Jan 29, 2009
Executives
John Brooklier – VP of IR David Speer – Chairman and CEO Ron Kropp – CFO
Analysts
Jamie Cook – Credit Suisse Eli Lustgarten – Longbow Securities Henry Kirn – UBS Mark Koznarek – The Cleveland Research Andrew Casey – Wachovia Securities Ann Duignan – J.P. Morgan John Inch – Merrill Lynch Daniel Dowd – Bernstein Robert Wertheimer – Morgan Stanley Robert McCarthy – Robert W.
Baird Joel Tiss – Buckingham Research Shannon O’Callaghan – Barclays Capital
Operator
Good afternoon, and welcome to the ITW fourth quarter and year-end 2008 earnings release conference call. At this time, all participants are in a listen-only mode.
After the presentation, we will conduct a question-and-answer session. (Operator instructions) As a reminder, today’s call is being recorded.
If you have any objections, please disconnect at this time. I’d now turn the meeting over to Mr.
John Brooklier, Vice President of Investor Relations. Sir, you may begin.
John Brooklier
Thank you. Good afternoon, everybody, and welcome to our fourth quarter 2008 conference call.
With me today is David Speer, our CEO and Ron Kropp, our CFO. Thanks for joining us.
At this point, David will make some brief remarks about what was a very difficult fourth quarter and what we expect to be a very difficult 2009. David?
David Speer
Thank you, John. There is no question the fourth quarter provided a challenging environment for most industrial companies and ITW is certainly included.
We saw our North American and international end markets further deteriorate as the quarter progressed with accelerated declines in November and December. You may recall, those of you who were at our December 8 investor meeting in New York, we updated and lowered our fourth quarter forecast at that time and previewed our 2009 end market assumptions.
It’s now clear the macro environment has weakened even further since that meeting. Later in this call, John will provide more specific macro and end market data when he reviews our operating segments.
Looking ahead, the vital question is how will ITW respond to what we believe will be a challenging worldwide economy in 2009? You’ve seen from our 2009 forecast, we expect our total revenues to decline in a range of minus 6% to minus 12% with base revenues at a similar level for the year.
Our full year 2009 forecast indicates at the mid point, a base revenue decline of 9% and an earnings decrease of 29%. Our forecast has no expectation of any significant end market in 2009.
Though we can’t control our end markets, what we will focus on in 2009, is operating our company as efficiently and as effectively as possible while identifying and funding long term growth initiatives. Our decentralized close to the customer business units, our 80-20 business process, and our related toolbox programs, as well as our deep experienced management team will all play critical roles in the coming year positioning the company for the long term growth opportunities ahead.
Another key area strength for us is our fundamentally sound capital structure. With target debt to cap in the range of 25% to 30%, with solid credit ratings, and with strong free operating cash flows, we have the flexibility to fund capital expenditures, dividends, and acquisitions as appropriate.
You’ve may have noted that in the most recent quarter, we produced free cash flow to net income conversion rates of 218% for the fourth quarter and 123% for the full year 2008. And we strongly generated strong free cash flow in periods of economic downturns.
In summary, we anticipate an extremely challenging 2009 but we believe that given our long track record and our strong financial and management resources, we’re well positioned to address the challenges ahead. John, back to you.
John Brooklier
Thanks, David. Here’s the agenda for today’s call.
Ron will join us in just a moment to cover Q4 financial highlights. I’ll then come back to talk about operating highlights for our reporting segments.
Ron will then address our 2009 first quarter and full year earnings forecast as well as the associated assumptions. Finally, we’ll take your question.
And as always, we ask for your cooperation for the one question, one follow up policy. We are targeting the completion time of one hour for today’s call.
First, the usual housekeeping items. Please note that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including without limitations statements regarding operating performance, revenue growth, operating income, income from continuing operations, diluted income per share from continuing operations, use of free cash, end market conditions, and the company's related forecast.
Important factors that could cause actual results to differ materially from the company’s expectations are set forth in our Form 10-Q for the 2008 third quarter and our form 10-K for 2007. Finally, before we get to Ron, the telephone replay for this conference call is 203-369-0593.
No pass code is necessary. The playback number will be available through 12 midnight on February 12, 2009.
And as always, you can access our conference call PowerPoint presentation via the itw.com Web site. Please link to the Investor Relations section and look for the Events Presentation tab.
Now, let me introduce Ron Kropp, who will cover the financial highlights for the quarter.
Ron Kropp
Thanks, John. Good afternoon, everybody.
The overall results for the fourth quarter were as follows. Revenues decreased 6% through the significantly lower base revenues and unfavorable currency translation.
Operating income was down 33% and margins were lower by 450 basis points. Diluted income per share for continuing operations of $0.54 was 34% lower than last year.
But with all of our previous forecast range, $0.44 to $0.52, primarily due to a lower tax rate, which added $0.04. In spite of the significantly lower income, free operating cash flow was strong at $509 million or more than double our net income.
Now, let’s go to the details of our results. Our 5.9% revenue decrease was primarily due to three factors.
First, base revenue was down 9.2%, which was unfavorable by 840 basis points versus the third quarter. We saw a significant weakness across most of our end markets and geographies.
North American base revenues decreased 12.3%, which was significantly worse than the 2.1% decrease in the third quarter. International base revenues decreased 6.2%, which was 740 basis points lower than the third quarter.
Europe decreased 8% while Asia Pacific only decreased 1%. Secondly currency translation decreased revenues by 4.5%, which was 920 basis points lower than the third quarter currency effect.
Lastly, acquisitions added 7.8% to revenue growth, which was 90 basis points higher than third quarter 2008 acquisitions impact. Operating margins for the fourth quarter of 11.3% were lower than last year by 450 basis points.
The base business margins were lower by 250 basis points primarily due to the lower sales volume. The effective price increases versus raw material cost had a minimal impact on base margins this quarter.
In addition, the lower margins of acquired companies diluted margins by 90 basis points and higher restructuring costs reduced margins by 80 basis points. When I turn it back over to John, he’ll provide more details on the operating results as he discusses the individual segments.
In our non-operating area, interest expense was higher by $14 million as a result of overall higher debt levels in 2008 versus 2007 partially offset by lower interest rates in commercial paper. Other non operating income expense was unfavorable versus the prior year by $19 million mainly due to lower investment income.
The fourth quarter effective tax rate of 23.9% was lower than last year by 180 basis points. The full year 2008 tax rate of 27.75% was lower than the third quarter year-to-date rate of 28.5%.
For the full year, the overall results were as follows. Revenues increased 6.7% due to acquisitions and the favorable impact of currency translations.
