Illinois Tool Works' Management Presents at DbAccess Global Industrials and Basic Materials Conference (Transcript)

Jun.12.13 | About: Illinois Tool (ITW)

Illinois Tool Works Inc. (NYSE:ITW)

DbAccess Global Industrials and Basic Materials Conference

June 12, 2013 3:20 pm ET

Executives

David C. Parry - Vice Chairman

Analysts

John G. Inch - Deutsche Bank AG, Research Division

John G. Inch - Deutsche Bank AG, Research Division

Good afternoon, everyone. It gives me great pleasure to introduce the management team of ITW. With me is David Parry, ITW Vice Chair. He's been at ITW almost 20 years and Vice Chairman of the company since 2010. He's an integral part of the company's business simplification structure initiatives and overall enterprise strategy. And with that, let me introduce David.

David C. Parry

Okay. Thank you, John. Hopefully, I can make this system work. I'm just going to give a very quick presentation using a couple of slides just to illustrate the high key points of our enterprise strategy that we've been pursuing really ever since -- beginning of 2012. Can you all hear me? Yes?

John G. Inch - Deutsche Bank AG, Research Division

Very good.

David C. Parry

Good, okay. Sound of drums. So this one slide is a way to illustrate some of the things that are changing and some of the things that are staying the same within ITW. The real key thing here is the 3 enterprise strategy that we've been pursuing since the beginning of 2012, which we've been communicating with the investment community and obviously, our own employees in total. And those are very much around the portfolio management, the business structure simplification and to the sourcing activities. Those 3 enterprise strategies are really built on our sort of unique core capabilities of ITW. The 80/20 business design process, which we've been employing probably since the mid-1980s, sustainable differentiation through innovation processes. We have about 19,000 patents and constantly continuing to innovate and a very much of the centralized business structure. So those 3 things have been the core focus of our business and those things continue through these 3 enterprise strategy initiatives over the next 4 or 5 years.

So let me just quickly touch on the enterprise initiatives of portfolio management, business structure simplification and strategic sourcing. So portfolio management, pretty simple. It's a matter of looking at our portfolio of businesses and deciding which ones are the ones that we really want invest in and which ones don't quite fit our business model. Many of you will be aware of the Decorative Surfaces businesses that we got rid of a couple of years ago, the Graco businesses with regard to the finishing and more recently, Industrial Packaging, which we've said we will look to dispose of and the process has started and would expect it to be completed probably first quarter of 2014.

Business structure simplification is very much around the process of reducing our 800 -- 850 business units down to 105 global divisions of about $100 million revenue versus the $25 million more local businesses. And the last bit is around strategic sourcing. Strategic sourcing in the past has been very much the one where we have done advisory, a little bit from corporate. But really, it was very much an "opt in, opt out" process. Now we're going to drive and leverage our scale to really drive the savings we've got from the raw materials that we buy. We roughly buy $11 billion worth of purchases in one shape or form. And we really feel there's an opportunity here for us to drive those benefits to the benefit of our bottom line. Those 3 enterprise strategies we believe will generate between $600 million and $800 million worth of savings over the 5-year period.

We will maintain our very much disciplined capital allocation strategy. Obviously, reinvesting our efforts on capital investment on the businesses, investing in those, giving dividend yields back to our shareholders and also, using the cash and allocation between whether it be buyback of shares or whether it be in acquisitions.

So what does this all mean? This basically means that we believe that we pursue these 3 enterprise strategies. We'll have a very much differentiated performance, giving solid growth, strong returns and best-in-class operating capabilities.

The end-use results of all these things is really comes down to 3 elements that fit into the solid growth, strong returns, best-in-class operating categories. First one around the portfolio mix, largest scale of businesses going from the $25 million to the $100 million. Focused acquisitions. We've said our acquisitions will be roughly around the $500 million, $600 million a year. And it is a switch of our strategy. In the past, we've been 2/3 -- our growth being based on 2/3 of acquisitions, 1/3 organic growth. Now we're switching it being much more 2/3 organic growth, 1/3 acquisitions.

