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Illinois Tool Works, Inc. (NYSE:ITW)

Q4 FY07 Earnings Call

January 30, 2008, 2.00 PM

Executives

John L. Brooklier - VP, IR

David B. Speer - Chairman and CEO

Ronald D. Kropp - CFO

Analysts

Robert Lagaipa - Oppenheimer & Co.

Deane Dray - Goldman Sachs

John Inch - Merrill Lynch

James Edelman - Highland Capital

Joel G. Tiss - Lehman Brothers

Robert Wertheimer - Morgan Stanley

Daniel Dowd - Bernstein Research

Robert McCarthy - Robert W. Baird & Co., Inc.

Ann Duignan - Bear Stearns

Mark Koznarek - Cleveland Research

Jamie Cook - Credit Suisse

Andrew Casey - Wachovia Capital Markets Llc

Operator

Welcome to the ITW Fourth Quarter 2007 and Year-End Earnings Release Conference Call. All lines will be on a listen-only mode. [Operator Instructions] Today's call is being recorded and if you have any objections you may disconnect at this time.

I would now like to turn meeting over to Mr. John Brooklier, Vice President of Investor Relations. Sir you may begin.

John L. Brooklier - Vice President, Investor Relations

Thank you, Kathera. Good afternoon everyone and welcome to ITW's fourth quarter 2007 conference call. As noted, I'm John Brooklier, ITW's Investor Relations Officer. And with me today is David Speer, our CEO, and Ron Kropp, our CFO. Thanks for joining us today.

At this point, David will make some general comments about the fourth quarter and the full year.

David B. Speer - Chairman and Chief Executive Officer

Thank you, John. I'm pleased to announce that based on a variety of financial, operating and management achievements, the 2007 fourth quarter and full year results translated into a strong report card for us.

Let me share some highlights. Our fourth quarter operating revenues of $4.2 billion, grew a very healthy 19%, thanks in large part to our ability to find and close value-adding acquisitions to our portfolio of businesses.

In the fourth quarter, we acquired 15 companies around the world. Notably for the full year 2007, we closed 52 transactions and added approximately $1 billion to our top line. In classic ITW style, we paid less than one time revenues for these acquisitions.

While base revenues increased a total of 2.5% in the fourth quarter, our international units grew base revenues at 4.6%. This helped to offset softness we continue to see in a variety of North American markets. For the full year, our revenues totaled $16.2 billion representing a 17% growth over 2006.

Operating income grew an impressive 14% in the quarter and increased 10% for the full year. Diluted income per share from continuing operations was $0.87 a share, increased an impressive 19% in the fourth quarter. For the full year diluted income per share from continue operations was $3.28, an 11% increase over 2006.

Free cash totaled a robust $694 million for the quarter, and $2.1 billion for the year. While we used much of this free cash to make numerous acquisitions, we also redeployed cash to help repurchase 32.4 million shares. That represents $1.8 billion worth of share repurchases for 2007.

By the way at the end of the year, our debt to cap was approximately 20%. We also took steps in 2007 to divest businesses that we believe did not fit ITW's long-term growth and margin profile. As a result, we have reclassified five businesses which collectively represent $256 million of operating revenues as discontinued operations. Including gains on sales, they represent $0.08 per share worth of earnings on a full year basis.

Look for us to continue to review our businesses to ensure they fit long-term growth and margin expectations.

Finally, we have added to the depth of an already strong senior management team in 2007, by adding two new Executive Vice Presidents. Jane Warner and Juan Valls were named Executive Vice Presidents in the second half of the year. And they collectively bring many years of valuable operating experience to their new assignments.

They also represent first at ITW, Jane, as our first woman EVP and Juan as our first European-based Executive Vice President, operating out of Barcelona, Spain. Together these collective achievements made 2007 a year we can be proud of and also demonstrate the strength of the increased diversified nature of our business. We believe this diversification will continue to serve us well as we face some challenging end-market conditions in 2008.

Now let me turn the call back over to John.

John L. Brooklier - Vice President, Investor Relations

Thank you, David. Here is the agenda for today's call. Ron will join us in just a few moments to review our fourth quarter financial performance and other fourth quarter events. I will then update you on our four segments and associated end-markets. Ron will then address our 2008 full year and first quarter earnings forecast and associated assumption. Finally, David, Ron and I will take your questions. As always we ask for your cooperation as to the one question, one follow-up question policy. We are targeting a completion time of one hour for today's call.

First, a few compulsory items, please note that this call and the accompanying presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitations statements regarding end-market conditions, earnings growth, operating income, net operating expense, acquisitions, use of free cash and the company's related forecasts. These statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated. Important factors that could cause actual results to differ materially from the company's expectations are set forth in ITW's Form 10-Q for the 2007 third quarter.

Finally, the telephone replay for this conference call is 203-369-3229. No pass code is necessary. The playback number will be available through 12 Midnight on February 13. You can also access our fourth quarter conference call PowerPoint presentation via the itw.com website. Once you access the investor section, just look for the events tag.

Now, let me introduce Ron Kropp who will cover financial information for the quarter.

Ronald D. Kropp - Chief Financial Officer

Thank you, John. Good afternoon everybody. Before I begin discussing the results of the fourth quarter, I want to point out that David previously mentioned we have reclassified as discontinued operations in certain businesses. Therefore the income statements for 2006 and the first three quarters of 2007 had been restated to reclassify the results of discontinuing operations including the gains on sales. There is a separate line on the bottom of the income statement. This restated information was previously released on January 8 in a Form 8-K. All P&L information presented on this call reflects continuing operations only unless otherwise noted.

Now the highlights for the fourth quarter. Revenues grew 19% and operating income was up 14% versus last year. Operating margins of 15.7% were lower by 60 basis points, mainly due to the lower margins of acquired companies.

Diluted income from continuing operations per share of $0.87 was 90% higher. The operating cash flow was strong at $694 million and return on invested capital was 18.3%, was higher than last year by 90 basis points.

Now let's go to the details of the operating results. Our 18.9% revenue growth was primarily due to three factors. First, acquisitions added 10.8% to revenue growth which was 110 basis points lower than the third quarter acquisition effect. Secondly, base business grew... revenue grew 2.5%. This growth rate was 20 basis points higher than the third quarter of 2007.

Internationally, base business revenues increased 4.6% which was 70 basis points lower than the third quarter. Our international growth has slowed a bit from the 8 plus percent level we saw in the first half. We continue to see stellar performance in most of the company's end markets in Europe and Asia Pacific region.

North American base revenues increased 0.8% which was favorable by 60 points versus the third quarter. North American businesses continue to see the effect of slowing industrial production and declines in residential construction.

Thirdly, currency translation increased revenues by 6.1% which was 240 basis points higher than the third quarter currency effect.

And more to the story in the previous quarters of '07, our overall revenue growth was a result of strong base business growth internationally, the impact of acquisition and favorable currency translation.

Operating margins for the fourth quarter of 15.7% were lower than last year by 60 basis points primarily due to acquisitions and a typically lower margin, which reduced overall margins by 110 basis points. Base businesses improved margins 30 basis points which partially offset the negative acquisition effect.

