Illinois Tool Works Inc. (ITW) Q2 2014 Earnings Report, Transcript and Summary

Good morning. Welcome, and thank you, all, for joining today's conference. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. And now I'll turn today's conference over to John Brooklier. Thank you, sir. You may begin.

Good morning, everyone, and welcome to ITW's Second Quarter 2014 Conference Call. Joining me this morning is our CEO, Scott Santi; and our CFO, Michael Larsen. During today's call, we will discuss our strong Q2 financial results and update you on our earnings forecast. As usual, we will open the call to your questions. [Operator Instructions] We have scheduled 1 hour for today's call. Before we get to the quarterly data, let me remind you that this presentation contains our financial forecast for the 2014 third quarter and full year, as well as other forward-looking statements identified on this slide. We refer you to the company's 2013 10-K 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 housekeeping taking place, I will turn the call over to Scott Santi, who will make some brief overview comments on the quarter. Scott?

Thanks, John, and good morning, everyone. Overall, we were pleased with our performance in the quarter and with the continued progress we are making in executing our enterprise strategy in what continues to be a mixed environment. Our operating margins in the quarter of 20.5% were up 300 basis points, and after-tax return on invested capital was also up 300 basis points to 19.5%, representing continued solid progress towards our enterprise performance goals of 20%-plus for each of these metrics by 2017. 6 of our 7 segments improved operating margins in the quarter, with strong performance across the board as enterprise initiatives contributed 120 basis points to overall margin improvement. The environment continued to be mixed, and overall revenues were up 4% and organic revenue up 1.4%, lower than our Q1 growth rate, primarily due to more challenging comps internationally and lower auto builds. In addition, ongoing product line and customer base simplification associated with the execution of our enterprise strategy reduced our organic growth by approximately 1 percentage point. There were some encouraging signs in North America as our Test & Measurement business and Welding business both grew 4%. For the first half of 2014, total revenues are up 4% and organic up 2.3%, both in line with the top line guidance we've been giving since December. EPS of $1.21 was up 32% versus Q2 of last year, slightly ahead of the midpoint of our guidance. And as a result of performance year-to-date and our confidence in the outlook for the second half of the year, we are narrowing and slightly raising our guidance range today. The new full year midpoint represents a 26% increase on a year-over-year basis. In closing, I'd like to thank the ITW team for the strong performance and continued progress they've delivered in the quarter. In year 2 of our 5-year enterprise strategy, we are pleased with the progress so far and confident in our ability to deliver on our enterprise performance goals. Now let me turn the call over to Michael Larsen, our CFO. Michael?