And as we change our portfolio and get rid of the slower-growth or no-growth businesses and focus on those higher growth, we believe we can run the businesses with basically 200 basis points above GDP to the period of 2017.

At the moment, our returns are roughly around the 16% area. We believe we can drive the return on invested capital to 20% plus. And a similar situation with regard to our return on sales or operating margin's percentages, pushing that again from the 16%, 17% to the 20% plus basis. All this mathematically adds up to an EPS target growth of about 12% CAGR. We're well in the path of going down this strategy in the enterprise and we feel comfortable this is the best way for us in driving best shareholder returns for our shareholders.

Question-and-Answer Session

John G. Inch - Deutsche Bank AG, Research Division

Okay. Q&A time. David, how much time do you personally spend on these initiatives?

David C. Parry

Well, like everything else, it's a team, team effort. We started this process very much after our 2008, 2009. I'll call it fiasco with regard to economic market in place. We looked at our businesses and decided which ones were sort of differentiated and not differentiated. So a lot of times were spent through 2009, 2010 to really decide on what our strategy should be and that's why we came out in 2012 with a strategy that you see and it's right up here. So a lot of the time of the management team has been spent on this. It's been our main focus. And really, since 2012, a significant amount of time has been spent communicating the message not only to the investment community, but also to our employees. So Scott Santi, the President, and myself have been spending a period of time doing town hall meetings with our business units, really making sure they understand the strategy, address their fears, concerns and pushing that forward.

John G. Inch - Deutsche Bank AG, Research Division

And is there one person who is in charge of this overall? And in terms -- like kind of the team leader or is that -- I've realized you're using consultants, but is there an internal point person that Scott points to then say, "Hey, give me an update on this?"

David C. Parry

Well, we all have individual responsibilities, but this -- there's no one person who's responsible for the whole enterprise strategy unless, I suppose, you'd say, Scott, I suppose [indiscernible]. But certainly, he and I work very closely together. We're being very inclusive, our Executive Vice President, so we kind of include them in the process in driving things forward. So it's very much a team performance. Do each of us have certain areas of sort of what we need to push a bit more? Yes, I mean I have responsibility to the sourcing activities, so I probably have more responsibility there. I have the innovation tech center for the company, so that's obviously a focus for me as well. But the business simplification activities, clearly, that's very much an exercise that's driven by the EVPs over individual segments. But I think that would be a pain to point out. This is very much a team performance. There are 7 EVPs or 8 EVPs, myself and Scott. We have regular meetings, monthly meetings, really driven to make this all happen together.

John G. Inch - Deutsche Bank AG, Research Division

And just so I understand, basically, in terms of the cost opportunity, you have the overhead and you have the sourcing. Is that a simplistic way to view this?

David C. Parry

You could look at it in those terms, yes.

John G. Inch - Deutsche Bank AG, Research Division

And you have sourcing? It's kind of wrapped under you?

David C. Parry

Yes, you can say that, but at the same time, that's why I said it's a bit more complicated because clearly this -- 4 of the EVPs report through to myself, right? Three report through to Scott. So obviously, those EVPs are driving the business simplification activities, but they're feeding the information back into Scott and myself to make sure we actually hit the targets.

John G. Inch - Deutsche Bank AG, Research Division

Now, sourcing benefits are coming later. Is that the way the timeline is prospectively targeted to work?

David C. Parry

Yes. What we have said is that the 3 initiatives basically come in 3 separate waves over the sort of 2012-2017 period. And the first stage is really the portfolio analysis. So you're seeing -- you've seen Industrial Packaging coming through. You've seen Decorative Surfaces come through. You've seen Graco come through. We said we would basically dispose of about 25% of the company's revenues. By the time we have basically got rid of the Industrial Packaging business, we'll be up around 23%, 24% of that number. So by the end, I think, of the first quarter of 2014, we would have done the portfolio. And maybe a few small businesses that might drag on as we go through but pretty much will be done. The business simplification, that work has started in 2012. It's rolled through 2013. It's going to continue to roll through 2014 as well. And so you're going to see more of that activity in the 2014 period than you are many time. As far as the sourcing activities, clearly, as you try and change suppliers and change raw materials, particularly with high-specification products that we have and across a very diverse range of products, then that is going to be a 2015, 2016, 2017. So it's -- it really is -- they all occur in certain peaks and times in the various 3 years. If you're trying to do your modeling, I would say you take the $600 million to $800 million worth of savings that we have committed to these initiatives and spread them fairly evenly over the years.