I'll turn it back over to John. He will provide more detail on the operating results as he discusses the individual segments.

For the full year revenues grew 17%, operating income was up 10%. Operating margins of 16.2% were lower than last year by 110 basis points. Diluted income from continuing operations per share of $3.28 was 11% higher. And free operating cash flow of $2.1 billion was a 114% of net income.

The full year revenue growth of 17.2% was primarily due to the same three factors as the fourth quarter. Acquisitions contributed 11.3%, base business revenue grew 1.8% and translation added 4.1%.

Operating. margins for the full year were lower by 110 basis points, primarily due to acquisitions which decreased overall margins by 150 basis points. Base business margins improved by 40 basis points.

In a non-operating area, other income was lower in the fourth quarter than the prior year by $16 million, primarily due to lower investment income of $10 million. Fourth quarter effective tax rate of 26.7% was lower than the fourth quarter '06 rate of 27.3%. This lower than expected tax rate resulted into $0.03 per share benefit in the fourth quarter versus our previous forecast.

Full year tax rate was 29.25% versus last year's rate of 29.7%. Income from discontinued operations was lower than last year by $22 million, primarily due to a gain on the sale of a roofing fastener business in the fourth quarter of 2006.

Turning to the balance sheet, total invested capital increased $364 million from the third quarter, primarily due to favorable currency translation and acquisitions, partially offset by lower working capital for the base businesses.

Cost receivables increased mainly due to translation and acquisitions. However, DSO decreased 62.8 days to 61.8 days. Inventories were up slightly as month in hand was flat at 1.8 months, even with inventory increases due to translation and acquisitions. For the fourth quarter, capital expenditures and depreciation were both $99 million.

On the financing side, our debt increased $625 million from last quarter, primarily due to the issuance of euro bond of €750 million on October 1st, partially offset by lower U.S. commercial paper balances.

Our debt to capital ratio increased from 15% to 20% during the quarter. Our cash position increased $225 million in the fourth quarter as our free operating cash flow of $694 million and net borrowings of $592 million, we utilized for acquisitions of $193 million, dividends of $152 million, and share repurchases of $799 million.

For the quarter we repurchased 14.4 million shares under our ongoing open ended program. For the full year, we spent $1.8 billion to repurchase 32 million shares. Our fourth quarter return on invested capital of 18.3% was higher than last year by 90 basis points. Lower working capital for the base businesses and a lower tax rate more than offset with negative effect of acquisitions. For the full year ROIC was 18%.

Regarding acquisitions, we acquired 15 companies in the fourth quarter which had annual revenues of $165 million. For the full year we acquired 52 businesses with annualized revenues of approximately $1 billion. In the fourth quarter, we made a change to how our operations were internally reported to top management. Our 825 business units have now been grouped into 56 operating segments.

These operating segments generally line up with our group presidents, who are one level below the EVPs. Group President function has gradually evolved over the years to help manage our decentralized operation, as the company has grown. As a result of this internal reporting change, our external reporting segments have also changed. The 56 operating segments have been aggregated into 8 reporting segments which I'll describe on the next slide.

This change is effective for the fourth quarter of 2007. The segment operating results for all periods of 2007, 2006 and 2005 will be restated for this new segment structure for the 2007 Form 10-K, which is expected to be filed near the end of February.

This next slide shows the revenues for the new segments for the last two years. Note that the results for each segment would be presented on a worldwide basis. The segments are as follows. Industrial packaging segment includes our strapping, stretch films, protective packaging and insulation businesses.

Power systems and electronic segment includes our welding, PC board fabrication, ground power, a kind of component packaging and electronic component businesses. Transportation segment is made up of our components of fastener businesses that serve the automotive, heavy truck and marine industries as well as the automotive aftermarket business units.

Construction product segment includes the tool and fastener businesses and the trucks product businesses. Food equipment segment includes businesses that make commercial food equipment for food, institutional restaurants and retail operations as well as businesses that provide service for that equipment.

Decorative services segment includes laminate and solid surface businesses which is sold into the world class brand and other brands names around the world as well as the laminate flooring business.

Polymers and fluid segment is made up of business groups which make a variety of pieces here [ph] on lubrication and cutting fluids and janitorial and sanitation materials for a variety of end markets. The all other segment includes remaining businesses which are not individually significant enough to be reported separately.

As I previously mentioned the full operating results for these new segments will be released in late February in the 2007 10-K. However, for informational purposes John will now provide more details on our fourth quarter operating results under the old segment structure.

John L. Brooklier - Vice President, Investor Relations

Thank you, Ron. Let me just take a few minutes to comment on international and U.S. economic data that underlies slowing market activity especially in the U.S. So the indices have dipped somewhat, the news continues to be better internationally.

EuroZone industrial production grew 2.9% in November versus 4.0% in August and the EuroZone Purchasing Managers Index was at 52.6% in December '07 versus 53.2% in September '07. We have however continued to see weakening macro data for North America.

U.S. industrial production, ex-technology with at top at 0.27% in December '07 versus 0.7% in September. As important the ISM purchasing managers index dropped to 47.7% in December '07 from 52% in September '07.

Now let's review our four manufacturing segments. Starting with North American Engineered Products, revenues increased 2.7% and operating income grew 3.6% in the fourth quarter. That's the first time segment operating income growth was positive in 2008. In fact, operating margins of 15.5% were 20 basis points higher than the year ago period thanks to a base margin contribution of 30 basis points. That represents a base margin improvement of 90 basis point compared to the third quarter.

Looking at segment results, 2.7 increase... 2.7% increase in top-line consisted of the following. And there's 1.8% for base revenues, plus 3.6% from acquisitions plus 0.8% from translation, plus 0.1% from other.

Moving to the next slide, the fourth quarter represented the best quarterly base revenue performance from our construction businesses in 2007. Total construction base revenues declined 4% in Q4, having decreased 5% for both Q3 and Q2 and 11% in Q1. Specifically base revenues for ITW construction consisting of tools, fasteners and truss products declined 10% in Q4 versus minus 8 in Q3.

By channel, our new housing base revenues decreased 16% in Q4 which improved modestly from the 19% decline in Q3. Our Q4 housing base revenues performed 8 points better than the housing start decrease of 24% in the quarter. And HB's most recent data indicates that in December '07 housing starts were slightly over 1 million, a 38% decrease from the year ago period.

From an ITW perspective, we still anticipate housing starts for full year '08 to be approximately in the range of 1 million to 1.1 million units. In HB's January 24 forecast has 2008 full year housing starts at 1.066 million.

Our performance in other construction categories was mixed. For Q4 our renovation businesses declined 8% due to slower activities in box stores such has Home Depot and Lowe's.

Our commercial construction businesses, however, grew base revenues 4% in the quarter mainly as a result of contributions from our truss business units. Now Wilsonart business base revenues grew 3%, marking the fourth quarter as Wilsonart's best top like performance of the year. Improved base laminate sales, driven largely by premium high definition products accounted for most of the base revenue increase.