Thank you, Scott, and good morning, everyone. Okay. Let's start with the financial summary on Page 2. Q2 was another quarter of strong operational execution, resulting in EPS of $1.21, an increase of 32% year-on-year. As you may recall, last year had a $0.05 nonrecurring pension settlement charge. So on an adjusted basis, EPS increased 25%. The operating teams continue to execute well on their business structure simplification and sourcing efforts, delivering record operating margins of 20.5%, a 300-basis-points improvement over last year with 120 basis points of margin expansion from the enterprise initiatives. Total revenues were $3.7 billion, up 4% versus prior year, with organic revenues up 1.4%, below our Q1 organic growth rate, primarily as a result of more difficult comps internationally. For the first half of 2014, our total revenues are up 4%, 2.3% organically, in line with the revenue guidance we've been giving since December of last year. In the quarter, we essentially completed the portfolio management element of our 5-year enterprise strategy with the sale of the Industrial Packaging business and we're confident that our current portfolio of differentiated businesses is well positioned for growth with best-in-class margins and return on invested capital. We also completed the share repurchase program related to Industrial Packaging by repurchasing 17 million shares in the quarter, bringing the total share repurchases to 50 million shares since the announcement in September of last year. Our ending diluted share count for Q2 is 400 million shares. And since September, we've spent $4 billion and repurchased 11% of our outstanding shares. Our remaining share repurchase authorization is $2.8 billion, and given the performance of the company and our outlook for 2014 and beyond, we fully expect to repurchase shares opportunistically in the second half of the year. Free operating cash flow for the quarter was $0.5 billion and our conversion rate is tracking to be greater than 100% for the full year, in line with our previous guidance. Finally, as you can see, our return on invested capital on an after-tax basis was 19.5%, an improvement of 300 basis points. In summary, the ITW team continue to make good progress on the enterprise strategy in a mixed environment, and we remain on track for a strong 2014, which I'll discuss in more detail in a few minutes. On Page 3, some more color on the organic growth rate for the quarter, with North America up 1%, with continued strength in Automotive, up 8%, and Food Equipment, up 4%. As Scott said, we were encouraged by our Welding segment and Test & Measurement business in North America, both up 4%. International growth was 2% in the second quarter compared to 6% in the first quarter, primarily due to tougher comps in Europe and South America. Internationally, strength in Automotive and Test & Measurement and Electronics was partially offset by expected declines in Welding. You can see, Europe up 1% in the quarter; South America down 5%; and Asia Pacific up 7%, as China and Australia performed well. In China, Automotive was up 22%, Food Equipment, up 14%; Polymers & Fluids, up 9%. Since we will be mentioning product line and customer base simplification, what we commonly refer to as PLS, a few times today, let me just spend a minute and put this core element of our 80/20 management process in the context of our enterprise strategy. An integral part of our 80/20 process and our enterprise strategy is to focus on quality of revenue and not quantity. And through product line and customer base simplification, our segments are eliminating the complexity and overhead costs associated with smaller product lines and customers and focusing their businesses on supporting and growing with their largest customers and product lines. PLS is a core element of our 80/20 management process and an integral component of our ability to achieve sustainable, best-in-class margins and returns going forward. In year 2 of our enterprise strategy, PLS is a natural and expected outgrowth of our business-structure simplification initiative as we now focus on reapplying ITW's proprietary 80/20 management process to our 90 new larger-scale divisions. We quantified the reduction on organic revenue to be approximately 1 percentage point, and we fully expect that focusing the company on taking full advantage of the considerable growth potential that resides within our largest customers and product lines will achieve improved overall organic growth performance over the medium and long term. The financial impact of product line and customer base simplification continues to be fully captured in our guidance as we continue to expect total year revenues up 3% to 4% and organic revenues up 2% to 3% in what continues to be a mixed environment. Moving on to Slide 4. Operating margins were a highlight this quarter, as solid execution across the board led to operating margins of 20.5%, an increase of 300 basis points from last year. 6 out of 7 segments expanded margins in a big way, many achieving the record levels of profitability, as Construction Products, Automotive OEM, Polymers & Fluids, Specialty Products and Test & Measurement and Electronics all put up solid margin expansion numbers. As you can see, businesses such as Polymers & Fluids and Construction are now approaching sustainable 20%-plus operating margins, levels that, frankly, seemed out of reach just a few years ago. In a sluggish environment, Welding essentially maintained their best-in-class 26% operating margin for the quarter. On the right side of the page, we've listed the drivers, with 120 basis points from the continued progress on our enterprise initiatives, operating leverage of the top line growth was 40 basis points, and price/cost was again a favorable 10 basis points. And with a few exceptions, the material cost environment remains benign. You can see the 130 basis points of margin favorability from other, which includes the nonrecurring pension settlement in the year-ago quarter. With that, I'll be back in a few minutes to discuss the third quarter and updated 2014 guidance. But first, let me turn it over to John for some additional commentary on the segments. John?