Operating income was down 4.5% and margins were lower by 180 basis points. Diluted income per share for continuing operations of $3.04 was 1% lower than last year.
And free operating cash flow was strong at $1.9 billion or 123% of net income. Turning to the details for the full year, our 6.7% revenue increase was primarily due to three factors.
First, base revenue was down 2.5% with North America down 4.8% and international essentially flat. Second, currency translation increased revenues by 2.8% with the favorable effect of the first three quarters of the year being partially reversed in the fourth quarter.
Lastly, acquisitions added 6.5% throughout the growth. Operating margins for the year of 14.7% are lower than last year by 180 basis points.
The base business margins were lower by 90 basis points primarily due to the lower sales volume. In addition, the lower margins of acquired companies diluted margins by 70 basis points and higher restructuring costs reduced margins by 20 basis points.
On the balance sheet, total invested capital decreased $1.2 billion from the third quarter primarily due to currency translation as a result of strengthening of the US dollar versus most of our major currencies. Accounts receivable DSO was 59.4 days versus 64.7 at the end of the third quarter.
Inventory month on hand was 2.1 at the end of the quarter. For the fourth quarter, capital expenditures were $81 million appreciation with $83 million.
ROIC declined 11.2% versus 17.3% last year as a result of lower based business income and the fluid [ph] impact of acquisitions. In the financing side, our debt increased $82 million from last quarter.
Our debt to capital ratio increased at 32% from 28% last quarter primarily due to reduction of equity of $1.1 billion related to currency translation and pension adjustments. Excluding the impact of those equity adjustments, the debt to cap at year-end would have been at 29%.
Shares outstanding at 12/31 were $490 million. Note that the impact of options typically add $2 million to $3 million shares at the diluted share calculation.
Our cash position decreased $125 million in the fourth quarter as our free operating cash flow of $509 million was utilized for acquisitions of $223 million and dividends of $159 million. In addition, we spent $399 million in the quarter to repurchase 12.4 million shares under our ongoing open-ended program.
Regarding acquisitions, we acquired ten companies in the fourth quarter which have annual revenues of $154 million. For the year, we completed 50 deals with acquired revenues of more than $1.5 billion.
2008 was the third consecutive year that we transacted 50 or more acquisitions. I will now turn it back over to John who’ll provide more details on our fourth quarter results.
John Brooklier
Thank you, Ron. Before I comment on the segments, let’s share data which underlies the very troubling economic environment.
If you recall, the data we talked about in our early December investor meeting in New York City, we anticipated 2009 base revenues in a range of minus 5% to minus 10%. Clearly, the macro data and end market trends have continued to deteriorate since that time.
We are now expecting both of our 2009 total company revenues and base revenues to be in a range of minus 6% to minus 12%. Here’s the underlying data.
North America industrial production ex-technology moved from minus 6.1 in October to minus 10.2 in December 2008. The ISM index also has trimmed it down from 36.2% in November to 32.4% in December.
Notably, cap capacity utilization has dropped from 79.2% in December 2007 to 70.5% in December 2008. And both our North American auto builds down 26% in Q4 and US housing starts down 41% in Q4.
We finished the quarter in far more negative territory than we expected some eight weeks ago. Internationally, the trends have moved in a similar negative direction.
Euro-Zone industrial production moved from minus 2.2% in October 2008 to minus 6.9% in December 2008. The Euro-Zone purchasing managers index also has trimmed it down from 41.1% in October 2008 to 33.9% in December 2008.
Euro-Zone capacity utilization has also declined to 81.6% in Q4 2008. Not surprisingly, European auto builds fell 16% in Q4.
In summary, we expect many of these North American and international data points to continue to be negative in the first half of 2009. Now, refer to the next slide and review our fourth quarter reporting segment highlights beginning with Industrial Packaging segment revenues fell 9.2% in the quarter and operating income declined 50%.
Operating margins of 6.8% were 550 basis points forward in the year ago period due to 370 basis points base margin dilution and 140 basis points of dilution due to restructuring. Translation also diluted margins 30 basis points.
9.2% drop in revenues consisted of the following, 5.7% from base, 2.4% from acquisitions, and minus 5.9% from translation. The industrial packaging segment’s Q4 base revenues, as noted, decreased 5.7% after posting base revenue growth of 5.2% in Q3.
The differential decline of base revenues in due prints, which will notably fall off in North American demand for industrial packaging, especially consumable related strapping products. The North American industrial packaging businesses base revenues decline 12.3% in Q4 and international industrial packaging fell at a rate of 1.2% in the quarter.
The only standout business in the segment continue to be the worldwide insulation unit, which produced base revenue growth of 24.5% in the quarter and as noted in previous quarters, this business provides energy-related insulation solutions for worldwide customers, including those in the refinery and natural gas plant sectors. Moving to the next segment, power systems and electronics.
In the fourth quarter, segment revenues declined 9.6% and operating income fell 27.7%. Operating margins of 15.4% were 380 basis points lower than the prior year period with base margins declining 220 basis points and acquisitions diluting margins 130 basis points in the quarter.
The 9.6% decrease in revenues consisted of the following, minus 10.8% from base revenues, 3.2% from acquisitions, and minus 1.9% from translation. The power systems and electronics segment base revenues as noted fell 10.8% in the quarter, which compared unfavorably to third quarter when segment base revenues actually grew 3.1%.
The major contributor to base revenue decrease in Q4 was worldwide welding which saw base revenues decline 9%. Notably, North American welding fell 15.7% thanks largely to slowing in the construction and welding distribution end markets.
International welding fared better in the quarter, growing 9.4% overall and 18.7% in Asia Pacific. The Asia Pacific growth is still being driven by demand in China for welding consumables and equipment for specialty markets such as energy, shipbuilding, and shipping containers.
The other bit of good news in this segment, our brown power business which supplies at the gate power equipment for airplanes and commercial and military airports increased base revenues by 17.9% in the quarter. Moving towards transportation segment.
In Q4, segment revenues decreased 4.7% and operating income fell a dramatic 82.1%. Operating margins of 3.1% were 1350 basis points lower than a year ago period due to unprecedented declines in North American and European auto production as well as dilution associated with acquisitions and restructuring.
Base margins accounted for 910 basis points of dilution in the quarter. Acquisitions contributed 200 basis points of dilution while restructuring added another 170 basis points of dilution.
The 4.7% decrease in revenues consisted of the following, minus 20.3% from base revenues, 19.8% from acquisitions, and minus 4.2% from translation. The transportation segment base revenues declined 20.3% in the quarter, which was dramatically more negative than the segment base revenue decrease of 9.6% in the third quarter.
