Illinois Tool Works Inc (ITW) — Q4 2015 Earnings Call Transcript

Thanks, Anna, and good morning and welcome to ITW's fourth quarter 2015 conference call. Joining me this morning are our CEO, Scott Santi; and our CFO, Michael Larsen. During today's call, we will discuss our fourth quarter and full-year 2015 financial results, update you on our 2016 earnings forecast and discuss the acquisition that we announced on Monday. Before we get to the results, let me remind you that this presentation contains our financial forecast for the 2016 first quarter and full-year, as well as other forward-looking statements identified on this slide. We refer you to the company's 2014 Form 10-K and third quarter 2015 Form 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. Also, this presentation uses certain non-GAAP measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the press release. With that, I'll turn the call over to Scott.

Thanks, Aaron, and good morning. Overall, we were pleased with our performance in the fourth quarter and for the full year as we continued to execute on our Enterprise Strategy and deliver strong results in a challenging but stable environment. In 2015, ITW grew earnings per share by 10%, expanded operating margins by 150 basis points to a record 21.4%, and improved after-tax return on invested capital by 140 basis points to a record 20.4%. Free cash flow was strong in 2015 at 106% of net income, and we invested roughly $560 million in our businesses for growth and productivity. In addition, we returned more than $2.7 billion to shareholders in the form of dividends and share repurchases. In 2015, we continued to make significant progress on the execution of our Enterprise Strategy, which was evidenced by more than 100 basis points of margin improvement from our self-help enterprise initiatives. As a reminder, we expect an additional incremental 100 basis points of margin expansion from our Business Structure Simplification, Sourcing, and 80/20 Excellence initiatives in each of 2016 and 2017. In 2015, we also began our pivot to focus on our organic growth agenda, and we made meaningful progress with 60% of the company's revenues achieving ready-to-grow status and 45% growing at 6% in 2015. We continue to execute the various elements of our Enterprise Strategy in a well-planned and logical sequence as we position ITW to deliver solid growth with best-in-class margins and returns, and we remain firmly on track to deliver on our end of 2017 enterprise performance goals. I'd like to close by thanking all of our ITW colleagues around the world for the great job that they continue to do in serving our customers and executing our strategy. I'll now turn the call over to Michael, and then, I'll be back to discuss the acquisition that we announced earlier this week.

Thank you, Scott, and good morning, everybody. As you saw this morning, ITW delivered another strong quarter. EPS of $1.23 increased by 4% versus prior year and 11% excluding currency. Our results were driven by strong execution across the board as operating margin improved 110 basis points to 20.7%, and our self-help enterprise initiatives contributed 110 basis points of improvement. Organic revenue was modestly better than our guidance with some credit challenging comparisons in a few segments. While demand for capital equipment remains sluggish, underlying demand trends were stable across our business portfolio. Adjusted for seasonality, demand in our industrial businesses improved by 4% sequentially in Q4 versus Q3. Free cash flow was very strong at 140% of net income, and as you can see, we made meaningful progress on our return on invested capital metrics. In summary, stable demand across our business portfolio and solid execution drove strong Q4 performance. Turning to revenue by geography on page five, let me just remind you that the organic revenue number includes a one percentage point impact from Product Line Simplification as organic revenue declined by 0.6% with some fairly challenging comparisons in the prior year. By geography, North America was down 1.6% with our consumer-facing businesses up 2% and the industrial businesses down 5.6%. International was positive, up 0.6% with Europe, Middle East and Africa up 1.9%. Our consumer businesses grew 4.6%, with strength in Automotive OEM up 10% in Europe and Food Equipment. Asia Pacific and China were essentially flat, and it's worth pointing out that China automotive was up 14% in the fourth quarter. So overall, stable end-market conditions across the portfolio and slightly better-than-expected organic revenue performance in the quarter against a fairly challenging comparison. On page six, strong operating margin performance once again in the quarter. Operating margin of 20.7% improved 110 basis points, and four segments improved by between 220 basis points and 420 basis points, driven primarily by our self-help enterprise initiatives and lower restructuring. Pricing was solid in the quarter. Price/cost was favorable, 30 basis points. So strong progress on operating margin, and as Scott said, we're on track to realize additional incremental margin improvement as we go forward. On page seven, we listed full-year 2015 operating margin by segment, and you can see the strong progress since the launch of the Enterprise Strategy.