Thanks, Michael. On Slide 5, you'll see a breakdown of total revenue and operating income per segment. And while Auto OEM and Food Equipment segments led the way in top line growth, 5 of our 7 segments produced double-digit growth and operating income. In particular, and as noted earlier, Construction Products and Auto OEM achieved operating income gains of 32% and 26%, respectively. You'll see further evidence of this as we highlight significant operating margin progress for nearly all of our segments. Now I'll go into further detail on our operating segments. On the right-hand side of the page, in Auto OEM, the segment produced another outstanding quarter on multiple fronts. Organic revenues grew 8%, outpacing worldwide auto builds by 6 percentage points. By geography, organic revenues for Europe grew 9%; North America, 8%; and China was up 22%. Our European businesses outperformed European auto builds by 7 percentage points, largely due to our fuel and powertrain product lines. In North America, we outpaced auto builds by 4 percentage points, thanks to our plastic fastener and powertrain products. And in China, we continued to gain share via multiple product lines outperforming auto builds by 11 percentage points. The drop-through to the bottom line was very strong as segment margins of 23.7% were 310 basis points higher than the year-ago period. Great performance by Auto. In our Test & Measurement and Electronics segment on Slide 6, organic revenues increased 1% in Q2. The good news is that we saw improvement in the Test & Measurement portion of the segment in the quarter. The T&M portion, their organic revenues grew 6%, thanks in large part to the strength from our flagship Instron business, which was up 8% in Q2. We're hopeful that the better performance in T&M and Instron is suggestive of a more sustained pickup of CapEx spending, and we're encouraged by order activity and backlog as we move into the third quarter. In the Electronics piece of the business, organic revenues declined 3%, largely due to comps in the electronics assemblies business. We believe this category will improve as the year progresses. For the segment, operating margins of 15.2% were 150 basis points higher than the year-ago period. Looking at Food Equipment. Segment organic revenue growth was 3% and largely reflected global contributions from its equipment and service businesses. In North America, equipment and service-related organic revenues grew 4% and 5%, respectively. Equipment's organic revenue growth was driven by an increase in the sales of refrigeration and cooking products. Internationally, equipment revenues increased 5%, thanks to a strong warewash and refrigeration sales. International service organic revenues declined 2% due, in part, to some weakness in France. And once again, the segment's operating margins of 19.5% improved with 80 basis points of improvement versus the prior year period. Moving to Slide 7. In our Polymers & Fluids segment, organic revenues declined 3%, and that was largely attributable to our ongoing PLS activity. As Michael noted earlier in his PLS comments, we continue to weed out the less profitable products and customers in this and other segments. As a result, PLS has had the typical impact of decreasing organic revenues but improving margins. All 3 of our platforms, polymers, fluids & hygiene and auto aftermarket, posted declining organic revenues of 6%, 3% and 1%, respectively. The much better news is that segment operating margins moved up significantly to 19.6%, and that was 130 basis points higher than the year-ago period. In the Welding segment, worldwide organic revenues declined 2% but that was largely due to specific international business, as well as some targeted PLS customer back activity. The international organic revenue decline of 15% was due to a convergence of events. In China, we were once again hit by comps related to the completion of the portfolio transition from a shipbuilding to an energy-infrastructure focus. We believe, however, that this comp will ease in the Q3 and beyond. We also experienced some delays in onshore pipeline projects in China. In Europe, we implemented PLS activity in Germany, and our Middle East business was negatively impacted by political events in the region. The much better news came from North America. And as Michael mentioned earlier, organic revenues increased 4% in the quarter. We saw some early signs of strengthening in equipment sales for both the industrial and commercial end markets and continued growth in the welding gun area. We also expect Welding to benefit from easier second half 2014 comps. And we'll remind you that the company-leading operating margins of 26.3%, while they were down 20 basis points, is still a very strong performance. On Slide 8, we continue to be very pleased with the dramatically improving profitability metrics in our Construction Products segment despite some uneven organic revenue performance. Segment top line reflected geographic variability as Asia Pacific's organic revenues grew 8%, thanks to our residential and commercial construction growth in Australia and New Zealand. You'll recall, we also had good performance in Australia and New Zealand in the first quarter. Our North American Construction-related organic revenues declined 2% as our residential business was moderately negative, thanks in part to some ongoing PLS activity, while our renovation and commercial construction business showed modest growth. In Europe, organic revenues declined 4% as commercial construction activity was especially soft in France. As we have consistently communicated with our investors, at this point in time, we are chiefly focused on improving the profit profile of this segment through both business structure simplification and PLS initiatives. We are clearly on the right path as Construction Products' operating margins of 18.2% were 450 basis points higher than the year-ago period. And then finally, in our Specialty Products segment, organic revenues were flat as a pickup in a variety of our consumer packaging businesses, principally our film, gluing systems and apparel-related units, was offset by delays in projects for our warehouse automation products. Our appliance business grew organic revenues 1%, while our ground support organic revenues were flat. Strong segment operating margins of 24.2% were 180 basis points higher than the year-ago period. Now let me turn the call back over to Michael, who will cover our 2014 and third quarter guidance. Michael?