Both of our North American and international automotive businesses produced significantly lower base revenues in Q4 largely due to major cuts in auto builds. Our North American automotive base revenues declined 26.5% as North America combined Detroit three and new domestic builds fell a similar 26% in the quarter.
By category, Detroit’s rebuilds were down 28% in Q4, with GM down 23%, Ford down 29%, and Chrysler down 37%. Even our new domestic builds declined 22% in Q4.
This radically lower fourth quarter builds translates into full year 2008 builds of minus 16% for combined Detroit 3 and new domestics with Detroit three builds down 21% and with new domestic builds up – I’m sorry, builds down 8%. Internationally, the build environment was also problematic.
Our Q4 automotive base revenue decline at 21.7% was a result of a 16% drop in auto builds in the quarter and negative penetration related to customer mix. Key international OEM builds in Q4 were as follows, GM Group down 39%, Renault Group down 24%, Fiat down 21%, BMW down 18%, PSA down 15%, and Ford down 14%.
For full year, 2008 international auto production dropped 3%. Looking forward to prospects for 2009 North American and international auto builds continue to be difficult and currently we are estimating the 2009 total North American build to be somewhere in the vicinity of 10 million vehicles and that would represent a decline of 21% versus 2008.
Internationally, we’re forecasting the build to be nearly 17 million vehicles or 20% lower than the prior year. The only somewhat good news in the transportation segment was our auto after market group business’ base revenues only declined 3.6% in the quarter.
I’ll move forward to the construction product segment. In Q4, segment revenues fell 21.9% and operating income declined 51.6%.
Segment results were impacted by the further weakening of fundamentals in a wide array of North American and international construction categories. Operating margins were 530 basis points lower than the year ago period as a result of 370 basis point decline in base margins and 80 basis point decline due to translation and a 50 basis point decline due to restructuring.
The 21.9% decrease in revenues consisted of the following, minus 14.6% from base revenues, 0.4% from acquisitions, and minus 7.7% from translation. Breaking up construction segment worldwide base revenue decrease of 14.6% in Q4 that compared substantially to a substantial left negative base revenue decline of 4.4% in the third quarter.
The main drivers of our more negative results come from both North American and international end markets. In North America, construction base revenues decline 23.4% in Q4 versus the base revenue decrease of 6.2% in Q3.
In Q4, housing starts as well as commercial construction and renovation activity continued to decelerate. First, our residential construction base revenues declined 29% as housing starts fell 41% in Q4.
Second, our commercial construction base revenues were down 16% in Q4 versus a 19% decline for the Dodge commercial index calculated on the square footage basis through December 2008. Finally, our renovation base revenues declined 19% in the quarter mainly due to Big Box stores pulling down inventories to match very weak consumer demand.
Internationally, base revenues showed sequential slowing in Q4 versus Q3. Construction international base revenues declined 10.5% in Q4 versus a decrease of 3.2% in Q3.
European base revenues were down 16.9% as construction declined over much of Europe. Asia Pacific base revenues declined 1.6% in Q4 as Asia activities slowed in North America – I should say, Australia, New Zealand base revenues were essentially flat.
Moving to our next segment, food equipment. In Q4, segment revenues declined 4.1% while operating income grew an impressive 9.6%.
Operating margins of 16.2% were 200 basis points higher than the year ago period thanks to 230 basis points of margin improvement. Restructuring diluted margins 40 basis points in the quarter.
The components of the 4.1% decrease in revenues consisted of the following, 1.7% from base revenues, minus 1.9% from acquisitions, and minus 3.9% from translation. As noted earlier, food equipment’s worldwide base revenues grew 1.7% in the quarter, a reversal from Q3 when base revenues declined 1.7%.
Base revenue expansion in Q4 was driven by international operations. Food equipment Europe’s base revenues grew 3% in the quarter while food equipment Asia increased base revenues 6.4%.
In North America, total base revenues declined 70 basis points exclude institutional base revenues fell 4% in the quarter. Fundamentally, demand from institutional customers, such as casual dining restaurants to airports and universities, soften resulting in slowing equipment orders.
In better news, the North American service unit grew base revenues 3.5%, while the retail units increased base revenues 6.7% in Q4. In our polymers and fluids segment, Q4 segment revenues increased 25.3% while operating income fell 11%.
Operating margins of 11.1% were 450 basis points lower than the year ago period thanks to base margins declining 210 basis points and acquisitions diluting margins 210 basis points. The 25.3% increase in segment revenues consisted of the following, minus 7.9% from base revenues, 38.2% from acquisitions, and minus 5.3% from translation.
The polymers and fluids segment base revenues decline 7.9% in the quarter as noted. Base revenues, which were negative across all product and geographic categories in the quarter showed significant sequential slowing from Q3 when base revenues grew at a rate of 3.5%.
Most of our businesses in this segment are tied to industrial end markets including MRO repair and by-product worldwide polymers base revenues fell 7.8% and worldwide fluids declined 8% in Q4. By geography, base revenues for polymers decreased 9.1% internationally and fell 5.4% in North America.
Base revenues for fluids declined 14.7% in North America and 4.6% internationally. And finally, in our all other segment, segment revenues declined 2.3% in operating income throughout 16.5%.
Operating margins of 15.4% were 260 basis points lower than the year ago period. Base margins dropped 120 basis points in the quarter.
Acquisitions diluted margins 60 basis points and restructuring diluted margins another 60 basis points. The 2.3% decline in segment revenues consisted of the following, minus 7.5% from base revenues, 8.5% from acquisitions, and minus 3.3% from translation.
Moving to the next slide, in Q4, all of the all other segment produced the base revenue decline of 7.5% versus the decrease of 0.7% in Q3. The segment principally consists of four major reporting categories, test and measurement, consumer packaging, finishing, and industrial appliance products.
The breakup for each of these categories in Q4 were as follows, test and measurement worldwide base revenues increased 3% in Q4 largely as a result of the group’s Asian operations. In the consumer packaging area, worldwide base revenues declined 7.6% as weakening demand for graphics spoils the marking products offset growth from a Hi-Cone, Multi-Pack and Zip-Pack specialty consumer packaging businesses.
The finishing sub category of worldwide base revenues go 8.3% as falling demand for the industrial paint spray product both in North America and internationally offset growth in the Gima businesses, which provide special equipment for European and Asian customers. And finally, the industrial appliance products worldwide base revenues declined 14.5% due to slackening demand and related double-digit declines in the appliance area in particular.
With that said, I will now turn the call over to Ron, who will cover the 2009 first quarter and full year earnings forecast.
Ron Kropp
We are forecasting the full year diluted income per share from continuing operations to be within a range of $1.84 to $2.48. The low end of this range assumes a 12% decrease in total revenues and a high end of the range assumes a 6% decrease.