John G. Inch - Deutsche Bank AG, Research Division

Now companies sort of have gone through this exercise before, Dover comes to mind, sort of at the top of my head. Did at the onset of their process articulate, "Look, we have this number of suppliers and based on our initial sort of diligence, it appears that we should have perhaps a third fewer or something." Do you have any sort of initial benchmarks to kind of gauge the opportunities out of ITW in terms of how many suppliers you have for an $18 billion company? And maybe how -- what you think the number could be?

David C. Parry

Yes. We don't tend to think of it in those terms simply because the raw materials and services that we have are so diverse that I don't believe you can say some macro number and reduce it from X to Y. So you have to really deal with it in what we call waves. So, for instance, we've started one with regard to our coil and wire activities. So we buy obviously coil and wires and steel in one shape or form. The number of suppliers there is around about 170, or was. Today, we're down to probably about 90. And by the time we finished the exercise, we'll probably be down to 30. But it's going to vary depending upon each of the individual activities. Telecommunications in the U.S., we had traditionally used all 4. Are we going to go down to 1? The answer is yes, we are. And so it's a multitude of different scenarios depending upon what the commodity or what the services being provided.

John G. Inch - Deutsche Bank AG, Research Division

Now when you take a structure that had several hundred businesses and you whittle that down and I believe all of the general managers have been identified, what's happened to the hundreds of other people who are in that sort of a capacity? Are they leaving the organization or are you trying to find them other homes? I'm not sure why. If I were a general manager, I would want to go do something else. It's -- to talk a little bit about this process because it's one thing to put this on paper. It's another to actually execute in such a very large and diversified company.

David C. Parry

Yes, fully understand the question. Let me try and sort of frame it for you. So if you go back into history, back to, say, 2009, 2010, you will have heard regularly ITW talk about having 800 to 850 business units plus the number that a lot of you may have heard. That number referred to really legal units, legal business units. It was not actually the number of general managers. So as if you like these number of line items in our financial bluebook that we do to report each of legal entrants -- entities inside the company. The number of general managers were probably around about 600, right? So 600 GMs run basically about 800 and 850, right? They all ran businesses to a roughly around about $20 million, $25 million of the revenue. We scale those up to basically be $100 million and we end up with what we call the VP GMs, Vice President General Managers, of which there are 105, right? If you were at the Analyst Meeting in New York in December, you would have probably heard 150, which was out of an approximation. Today, we have 105. And that's the number that we have. So you go, "Okay, so you've gone from 600 down to 105." So clearly, let's keep it simple, that's 500 people. What exactly has happened to those 500? About half of those have left the company and have already gone, right? The other half have actually moved into functional roles. And by a functional role, to give you a simple example, if you've got 4 $25 million businesses around the world, then suppose they all have a plant, all right, so you've got 4 plants, right? Obviously, what you need is an Operations Director to look after those 4 plants to run them and consolidate them. So there's a role there. So the compensation and the roles and responsibility going from a GM in charge of $25 million business to an Operations Director looking after $100 million business. It's roughly about the same. And some of those GMs were extremely good at one particular function. They were either good salesmen or good marketeers or they were good operational people. So we've slotted those people into those roles. Now, what's their function? Their function is to take those 4 operating facilities and look at ways that we can actually supply our world demand, not our regional sort of country demand, all right? And say, "Can we run this business with 3 plants, 2 plants and even 1 plant?" And so we got into that phase of reducing those number of plants. Now, that's going to be the 2013, 2014 activities. But that's the one that's being charged with. So as you look at this thing, it has been scaled down. If you go back to 2010, we have roughly -- well, we had 2 Vice Chair and 10 EVPs and about 40, 45 group Presidents. And today, we have 1 Vice Chair. Effectively, after Industrial Packaging, we'll have 7 EVPs. Group Presidents is roughly 32, 33. So you can see how it is scaled down. And you can see that actually, we've got to the VP/GM level, but have we worked our way down to the rest of the organization? That's still to come.