Okay. Thanks, John. Our financial performance in the first half of '14 and the positive momentum on the enterprise initiatives gives us increased confidence in our ability to deliver on our financial commitments for 2014 and beyond. For 2014, we're raising the EPS midpoint slightly and narrowing our full year EPS guidance range to $4.50 to $4.62, which compares to the previous range of $4.45 to $4.65. The new $4.56 midpoint represents an increase of 26% versus 2013 on unchanged total 3% to 4% revenue growth. As you can tell, we're not counting on a second half acceleration of revenues. Our balance sheet and cash position is excellent and we fully expect to repurchase shares opportunistically in the second half of the year. At this point, we can't be more specific in terms of timing or magnitude, and we have not included any impact from lower share count in the updated guidance today. With the month of July, the third quarter is off to a good start and we expect Q3 EPS to be in a range of $1.19 to $1.27, again with 3% to 4% total revenue growth and continued year-over-year margin expansion with approximately 100 basis points coming from our enterprise initiatives. We're pleased with our first half financial performance with total revenues up 4%, operating margins of 19.6%, an improvement of 240 basis points, and EPS up 23%. In addition, following the completion of our portfolio management efforts, we now have 7 highly differentiated segments with significant growth potential going forward. While much work is still ahead of us, 2014, the second year of our 5-year enterprise strategy, is shaping up to be a year of continued progress as the ITW team works hard to further expand margins and returns, and we continue to redeploy our strong cash flows in a disciplined and returns-focused manner. In addition, we believe that many of the efforts that we're undertaking today are positioning the company for stronger organic growth in the future. With that, let me turn the call back over to John.

Thanks, Michael. We will now open the call to your questions. [Operator Instructions] We'll take the first question.

[Operator Instructions] Our first question, Andrew Kaplowitz, Barclays.

Scott, so you've talked in the past about some of the bigger CapEx markets potentially coming back such as Test & Measurement and Welding. In 2Q, you did see some of that improvement. So do you think this is the inflection in sort of these large CapEx markets that we've been waiting for? And you did mention pretty good order visibility into 3Q, and that's despite ag being weak, which we know is part of the Welding business. So maybe you could talk about that.

Yes. Andy, I don't think that we've seen enough to say it would be an inflection point by any stretch, particularly given the overall choppiness of the environment. I think we were generally pleased with, certainly, a noticeable pickup in the order rates in both businesses in North America. But I think we'd like to see another quarter or 2 before we call it an inflection, for sure.

And then, Scott, in terms of ag, are you worried about that affecting the Welding business a little more as you go forward in the second half?

I don't think so. I think right now, we're -- I don't expect things to get a whole lot worse there. And again, the overall mix, ag represents 10%-ish of our revenues in North America. So I think we've got a nice mix of end-market exposure there that even if it did erode further, I don't think it's going to put us off our plan at all for the year.

Okay. And then maybe just another big-picture question. Like business simplification through PLS is -- it's actually slowing down some of your businesses that you just talked about. But you've talked about how it eventually will accelerate organic growth. So the headwind that you mentioned was 1% in the quarter. When do you think that headwind will turn into a tailwind? Is that next year, end of this year? Like how should we look at that?

Well, I think it's a little early to tell. I think we'll have a little bit better view for you on '15 as we get to December and we've gone through our planning process. What I would say is it's in our plans for the next 2 quarters. As Michael said earlier, this is -- we are front and center on the reapplication of 80/20 across our 90 scaled-up divisions and it's certainly a normal and expected part of the process. So what I can say for sure is for the next 2 quarters, we expect a similar sort of impact that's fully embedded in our guidance. And I think we need to get through our '15 planning process to have a better view internally and what we can share externally on how that ultimately impacts our overall performance in '15, if at all.

The next question from Deane Dray, Citi.

So year 2 enterprise strategy and you're already bumping up on the operating margin, 20%, and the return on invested capital target. So is it time to start setting the bar higher? Should we be going some -- temper expectations for further improvement? But just help put us in context as you get there sooner than you thought.