The mid point of the CPS range of $2.16 would be 29% lower than 2008. For the first quarter of ’09, our forecast and earnings range $0.26 to $0.42 diluted income per share from continuing operations.
The total revenue decline expected to be in a range of 11% to 17%. The midpoint of this range at $0.34 per share would be 51% lower than the first quarter of 2008.
Other assumptions included in this forecast are, exchange rates holding at current levels, acquired revenues in the range of $400 to $600 million, no share repurchases currently planned for the year, restructuring costs of $60 to $100 million, net non operating expense which includes both interest and other non operating income expense, in a range of $90 to $100 million for the year, which is favorable versus 2008 by $47 to $57 million, and a tax rate in the range of 27.75% to 28.25% for both the first quarter and the full year. I now turn it back over to John for the Q&A.
John Brooklier
We now open the call for questions. I remind you one more time, we ask for one question and one follow up per person.
Operator
(Operator instructions) Our first question comes from Jamie Cook of Credit Suisse.
Jamie Cook – Credit Suisse
Hi. Good morning.
David Speer
Jamie, good afternoon.
Jamie Cook – Credit Suisse
Oh, I’m sorry. Good afternoon.
It’s been a long day already.
David Speer
Yes, it is.
Jamie Cook – Credit Suisse
My first question, you guys gave your initial take at the NLS [ph] meeting in December, sort of bi-market, what you were forecasting in terms of industrial packaging power systems. My first question, can you give us your updated view on those markets?
And then my second follow up question, you talked about acquisition revenues for 2009. I think it was forecasted at a $460 million range.
That was a little wider than I expected. I sort of assumed you’d be more aggressive in this type of market environment, so if you could just give me your updated thought there.
David Speer
Jamie, let me answer the question on the end markets. I’ll give you three or four maybe to put flavor in it.
But certainly, what we have seen, as John pointed out in his segment highlights, is a continued deterioration in the macro data. In auto as an example, when we were together in New York in early December, we were projecting the auto build to be down to the 12% to 14% range.
It now appears that the auto build will be down globally – internationally, that is Europe and North America, in the 20% range, so significant declines since we met in December. We talked about housing at that time in North America.
We were projecting somewhere in the 700,000 to 750,000 range. If you saw the numbers from December, the December actual came at an annualized rate of under 600.
They were at 550. So we expect the housing range now to be more in the 600 perhaps 700 range.
So certainly weaker there. John noted the industrial production numbers.
We talked about industrial production. We met with data that was through October, which was minus 6%, the final number for the year.
And North America came in at minus 10%. So clearly, all of these industries have continued to show a continuing decline.
And we have certainly seen that in the numbers that we experienced in the fourth quarter you saw in our reported results and certainly don’t anticipate any significant improvement in the near term. Certainly, the first quarter is the most difficult quarter from a comparable standpoint.
And the trends that we’ve seen so far, early yet in the year, would indicate that we’re going to continue to see these kinds of declines in those key markets. Your question on acquisitions, yes.
The range is about half of what the range was as we entered 2008. And it’s really reflective of what we think is occurring in the environment at the moment, which is I think, as we noted in New York, we have seen the activity levels from a seller standpoint pull back as clearly the market has moved to a low.
And most sellers don’t want to sell at this point in the market. My suspicion is that we’ll see some improvement in this as the year unfolds.
But with what we see today, and that’s really how we strike our number for the year, by looking at our pipeline, that’s what we realistically would assume based on current activity levels. If we see a change in the market, clearly, we update those numbers quarterly and we’ll reflect that.
But based on what we see today that’s why we have a relatively small number by comparison to 2008 actual.
Jamie Cook – Credit Suisse
Thanks. I’ll go back to you.
Operator
Our next question comes from Eli Lustgarten of Longbow Securities. You may ask your question.
Eli Lustgarten – Longbow Securities
Good afternoon. Nice job in a tough environment.
One specific question on the outlook, not much in numbers, but with automotive down so far and construction down so far, and probably not recovering so quickly, have you looked at whether you have to size or restructure your operations at all to a new longer term environment? And at the same time, with all the big acquisitions that you’ve made, is there any impairment charges that have to be looked at given the change in market values and change of financial conditions that occurred.
David Speer
Eli, let me answer the restructuring question. I’ll ask Ron to answer your question on impairment.
We have been restructuring all along, and certainly the auto and construction businesses would be at the top of the list as those markets, as you know, have been in a decline now for – this will be four years. We have been trying to size our businesses along the way.
Clearly, what we saw in Q4 and the data that we now see from both of those markets, more particularly probably in auto, has changed dramatically. So yes.
In fact we are in the process of continuing to right size our businesses. The challenge at the moment is there’s not a lot of great visibility in the market.
So what we thought were reasonably good numbers 60 days ago have proven to be not even numbers that are in the range any longer in terms of the auto build. So we have – as you would note, we made significant restructuring charges in the fourth quarter of the year.
We have a range this year of 2009 of $60 million to $100 million. So we will continue to spend money in restructuring our businesses to right size them and try and strike the right balance between managing them into the current market environment.
But also recognizing that, as these markets improve, we want to be in a position to participate on the upside as well. I’ll let Ron answer the impairment question.
Ron Kropp
Regarding the impairment process, as a result, have gotten worse. But some things that we’re watching and looking at will require the test for impairment once a year.
All business we do that in the first quarter of each year. We did that in the first quarter of ’08.
But then during the year what we do is we look for events and triggers that could trigger an additional impairment test. So we did look at a handful of business in the fourth quarter.
But from an impairment view we didn’t record any impairment charges related to those. And as a reminder, we’re testing at the level of 60 different sub-segments.
And those sub-segments include both recently acquired businesses as well as old time day sales. ITW built up a lot of investment.
So even if the recent acquisitions have performed as we would have expected given the environment, that doesn’t necessarily trigger a big impairment. But we’ll look at it again for all businesses in the first quarter of ’09.
Right now, we don’t have a – not really an estimate in the forecast for impairment for ’09.
Eli Lustgarten – Longbow Securities
As a follow up, we’ve had some huge margin declines in the quarter that offers you big volumes. Can we look for to get some guidance of what margin or profitability levels could look like in the segment for 2009 maybe on a more stable basis as opposed to the sharp impact that was seen in the fourth quarter and first quarter?
Ron Kropp
Yes. The margins clearly in the fourth quarter are the results of the volume decline.
We have typically incremental margins in that 40% range. And on the down side that’s what we saw in the quarter.
I think the incremental was 42% on the base business. So looking into ’09, clearly, we continue to see the same kind of margin pressure we saw in the fourth quarter.