John G. Inch - Deutsche Bank AG, Research Division

As part of the process, is there any compensation incentive for managers? So I mean, obviously, they are workers who will follow what their managers tell them to do. Are there any compensation incentives for managers to want to, say, be on a path and move more quickly on a path? Or is it just simply corporate dictating this and this is what's going to happen.

David C. Parry

No. I'm afraid we're all very sort of -- in reality is we're all very financially driven in one shape or form probably. So, no, the way that the system works within ITW pretty much throughout the sort of management structure is there's clearly a base salary and there's a bonus system. And that the percentage of the bonus on other of base salary varies. Can be as much as 100%, but probably wouldn't be that much in most cases. But -- so there's a bonus factor. That bonus factor is basically split between 2 categories. One category is profitability and the profitability is a simple measure between what was the profit last year, what's the profit you're going to generate this year and there's a formula that calculates. Okay, if you do better than last year, you get this amount. If you do a lot better, you get this amount. That's one element.

John G. Inch - Deutsche Bank AG, Research Division

And this is operating profit or is it...

David C. Parry

Operating profit.

John G. Inch - Deutsche Bank AG, Research Division

Operating profit. Not ROIC or...

David C. Parry

It's not ROIC, all right? So tax issues that go out of it is pure operating profit. Then the other element is what we call O-factors [ph], which are basically management O-factors [ph] and those are very specifically driven around particular criteria. So if I go back to the example that I just illustrated about 4 plants going down to 2, there could well be an O-factor [ph] written into the new Operational Director. Your job is to come back at the end of 2013 with a proposal to basically how do we move from 4 plants down to 2 plants, right? So each of those managers has been given very specific objectives to achieve the goals that we've set. And clearly, the bonus rests on it. So...

John G. Inch - Deutsche Bank AG, Research Division

Now if initially, as you pointed out in December, we were going to go from 650 roughly GMs down to kind of 150, and now we're down to 105. Now if one of the premises of opportunity is scale leverage, which is intuitive, right, we're going to go from $25 million average business clusters to $100 million. If you're going to fewer, it suggests your business cluster is definitionally are larger which, all else equal, should be driving incrementally more savings. Is that not the way to think about it? At minimum, you have 45 fewer entities than what you thought so you would have the management savings from them. But in turn, if they are, by definition, larger because you haven't changed the divestiture part of the equation, shouldn't you also be driving greater cost efficiencies and savings?

David C. Parry

Certainly, as you get greater scale than in a individual division as we call it, will you get potential for savings? Absolutely, right? I mean that leverage is going to come through. And clearly, as you reduce the number of people in the organization, the surrounding noise are the -- right, that's obviously or clearly going to drive more savings. So how we quantify that internally as to what that savings is, we have an idea. Have we come out and said the company what that number is? No we haven't.

John G. Inch - Deutsche Bank AG, Research Division

But I'm on the right track? I'm not missing something.

David C. Parry

You're not missing something, all right? I mean...

John G. Inch - Deutsche Bank AG, Research Division

Fewer should ultimately equate to more cost savings, all else equal.

David C. Parry

Yes. I mean, this strategy basically is driven around, making sure that we have prepared for the global economic, sort of, marketplace. Do we believe when we were compiling this that the global economy was going to grow at vast amounts? No, we perceived the market was going to be pretty sort of, I hate to say, boring, but 2%, 3% sort of growth rates and so we will focus on the self-help and try to look after the things that we can really control and also position ourselves so we can really grow on those markets and businesses that we think have potential long-term sustainable growth and put our energies onto those.