Well, what I would, I guess, sort of offer as a reminder is this is 1 quarter, not a full year. So I think what -- where we are sets us up certainly, for us to be able to at least hit those 2 metrics in '15 given the progress that we're making. And I think what I would say is we still have plenty of work to do across all of these initiatives. We are not done with BSS, not done with sourcing. So we would expect continued progress as we move forward. But it -- but we haven't sort of boxed the upper end at this point and we're really managing the company quarter-by-quarter, and ultimately, we'll talk about where we think we can get in '15 late this year.

And Scott, I probably should've added a congratulations within that question because you did get there faster and those are impressive numbers. And then the second question is on capital allocation. So just in terms of how you've couched buybacks to be opportunistic, other uses of cash, maybe the M&A environment, the target has been 1/3 of your revenue growth to come from M&A, but it's been pretty quiet there. So maybe put that in context for us, please.

Yes, Dean, so this is Michael here. So what I would start with is that our capital allocation strategy remains unchanged. As you know, we've been very disciplined and returns-focused. And we generate a significant amount of cash. And priority one is reinvesting in our businesses, whether those are CapEx projects or new products given our innovation efforts, as well as BSS or restructuring efforts. And so all of those projects are fully funded. The second priority is our dividend. We have a -- roughly a 2% dividend yield at this point. And the dividend continues to grow in line with our cash flows as -- and has done so for a little over 50 years. And we certainly view that as an important component of our capital allocation strategy. And so that leaves the balance, approximately 50% of our total cash flows, for we've -- what we've called external investments. And really, that encompasses acquisitions, which, under the right set of conditions and financial criteria, would take priority over share repurchases. Given where we're at in terms of the M&A environment and also given our strong balance sheet and cash position and our view of where the company is going to be, not just in 2014 but really as we continue to execute this 5-year strategy, we have a preference for repurchasing shares. And so that's what we alluded to in the second half of the year, is that we will -- rather than an announced program like the one we just completed for -- associated with the IPG divestiture, is an attempt to be more opportunistic as we go into the balance of the year and also, as we start to think about 2015 and putting together the plans for next year. So that's how I'd position it for you, Deane.

Next question, Jamie Cook, Crédit Suisse. Andrew Buscaglia - Crédit Suisse AG, Research Division: This is actually Andrew on behalf of Jamie. Just a quick question on Construction. So you guys spoke about there's some -- still some uncertainty, I think, and some mixed commentary on housing and commercial construction. Would you guys say you're -- have changed your stance on this segment at all in terms of becoming more cautious of recovery? Or what's your view at this point, as it relates to how it was 6 months ago when the year started?

Well, I don't think it's changed at all. I think what we've been saying for the last year for our business in the Construction or in our focus, that we had a business that had the potential to generate a significantly greater level of earnings at the current revenue base than what we have been performing to. So our focus for the last 4 to 6 quarters has largely been on getting our Construction business up to margins and profitability levels that we could see in terms of their potential. And I think that's been the focus. Our -- from the standpoint of top line and the market dynamics, right now, you all read what's going on there. It's pretty up and down. I think on a year-to-date basis, from an overall organic standpoint, we're largely tracking various industry metrics. We're not looking for a lot of out-performance there yet, because we are so focused on driving these internal improvements and we got a lot more work to do there, particularly in Europe, and we're on it. So I don't think our view has changed at all, other than I think we're on track, we're pleased with our progress and clearly, there is no sort of momentum right now on the ground in terms of any significant recovery building, particularly in the housing market in the U.S. Andrew Buscaglia - Crédit Suisse AG, Research Division: Okay, that's helpful. And then just switching to Food Equipment. Margins there were pretty impressive and are looking pretty good relative to historical levels. How sustainable do you think those are? Are there any initiatives underway? Or that you could talk about that you think you can get those -- you keep those margins at this -- at current levels or even go higher?

I think they're very sustainable and would expect that as we continue to grow that business, given historical levels of incremental profitability, that we generate an organic growth, let alone the continued impact of some BSS and sourcing initiatives there, that we'll continue to move those margins up as we go forward.

[Operator Instructions] Our next question, John Inch, Deutsche Bank.