So the expectation is, given the forecast of base revenues, declines in the wide range. That the base margins will be down in the 200 to 300 basis point range primarily due to volume.
Eli Lustgarten – Longbow Securities
All right. Thank you.
Operator
Thank you. Our next question comes from Henry Kirn of UBS.
You may ask your question.
Henry Kirn – UBS
Hi, guys. If I could look on the positive side here what markets do you think could take a burst as we bottom out and ultimately approach the next cycle?
And what are signposts you’re looking for to see when things turn around?
David Speer
Well I think if you look at the markets here in North America, certainly, the first ones to decline is in the housing and the auto markets. Clearly, as I’ve mentioned earlier, housing has been – this will be the fourth year of decline, 2009 that will be.
And certainly we’ve seen a dramatic drop. I think this is sixth year in a row that we’ve seen a drop in the auto build.
So I think if you’re looking for early indicators of any kind of stability or bottom being reached it might be what’s going to occur when we see the housing market begin to turn, which in my view doesn’t turn until we see the foreclosure issue really get effectively addressed. And we see the value of existing homes stabilize in terms of pricing.
And clearly we aren’t there yet. The data that came out today would indicate we’re still seeing pretty dramatic drop, double-digit drop, in housing prices.
So clearly the economy is, here in North America, still largely based on the consumer. 65% to 70% of the GDP is consumer based.
And until we see the consumer be able to recover we’re not going to see improvement in those markets, which I think will be the earlier indicators before we see any general industrial recovery.
Ron Kropp
To David’s point, Henry, I would add that on the general industrial side I’ll probably look at Signode, the industrial packaging businesses. Clearly on the consumable side, as production ramps up, our consumable sales also ramp up in tandem.
Henry Kirn – UBS
Okay. And what are your OEM customers telling you about how long the shutdowns are going to last?
David Speer
What are they telling us or what is happening? Because those tend to be two different answers.
What we–
Henry Kirn – UBS
I guess the real answer is better.
David Speer
Well, as an example, we shared with you in early December that we were facing two to three week shutdowns. Many of those turned in to be five to six-week shutdowns.
So there. I think the OEMs are scrambling as well.
I think there is a distinct period here where visibility on any end market activity is really blurred. And so it’s difficult to get reliable date.
We’re having to react to data almost daily. So it’s hard to get much of a head start on this.
I think the anticipation in terms of where this ends up is when we start to see some of these inventory levels move off the car lots and we start to see car loans be able to be made again. And other triggers if you will depending on end markets.
But the OEMs are still dealing with pretty imperfect information themselves as well.
Henry Kirn – UBS
Okay. Thanks a lot.
David Speer
Thank you.
Operator
Thank you. Our next question comes from Mark Koznarek of The Cleveland Research.
Sir you may ask your question.
Mark Koznarek – The Cleveland Research
Hi. Good afternoon.
David Speer
Mark.
Ron Kropp
Mark.
Mark Koznarek – The Cleveland Research
Question on the acquired revenues this year over $1.5 billion. And am wondering if you could characterize effectively what kind of margin improvement should we expect on that slug of revenues for next year that might help offset some of this down draft in the base part of the business?
David Speer
Well, as you know, acquisitions for the first several years are actually diluted to our margins. So we would expect that would be the case as we move into next year as well.
The businesses last year, I don’t have the exact numbers, but the acquired pre-amortization margins would have been in the 8% range. And we would expect over time for those margins to march up into the 15% to 16% range.
Normally over a four to five-year period. We won’t see much lift out of margins in the first year because we have a lot of amortizations that takes place.
And we would expect – we’ll see obviously a dilution from that standpoint. So I think next year in our base plan, with the acquisitions we have planned, we have overall impact of acquisitions as diluted in our margin outlook by somewhere around 50 to 75 basis points.
Mark Koznarek – The Cleveland Research
And that would compare to what this past year?
David Speer
I have to ask Ron to answer that question.
Ron Kropp
Yes. That was 70 basis points for the full year.
David Speer
So about the same.
Mark Koznarek – The Cleveland Research
Okay. And then as a follow up could you discuss price versus cost in the quarter?
How that performed and then what are your expectations for ’09?
Ron Kropp
Yes. Overall it varies by segment but overall for the company we saw much less impact of price versus cost in the fourth quarter.
There was only about 30 basis points on negative margins. Last quarter, if you remember, it was 110 basis points.
So as we’ve said last quarter we expected to see some raw material cost going down. We saw that in some segments purely [ph] significantly.
We put price increases in place throughout the year. We’ve given some of those back but kept some of them as well.
So negative 30 basis points for the quarter. Looking at 2009, right now as we look at the numbers, it looks like it's going to have a pretty minimal impact.
Almost flat for 2009. Especially given the (inaudible) continued decline in some of the key raw materials we have.
Mark Koznarek – The Cleveland Research
By flat line do you mean that it’s going to be neutral and not a negative to margin? Okay.
Thanks.
Operator
Our next question comes from Andrew Casey of Wachovia Securities. You may ask your question.
Andrew Casey – Wachovia Securities
Thanks. Good afternoon everybody.
David Speer
Andy.
Andrew Casey – Wachovia Securities
A couple of questions. The first, guidance (inaudible) obviously pretty week the first half with some sort of bottom and then flatter second half year-over-year performance.
If that’s the correct read, is that driven by an expectation that distributor inventory liquidation ends sometime in the first half and the markets that you serve don’t do much relative to what they did in the second half of last year?
David Speer
Yes, Andy. I think clearly we would expect, as you accurately point out.
The first quarter in particular, the most difficult quarter for sure. The second quarter will be difficult but not quite as bad as we expect to see in the first quarter.
And I think a lot of that is in fact related to a couple of things. First of all to visibility.
These markets in many cases are still in a decline rate. And secondly, as you point out, there’s been a fair amount of de-stocking going on.
Certainly in any markets that are served with indirect channels through distribution. The second half of the year, obviously the comparables are also somewhat easier.
So the comparison rates you would expect them to not be as bad in the second half of the year. The first quarter clearly is the most difficult comparable.
So I would say that our view is that the de-stocking that been taking place would largely be behind us by probably sometime in the second quarter. But hard to get a read on that exactly by end market.
But I think, directionally, that’s certainly what we would expect to see.
Andrew Casey – Wachovia Securities
Okay. Thanks, David.
And then a different – if I could dig into Mark’s price question, are you seeing any competitive price pressure? And if so, which segments?
Not so much the price get back relative to the input cost but any segments where you see competitors really trying to go after share with the price.
David Speer
Not anything notable at the moment but I expect that, with the dramatic decrease in some of the commodity costs, that likely will occur. We certainly expect that as these commodity costs come down that we, like many, will be in a position that we have to share those declines with our customers.