Moving to the next slide; thanks to penetration gains, our automotive base revenues were flat in the quarter even as Detroit 3 auto production fell 3% in Q4. That compares unfavorably to Detroit 3 builds, plus 1% in Q3... Detroit 3 builds were for Q4 were as follow: GM down 7, 4 plus 3 and Chrysler minus 3. For the full year '07 Detroit 3 builds were GM down 8, Ford down 7 and Chrysler was flat.

As expected new domestic builds grew 8% in Q4 and increased 6% for the full year. Inventories showed modest improvement in the quarter. At December 31 Detroit 3 inventories were at 68 days on hand versus 70 days at September 30th. Specifically GM was at 73 days, Ford was at 70 days and Chrysler was at 59 days.

New domestic inventories were at a relatively healthy 53 days at December 31 versus 48 days at September 30. Our latest CSM external forecast data now indicates that Detroit 3 builds will decline 9% and new domestics will increase 3% for full year 2008. That's a combined decline of 5% for 2008 and that is more negative than the range of minus 2 to minus 3 we gave you in New York City on November 30th.

In our industrial products category of businesses, base revenues were flat in Q4. That's a slight improvement from our Q3 when base revenues were at minus 1%. Key growth and unit performance in Q4 included performance polymers growing 3%, Minigrip/ZipPak increasing 5% and fluid products growing 7%.

On the down side industrial plastics declined 6% in the quarter mainly due to weaker demand from the appliance and electronic sectors.

Moving to the next sector, or I should say the next segment. International Engineered Products, in the fourth quarter segment revenues increased 35.8% and operating income grew 21.4%. Operating margins of 14.8% were 170 basis points lower than year-ago period due to the diluted impact of acquisitions.

Taking a closer look at the top line, the 35.8% increase in revenues consisted of the following: plus 6.6% from base revenues plus 16.2% from acquisitions, minus 0.4% from divestitures, plus 13.3% from translation and plus 0.1% from other.

Similar to past quarters, this segment in Q4 produced across the board revenue growth in all business categories. Total construction base revenues grew 7% in Q4 versus 8% growth in Q3. By geography, Q4 base revenues were as follows: European Construction grew 4%, Asia-Pacific increased 13% and Wilsonart International grew 3%.

Europe was aided by demand for commercial construction products to a wide variety of countries including France, Germany and a number of Nordic countries. Asia-Pacific benefited from strong performance from retail and truss units in Australia and Wilsonart's growth was largely driven by strong performance from Resopal, its German based business unit.

Automotive base revenues increased a very healthy 8% in Q4, having been up similar 8% in Q3. Top-line growth was assisted by both penetration and a 6% increase in light vehicle production. In Europe, key build in Q4 included the following: Fiat at plus 14%, BMW at 13.1%, GM Group at 11.2%, Daimler at 10.1%, Ford Group at 3.2% and PSA Group at 1.5%.

The remaining part of the segment is made of our industrial base units. These units in aggregate generated a base revenue growth of 5% in Q4. By base business group, Q4 base revenues were as follows: fluid products at plus 11%, performance polymers of 7% and industrial plastics declined 3%.

Let's move to the North American Specialty Systems segment. For the fourth quarter our segment revenues grew to 8.2% and operating income increased 6.7%. Operating margins of 16.8% were 30 basis points lower than a year ago due to the dilutive impact of acquisitions. In fact base margins improved 20 basis points in the quarter.

Focusing on the top line, the 8.2% growth in revenues consisted of the following components: 2.9% from base revenues, 4.5% from acquisitions and 0.8% from translation.

The two standout performers in terms of base revenue performance during the quarter were food equipment and welding. Food equipment's base revenues grew 6% in Q4 versus an increase of plus 9% in Q3. For the full year food equipment grew 6%. In Q4 food equipment benefited from strong institutional casual dining demand for its refrigeration and cooking products and related service businesses,

Welding's base revenues grew 5% in Q4, even with some very difficult comparisons from a year ago and ongoing weakness in the mix of industrial end-markets. That compares to 7% growth in Q3.

For the full year, welding's base revenues were up 5%. The weakness in the segment continues to be the Signode industrial packaging business which saw base revenues decline 2% in Q4 versus a decrease of 6% in Q3. For the full year base revenues fell 5%. Again weaker demand for end of life packaging applications in lumber, brick and block and primary metals continues to impact revenues.

Finally, International Specialty Systems, for the fourth quarter segment revenues increased 34.9% and operating income grew 32.3%. Operating margins of 13.8% were 20 basis points lower from a year ago due to acquisitions. In fact, base margins increased 120 basis points from a year ago period.

Looking at top line, the 34.9% growth in revenues consisted of the following: 2.5% from base, 21.2% from acquisitions, 11.7% from translation and divestitures were negative 40 basis points and other was negative 10 basis points.

So more of the North America, food equipment and welding were the key contributors to top line growth in this segment. Food equipment's base revenues grew 10% in Q4 with contributions hailing from a variety of countries especially Germany and France. Food equipment's base revenues increased 10% for the full year. That compares to growth of 14% in Q3.

Welding's base revenues increased 12% in Q4, thanks to strong demand for consumables and equipment in Asia, particularly China. By comparison, welding's base revenues increased 6% in Q3 and for the full year, base revenues grew an impressive 13%.

On the downside, industrial packing Europe declined 5%, industrial packaging Asia decreased 4% in Q4. For Q3 both categories were flat and for the full year both categories were up 3%.

Now, let me turn it back over to Ron who'll talk about the '08 forecasts.

Ronald D. Kropp - Chief Financial Officer

Thanks John. We're forecasting first quarter 2008 diluted income from continuing operations to be within a range of $0.72 to $0.78 per share. Low end of this range assumes 8% growth of total revenues and higher end of the range assumes 11% total revenue growth. Midpoint of the EPS range of $0.75 per share would be 10% higher than the prior year.

For the full year 2008, our forecasted earnings range is $3.47 to $3.61 per share. The full year total revenue growth is expected to be in the range of 6% to 10%. Midpoint of this earnings range of $3.54 would be 8% higher than 2007.

Other assumptions included in this forecast are exchange rate holding at current levels, acquired revenues in the range of $800 million to $1.2 billion, share repurchases for the year of $800 million to $1.0 billion, estimated impairment of goodwill and intangibles stood $6 million in the first quarter. Net non-operating expense, which includes interest expense and other non-operating income in a range of $116 million to $125 million for the year, which is unfavorable versus 2007 by $70 million to $80 million. We had a tax rate between 28.75 and 29.25 for the full year.

I'll now turn back over to John for the Q&A.

John L. Brooklier - Vice President, Investor Relations

Thank you, Ron. Now we'll open the call to your questions.

Question And Answer

Operator

Thank you sir. [Operator Instructions]. And the first question is from Mr. Lagaipa of Oppenheimer.

Robert Lagaipa - Oppenheimer & Co.

Hi, good afternoon.

John L. Brooklier - Vice President, Investor Relations

Hi Bob.

Robert Lagaipa - Oppenheimer & Co.

Couple of questions. I guess one, you have moved away from given your actual base sales or core growth forecast to total revenue. I guess my first question is just asking you, why did you decide to move away from base sales? And two, what do you think base sales are going to be for the first quarter and for the full year?