John G. Inch - Deutsche Bank AG, Research Division

Right. Now that makes sense. If we were to sort think then in terms of the 5 years is a long time. On the other hand, the first quarter hardly rock them and talk them with respect to organic growth for any multi-industry company, yet you put up what appears to be some pretty robust results already from some of these initiatives. So are we off to the starting gate even stronger than you would have otherwise anticipated? Or was there something about the first quarter? You see where I'm going with this, right? We're into a trajectory where second quarter and second half isn't really helping anyone. Are we -- should we still expect the kind of improvement that we saw in the first quarter or begin to play out over the course of the year?

David C. Parry

It was -- certainly, do we feel that we're going to have a steady improvement over the quarters and years? Yes, we do, right? Is it a hogging curve? No, it's not. But do we think that it's going to be a steady improvement and the same sort of benefits you saw in the first quarter? Yes. I mean maybe there may be a few bumps in the road inevitably, right? You never know, but do we feel directionally this is the way it's going to tell you you're going to see those savings flow through at the bottom line? Yes, you are. And I think you're more likely to see stronger performance on the operating income side than you are on the revenue side. But I just don't think that's going to be much help.

John G. Inch - Deutsche Bank AG, Research Division

So, all else equal, well we'll be able to, with the benefit of hindsight, take a step back and plot out the quarters. And I recognize the quarters will be ups and downs, but you're generally suggesting there should be a trajectory of sequential improvement quarter-over-quarter over the course of the coming, say, 3 years or whatever.

David C. Parry

That would be my expectation, yes.

David C. Parry

Okay. Well that's interesting. You've also as a company signaled that you may have a willingness to possibly even raise financial leverage given their favorable interest rates to at least replace Signode earnings at minimum or close the gap. What might be the timing or your thought around when that could occur? I don't -- I appreciate that you're repurchasing your shares already and Wall Street wants more and more and more. But still, it's a strategy that I think other companies have employed, Dover and others, successfully. So what are your thoughts?

David C. Parry

I mean I think my reactions from this are, I mean, clearly, when we get rid of Industrial Packaging, we think this is going -- I think there is going to be a dilution effect, which is probably going to be about $0.15, right? We've got to use the cash as we get out of the Signode to basically buy back stock. Our perspective is that, can we go out and leverage up a bit more? Yes, we could do. I don't think that is our thinking at this moment in time. We're prepared to keep our options open. But we do think as we're a very strong cash generator and as our profitability continues to decline that we can fairly, rapidly close that gap anyway. So do we have any plans to rush out and sort of leverage up a bit stronger? The answer to that is no, we don't, but we're prepared to keep our options open depending upon how things go.

John G. Inch - Deutsche Bank AG, Research Division

Questions in the audience?

Unknown Analyst

Just a follow-on to that. As it pertains to your credit rating, your very high credit rating, do you think you need to maintain that? Could you execute your strategy as you say a high BBB-rated company?

David C. Parry

We're quite comfortable exactly where we are today. We don't think we need to either improve it or degrade it in any shape or form. So we're comfortable at our present location if you like.

Unknown Analyst

And could you just give a quick update on current relations with your shareholder base, relational investors or activist investors?

David C. Parry

I was wondering when that question would appear. Yes, basically, we treat relational in this at the same way we treat our other investors. They are very comfortable with where our investments, of our strategies so far and they still have their holding in the company. And they have taken no actions with regard to sort of correcting or making any comments about our strategy. But they're very comfortable with the situation as a we understand it. So I think they see continued upside with regard to our share price. So they're feeling comfortable in their position.

John G. Inch - Deutsche Bank AG, Research Division

There had been, I believe, the most recent investor conference you had presented at, you had described an outlook where you were beginning to see, I think, some green shoots with respect to demand in your portfolio and that could have been in the context of Europe or North America. What have you seen sequentially in terms of business activity?

David C. Parry

In general or something in particular?

John G. Inch - Deutsche Bank AG, Research Division

I think it was a comment, was more in general.

David C. Parry

Okay. Right. I mean, certainly...

John G. Inch - Deutsche Bank AG, Research Division

But frame it any way you want.

