Illinois Tool Works Earnings Call Nuggets: European Equipment Sales and Operating Leverage

Illinois Tool Works (NYSE:ITW) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

European Equipment Sales

Andy Kaplowitz – Barclays Capital: Scott, you guys mentioned equipment sales began to pick up in March. You had sort of sequential increases. Can you talk about where that was and did you see that at all out of Europe or was Europe still decelerating throughout the quarter?

E. Scott Santi – President and CEO: The primary businesses that we’re talking about in the equipment space would be Test & Measurement, Welding, and Food Equipment. In terms of reasonable, I think there is still a question that Europe remains much tougher. So, in terms of the improvement through the quarter, there is no question that it was certainly more tilted towards North America.

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Andy Kaplowitz – Barclays Capital: Is it too early to ask you about April there?

E. Scott Santi – President and CEO: It is a little early. Certainly based on everything we’re hearing, we remain on track relative to our plan.

Andy Kaplowitz – Barclays Capital: Then if I can for the follow-up ask you about North American construction. You guys did a great job of margins. When I look at the revenue growth – I mean, you mentioned the commercial year-over-year decline, that’s fine. When I look at sort of your residential and your renovation, it’s still underperforming housing starts by quite a bit. Is this still a share issue that you could improve over time and maybe you could talk about nonresidential in general in the U.S.? It’s certainly a bit more sluggish than we’d like, cannot get better over time?

E. Scott Santi – President and CEO: In terms of the non-res, in terms of the market or you’re talking about our particular performance?

Andy Kaplowitz – Barclays Capital: The market on the non-res and maybe the share on the res?

E. Scott Santi – President and CEO: I think I’ll take those in sort of reverse order. I think from a commercial construction standpoint, obviously, there has been – the environment there overall has been pretty sluggish for some time. Our expectations are for some sort of reasonable sequential improvement perhaps later in the year, but that’s going to be very much predicated on how the overall economy progresses from here. On the revenue side, I think we’re still in the mode of sort of lagging the start recovery just from the standpoint of when we participate and also some – there are some sort of differences on a regional basis with where some of the hotter sectors are relative to our positions. But overall, we expect this business to continue to improve in terms of our overall organic rates given the trends that we’re seeing in housing starts continue.

Operating Leverage

Jamie Cook – Credit Suisse: Two questions. Not to split hairs, but when you talked about operating leverage on your base business, I think you said more than half would be related to some of the internal initiatives that you have, which sounds a little better. I mean, I think last quarter you said half, but I’m just wondering if some of the initiatives you have in place are returning – results are a little bit quicker than you had anticipated. And then I guess my second question is, Scott, I think last quarter, in the Q&A session, you talked a little bit about constraints on craft labor and construction in North America, if you continue to see that, if you’re seeing the markets get a little tighter relative to where we were a couple of months ago?

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Ronald D. Kropp – SVP and CFO: So, on the operating leverage question, if you remember, we talked about as you said, half of the benefit in the original plan was related to initiatives. What’s happened since is we’ve brought down our base revenue forecast. So, as a result, the income from our base businesses from our normal operations has gone down, but our initiatives are largely on track. So the initiative benefits are now a bigger portion of the over base space coming to us.

E. Scott Santi – President and CEO: And related to your question on construction, our understanding is that labor remains tight in the construction market and that it is still having some effect on the pace of the recovery.

Jamie Cook – Credit Suisse: Okay, but no material change since last quarter?

E. Scott Santi – President and CEO: No.

A Closer Look: Illinois Tool Works Earnings Cheat Sheet>>