So we factored that into our outlook as best we can at the moment. But I can’t say there’s been any particular segment or area that is notable at the moment.
But clearly, as this develops and goes forward we obviously keep a close eye on that.
Andrew Casey – Wachovia Securities
Okay. Thank you very much.
Operator
Thank you. Our next question comes from Ann Duignan of J.P.
Morgan. You may ask your question.
Ann Duignan – J.P. Morgan
Hi, guys. It’s Ann.
Just curious, following up on Andy’s question. Which particular sector might you be thinking, in the back of your mind, where you might start to see competitive pressures first?
David Speer
Well, I think that commodity prices, Anne, that have dropped the greatest are steel. So certainly steel is a primary raw material for us in our faster businesses.
Both in the automotive and construction segments. And certainly it’s a primary raw material for us in our Signode business.
So those would probably be the areas that I would expect to see, at least initially, the most pressures. Those costs have dropped the most and, obviously, we recognize that.
We’ve been through these kinds of runoffs and declines in the past. So I think we have a pretty good handle on what we need to expect and how to manage that.
But I would expect to see it there first. And in certain grades of plastic.
We’ve seen likewise some fairly dramatic declines in some grades of plastic recently as well. So I would expect – and those would cross a number of different businesses of ours.
Consumer packaging as well as automotive and other segments as well where we use plastic as a primary raw material.
Ann Duignan – J.P. Morgan
Okay. That’s helpful.
And as my follow up, back in October you guys had talked about the inability of some of your smaller customers, particularly in something like food service, to access credit. Can you talk about the health of your small customers out there in general across some of your different businesses?
Back then it was they couldn’t get financing to buy equipment but I have to believe that their financial well being is failing by the day. Can you talk a little bit across your different businesses where you think the greatest risk to the health of your customers may lie and where we might start to see some secular [ph] changes in demand?
David Speer
Well, certainly nothing has changed to the goods since October end. Things have gotten, if anything, more difficult for the small, medium-sized channel players and distributors.
Their access to capital and their capability to be able to use it effectively in their businesses is clearly been limited. So that remains a major source of concern in the purchasing decisions that they make and also on how we look at how we manage our relationships with them.
So it’s a much more active topic, which indicates to me that the liquidity issues that a lot of the original TARP funds were supposed to help address clearly haven’t played out. At least in those business segments.
In terms of areas that would be most highlighted – the best area to highlight it is to look at areas like building materials supply, auto dealers, et cetera. While we don’t sell auto dealers clearly auto dealers are having trouble getting financing for their customers.
That’s putting pressure all the way up the chain which has led to these even more dramatic declines in the auto build numbers and their stacks of inventories. From the building materials side same kind of situation.
So you’ve got the various players in the channel that don’t have an even flow or even access to liquidity, which is creating, obviously, concern. So a lot of angst around spending liquidity that’s available for those that have it.
And it’s led to, obviously, and even more dramatic decline and probably even more aggressive de-stocking than you would normally see, which I think has led to an even greater inability or greater problem in terms of visibility in the near term. This is an active topic and credit worthiness is an active topic as you would realize a lot of these customers don’t have formal credit ratings.
So it’s something we really have to pay close attention to.
Ann Duignan – J.P. Morgan
Okay. First question was just a clarification of Andy’s.
Ron Kropp
That’s (inaudible) Ann.
Ann Duignan – J.P. Morgan
Just a real quick one. Do you think you’re competitively advantaged or disadvantaged given your decentralization?
Is it easier or harder when you’ve got 800 businesses full cost out and full inventory stand? Just 30 seconds.
David Speer
I think it’s an advantage in pulling inventories down. In fact if you look at the numbers that Ron talked about in spite of the weak fourth quarter and the dramatic declines our overall dollar investment and inventory went down by $150 million in the fourth quarter.
And that includes some acquisitions that we did that came to us in the third and fourth quarter with some pretty hefty inventory levels. So our ability to manage inventory down during these kinds of downturns is pretty well developed.
When you see them pass downturns and we fully expect we’ll see it here as well. Obviously the MOH number for the fourth quarter doesn’t fully reflect that.
And that’s largely been a fact that the declines occurred dramatically in November and December. We weren’t fully prepared for that.
I would expect to see though a fairly healthy reduction in inventory levels as we move forward.
Ann Duignan – J.P. Morgan
Okay. Thank you.
Operator
Your next question comes from John Inch of Merrill Lynch. You may ask your question.
John Inch – Merrill Lynch
First question comes to sort of broader assumptions with respects to earnings per share over the course of the year particularly considering the 2000 back in a pretty substantially and you are not doing your share of purchase. So if you kind of take the mid-point of your first quarter range, $0.34, and historically looks like the first quarter has been sort of 20%-25% in a year, you multiply that by 45 times, you get basically a dollar and fifty for the year.
So what is the bid between the first quarter day to day run. First is to sort the low end of your range not even lower?
When are you expecting things to get better, basically?
David Speer
Well, certainly, sequentially things get better in terms of the base revenues as the year unfolds so the most dramatic decline arranged for the first quarter’s minus 11 to minus 17. The range of years minus 6 to minus 12 so clearly, as we progress through the year, by the time we get to the third, fourth quarter, we are talking about single digits base year and year decline so obviously we expect significantly stronger earnings as a result of those declines being less.
The currency also becomes much less at the latter part of the year, certainly on the fourth quarter and has an impact as well so the first two quarters have a significant impact on currency. So for the year, the impact on earnings for the year, for translation alone is 7%.
Most of that recurring in the first two quarters.
John Inch – Merrill Lynch
Thank you, David. I understand the premise of the comps, I think he started out with the discussion by saying that you are not anticipating any kind of recoveries so will the earnings really get better just because the comps gets better or is there something else going on?
David Speer
Certainly, the impact of our restructuring programs that we put in place begin to pay off with these numbers as well so will we spend the money now or we are spending money at the end of last year’s. Well, we begin to see some improvement on the margins as a result of that as well and we had some fairly significant price cost headwinds as you recall that occurred during this year that then put back in balance.
I mean, Ron made the comment earlier that we expect that to be flat. We had a 110 or 120 basis point on the third quarter alone this year so that’s another significant amount.
So its cost is the pay off, if you will, of the restructure that we spent and I think it is managing and in some cases we get minor of some of the acquisitions in terms of margins but it’s a lot of things but the biggest element is that the base revenue declines on a sequential basis are not as great.
John Inch – Merrill Lynch
Ok. So there’s no way you see this first quarter somehow being annualized?
I’m just trying to get pretty confident about it. The follow is that it’s cost.