David C. Parry

Okay. I mean, if I just sort of time travel, what I think the overall economy is going to do. I think if the U.S. economy is probably, if anything, slightly weakened in the last month or so.

John G. Inch - Deutsche Bank AG, Research Division

You're talking April, May?

David C. Parry

April, May. I think that's probably true. We simply -- we've said that we see maybe 1% growth from the U.S. We'd be pretty consistent about that. We did drop it down a little bit from the first quarter, but we've stayed pretty consistently in that area. And I think we still feel that way. I think as far as Europe is concerned, Europe is probably minus 2, minus 3. China is probably in the 5% ballpark, right, and obviously, not much is changing. Australasia and New Zealand is another big market for us. That's probably more in the U.S. category lower sort of 1%, maybe 2%, right? Do I see this market to be changing in 2014? I think the answer to that is the U.S. might pick up a little, but it's not going to be dramatic. Europe, which may be the comment you're talking about green shoots. I think there are some signs in Europe of things [indiscernible] to stop going down. So hitting bottom so people have made those concepts. I think we're maybe getting to that point. China, I think China is going to stay in the 4%, 5% category. I don't see it accelerating back down, back up to an 8%, 10%, 15% growth rates that we saw historically. I think those days are over.

John G. Inch - Deutsche Bank AG, Research Division

How about with respect to the new business verticals? Are you -- what are -- are you seeing any sort of meaningful change on a sequential basis across your portfolio?

David C. Parry

As far as -- are you talking about innovation or just the change in...

John G. Inch - Deutsche Bank AG, Research Division

Change in demand, the top line.

David C. Parry

The top line, it varies from business to business, I think. I mean the automotive area, that's showing nice penetration. We sell, as I think a lot of you already know about, $50, $55 per ton in the U.S. It's about $40, $45 in Europe. About $15 in Asia. We see there's a lot of room for us to continue to increase penetration into those markets. So that's a good situation to be in. The food equipment side of things, seeing a little bit of lift possibly in the U.S. Europe is still struggling a little. So probably not surprising, tied to institutional investments, clearly is going to be having a hard time ahead. Welding businesses, the welding businesses have been doing well. They have come off a very tough comparable compared to Q1 2012. Those comparables certainly ease going forward into the rest of 2013, but we are also seeing in the welding side of things the oil and gas industry start to slow. And so you've got 2 competing activities going on there.

John G. Inch - Deutsche Bank AG, Research Division

Is that on a -- like what part of the channel in oil and gas are you seeing slowing?

David C. Parry

Oil and gas, basically, one of the -- oil and gas, we go into basically pipelines and petrochemical complexes. Principally, pipelines. Petrochemical complexes haven't been built to any great extent certainly in the U.S. They're starting to be a change in there. They're starting to build a few facilities. That's actually helping, but the number of pipeline activity there is slowing. And one of the barrier points that we look at is when the oil price gets to be in the $90 ballpark. If it starts below that, then the petrochemical firms stop investing. And when it's above that, they invest. And now obviously, it's not down to that level, but we definitely see some weakness on that side of things. The other side for the welding business is the heavy equipment. That's okay. It's not stellar, but it's okay. It's doing all right. The other businesses, if I take construction, which is obviously and clearly one, our construction strategy is a very clear strategy with regard to rightsizing the business. It's a business that some people said is a business that we might dispose of. That's not the case. This is a business that has high material margins. It's a business that the actual scale and structure of it is -- has very high overheads. So we need to focus on restructuring it, which is what we're doing. So you're going to see on the construction side maybe not vast growth in the overall revenues, but you should see quite a nice and basically pop, if it can be used on the phrase, in the actual margins.

John G. Inch - Deutsche Bank AG, Research Division

And shifting gears to just the management equation. So you're without a -- are you going to be without a the CFO as Ron steps down?

David C. Parry

Yes.

John G. Inch - Deutsche Bank AG, Research Division

What -- I'm assuming you're conducting an external search. That's a pretty good assumption.