Turning to the segments, starting with Automotive OEM, another strong quarter. Organic revenue was up 5% and up 6% for the year, outpacing worldwide builds of 1%. Europe was up 10% organically in the quarter and up 11% for the year. North America was up 4%, and China was up 14% in the quarter and up 8% for the year. Consistent with global industry growth rates, our 2016 guidance assumes a 1% increase in global auto builds versus 2015. Solid quarter in Test & Measurement/Electronics as margin improved 300 basis points to a new fourth quarter record of 18.1%. Demand trends in this segment improved in the quarter. Sequentially, from Q3 to Q4, revenues were up 6%, up 2% adjusted for typical seasonality. Also, another solid quarter in Food Equipment, up 2% organically, facing some challenging comparisons from last year. You may recall that Equipment was up 6% worldwide in Q4 last year. Operating margin improved by 220 basis points to a new fourth quarter record of 23.9%. North America service was up 4% and underlying equipment demand remained solid, particularly in bakery, healthcare, and lodging. International equipment was up 4% on continued strong demand in warewash, cooking, and refrigeration. Polymers & Fluids was down 3% due to soft demand related to industrial MRO, with North America down 4%, partially offset by Asia Pacific up 9%. Operating margin expanded by 70 basis points to 18.2%. Welding was down 11% organically in a tough environment and against some challenging comparisons. You may recall that in the fourth quarter last year, North America was up 10% and oil and gas was up 20%. The 11% year-over-year decline breaks down as 6 points from oil and gas, 3 points from industrial and 2 points from commercial. North America overall was down 8%, with consumables essentially flat. International, as you can see, was down 20% due to oil and gas, primarily in onshore pipeline and offshore. But as we've talked about on the last earnings calls, the year-over-year numbers can be somewhat misleading in terms of understanding the underlying trends. On a seasonally adjusted basis, the underlying demand trends have actually been fairly stable since the first quarter of 2015. On a seasonally adjusted sequential basis, we saw a significant step down in demand in Q1 last year followed by slight declines in Q2 and Q3, and then, in this fourth quarter, demand actually improved by 2% sequentially from Q3. Consistent with current demand levels, our 2016 guidance assumes a single-digit decline in the Welding segment.

On slide 10, Construction Products had another strong quarter, both on the top line and bottom line. Organic revenue was up 3% and margin was up 420 basis points. North America was up 2% with high single-digit growth in the renovation and remodel channel. Residential was essentially flat, and commercial was down slightly. Asia Pacific was strong, up 7% due to Australia. In Specialty Products, organic revenue was flat, with solid growth in consumer packaging, offset by the impact of Product Line Simplification. Operating margin improved by 400 basis points, reaching 23%. Turning to slide 11, as you know, one of the core strengths of ITW is our diversified portfolio, and in the current environment, the fact that about 60% of our revenues are consumer facing. As you can see, in a tough environment, our consumer businesses, Automotive OEM, Food Equipment, portions of Specialty Products, and Construction are growing at an organic rate of 3% in the fourth quarter and for the full year, and the seasonally adjusted sequential trends are stable. Our industrial businesses, Welding, Test & Measurement, and Electronics, were down 6% in the quarter and down 5% for the year. However, if you look at the seasonally adjusted sequential trend from Q3 to Q4, revenues were up 4%. In simple terms, based on typical seasonality, you would expect these businesses to be down 2% sequentially, but they were actually up 2%. It may be too early to call this a trend, but it is certainly an encouraging data point as we look ahead. Quickly on 2015, you can see that we continued to make significant progress on all of our financial performance metrics. EPS growth, operating margin improvement, return on capital, and free cash flow all reflect the strength of ITW's differentiated business model and our strong execution in a tough environment. Going back a little bit further to the launch of the Enterprise Strategy on slide 13, the same holds true. More than 500 basis points improvement in margin and returns, 17% EPS CAGR, and solid progress in our pivot to growth. As Scott said, 60% of the company's revenues achieved ready-to-grow status, and 45% grew by 6% in 2015. We fully expect that 85% of the company's revenues will be in ready-to-grow status by the end of 2016. In summary, over the last three years, we have made really good progress, and we've done everything we said we would do. And we're on track to achieve our 2017 performance goals. On slide 14, we are reaffirming the guidance as discussed in New York on December 4. Our organic revenue growth expectation of 1% to 3% is in line with Q4 demand levels, and includes 90 basis points of Product Line Simplification impact. In 2016, we expect 100 basis points or more of margin improvement from our self-help enterprise initiatives, independent of volume, and operating margin is projected to be a new record of approximately 22.5%, earnings per share in the range of $5.35 to $5.55, and 6% growth at the midpoint, and 10% growth excluding currency. Turning to the first quarter, our EPS guidance is $1.20 to $1.30, and the midpoint of $1.25 represents 23% of our full-year earnings, right in line with historical patterns. Again, we expect 100 basis points from our self-help enterprise initiatives, and based on current levels of demand, we expect organic revenue growth to be flat to up 2%. Finally, a quick update on capital allocation, given the two recent developments, and then, I'll hand it over to Scott. Earlier this week, we announced the acquisition of the Engineered Fasteners & Components business from ZF TRW for $450 million. From a capital allocation standpoint, approximately 70% of the purchase price will be funded with non-U.S. cash. We expect the acquisition to generate returns on capital in the 16% to 20% range by year seven. In addition, we see significant potential to improve the performance of the EF&C business through the application of ITW's 80/20 business management system, and we expect margins to improve from approximately 10% to 20% by year five. The acquisition is slightly accretive to EPS in the first 12 months, and based on the expected closing date, we expect very little EPS impact in 2016, with accelerating benefits into 2017 and beyond. Finally, we're maintaining our end of 2017 performance goals.

