,becauseagainconsumerisprettygood.Outsideofwelding,industrialisprettystable;doyouknowwhatImean?I'mjustmoreonanendmarketorgeographywhereyou'remostconcerned.
Scott Santi(CEO):
Well,Ithinkgenerallyspeakingwe'refeelinglikethefirstquarterwasprettysolid,prettyfirm.We'vetalkedaboutthisbefore.
Wearebasicallytakingcurrentrunratesandprojectingthosethroughtheyear,andthat'showwederiveourgrowthandearningsforecastfortheyear.Soifthingsstaywheretheyaretoday,weareinprettysolidshape.
JamieCook(Analyst-CreditSuisse):
Okay.Thankyou.
Operator :
AnnDuignanfromJPMorgan.
AnnDuignan (Analyst-JPMorgan):
Hi,goodmorning.
Scott Santi(CEO):
Goodmorning.
AnnDuignan (Analyst-JPMorgan):
Mostofmyquestionshavebeenanswered,butmaybetakingJamie'squestionandaskingitaslightlydifferentway.WhatwouldhavetohappenforyoutocomeinatthelowendofyourQ2guidanceandthenthehighendofyourQ2guidance?Whatareyoucontemplatinginthoseranges?
MichaelLarsen (CFO):
Wellthedriverswouldbeavariancefromcurrentrunrates,eitherbetterorworsethanwhatweseetoday.Sothatwouldbetheprimarydriver.
Ithinkonthethingsthatarewithinourowncontrolintermsoftheso-calledself-helpenterpriseinitiatives,wefeelverygoodaboutcontinuingtoexecutethewaywehaveforthelast--sinceweembarkedontheenterprisestrategy.SoIthinkthoseareonthemarginsideverysolid.
Scott Santi(CEO):
Thedeltaisthedemandside.
MichaelLarsen (CFO):
Right.
AnnDuignan (Analyst-JPMorgan):
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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.
AnnDuignan (Analyst-JPMorgan):
Okay.Andmaybeasafollowupthen,withinweldingitdoesseemtobetheonesegmentwheremaybeyou'renotasupbeataboutwherethingsare.Canyoujusttalkaboutalittlebitaboutthedifferenceyou'reseeinginoilandgasatthispointversus--youdidtalkaboutfabricationformining,ag,heavyequipment.Haveanyofthoseendmarketsgottenincrementallyworse,orisitjustthey'rebadandthey'renotgettinganybetter?
MichaelLarsen (CFO):
Well,Ithinklikewesaidearlier,weldingdiddecelerateinQ1versusQ4.Andwhenyoulookattheyear-over-yeardecline,morethanhalfofthatorganicdeclineisoilandgas.
Sothatisthemaindriver.Andlikewesaidearlier,wehaven'tseenanysignsthatthingsaregettingbetterthereyet.
AnnDuignan (Analyst-JPMorgan):
Andontheindustrialside?
MichaelLarsen (CFO):
Thosearefairlystable.Thedeclineisprimarilyontheoilandgasside.
AnnDuignan (Analyst-JPMorgan):
Okay,thankyou.I'llleaveitthere.
Operator :
StevenFisherfromUBS.
StevenFisher (Analyst-UBS):
Great,thanks.Goodmorning.Ijustwanttocomebacktotheprice/costthatDeanewasaskingaboutbefore,becausethecostshaverisenasthequarterhasgonealong.
SomaybehowarethepricingdiscussionsgoingatthestartofQ2?Arethoseadjustinginrealtimetomorethanoffsetthehigherinputcosts?Howdoyoukeepthatprice/coststable?
MichaelLarsen (CFO):
Well,I'mnotsurehowI'dansweritotherthanwhatIsaidearlierinmypreparedremarksandinresponsetoDeane'squestion.Price/costwasfavorable20points,nochange,andweexpectittoremainat20basispointsaswegothroughtheyear.
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Andifthatchangeswe'llletyouknowonthenextearningscall.Butwedon'texpectitto.
StevenFisher (Analyst-UBS):
Basicallyitsoundslikeyou'reabletoraisepricestooffsetthecostasit'sincreased?
MichaelLarsen (CFO):
IfyoulookatourhistoricalperformanceandwhatIjustsaid,thatwouldbetheconclusion,yes.
StevenFisher (Analyst-UBS):
Andthenjusttosummarizethis,Iknowit'sbeendiscussedbefore,butdoesyourbasecaseassumethattheindustrialfacingbusinessesexittheyearneutralorpositive?Orwillitstillbedeclining?
Scott Santi(CEO):
Wellthebasecasestaketheorderrateswearegettingtodayonadailybasisandprojectthemthroughtheendoftheyear.Thecompsgeteasier,asMichaelsaid,butweareprojectingnoaccelerationorfurtherdecelerationfromhere.
Andwe'vetalkedaboutthatbefore,weareafastreactor.We'renotapredictorofthefuture.SoembeddedinbothourorganicnumbersandourEPSforecastisanassumptionthatdemandstaysexactlywhereitistodayacrossallsevensegmentsprojectedoutthroughtherestoftheyear.
StevenFisher (Analyst-UBS):
Sowillthecompsgetyoutoneutralinindustrialfacingbyexitingtheyearthen?
Scott Santi(CEO):
Maybe.Close.
StevenFisher (Analyst-UBS):
Okay,thankyou.
AaronHof fman (VPofIR):
Great.Andthattakesustothetopofthehour.Weappreciateeverybody'stimethismorning,andhaveanoutstandingday.
Operator :
Thankyou,speakers.Andthatconcludestoday'scall
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