David B. Speer - Chairman and Chief Executive Officer

Well let me answer that Rob. We, in looking at our new segment reporting, have decided that in the data we are going to provide across these eight segments, so look at these businesses globally. And as such provide data in terms of total revenue growth. So while we will still reference based revenue growth really what we are looking at primarily across these segments is that... our full year full revenue growth including acquisitions.

I think across eight segments you will agree that, that data is obviously the most meaningful data as we look at these new groups of businesses. So while base is still a number that will track, it's really not the primary metric in how we look at revenue growth.

Robert Lagaipa - Oppenheimer & Co.

Okay. So what are you expecting base to be then? I mean if you are still tracking at... what's that component of your forecast for the first quarter and the full year?

David B. Speer - Chairman and Chief Executive Officer

I would expect for the first quarter that we will be looking at base revenues that are somewhat flat. And for the year probably base revenue growth somewhere in the 2% range.

Robert Lagaipa - Oppenheimer & Co.

Terrific. And second question if I could. Obviously we've had a couple of years now of acquisitions, it's put pressure on the operating margins of course. Now that you are a couple of years since the 80/20, of course you are going to continue with the acquisitions, especially in this type of an environment. But should we expect for 2008 or first quarter and 2008, are you capable of actually growing the margins year-over-year?

David B. Speer - Chairman and Chief Executive Officer

Yes, we are and we certainly would see that in the existing acquisitions. As you know, the first year of the acquisitions, we have the heavy step-ups in amortizations that occur that would dilute the margins on a post-amortization basis. We look at the pre-tax margins and the growth in those margins on an operating basis, and they have performed... collectively as a group, the acquisitions in '07 have performed in line with our expectations. And those that we completed in '06 are actually in that same category.

So we are seeing the kind of progress you would expect to see with a large amount of acquisitions that we did in the fourth quarter of '06. You will start to see the margin improvements as the amortization on those are largely behind us now. So in the first quarter of '08 and then forward you will see... begin to see that reflected. But as was pointed out in, I think Ron's comments, we expect the margin impact to be diluted by acquisitions, obviously in the first several years. It's really not until year 3 or 4 where we really start to see the significant change in operating margins. But I can tell you that for the first year of the acquisitions as we've looked at them this year we're right in line with what our expectations are.

Robert Lagaipa - Oppenheimer & Co.

Terrific. Thanks very much.

Operator

Your next question is from Deane Dray of Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you, good afternoon. David, I would be interested in hearing an update on your views on commercial construction for 2008. You saw the Fed step in this afternoon and give us another 50 basis points in referencing, tightening credit conditions on some businesses. What's your expectation for the businesses that ITW touches in the U.S. and international for commercial construction?

David B. Speer - Chairman and Chief Executive Officer

Well, as we told you in New York in December, our expectation for new awards for 2008 was going to be down, we thought on a square foot basis somewhere in the 5% range. I have seen nothing at that would indicate that, that would change at least our current outlook. So I still see it as a market that's going to contract and obviously there are a number of categories in commercial constructions. So the bulk of them we see contracting, there will be a couple that will probably show some positive numbers. The final numbers from Dodge for 2007 show a contraction of about 5.5%. So actually the biggest negative part of 2007 was actually in the beginning of the year but they are still tracking at negative numbers overall. In Europe, we saw a positive growth in the Europe in the market, so in 2007, on commercial construction in the 4% range and our view in 2008 is the same as what we shared with you in December which is about 3% growth in commercial numbers in Europe.

Deane Dray - Goldman Sachs

Great and then just a question on, with regard to the emphasis on divestitures and the way you're looking at your businesses today, are you applying any new standards in how you're evaluating the companies whether there is the right bid whether there is growth, the synergies, the returns and so forth? It sounds like you're giving these businesses a more critical look than you had in the past.

David B. Speer - Chairman and Chief Executive Officer

Well, I think from a financial metric standpoint, the standards are no different. I think, what perhaps is a bit different, Deane is that we have a number of businesses in some of these portfolios that you would have seen we've divested in the last year and a half. They were businesses that were adequate performers but frankly didn't fit the growth profile what we were looking for going forward. And in some cases may have been businesses that individually were interesting businesses but didn't fit collectively within our group and certainly not with our long term growth strategies.

So perhaps that's a bit of a change in our new ones and how we're looking at it. But I'd say the financial metrics, again if I look at the businesses we divested in the last year and these five businesses that have been put in discontinued operations, I'd say two of them were divested because of performance related... underperforming what our expectations would be. The other three would be a variety of sort of end-market sort of issues, businesses that came to us as a result of acquisitions that were portion of an acquisition that didn't really fit the core strategy. And in two cases, businesses that end-market conditions over the last four or five years changed to the point where we didn't see them being the kinds of businesses going forward that they'd been in the past.

Deane Dray - Goldman Sachs

Great. Thank you.

Operator

Next question is from Steven Nissan [ph] of Mindflow Capital Investment.

Unidentified Analyst

Yes, a couple of things. Congratulations on a solid quarter. Dave, you always seem to have come up with great results. Couple of things regarding the operational improvement initiatives, what can you elaborate? Can you give us some color on what you're doing regarding lean manufacturing TPM Six Sigma and how do you expect those benefits to impact the bottom line?

David B. Speer - Chairman and Chief Executive Officer

Well, our process is as you might know is what we refer to it as 80/20. And our operational programs from a lean standpoint revolve around our institution or our capabilities of implementing 80/20 across our business portfolio. It is a continuous process, so it's not something that stops. We see the greatest impact in generally newer acquired businesses and clearly that's where we drive the bulk of our improvement in margins. As a reference point last year, our average acquisition came to us with just over 7% pretax operating margins. It's our expectation that, that group of businesses would be performing somewhere in the 15% to 16% range in the next 4 to 5 years.

So the bulk of that probably, 80 plus percent of that improvement is going to come from our application of 80/20 inside those businesses and in really improving their supply chain, their manufacturing metrics and the focus on customers and products that are going to drive profitable growth. That would be likewise similar to what goes on inside our existing operations. And certainly as our businesses look at different sized market opportunities as markets expand and contract they likewise look at their own business base and adjust accordingly as well. But 80/20 is really what drives our operational improvements.

Unidentified Analyst

Okay. And follow up to that question, whether for mainly, one metric that you guys are going to be using to manage in the manufacturing process and make sure you're doing the right job, in terms of like OEE or RONA and also for the remainder of 2008, what systems and solutions do you plan to put in place the CEO of Illinois Tool Works to accelerate your great continuous improve initiatives? But you've definitely won the battle in the industry.

David B. Speer - Chairman and Chief Executive Officer

Well we use a number of different metrics obviously on our operating businesses. But if you look at it from an investment standpoint it's return on investment metric. And obviously the working capital areas that we pay particular attention to our operating units which are the short term assets that they have a great deal of impact on receivables inventory, are generally reflective of how efficient their supply chain operations are and how efficient they are from a service standpoint with their customers. So those are the metrics that we look at. We have a lot of businesses as Ron pointed out, our overall month on hand, 1.8 months gives us about 6.3 turns a year. We have a lot of businesses that operate with more than 12 turns a year in the inventories. So we look at those as short term operating metrics and return on investment obviously is the important metric at the operating units. And we use that across our 825 or so business units.