It's Karen Lau dialing in for John. So could you talk about the progression on the quarter? Some companies called out Europe fading and Latin America seems to be really soft, especially in June. Did you see any of that? And I guess, more importantly, did you see any of those geographic markets improve since the end of the quarter?

We didn't see any unusual trends as we went through the quarter. June was our best month, but it usually is. And so there was really nothing unusual. Europe, as you noted, was -- and South America, which is primarily Brazil for us, was weaker in the quarter. But weakness -- we didn't see increased weakness or strength as we went through the quarter. Like I mentioned, July for us is off to a good start and we feel good about the guidance we've given here for the third quarter and for the total year.

Okay, got it. And then on price costs, you realized 10 basis points in the first half. I believe you implemented some pricing increase, maybe towards the end of 1Q. Does -- did those price increases stick? And are you still expecting 20 to 30 basis points for the year?

Yes. So we -- as you mentioned, we did increase price in several of our segments and saw positive price in the majority of our segments. The 10 basis points is slightly below the 20 to 30 that we were expecting for the year, and we're probably going to be at the lower end of that range as we look at it today. Nothing structural. There's a little bit of FX impact here. But as I mentioned, the environment, in terms of direct material inflation, remains benign at this point, and the businesses are doing a good job taking advantage of price opportunities as we continue to add value to our customers. So that's how I'd describe it.

Next question, Nigel Coe, Morgan Stanley.

This is Jiayan filling in for Nigel. We just want to dig a little bit into SG&A. It has been pretty flat in the range of $680 million to $690 million for the past few quarters. So I wonder whether this is a good run rate going forward. And also, if we look at the sales under the G&A portion, how has the G&A expense been trending over the past few quarters? And what's your expectation there?

Yes. So if you look at SG&A this quarter, it was down $70 million on a year-over-year basis. About half of that is the pension charge that I mentioned in my comments. So approximately $35 million. And we did have slightly lower restructuring costs this quarter versus the same quarter last year. But beyond that, it's really continued good cost controls and discipline in our segments. And so with those caveats I just mentioned, I would think this quarter has a pretty good run rate on a go-forward basis. As a percentage of sales, 18.2%, and so we don't expect it to differ much from those levels. And actually, as we continue to implement our BSS efforts across the company, we should expect to see overheads come down. Like I said, as we exit smaller product lines and discontinuations with customers that -- and take out the overhead associated with that, you should expect to see overheads and SG&A to improve.

Great, that's really helpful. And another question for the 120 bps contribution from enterprise initiatives. Can you maybe just give us some color, what percentage of this is driven by the PLS and what percentage is driven by the other initiatives?

Yes. So we -- historically, we've not broken out the impact from the enterprise initiatives in much greater detail and we're not going to go down that path. And so the 120 basis points was really strong execution by the operating teams on our BSS efforts, as well as on the sourcing side.

Okay. So the PLS benefits, you're already seeing that during this quarter, right? So the -- all the things you are doing, you are already reaping the benefit. It's not like a benefit you're expecting to see in 2015.

Right. I mean, I think the benefit you're seeing now is the lower overhead costs and the improved mix of our product portfolio. What you don't see today is what we've talked about, which is as we focus on the larger product lines and customers, we fully expect that we will take advantage of the full organic growth potential with those customers and product lines. And so what we're doing is positioning the company for accelerated organic growth in the future. And that's -- so obviously, you have not -- in the short term, you're seeing the reduction in the revenues but you're not seeing the long -- medium- to long-term impact yet.

Our next question, Jim Krapfel, MorningStar.

So you had a couple of quarters now of 120-basis-point margin benefit from your strategic initiatives. Just wondering what's the run rate of improvement you expect going forward here in the next couple of quarters. And at what point would you expect maybe some strategic sourcing benefits to max out? Would that be in kind -- end of 2015 or '16 period?

So to answer your question, I mean, we are expecting approximately 100 basis points of margin expansion from the initiatives in the third quarter, and again in the fourth quarter. And that's on a year-over-year basis. And that's what I just described as very consistent with the guidance that we've previously provided. And we have -- as we develop the plans for '15 and '16, we don't see any reduction in the sourcing savings. So we really continue those -- expect to see those continue as we go through at least through 2017, which is the fifth year of our enterprise strategy. So we're not seeing a decline in sourcing savings. If anything, we're probably seeing a little more of an improvement this year versus last year in year 2 of our strategic sourcing efforts.