I was just curious about the progress. I mean you just got 8 cents and a quarter.
I am not sure if that was operational or right down but obviously with the environment worst. Is there any kind of a risk you have to bring these properties back on to your books?
Maybe you could talk a little bit about this process and kind of what is going on there.
David Speer
Well, there is always a risk. I mean obviously if they don’t get sold they come back on to your books but we’re in the midst on running processes on several businesses as we talked about in the past and in this stage we are committed to wrangle those processes out but obviously it’s difficult to sit here and project what those processes with you.
We’re certainly not in the position to enable to talk about where any of those stand and finitely but their discontinued operations are being held for sale and that’s, in fact, the plan. We have nothing at this moment to indicate we’re doing it differently from that.
I’ll let Ron because that is specific to the charges we took during the quarter.
Ronald Kropp
So for the quarter, we discussed about a lot of three million or so. Included in there is a loss of sales of property of sale of about $60 million so after that regular operative.
We’re still proud.
John Inch – Merrill Lynch
I’m sorry, was that a write-down or was that a natural operating law?
David Speer
Oh, that was a write down, John.
John Inch – Merrill Lynch
Okay. Great.
Thanks very much.
Operator
The next question comes from Daniel Dowd, Bernstein.
Daniel Dowd – Bernstein
Good afternoon. If you end up doing, say, low end of your guidance range, in EPs for the year and let’s say you only acquire $500 million in revenue with no cherry purchases, how much cash do you anticipate having on your balance sheet by the end of 2009?
Ronald Kropp
Well, I think the better question is probably what is our debt level? Typically, the cash is the point overseas and many excess cash flow is – into paying down commercial paper.
But the free cash, typically, in normal time, runs about one to one to net income. In recessionary times, as we’ve looked at it and you’ve seen some of that this quarter, well, we tend to do better than that.
We look back in 2001 to 2003 and it goes something like – it’s in the range of 120% to 130% of net income. So the longer the range, you’re talking probably in that billion dollar range of net income, so it’ll be free cash flow more to that.
$500 million in acquisitions, $600 million of dividends; and I would say that our debt level probably stayed about where it is now.
Daniel Dowd – Bernstein
So in effect, the share repurchase shutdown is an effort just to reduce the short-term debt?
Ronald Kropp
Or keep it the same. I think the thing to remember, we started the year at 19% debt to cap.
Two years ago, it was something like 13%. And we’ve set out a target range of our debt to cap of 20% to 30%, and we’ve been using the share repurchase as well as some strong acquisition activity to – it increased now.
I mean, we had a strong acquisition this year of $1.5 billion of our revenues and we did $1.4 billion of share repurchases. So this was a catch-up year, if you will, to get us on that range.
In fact, we’re at the top of the range ever since the equity adjustment. So now, we’re in more of a maintenance mode, right?
So we will be using the share repurchase as the third resort to use the free cash flow after dividends and acquisitions. And based on the forecast in the expected acquisition levels and what we expect to pay in dividends, it looks like we wouldn’t need to do any share repurchases to stay at that high end of the range.
Clearly, if results get better and we’ll have some extra cash flow of acquisitions, then our $500 million will have some as well. So share repurchases is really used just to balance out the free cash flow versus our target leverage.
David Speer
And I would just add to that, Dan, that I think that as we look at the year, I hope that we’ll be in a position to do more acquisitions than what we’ve got in this guidance, but certainly, with the guidance we’ve provided and you certainly have looked at the low end of the range, what Ron is saying is at the low end of the range, we maintain our debt to cap. At the high end of the range, obviously, the debt to cap drops.
I would hope that the deployment of free cash would be used more for acquisitions next year, but I think we’ve got ourselves positioned properly from a share repurchase standpoint, so it didn’t make any sense for us to provide guidance, so we’re going to continue that based on the range of our forecast for 2009.
Daniel Dowd – Bernstein
Okay. That’s very helpful and I recognize that it may actually be quite difficult to sell Click Commerce and Decorative Surfaces in this environment, but if you do–
David Speer
Well, we obviously didn’t project any cash flow in here from sales because we don’t do that. So obviously, if those do close, there’ll be significant cash flow to come from those deals and we’ll evaluate as we do every quarter.
We’ll evaluate the use of those cash proceeds, so if, in fact, that happens during the year or whatever quarter it would happen, then we, in fact, would recalculate and re-project, if you will, what we would plan to using the free cash flow for. I would tell you, however, that even if had that information today, I’m not sure I’d take much of a different position than what we’re taking because I really think that the acquisition environment will come out of this pause at some time during the year, perhaps by the middle of the year.
I would expect that to be a much more proactive period for us from an acquisition’s standpoint.
Daniel Dowd – Bernstein
Okay. That’s very helpful, guys.
Operator
Thank you. Our next question comes from Robert Wertheimer of Morgan Stanley.
You may ask your question.
Robert Wertheimer – Morgan Stanley
Thank you. Good afternoon, everybody.
David Speer
Hi, Rob.
Robert Wertheimer – Morgan Stanley
My question is on the backlog you have now on acquisitions, is there any better pricing evident in that backlog? It wasn’t exactly evident in your acquisitions, so the number wasn’t that high; and I know you’re not doing that many, so that’s great.
I’m just wondering if you’ve seen better pricing on the deals that you are looking at investing on.
David Speer
Well, I would say that we re-priced a number of deals during the fourth quarter; some of which went away as a result, some didn’t. And I would say that the things in the pipeline today are definitely priced at lower EBITDA multiples than what we saw in 2008, for sure, but I think that’s also one of the reasons why there’s this pause I’m talking about.
I think sellers are just adjusting to the fact that you’re not going to be getting seven to eight times EBITDA for businesses as you were able to do last year. And I think there is some adjustment period going on in that regard.
There’s also the question of even if you had somebody who was willing to pay you that level of EBITDA, do they have the liquidity to close the deal? So I think that’s changed the acquisition landscape for the near term, but certainly, we have definitely seen the valuations that come down.
Our valuations have definitely come down as the results of most starting companies have come down. So it’s a double impact, right?
The multiples come down in terms of what the businesses are worth and their earnings, their EBITDA numbers have come down likewise.
Robert Wertheimer – Morgan Stanley
Exactly. I mean, that’s the beautiful part of the end of the business year-end.
How much of that – what’s the four-multiple and the two-multiple?
David Speer
Well, I would expect – we don’t have a lot of data for me to be giving any precise numbers, but I would expect that over time, you’d see this be a change of 1.5 to 2 times EBITDA reduction in multiples.
Robert Wertheimer – Morgan Stanley
Fantastic. And if I get a follow up, accounts payable and accrued expenses came in a bit.