Unidentified Analyst

And the second part of that question was what systems?

John L. Brooklier - Vice President, Investor Relations

We have to move on, thanks. Next question.

Operator

Your next question is from Mark Koznarek of Cleveland Research Company.

John L. Brooklier - Vice President, Investor Relations

Mark?

Operator

Mr. Koznarek, your line is open

John L. Brooklier - Vice President, Investor Relations

I think it's call snap in Cleveland. Could we go to the next question?

Operator

: Certainly. Jamie Cook of Credit Suisse.

Operator

: Mr. Cook?

John L. Brooklier - Vice President, Investor Relations

Jamie?

Operator

All right Mr. John Inch of Merrill Lynch.

John Inch - Merrill Lynch

Thank you, good afternoon.

John L. Brooklier - Vice President, Investor Relations

John, you made it.

John Inch - Merrill Lynch

Yes I did. Hey, I just wanted to go back just briefly to the base business issue. David, when you became CEO, one of your key initiatives was to move the company's historical average base business, kind of the five to six or at least higher than the historical four. This kind of implies I don't want to misconstrue a bit, sort of implies that you may be moving away from that strategic initiatives. Could you talked about and comparably what sort of prompted this?

David B. Speer - Chairman and Chief Executive Officer

No we are not moving away from that initiative at all John. Obviously if you're referring to how we are reporting revenues as we looked at again these new eight segments that we are talking about, we wanted to reported those on a global basis because that's really the way those... the way we are operating those businesses, and the way we look at the data. And the most meaningful metric from a revenue standpoint, is total revenue growth but clearly underlying that is the compilation of acquisitions as well as base revenue growth. And no, we still are looking at 5% to 6% as our target long term for base revenue growth. And those are the targets that we will be measuring inside those of group of businesses.

John L. Brooklier - Vice President, Investor Relations

John, keep in mind that we will report base revenues on a quarterly basis. We will throw up all the numbers for you but I think it's our view that there has been sort of an overly myopic view of base revenues that people want to dissect almost on a daily basis.

John Inch - Merrill Lynch

No, I understand. You just... you're basically saying you just don't want that to be the short term focus of the street. I think that's what you're trying to say

David B. Speer - Chairman and Chief Executive Officer

Frankly John, it's not the way we develop our plans and report our plans. So we don't develop our plans looking only at base and we don't report them internally looking only at base. So it really is... this is much more a reflective of the way we actually operate the businesses.

John Inch - Merrill Lynch

The original kind of segmentation if I am not mistaken had kind of parses between equipment versus consumables. And I guess kind of got bored over time, I mean if you were to look at consumables board, are they sort of equally spread or is there a... are some of these segments going to be more equipment versus consumable oriented?

Ronald D. Kropp - Chief Financial Officer

I think if you look at it going down the list industrial packaging, clearly there is a big consumer involvement [ph] there. The power systems has the welding consumables. And so the other equipment businesses for instance food equipment, there's not really consumable but there is an aftermarket service element, so look at the bigger one is that we are in specialty systems in the past.

David B. Speer - Chairman and Chief Executive Officer

And we'll certainly be at a position when we look at those segments going forward John to talk more directly about equipment and consumable inside of each of those segments. That's one of the benefits I think that this segmentation will help us with. The large equipment group as you would know are concentrated in those three categories that Ron just mentioned the industrial packaging group, the power electronics area which can enhance welding and then certainly food equipment.

John Inch - Merrill Lynch

And where does the Click Commerce in those businesses go?

Ronald D. Kropp - Chief Financial Officer

They will be in the other --

David B. Speer - Chairman and Chief Executive Officer

They will be in the other category.

John Inch - Merrill Lynch

Just lastly, your raw material outlook is part of a guidance, I mean steel I guess debatably could be moving a little bit higher. How are you guys thinking about raw materials and the metals specifically and maybe what's the sensitivity as part of your outlook?

David B. Speer - Chairman and Chief Executive Officer

Well I think, our plans are structured with a particular point in time look at raw material cost with the idea that any change from that if it's upward, clearly we are going to have to price recovery plans. So we will have to institute price increases. So that's generally the way we approach raw material or input costs going into the planned cycle.

To answer your question about metals, we definitely have seen a rise in metal prices. Some of our businesses already had seen that telegraphed in the fourth quarter. So some of that was included in their plans, others have had recent announcements of cost increases on steel. So we'll be looking to our recover costs on some of the steel going forward as well. But we definitely have seen inflationary pressure on steel particularly in the last 60 to 90 days.

John Inch - Merrill Lynch

Thank you.

Ronald D. Kropp - Chief Financial Officer

To reiterate David's point in our margin, when we look at margins for '08 we're forecasting basically a flat impact of pricing and plus raw materials in the margin area.

Operator

Next question from Jim Edelman of Highland Capital.

James Edelman - Highland Capital

Hello. Can you comment on discontinued operations in '08? Do you expect earnings from those discontinued operations and if so, can you tell us about how much?

Ronald D. Kropp - Chief Financial Officer

Well, the only earnings we would have in 2008 from those would be the food businesses that have not yet been sold. The other three have already been sold in either 2007 or 2006. And while there will be... have some results, it's probably not significant, the most significant portion of it would probably be when they actually get sold. There may be a gain that we are not at this point trying to forecast what that might be.

James Edelman - Highland Capital

Okay. Thank you.

Operator

Your next question is from Joel Tiss of Lehman.

Joel G. Tiss - Lehman Brothers

Good afternoon. I have just one clarification. Are you going to be giving us operating profits by the new segments?

Ronald D. Kropp - Chief Financial Officer

Yes, when we release the 10-K for 2007 in late February and we'll be presenting these eights segments basically in the same format as we've done our prior segments. So, showing the revenues and operating income, operating margin and the various components clubbed between acquisition, translation etcetera... the revenues.

Joel G. Tiss - Lehman Brothers

Okay. And then in 2008, do you expect to spend more than your free cash flow again in the combination of share repurchase and acquisitions?

Ronald D. Kropp - Chief Financial Officer

Yes. I think if you look at it, we probably would have an estimate of free cash flow for '08 of about in the $2 billion range which is a little bit higher than one-time net income. And if you look at kind of the three, the three big areas that we spend our free cash flow on, our acquisition forecast, the midpoint is $1 billion. Share recall is $900 million and dividend is probably in the $550 million $600 million range. So, we would over spend our free cash flow a bit which we need to do to stay in target. Debt to cap range of 20% to 25%. So, we are in lower end of that range now. If we spend as a bottom line, it will be a little bit more flowed into that 20% to 25% range and which shouldn't be above it.

Joel G. Tiss - Lehman Brothers

Okay. And then last one, can you just talk a little bit, maybe, David about are you seeing any signs of second half economic rebound or what would be the factors that would cause you to revaluate your economy?