Thanks, Michael. Just now a couple of words on the acquisition that we announced earlier this week. Let me start in terms of foundation and just talk about the business that we are holding on this acquisition to our Automotive OEM segment. As many of you know, we have a very focused niche strategy in this space. We are essentially a high-velocity serial problem solver for OEM and tier suppliers. The segment, in 2015, had $2.5 billion of revenue and an 8% organic growth CAGR since 2012. As we have talked on a number of occasions, we see very attractive long-term growth opportunities in this space within ITW's very focused niche positioning and have demonstrated some real ability to execute on that strategy over the last four or five years. We've outgrown global auto builds by over 400 basis points on average since 2012. So the addition of the Engineered Fasteners & Components business from ZF TRW essentially gives us some additional leverage on that strategy, broadens our market positions. A very complementary business in terms of strategy and focus, this business is a leading global supplier of engineered fastening systems and technical components largely focused on the interior of the car. The business is headquartered in Germany, has 13 manufacturing facilities and 3,500 employees globally. Very strong, solid business, with excellent customer relationships, a very capable operating team, and a proven track record around quality and delivery execution throughout their history. In terms of what this business adds to our current position, a couple of key points in that regard. First of all, it adds several new strategic product platforms that have similar characteristics through the core product platforms we support today, with a demonstrated track record in terms of innovation. The business is bringing with it over 500 active patents. From the standpoint of the manufacturing customer support footprint, it's tilted towards Asia, so it supplements our position there. The overall business standpoint of revenue by geography is 45% in Europe, 20% in North America, and 35% in Asia Pacific, making it very complementary to our geographic footprint, which is a little more weighted towards North America. Lastly, we see significant potential to leverage our 80/20 business management process in terms of helping the EF&C business continue to improve its operating metrics. Operating margins on the way in are about 10%, and as Michael talked about, we believe we have line of sight on at least doubling that rate over the first five years of ownership. From the standpoint of the transaction components, the purchase price is roughly one times sales. Michael talked about the near-term accretion, which we expect to be modestly positive in the first 12 months, including all non-cash acquisition accounting related costs. We anticipate returns on capital to be well within our targets over the first seven to ten years of the acquisition. We expect to fund approximately 70% of the purchase price with non-U.S. cash, which is an acquisition from a strategic and operational and return standpoint that we would have done regardless of funding sources. We expect to close in the second half of this first half of 2016. So with that, I think we've covered everything in our prepared remarks, and we're happy to take your questions.

Yes, let's begin the question and answer. Thank you.

Thanks. Good morning, guys.

Good morning.

Good morning.