Our next question, Walter Liptak, Global Hunter.

Let me ask about the Welding business, especially North America. The 4% organics looked a little bit better than we were expecting. Can you talk about how the quarter trended? And how things are doing in July?

I don't know that we saw any major inflections month by month that was -- the improvement was in the capital equipment area, which, again, we thought was positive development, and also on guns. So it does speak to a little bit more investment by our Welding customers. But as I said earlier, it's basically a 1-quarter trend. So hopefully it will continue. We'll wait and see.

The only thing I'd add is we are -- if you look at the comps on a year-over-year basis, the comps do get easier here in the second half of the year. So on a year-over-year basis, we should be seeing improved growth rates out of the Welding business.

Walter, I also add that we've talked about Welding before, and we specifically talked international, that the comps on the international side relative to this portfolio transition in China, we should start to see better comps than that as we move into third quarter and beyond. So I think that'll be helpful to the overall segment performance.

Okay, great. That sounds good. And if I can switch over to electronics assembly and the decline there. There are some new mobile devices coming out in the second half and -- despite the decline there, I wonder what the outlook is for your second half.

Yes. So Walter, this is Michael. I mean, we're not expecting significant improvement for the electronics business here for the balance of the year. You are right that there are some encouraging potential order activity going on in that segment, and that would be slight upside to our current expectations for the second half. But again, we're not counting on it at this point.

[Operator Instructions] Next question, Ajay Kejriwal, FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So on PLS, Scott, we've seen actions in a couple of segments here, Polymers & Fluids, Welding, Construction. I guess, the question, is there more opportunity in PLS either within these segments or maybe on the segments where we haven't seen that initiative being played out? So just if you can talk a little bit about what to expect on PLS in the next, say, 12 to 18 months.

Yes. I would -- I think the -- we've talked, I think, throughout our description of what this business structure simplification initiative means, is that there's a structural element to it in terms of generating better scale and leverage and focus in terms of the division structure. And the second part of that is then the opportunity to reapply 80/20 to all of those businesses. And so I think what I would say is we've moved -- it's largely a function of who's ready to get to that second stage more so than there's a particular -- there's a differential impact as you go segment by segment. So in the Polymers & Fluids business was -- got to that place earlier than some of the other segments. We're now at a place where pretty much across all 7 segments, it's an active part of, let's call it, Stage 2 of the BSS process. So I think it has just become -- it sort of moved again from a couple of segments to pretty much being implemented across all 7. It's a normal part of the process. Polymers & Fluids is going to get to the end of it sooner than the other segments because they started it first. But I think overall, that opportunity to reapply 80/20 is a real significant and meaningful part of the overall impact on BSS. And it's an impact of that. It's just starting to show up in terms of overall margin and profitability performance. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So I guess, expect more PLS in the other segments where we haven't seen that started yet.

Well, it's been started. I think it's, what would you say, pretty much from -- at a minimum the beginning of this year, everybody, I think, across the company's been in a pretty heavy teeing [ph] around, starting to really focus. Getting the structural stuff out of the way and really starting to focus on reapplying 80/20 across the company. As we've said earlier, we've got another couple of quarters where, clearly, it's going to be an active part of what we're up to. And I think we need to get through the planning process and see how much -- what the '15 agenda looks like, business by business, in that regard. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it. And then China, we're seeing really good growth in Auto. And then overall, that 8% number, is that reflecting the impact in Welding? Or is there anything else going on in that 8% number?

Yes. That's the largest declines in revenue in China is indeed the Welding segment, as we've talked about, as we exited the shipbuilding market and really have focused on the energy side. And we believe that's where the -- not just the better margins reside, but also the better growth potential. So in the quarter, in China, strong performance in Automotive and Polymers & Fluids and Food Equipment. And then decline's primarily focused just in the Welding segment.

And gentlemen, I am showing no further questions at this time.

Okay. Well, we appreciate everybody's participation in the call, and we look forward to talking to you later. Thank you. Have a good day.

Thank you. This concludes today's conference. You may disconnect at this time. Thank you for joining.