David B. Speer - Chairman and Chief Executive Officer

Are you telling about the second half of '07 or '08?

Joel G. Tiss - Lehman Brothers

Yes, exactly. I was still waiting for the other one.

David B. Speer - Chairman and Chief Executive Officer

Well, I think if you look at the way our plan has structured, Joe, I mean, obviously the second half seems like a long way of the way at the moment. But if you look at the way our plan is structured, we would expect to see in our businesses a better growth in the second half of the year particularly, here in North America. But I will tell you, it's primarily based on easier comps, not necessarily more robust market activity. I think, the impact of the change in rate cuts is going to take some time to play through. We will see what happens. But I think what we have seen, as John referenced to earlier in the ISM data in the industrial production data here in North America we're obviously still seeing those markets contracting. The ISM data at the end of December was under 50 and the industrial production number is almost zero now. So, that's clearly in line with what we've been seeing. So I expect the first half of the year to be in North America, in particular, flat and in some end-markets probably actually down and I would expect the second half to show improvement.

Joel G. Tiss - Lehman Brothers

Thank you.

Operator

The next question is with Mr. Robert Wertheimer of Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Hi. Good afternoon everybody. I guess my question first on acquisitions. Are you looking to be more aggressive into the downturn or no? And can discuss your pipeline backlog and what are those... any at least potential for larger chunky acquisitions that could make the number bigger?

Ronald D. Kropp - Chief Financial Officer

Well as it relates to the acquisition range we've established, it's largely the same range we established going into '07. And in fact it's largely in line with what we actually were able to achieve in '07. So I would say the... our view of the market in terms of what we see today is not largely different. Our pipeline is roughly the same, a little over $1 billion in the pipeline.

I think in terms of what I would expect to see based on what's happened with private equity and leverage, I would expect to see some improvement although I have to say that so far we haven't seen any significant change. I think that's probably based on the fact that anybody that is selling larger size assets in particular is probably taking a serious look as to where they want to put anything on the market at the moment. So, I think there has actually been somewhat of a low in terms of larger transactions. I would expect though going forward, that we're going to be... have going to have the opportunity to look at perhaps somewhat larger deals with more favorable valuations than what we've seen in the past. But that is not necessarily represented in our pipeline. I think there is perhaps only one deal in our pipeline at the moment that approaches $200 million in size. So we haven't seen it yet.

Robert Wertheimer - Morgan Stanley

That's helpful. Thank you. And if I can just ask you a quick one, was there any change in internal operating structure along with your reporting structure? Or is it strictly reporting, and any philosophical change there?

Ronald D. Kropp - Chief Financial Officer

Well there were some changes made during 2007 that in the reporting structure as we added two Executive Vice Presidents. And really at that point as we began to look at the businesses and the structures when we really made the decision that realigning our segments and the operating groups under this 56 group presidents is what we really spent the fourth quarter looking at and making that decision.

Robert Wertheimer - Morgan Stanley

I didn't mean to ignore that. I was thinking more though on the.. just the business unit level of the business unit managers relating to each other differently now that they are in different silos.

David B. Speer - Chairman and Chief Executive Officer

No.

Robert Wertheimer - Morgan Stanley

Okay. Thank you.

Operator

The next question is from Daniel Dowd of Bernstein... Bernstein, your line is open.

Daniel Dowd - Bernstein Research

Hi. let me ask you follow up on the internal operating segment change. Let me just be clear right, you have gone to 56 operating segments, and you have 835 business units. Part of your operating model has always been in addition to the acquisitions, and addition 80/20 has been enormous proximity to the end customer. Are you centralizing the business more today operationally than you were a year ago? Should we read back into this change or not?

David B. Speer - Chairman and Chief Executive Officer

No. not at all. No it's not, the group President level which is the 56 groups that John and Ron referenced earlier. That level has been in existence and it has been growing over the last 4 or 5 years. Really this segment reporting these eight segments we have talked about is really a realignment of the way we are looking at the businesses internally and the way those 56 group presidents operate. But the 825 business units and the decentralization we use in running those individual businesses is exactly the same as it was in the past. So the focus at the business unit level hasn't changed at all.

And in sort of answer to the previous question, it was... that was asked as well, we didn't realign the group presidents and their operating units. So there really the group President level and the units they have responsibility for, are largely intact the way they were about 2007, so no change in the focus in terms of decentralization and really no move to centralize anything. You shouldn't read any of that into this.

Daniel Dowd - Bernstein Research

So I might understand that, so in this new segment that's reporting industrial packaging, there is no one inside ITW who actually has a P&L called industrial packaging. there is no executive who has responsibility for that.

David B. Speer - Chairman and Chief Executive Officer

Oh no, there is an executive who have responsibility for that, yes.

Daniel Dowd - Bernstein Research

Okay so the EVPs are aligned against the way in which you're reporting this?

David B. Speer - Chairman and Chief Executive Officer

No, in some cases the segment may in total report to an EVP but in other cases the segment may be representative of more than one EVPs group of businesses.

Daniel Dowd - Bernstein Research

Okay, all right.

John L. Brooklier - Vice President, Investor Relations

The way the accounting rule work on this is, it starts with how is the data get reported up to top management. And so historically we're reporting basically end of business level of top management, now we have 825 business units. And we have a this group President layer that we have added over the years. And at the end of the day we've looked and said the right place for top management to really look at how the businesses are doing, it's the group President level. And therefore that's what we have for 56. It allows you to aggregate the 56 based on how similarly are the some [indiscernible] naturally like industrial packaging together under EVP, other ones come from different EVPs.

Daniel Dowd - Bernstein Research

That's very helpful and one last thing. Are your acquisitions roughly... evenly your acquisition pipeline and your thinking about how you're going to acquire roughly evenly distributed across these segments? Or are there segments that are really going to be the focus of acquisitions?

David B. Speer - Chairman and Chief Executive Officer

Well, as you would look Dan, not much change going forward at least to the pipeline. If you look at what we did in 2007, we did virtually no acquisitions or very small acquisitions in auto and construction as an example. Bulk of the acquisitions were coming from other areas, and as you might remember about 75% of the acquired dollars in 2007 were in international markets.

So that's largely representative of what I see in the pipeline at the moment as well. So it's not that we aren't doing acquisitions in construction and auto. We just haven't seen the kinds of opportunities that are attractive in those two areas. So polymers and fluids was a very active area for acquisition as was the powered electronics area and the food equipment area in 2007.

Daniel Dowd - Bernstein Research

Alright, thank you very much.

Operator

The next question is from Tom Lamb of Woodhouse Research [ph].

Unidentified Analyst

Yes, good afternoon gentlemen. One moment please. Hi, it's Fli Louis [ph]. My question relates to the R&D line, which is a very large relative to revenues and up quite a bit both for the quarter and for the year. What goes into that line?

John L. Brooklier - Vice President, Investor Relations

You are talking about the line on the income statement is really SG&A, selling administrative and R&D altogether...

Unidentified Analyst

Oh, I see, okay.

John L. Brooklier - Vice President, Investor Relations

And it's so up... it's up year-over-year primarily due to acquisition. As we acquire companies, we bring on their SG&A. And as percentage of revenue slightly unfavorable year-on-year primarily due to acquisition having higher overhead typically when they start with ITW.