And nice quarter. Maybe starting on the 2016 guide, you maintain the guide, and it seems like you've built some margin of error in the guide also with this $1 billion repatriation. And so, maybe talk a little bit about your opportunity to still hit at least the midpoint, maybe even the higher end of the guide, if in fact organic growth were to disappoint as we kind of progress through the year.

Yeah, Joe, I'd say on the organic, the 1% to 3% guide for 2016 is based on the demand levels we're seeing in the businesses today, as per usual. So we're not counting on improvement in underlying demand or in market conditions. Based on current run rates, we are solidly in that range of 1% to 3%. What I would say is that we still have a lot of things that are within our control, in terms of our self-help. Number one on the list are the enterprise initiatives that we've continued to execute well on over the last two years. We expect another 100 basis points of margin expansion independent of volume from those in 2016. If you translate that into EPS, as we said in December, that's about $0.30 of EPS growth. Certainly, in addition to that, the $1 billion increase in our share repurchase program gives us some additional EPS benefit. Unfortunately, some of that is, depending on the timing, offset by recent currency moves. Not so much in the euro, but primarily in Canadian and Australian dollars and the pound. However, it does give us a little bit of room here. Overall, in terms of the guidance, we feel very good about maintaining where we're at in the $5.35 to $5.55 range, and we feel really good about continuing to make solid progress on organic growth. You saw some of that in the fourth quarter, and just based on what we're seeing in our businesses today, we'd expect that to continue in 2016.

That's helpful color, Michael. Maybe as my follow-on question, there's a lot of concern in the market regarding what's happening in the auto end market. Clearly, that's an end market that has been incredibly good for you guys. You continue to outpace global auto builds, but it looks like this past quarter, we saw a little bit less outgrowth in Auto OEM. So maybe some color on your ability to continue to sustain outgrowth in that end market and how you think about that end market over the next 12 months.

Yes, sure, Joe, this is Scott. I think the story for us remains one of penetration. Michael made a comment in his prepared remarks that our planning scenario, essentially, is for a 1% increase in global auto builds next year. I think most of the sort of external forecasters and pundits are in the 2.5% to 3% range. So in our own planning assumptions, I think we're taking a much more conservative approach as a baseline. It is also, as we talked about before, the one area of our business where we have a significant amount of forward visibility vis-à-vis. We've sold programs into production plans going on this year, programs that were sold two years and three years ago. So I think we've got a pretty stable outlook in terms of what our expectations are for 2016 with respect to auto built into our plans. It doesn't mean that builds, if we see some inflection or some change in overall builds relative to our 1%, that's not going to have an impact, but ultimately, I think the potential impacts are pretty modest. We've set our plans where there's an appropriate level of conservatism. We have enough new penetration and new content in 2016 coming online that we ought to be able to be all right regardless of any major crash, which I don't think anybody thinks is going to happen. I think we're in a pretty good position in 2016.

Okay, great. Thanks, Scott. I'll get back in queue.

Hey, good morning, guys. Nice quarter. Scott, can you talk a little bit more about the pivot to growth? How much more challenging do you think it could be to get your businesses that are preparing to grow, to get ready to grow by the end of 2016, as you talked about in the Analyst Day, if the global economy is a bit weaker? And maybe you can talk about what these businesses are. If I look at it, it seems like it'd be businesses like European construction, parts of polymers and fluids, parts of specialty products. But that's what I think. What do you think?

Yeah, I think you've hit, in terms of those three areas of the company, you've hit three that are still in the preparing to grow mode. The agenda is pretty much within our own control from the standpoint of what we have characterized as moving from preparing to grow to ready to grow. It's largely a lot of 80/20 work, a lot of product line pruning, a lot of customer focus, and a lot of – as we talked in December, really focusing on where the best opportunities to grow are. I don't think there's much impact on the preparation part from the standpoint of the external environment. That agenda is pretty well mapped out. The timing is a function of how extensive the agenda was to get from A to B. In some cases, we had further to go than others. The 60% we've gotten in that mode to this point had a slightly less deep agenda. We're working our way through the rest. I don't think there's much impact in terms of the external environment regarding the objective we've laid out to get 85% of our businesses in that mode by the end of this year. However, the external environment may impact the yield on that investment in the short run. A little tailwind at some point would help us showcase the progress we're making, but I think I'd also point out that the fact that we're able to grow 45% of our sales in this environment at a 6% clip in 2015 is a good indicator of some progress.