David C. Parry

You don't want me doing the job.

John G. Inch - Deutsche Bank AG, Research Division

So what do you think the timing is ultimately toward naming someone? And presumably you're out, you'll be pretty quick to filter the candidates, I would think. What are your thoughts?

David C. Parry

Yes, were basically, we have conducted and are conducting the search for a candidate. We are looking at candidates both internally and externally. So we're looking at going through that process. My belief is that this will take some time. We want to get the right person that fits into our team environment and fits in with our decentralized business culture. So that's a prime focus for us. I think this is a Q3 hire. It's where I think it's probably going to end up. It might drift into Q4 and if does, that's not a problem. We have a strong financial team behind Ron. And so I think we're in reasonable shape.

John G. Inch - Deutsche Bank AG, Research Division

Are you proportionally looking in the United States or is it -- this...

David C. Parry

We are looking pretty much across the spectrum.

John G. Inch - Deutsche Bank AG, Research Division

Okay. The other question I wanted to ask was, is there a cost to enterprise initiatives, BSS, i.e, from an implementation of new IT systems or some sort of platforming that's embedded? I get that question from time to time. And if so, can you quantify it?

David C. Parry

WelI, I think there's probably several elements there to answer that question. Clearly, as you go through -- I mean, you raised IT, but let me just start off with sourcing first of all...

John G. Inch - Deutsche Bank AG, Research Division

The consultants are clearly costs so -- I'm not talking about them. I mean something that's more structural to your organization that will persist.

David C. Parry

I mean, clearly as you go through the whole sourcing structure change, you need to put sourcing professionals in place. So we have already decided and are already implementing putting sourcing leaders in each of the segments. So each Executive Vice President will have his own or her own Sourcing Director. So that's a change. Are we putting in sourcing professional to deal with certain commodities? So whether it'd be steel or whether it'd be electronics or whether it'd be resins, whether it'd be electronic telecommunications for putting those people in place as well. So obviously, that's a structural change. And also putting in the analysts that are required beneath them to be able to do that. The other thing that you'll also need to do is because our systems are very decentralized, you have to put in effectively a process to data collect because obviously, our data in each of the businesses is defined and categorized differently. And if you're to do a sourcing initiative, you've got to have a collective database. So we're putting that in -- to be in place. As you work your way through and you end up with 105 business units, clearly, you would need all the different computer systems you'd need. So definitely, you have to work your way through having not one IT system, but an IT system for each of those business units. That's a structural implication that will come through. How we quantify that? The answer to that is no, we haven't.

John G. Inch - Deutsche Bank AG, Research Division

Does that come at the beginning or toward the end of the process?

David C. Parry

That would come towards the end of the process.

John G. Inch - Deutsche Bank AG, Research Division

So in other words, you basically need some kind of a threading of IT that -- where someone like you or Scott can sit at the top of the organization and drill into performance that probably you've never seen before.

David C. Parry

Well, yes. You would be -- what you really need to do is first of all, you need to create computer systems that fit our portfolio, that will communicate to each other, but not one centralized computer system. So you would -- you'd say what we call freedom within the framework. So you can say you can have a computer system, but you're a $100 million business, but it's got to be 1 of these 4 or 5 systems. Whereas in the past, it was very much, do your own thing. So that's a change. And then obviously, you've got to build in from those systems to be able to talk, right, which is pretty simple to do once you've done the first stage to get those system to pull the data together, collect the data, spit it out.

John G. Inch - Deutsche Bank AG, Research Division

One more question. Here we are at the halfway point of 2013. Not that long ago, people were talking about a second half recovery. Do you see any sort of sign that the second half can sequentially improve versus the first half?

David C. Parry

Short answer is no. And I think it's going to be pretty flat going through the rest of 2013. I don't see any major change at all. That's why I think our strategy is so applicable. It's very much driven around self-help. It's very much driven around things that we can control ourselves. So I feel comfortable where ITW is in this environment.

John G. Inch - Deutsche Bank AG, Research Division

Terrific. Thank you very much, David.

David C. Parry

Thank you.

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