Unidentified Analyst

I see, okay, I guess you're surely doing a lot of research. Thanks very much.

Operator

The next question is from Robert McCarthy of R. W. Baird.

Robert McCarthy - Robert W. Baird & Co., Inc.

Good afternoon guys.

David B. Speer - Chairman and Chief Executive Officer

Hi. Rob.

Ronald D. Kropp - Chief Financial Officer

Hi. Rob.

Robert McCarthy - Robert W. Baird & Co., Inc.

Can you give us your forecast for capital spending and depreciation in 2008?

Ronald D. Kropp - Chief Financial Officer

Yes, for depreciation --

Unidentified Analyst

Capital spending will be what, Ron? In excess of 350?

Ronald D. Kropp - Chief Financial Officer

Yes, CapEx is about 430 to 440. Depreciation about 370.

Unidentified Analyst

Depreciation and amortization?

Ronald D. Kropp - Chief Financial Officer

Just depreciation.

Unidentified Analyst

Okay. And really two questions about, I guess, revenues what we are talking about. One is as part of your change in reporting format as we get into next year, are you going to be at a position yet where you can start to report on the contribution from new product development that you have been working on aggregating?

David B. Speer - Chairman and Chief Executive Officer

Not on a global, no.

Unidentified Analyst

What does that mean, David? You are going to start to be able to talk about it, maybe in some businesses.

David B. Speer - Chairman and Chief Executive Officer

Measurement in all of the business units. Even within some of these groups to be able to aggregate it and have one corporate measure that's the same.

Unidentified Analyst

I see. Okay. And my other question goes to the organic or base revenue growth performance in specialty systems international where you saw what, basically flat third quarter in industrial packaging go to negative numbers. Not so much Europe but I think everybody is pretty satisfied that things will slow down there. This business is a leading indicator but that gives me some concern about Asia. Should we read a negative comp in that business as a leading indicator of weakening conditions there? Or is there something unusual in the comparison that's really ITW specific?

David B. Speer - Chairman and Chief Executive Officer

No, you shouldn't read anything into there. It really is specific to... the delay on the startup of a business unit, actually two businesses in China and also some restructuring that went on in another. So it was anomaly. It's a relatively modest number at the moment in terms of the Asian content but it will become much more significantly going forward but no, you shouldn't read anything into that.

Ronald D. Kropp - Chief Financial Officer

Rob, across the company Asia growth is about 8% in the quarter.

Unidentified Analyst

And for the full year?

Ronald D. Kropp - Chief Financial Officer

I am not sure. I don't know what that is?

Unidentified Analyst

Okay. If you come up with it, tell us later. Thank you.

Operator

The next question is from Ann Duignan of Bear Stearns.

Ann Duignan - Bear Stearns

Hi guys. Good afternoon. My first question would be to David. David back in November you had expected organic growth going into '08 to be somewhere 2.5% to 3%, roughly 2%. What's changed incrementally? I know some of it may be the discontinued operations that came out, so you got partitioned herein [ph] and sales of businesses. But you noted that North America automotive has gotten worse. Has anything else deteriorated?

David B. Speer - Chairman and Chief Executive Officer

Well, yes. Since November, Ann certainly the housing market, I mean we took our numbers down in actually as we headed into to our meetings in December in housing. We had been at $1.2 million to $1.3 million in projected starts for '08. And we moved that down to 1 to 1.1. The other one would be auto. And frankly the industrial production numbers now in North America are clearly much clearer to us, and that is flat and in some end markets the first half of the year probably actually negative. And I think you've seen that reflected now in the industrial production and ISM numbers. So those would have been the significant changes. I think, where we are in Europe is about where we thought we would be, which is back to more historical kind of growth and GDP ranges in Europe but still positive growth. And really nothing has changed materially in Asia. So it's really North America.

Ann Duignan - Bear Stearns

Okay. So automotive... whereas housing, I think, you had already talked about being very weak. And then industrial production may be a little bit weaker today than you might have expected a month and a half ago. is that...

David B. Speer - Chairman and Chief Executive Officer

Yes. But actually the auto build has come down twice since November. It came down rather significantly in December. The numbers we shared with and it came down again in January as particularly the Detroit 3 cut their builds even further. So I think when we were with you in December, we were talking about an auto build that was for the year that Detroit 3 were going to be down in the 6% range. Now it's down 9.

John L. Brooklier - Vice President, Investor Relations

David, I would also add that the performance out of our industrial plastics area with compliance-related products reached down fairly significantly from where we thought it would be in November. So Ann we're seeing that mostly on the North American side. We're starting to see some additional weakness on the international side.

Ann Duignan - Bear Stearns

Okay, that's good color. Thank you. And just as a follow up. I just wanted to make sure I understand your '08 guidance because I think between you and 1 communicating, I was just wondering, John, I had messed it up. I think what you're saying now is that your earnings from continuing operations is the same as your GAAP earnings for '08?

John L. Brooklier - Vice President, Investor Relations

I'm not sure if I understand that.

Ann Duignan - Bear Stearns

Your midpoint for full year income per share from continuing ops is 354?

John L. Brooklier - Vice President, Investor Relations

Correct.

Ann Duignan - Bear Stearns

And GAAP will be the same, is that what you are saying?

John L. Brooklier - Vice President, Investor Relations

Well, we are not really giving guidance on the continuing ops. It shouldn't be of any significance. I mean, the biggest... like I mentioned earlier, the biggest will be [indiscernible] businesses, there could be a gain that has some impact, but at this point our guidance is really focused on income from continuing operations, which is a GAAP measurement.

Ann Duignan - Bear Stearns

Okay, I was just surprised that it was so far from consensus given the positive impact of lower tax rate and lower share count. So I will get back in line and take

my questions offline with you. Thanks

Operator

Next question is from Mark Koznarek of Cleveland Research.

David B. Speer - Chairman and Chief Executive Officer

Are you there Mark?

Mark Koznarek - Cleveland Research

Hi, guys, can you hear at this point?

David B. Speer - Chairman and Chief Executive Officer

We can hear you now.

Mark Koznarek - Cleveland Research

Okay, thanks. Just I have kind of a conceptual question about the earnings growth for next year having to do with the dilution from acquisition because if we look at this year, we just came off a year where you had roughly 2% organic growth and posted 11% earnings growth, and next year the mid-point on about the same organic growth on the top line is 8%, and we've got, it looks like, about 3 percentage points of growth from the last era [ph] of your investments. So you would say that it's a pretty reasonable estimate on the face of it, but one thing that strikes me is that in... back in '06 you did this huge slug of acquisitions, $1.7 billion, and we had a big increase in acquisition dilution this year. Shouldn't that be cresting and going back towards more normal levels because now you're in the second and even latter part of the year you'll be in the third year of ownership of some of these '06 deals. So it strikes me that margins should be improving a bit more than your guidance range and I know I have kind of stepped you through a lot of numbers, but I'm wondering if you can kind of conceptually help me with that... those thoughts.