Thanks for that, Scott. And Scott or Michael, can I ask you about price/cost? You had a minor improvement in price/cost from 20 basis points to 30 basis points. But as you know, raw material costs do seem to be coming down, maybe a little more significantly now. Can you actually improve that price/cost from 30 basis points that you had in 1Q, or at least maintain it for the year?

Yeah, so I think obviously, Andrew, price is not the main driver of our margin performance here. That's really the enterprise initiatives. But we were pleased to see 30 basis points in the fourth quarter, our best result in 2015. The average for the year is 20 basis points. That's what we modeled for 2016. We were encouraged to see solid price across the portfolio, a lot of it driven by the launch of new products, as we've talked about before. We're starting to see the deflation come through on some key raw materials. In some cases, we pass those on to customers; we're contractually obligated, so we obviously will do that. But there is a little bit more of an improvement in the overall equation here in the fourth quarter. We're hopeful that we can maintain that. We're certainly working very hard on that and we're counting on 20 basis points in the guide for 2016.

Thanks, Michael. Take care, guys.

Yeah, thanks very much. I want to pick up on this auto thematic. I mean, let's be blunt. It was very clear your stock was shorted earlier this year because of this perceived exposure. Your Auto business is going to fall off a cliff. And I understand your confidence based on your track record and your ability to continue to penetrate. My question is, do you see anything, Scott or Michael, based on your operations that give you a little more comfort than simply the trend? In other words, do you have – and I realize you've got a little bit of a backlog, but do you have any initiatives that you’re working on that may be derivative of, say, CAFE standards or vehicle electrification, or you're working on a big something in Indonesia or something like that that you think maybe gives you – maybe not dramatically, but like a point or two of step-up help over the coming cycle?

I wouldn't put Indonesia on the high priority list.

But other than that, I think I get it, your question. What I would say is we have a very full pipeline of engineering and product development activity related to Automotive that's certainly driven by some of the things you talked about, and just other changes in the need profile of our OEM customers in terms of new features, new technologies, and new things that they're looking to add. We have a very solid view of the next 10 years in the space in terms of what the opportunities are for our particular niche in the space. This is not something we manage for the next two quarters; we manage them for the long haul. I think this is an area where we remain very optimistic about our ability to continue to increase our content per vehicle, focusing on a narrowly defined strategy in terms of what we do. The pipeline, in terms of the projects we're working on that will come to fruition two years and three years and four years out, remains very healthy. We track it, we monitor it, so I think we are on top of what the future holds in terms of opportunity for us here.

And John, maybe I'll just add that, for those that are a little more short-term focused, we have not seen any signs of a slowdown in the fourth quarter or year-to-date in the automotive space, or across our business portfolio.

Let me just ask kind of a follow-up. This German company you've bought, right, it's going to give you a leg up into Asia. And obviously, ITW, as you're pivoting with cost and simplification, you're going to be doing more M&A. Is there runway to do other kinds of deals like this, perhaps to extend what clearly is a successful M&A penetration track record in auto into other markets like, I don't know, for example, Japan or something? I realize you can't talk specifically, but maybe the question was more the deal that you did, was it more one-off? Or do you think that there are other opportunities? And just as a follow-up, I mean having a little bit of experience with German companies, I'm assuming that company has a lot of potential productivity or cost efficiency opportunities. Can you still grow it at that cadence and expand the margins?

I’m not sure where to start with that one. Yes, our overall story in Automotive is largely an organic one. This particular business, from the standpoint of complementary fit with our strategy, is a unique opportunity. I would certainly not rule out other opportunities like this. But it's not a matter of scale we're after here. It's about auto opportunities where we can extend our access to the key OEMs and extend our ability to play across a range of different product platforms we think fit the overall model in terms of high value-added content. So we talked about the organic growth rate in Auto OEM. I think that's largely the ongoing thrust here. The story is we have the opportunity to continue to grow and add content per vehicle and do so in a way consistent with our overall enterprise performance goals. That being said, would we look at something that gave us a similar opportunity to extend our reach in some geography? Sure.