Ronald D. Kropp - Chief Financial Officer

So, let's start with the midpoint on 8% on earnings growth, right? On the operating margin side, we're expecting a little bit lower margins, but not as significant as we saw in 2007 and 2006. We are seeing some improvement some improvement in the face margin, very little effect from price cost, as I had mentioned earlier. I think we are seeing some of the benefits of the year two and three from of some these acquisitions. The acquisition dilution on margins, which was double-digits for most of 2007 and 2006, we expect to be a lot less, may be half of that in the five to six... 50 or 60 basis points range. So while we are seeing some dilution in margins, not as big as we have seen. Now, when you go down the rest of the income statements, one thing to consider here is that as we disclose in our assumptions, we had some negative comparables related to non-operating.

So we've grouped our other income, which includes the investment income from the past, as well as interest expense together, it looked that all in [ph] and we are seeing that that could be down year-on-year by about $75 million. $50 million of that is interest. So the way we are viewing that interest, that's really interest on leveraging up the balance sheet up this higher level primarily to repurchase shares, but also to do acquisitions. So we have kind of looked at that increase in interest and the lower share count together and say that together is adding about $0.11 to $0.12 for the year. It's above 3.5% of the 8, it is from shares and interest. But what that also means in the non-operating area, we are losing about $0.04 for the year in other things, primarily investment income would continue to be a drag in that $20 million to $30 million range versus what it was in 2007.

So, looking at the total 8%, the midpoint, you have base in the 2% to 3% range, acquisitions in the 1% to 2%, a little bit from translation, some negative in the non-operating area and some favorable impact from shares and interest.

Mark Koznarek - Cleveland Research

Okay, that's helpful. I am still not sure it totally adds up, it seems like there... is there any kind of mix dynamics that's going on where you expect certain parts of the business to contribute more of the growth than other more profitable pieces? Is there any elements like that in there?

Ronald D. Kropp - Chief Financial Officer

Well, similar to '07, international, which will be stronger than North America. So there is a bit of a mix issue because our international margins aren't quite as high as North America. So there is some of that, but clearly not as much as it was since last year.

Mark Koznarek - Cleveland Research

Okay, alright, that's helpful. Thank you

Operator

The next question is from Jamie Cook of Credit Suisse

Jamie Cook - Credit Suisse

Hi, can you hear me?

David B. Speer - Chairman and Chief Executive Officer

Yes, hi Jamie

Jamie Cook - Credit Suisse

Hey guys. Most of my questions have been answered, two quick follow ups; one, I guess David, when you think about inventory levels, not things that you are selling direct that are going through distribution, any areas where you think you might need to... that they might need to cut back a little or are you pretty comfortable there? So I guess if you could start there first?

David B. Speer - Chairman and Chief Executive Officer

No, overall I think our businesses have done a reasonably good job of adjusting their inventories. I mean, we have seen the big changes that we had to deal with probably here in North America where it largely related to what was going on in housing and most of those adjustment occurred during the first half of the year. So even though the market has continued to trend downward, I think our businesses run pretty close to those trend lines and adjust accordingly.

I think the biggest opportunity for us in inventory is with the newer acquisitions and that's usually the case. So I would expect that in 2008 that we are going to see the opportunity as we do with our acquisitions to make significant progress in reducing inventories there. I don't know what the overall MOH number would have been with the acquired businesses in 2007, but it certainly would have been well above our 1.8 average MOH. So I think most of the opportunity, Jamie, will come from newly acquired businesses.

Jamie Cook - Credit Suisse

And then just secondly last question, the ISM numbers that came out in December, I guess, surprised everyone. Did you guys see that... when you think about the month of December, was it much weaker than sort of October, November and at the end of January, any commentary you can give us there yet?

David B. Speer - Chairman and Chief Executive Officer

Well, we've been... I think, we've been saying for the last four months or so that we saw the industrial number, the industrial activity actually weakening and I wasn't using the ISM number when I was looking at that, I was looking at the actual activity levels in our businesses. So I don't want to say we're a precursor to the ISM, but I think we certainly have seen this softening in the industrial markets here ahead of those indices, that's for sure. I have not seen any strengthening and I think that in some of the end markets as we would have expected we've seen some continued slowing. So, as I think I pointed out earlier, I think the industrial markets here in North America, I see the first half of the year some of them being flat and probably some of those end segments actually being down. But I think the ISM data is probably accurately reflecting what we've been seeing going on from last three or four months.

Jamie, if you look at our North American Engineered Products in December, it was the weakest month of the quarter for us.

Jamie Cook - Credit Suisse

Alright, thank you I appreciate the color.

Operator

And the final question is from Andy Casey of Wachovia.

David B. Speer - Chairman and Chief Executive Officer

Hey Andy.

Andrew Casey - Wachovia Capital Markets Llc

Good afternoon guys, I got in.

David B. Speer - Chairman and Chief Executive Officer

We can even hear you too.

Andrew Casey - Wachovia Capital Markets Llc

Yes, good. First question on the non volume margin impacts in the two North American businesses in the quarter, is that totally related to the input cost inflation?

Ronald D. Kropp - Chief Financial Officer

Let's talk about them separately. For Engineered Products North America, the non-volume is favorable by 80 basis points. The input costs and the pricing is flat. So most of the benefit of that is coming from cost controls and primarily the benefit of some prior restructurings we have done in a bunch of different business units. Also, we had some favorable mix issues, for instance, in our Wilsonart business we're selling more high-definition laminates that has margins. And especially, systems [ph] North American side, we are down 50 basis points. Again, price cost is flat and there we have some inefficiencies and some other miscellaneous issues, nothing of any significance, inventory adjustments in one place and some other issues in another place. Also we have the mix issues there where we have some stronger revenue growth in some lower margin type businesses.

Andrew Casey - Wachovia Capital Markets Llc

Okay. I guess a follow-up on price costs flat comments in both. I think earlier in the call you referred to recapturing pricing. Was that international or are you going after margin in North America.

Ronald D. Kropp - Chief Financial Officer

Well, I think it's worldwide. I mean, I think we have seen this over the last few years and have become much quicker to react to changes in input costs. So, not only are we looking to recover the dollars of cost increases, but also trying to establish our margins as well, and we have been able to that, because even though it was flat in the quarter, we did have some cost increases that we were able to recover.

Andrew Casey - Wachovia Capital Markets Llc

Okay. And then the last one and maybe it's get back to the question Jamie was just asking on the inventory. Did you see any disruption in distributor orders related to the New Mexican tax law?

David B. Speer - Chairman and Chief Executive Officer

Boy, Andy, I can't tell you that I have heard that come up from any of our executives as an issue. So, I would have to say that nothing material. I certainly haven't heard anything. Ron, I don't know whether you have heard anything, but I certainly did not.

Ronald D. Kropp - Chief Financial Officer

No.

Andrew Casey - Wachovia Capital Markets Llc

Okay, thank you very much.

Ronald D. Kropp - Chief Financial Officer

Okay.

Operator

And there are no further questions, sir.

John L. Brooklier - Vice President, Investor Relations

Thank you very much. Thanks for joining us today and we look forward to talking to you again.

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