Or technology, perhaps? I mean, I won't – Mobileye comes to mind only because it's been so topical. I'm not talking about that company specifically, but maybe breakthrough technology. Is that a possibility?

I’m not sure I heard who the company was. I wouldn't comment on that. I don't think it's – I think we'll assess each opportunity on its own. I don't want to overplay this. I think our primary thrust is to leverage and execute the strategy we have. We don't need any more M&A to continue to generate strong organic growth at nice incremental yield. So I would say our thrust here would be more opportunistic than a view that we have to do anything more here. If opportunities present themselves that we think will certainly do it, we have no particular view of we're deficient, we need this, or we have to have that in order to be very successful here over the long haul.

No, I got it. Mobileye was the company I called out. Thanks very much. I appreciate it.

Hi, good morning, guys. I'm new to your story, so I'm allowed to ask dumb questions for a couple of quarters. I hope you guys forgive me.

Sure.

Can you give us a sense – you seem to have a fair amount of confidence in the 0% to 2% 1Q guide. January is a fairly important month in the quarter. We're already on this 27th. Are you tracking in that range in January and that gives you the confidence?

Yeah, Scott, we're on track in January for the guidance that we gave for the first quarter.

Okay. That's helpful. And then, second question, just following up a little on what John was saying. This TRW deal looks like just a fantastic deal. I mean, if there's other stuff out there like this, would you be willing to – I mean, would it make sense, at least, to think about not doing the share repurchase and adding the higher return profile instead?

I think, Scott, we really – absolutely, we will continue to look at acquisitions where we can meet the criteria we talked about in December. The primary purpose here is to support or accelerate our organic growth rate, and we're looking for businesses where we can have significant impact from an 80/20 standpoint. To the extent that we see those, we'll certainly continue to work on that. In terms of overall capital allocation, nothing has changed in terms of our structure and strategy. We have a strong balance sheet, strong liquidity, and we generate a lot of cash flow. You saw 140% in the quarter, 106% for the year. We have a lot of options. For us, it's not a question of either/or; we can do all of the above. What we've said is to the extent that we don't identify acquisitions that meet the criteria that I just described, then we make a choice to return that cash to our shareholders through an active share repurchase program. As you saw, we just raised that today from $1 billion to $2 billion for 2016.

Okay. That seems to make sense. And then just a quick one. How much of the 150-basis-point margin of the year do you think was price/cost related or LIFO accounting related, or something related to that?

So price/cost was 20 basis points and the primary driver was 110 basis points from the enterprise initiatives.

Thank you. Good morning, everyone.

Good morning.

I just want to circle back to the ZF deal. Scott, it's pretty clear this is a natural fit for you guys, but I didn't hear any specifics regarding what the products are. There's a vague description of strategic product platforms, but if you can get down to the level of the 80/20, the 20% that really matter compared to like lift-to-sits, handles, fuel caps, what is it adding to the portfolio, and are there any redundancies?

So, this is Michael, Deane. If you think about it, $470 million in revenues, half of that is what we would describe as fastening systems. Not to get too technical here, but they're described broadly as fasteners for trim, pipe and hose, hole plugs, and wire harnesses. The other half is what we describe as technical components. So this is, again, in the interior of the vehicle – air registers, interior ventilation systems, lighting, and other interior products. There's a nice fit with what we know and do very well inside of our current Automotive business.

Just in the description, Michael, there are overlaps, it sounds, in terms of the fasteners and even some of the air handling. Do you have a sense of how much specific overlap there is?

I think overlap is not a good characterization. Every one of these products is custom-designed around a particular model. We're sort of describing them in broad categories, so there are areas that we know. We know fastening very well in Automotive, but there are hundreds of fastening applications on every car. Every product line here is a specifically designed and engineered solution to a specific problem on a specific model for a specific OEM. These are sort of areas that we're familiar with in broad terms, but from the standpoint of any exact like-like products? Minimal to none.

That's great to hear. And that's a good perspective. And then, just my follow-up question for Michael. On the repatriated cash, what's the effective tax rate that you paid on bringing this cash back? And maybe are you netting it against any tax losses? But when you say it's tax-efficient, what did you have to pay?

Yeah. So we paid very little. You saw that in our tax rate last year. We had a similar transaction in the quarter last year. Our rate for the last year was 30.2%, in that 30% to 31% range. For 2016, we expect to be in that range, including in the first quarter. This was done in a very tax-efficient, simple transaction, a good outcome for the company.

And, Michael, I'm sorry to try to pin you down on this. When you say very little, what effective tax rate are you paying to bring this cash back?

Essentially zero.

Yes. Thank you. Good morning, everyone. I guess, my question relates to slide 11 in the deck, looking at industrial and consumer sequentially. For your industrial businesses, you're up 4% adjusted for seasonality. Maybe kind of nitpicking a little bit; if Welding was flat and Test & Measurement were up 2%, can you give us a sense for what else grew to get you to the plus 4%? And then, related to this, I'm trying to understand if this is just specific to the company, either through new product introductions or your exposure? Or are you trying to signal that there's something bigger going on in the environment that’s a little different than what we're hearing from other industrial companies?

Mig, all we're saying is that, as we talked about on the last earnings call, we saw trends stabilize, really starting in the second quarter last year. If you take Welding to illustrate this, look at the sequential demand trends in Welding. In the first quarter, we saw an 8% decline in the demand rate; in the second quarter, it was down 1%, and the fourth quarter was flat. This means that typical seasonality would expect that business to be down 2%, and it was flat. Overall that indicates an improvement in underlying demand trends.

Part of what I would add is there's a lot of volatility in the comps, given just the volatility in the end market. We talked about the fourth quarter last year. So what we're trying to communicate is not any big change in trend as much as when you look at the year-on-year comps quarter by quarter, because of the volatility over the last eight to ten quarters, those aren't necessarily indicative of what's going on currently. We're seeing relatively stable demand on a orders per day basis, so we're not calling it a trend or a pickup, but what we're saying is things are relatively stable.

Yeah, and, Mig, a point on the consumer side is really different than some of our peers, where 60% of our revenues are tied to the consumer. In the current environment where there's some pressure on the industrial side, particularly CapEx into oil and gas, we have 60% of the company growing at 3% at a very stable rate for the quarter and for the year. Those are the points we're trying to make on slide 11.

Okay. I appreciate that. And then, I know you commented on price/cost, but if we can focus on just price specifically in your industrial businesses, are there parallels that you can draw between the current environment versus prior downturns where things were challenging? How's pricing behaving versus history here?

No change here, Mig. We saw across the portfolio the ability to get price based on offering value-added products and solutions. We saw no change in the quarter, so there's really nothing different here.

Hi, good morning.

So two questions: one positive, I guess, one negative. But first a clarification. Maybe I missed it. The guidance, does it not include the auto acquisition, just so we're clear?

No, the guidance today does not include the acquisition. But what we did say is that we expect minimal EPS impact in 2016. This is really more of a 2017 and beyond EPS growth story. When the transaction closes, which we expect will happen in the first half of the year, we will update revenue margin guidance. We expect some impact, but very little on the EPS side, and we'll provide all of that once the transaction closes.

All right. Thank you. On the positive side, the organic growth guidance for the first quarter was stronger than I would have thought. Is it fair to say the tone at the December meeting, when you thought about the cadence for 2016 organic to get to the full-year midpoint of up 2% that the first-quarter organic guidance you just gave is maybe a little better than you were thinking a month or two ago?

I'd say not really, David. The fourth-quarter here was a little bit better than our guidance at the beginning of the quarter, but that wasn't really a surprise to us. Again, we're taking typical seasonality, run rates from Q4 adjusted for seasonality into Q1, and that gets you into that 0% to 2% range, so there's nothing really different about it.

Okay, I have to admit, I was thinking that it was a very back half loaded guide in the sense of first-half organic maybe down a bit, second half would have to be up a lot. But it sounds like now the cadence sounds a little more 1%, 1%, 3%, 3% is kind of the generic base case of the cadence to get the full year 2%?

Yeah, but again, it's much more about the – because of the comparison to the comps. We're taking current daily run rates and applying basically what we’re saying in 2016 is – no change in current run rates gets us 1% to 3% for the year.

Based on that, the way you're looking at it, David, this is not a back-end loaded plan in terms of the organic or EPS guidance.

Hey guys, how's it going?

Good.

Just quick for Mike, just a clarification. You said the consumer-facing businesses are stable. Does that mean that they're up 3%? They're stable at an up 3% run rate for 2016, or they're stable closer to flat for 2016 versus the up 3% in 2015?

No, when we say stable, we mean the underlying demand trends adjusted for seasonality from Q3 to Q4, we saw stable demand in those businesses. So it doesn't mean we expect the consumer businesses to be flat in 2016. We certainly don't guide for consumer and industrial for 2016, but if you think about what's in there – Automotive, Food Equipment, parts of Construction and Specialty – we'd expect those businesses to grow again in 2016.

Okay. And then just a strategic question on the debt. You were saying in December that you were hoping to use the free cash flow to pay down debt. I see that your cash is coming down a little bit, and your debt is going up. I just wondered if there's any change in that thinking going into 2016?

I think, Joel, you were saying that. I don't think I said that at the December meeting. We have our current debt to EBITDA is in the 2.2/2.3 range, and we expect no changes to that.

Thanks. Good morning, everybody. First question on the acquisition. Could you help us frame the historical growth rate over the last three years? Was it even close to the 8% CAGR achieved by your Auto business? And then, based on your initial meetings with the organization over there so far, is your impression that they have the embedded skill set right now to drive both margin improvement and ultimately above-market growth in line with corporate goals?

Yeah. So the answer to the first question is the growth rate has been solid but not at the rate that we've been growing over the last four years. We expect to offer some help in that regard. Regarding the second question, we've been impressed with the management team in the organization and feel like we're getting a really solid quality team that runs a great business today. Through some additional tools we can provide around our operating system, I think we can certainly leverage those tools to their full potential.

Great. Thanks, Scott. And then, last one back on Welding, your comments about that being one of the businesses that stabilized during at least the second half of last year. Did you see any difference in trends through the year between CapEx and consumables? And also, did you see any change within the second half in some of your bigger customers, maybe machinery OEM behavior versus, if you will, the general distributor base?

Yeah, no, so we didn't really see anything other than what I described earlier. Equipment side has certainly been down a little bit more than consumables that have stabilized throughout the year, but there were no significant changes as we've gone through the year or the fourth quarter.

Yeah, thanks. Good morning.

Good morning. Sorry about the last name there.

It's okay. I'm used to it. It's DeBlase. So the first question is on Construction. So North America Construction Products core growth, I think, it decelerated a bit to 2% this quarter. It was more like 7% in 3Q. I'm just curious on the drivers, is it a comp issue? Are you seeing some slowdown in North America Construction on an underlying basis? And then, I guess, what are your thoughts on the North America non-resi construction side goal into 2016?

Yeah. So if you look at the fourth quarter, up 3% organically. Residential was flat, which was slightly better than expected. The renovation remodel channel is where the growth was, up 12% for the full year, while commercial was down slightly. We have been bumping along those same numbers in 2015. We feel good about 2016 and we'd expect that business to grow in 2016 at a rate similar to what we saw in 2015, which was up 4% organically.

Okay, got it. That's helpful. And then for my follow-up, just looking at the T&M/Electronics business, it was pretty strong this quarter, stronger than we had expected. I would say that the margin performance there was a bit of a standout. So is that just enterprise initiatives? Or is there anything else to highlight from a margin perspective? And do you also think that T&M/Electronics can show positive margin progression in 2016?

Absolutely. I mean, we think we’ll continue to make progress on operating margin in Test & Measurement. In the fourth quarter, really nothing unusual other than strong execution of the enterprise initiatives, including 80/20 in that business. Very sustainable, and we expect more progress in 2016 and 2017.

Hi. Good morning. Just two quick follow-ups. One, again, the comments you made about the sequential improvements in some of your industrial businesses was interesting. Can you comment on if that trend continued into January? And then, I guess, the second question is given the incremental lag-down we've seen in oil prices, what have you sort of baked into your guidance in 2016 in terms of risk, because you could see a lag effect there? Thanks.

Yes. Like we said earlier, no change in January. We're on track to the guidance for the quarter. Oil and gas demand has remained stable while certainly down year-over-year. The primary impact there is on the Welding side, and we expect that business to decline in the single digits in 2016.

Great. And that brings us actually just past the top of the hour. So we're going to conclude the call there. Thanks to everyone for your time today and participation. We'll talk to you for the first quarter in three months. Thank you.