Are you – why did that happen? Are your suppliers trying to use you as a source of fund?
Are you getting anything out of that or was that a choice on your part?
Ronald Kropp
Well, a couple of things. One, currency translation had a role on that.
Foreign amount had come down because of that. It was a big drop in currency during the quarter.
Secondly, there was – obviously, as the quarter went on and we got it in December and we saw things deteriorate, we didn’t buy a lot of inventory in December, so.
Robert Wertheimer – Morgan Stanley
Hello?
Operator
I’m sorry. One moment.
We’ve lost our conference leader’s [ph] line. It will be just a moment, please stay connected.
Please stand by. Your conference will resume momentarily, please stand by.
Please stand by. The conference will resume momentarily.
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The conference will resume momentarily. Please stand by.
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David Speer
Carla? Hello?
Hello?
Operator
Sir, your line is open. You may continue.
Ronald Kropp
We’re on the call now?
Operator
Yes, sir.
Ronald Kropp
Okay. As we were saying, first of all, we want to share with everybody, we did pay our phone bill here this month.
We were talking about –
David Speer
I think we were waiting for the next question.
Ronald Kropp
Okay, yes. Next question.
I think Robert Wertheimer was the last questioner. We’ll take another question.
Operator
Of course. Mr.
– yes, we do have a party waiting. Robert McCarthy of Robert W.
Baird, you may ask your question.
Robert McCarthy – Robert W. Baird
I’m not sure my question’s good enough for all these.
Ronald Kropp
You’re the one that did this, Rob McCarthy [ph]?
Robert McCarthy – Robert W. Baird
I had nothing to do with it.
Ronald Kropp
Okay. I’m sorry.
Go ahead.
Robert McCarthy – Robert W. Baird
Restructuring expenses, $60 million to $100 million. Usually, range of course has to do with the fact that you don’t know how many businesses you’ll buy and at what pace you’ll initiate programs and what you acquire, but this range looks a litter bigger than that.
It’s my observation that I’d like you to respond to, and then as you’re doing that, could you help us with how we should expect to see the year start? I mean, if $60 million is the low end, do we see $30 million or $40 million in the first quarter?
David Speer
Rob, let me answer that question. First of all, that number doesn’t include any significant restructurings we do with acquisitions.
Robert McCarthy – Robert W. Baird
Okay.
David Speer
The acquired businesses, that’s not included. These are really businesses that we’ve owned for more than a year.
Robert McCarthy – Robert W. Baird
All right.
David Speer
I would expect that we will spend in the first quarter a disproportional rate, probably somewhere in the $30 million to $40 million range in the in the first quarter.
Robert McCarthy – Robert W. Baird
Okay.
David Speer
And the high end of the range is based on the low end or the high end of the decline, if you will. So if we think things will decline more dramatically, which should be towards the minus 12% annual number, you’d see a spend close to the $100 million mark, so.
Robert McCarthy – Robert W. Baird
David, is that something that you reach a decision point on like at the end of the quarter?
David Speer
We’ll reach a decision point on as things unfold, but generally, we take a really hard look at it at the end of the quarter. But it’s really based on the individual businesses looking at their near term environment and what they think they’re managing towards and trying to get themselves positioned for that appropriately, so it’s not a perfect science and the timing is not always perfect, but it is looked at very rigorously.
We look at projects throughout the quarter, so it’s not like we wait till the end of the quarter and then ask for input. So we’ve already seen several restructuring projects come through.
I mean, we’ve seen more than several come through in January, so it’s an ongoing process.
Robert McCarthy – Robert W. Baird
Okay. Thanks.
And I wanted to follow up, there were a couple questions that talked about the idea of inventory de-stocking. I wonder if you could speak to, perhaps, one or two businesses where you saw a particularly severe effect and where that might suggest that the revenue comparison organically, base revenue growth that we saw in the fourth quarter might be an exaggerated statement of what’s really going on in the end market?
David Speer
Sure. Well, certainly, what we’ve seen in the construction channel has been dramatic in terms of de-stocking.
As those numbers have plummeted further, they’ve been exacerbated in that group as well by what’s going on with the big boxes. There has been a huge de-stocking with the big boxes.
In fact, in some of the stores, you can’t find some of our products even on the shelf at the moment. So those are clear de-stocking decisions that have been made around probably meeting year-end inventory targets or other objectives.
I don’t know.
Robert McCarthy – Robert W. Baird
Okay. Even though in that business, you’re handily beating the end-market growth comparisons?
David Speer
Correct.
Robert McCarthy – Robert W. Baird
Okay. Go on please.
David Speer
Yes, exactly. So I mean, that’s probably one I would highlight at the top of the list because we sell almost exclusively through indirect channels in the construction field, and so we see it happen there very dramatically and, generally, very quickly.
Robert McCarthy – Robert W. Baird
What about something like welding?
David Speer
Welding, there has definitely been de-stocking going on in welding in the fourth quarter. And certainly, the pullback in that environment, as John detailed in the segment numbers, we’ve seen definitely a pullback in inventory.
Most of the equipment we sell in North America moves through a distribution channel and those channel players are under the same pressure as everybody else from a working capital standpoint. And they have seen things drop at their customer level, and so now, you begin to see now a drop at the customer level, but then now are running off stock levels.
Robert McCarthy – Robert W. Baird
Can you give us an idea of how much of your business in industrial packaging and welding goes through independent distribution?
David Speer
In welding, it would be 90 plus percent; industrial packaging, probably north of 80.
Robert McCarthy – Robert W. Baird
Okay. Thanks a lot, David.
Very helpful.
David Speer
You’re welcome.
Operator
Thank you. Our next question comes from Joel Tiss of Buckingham Research.
Joel Tiss – Buckingham Research
Hey guys, how’s it going?
David Speer
Hey, Joel. Thanks for hanging out with us here.
Joel Tiss – Buckingham Research
No problem. I know you have to answer everybody’s questions.
David Speer
We’ll be on here until 3 o’clock, right?
Joel Tiss – Buckingham Research
Yeah, exactly. Just one clarification.
It seems to me that if in January, all the customers went away, I mean, there’s not going to be that – - that will not help the second half or that will not help the quarterly numbers be a little bit better as we move through the year, isn’t that fair?
David Speer
That’s fair. Understand also Joel, that in some markets, the customer hasn’t come back in the market yet so there are still markets are sold on sidelines.
I would put the other business in that category. If you look at the shut downs that occurred in December, and remember December for us and international is the first month of the New Year, you look at the continued qualities that recurred in January in the auto business in Europe.
Some of the plants have been shut for only two months.
Joel Tiss – Buckingham Research
And that’s my only question. Is the inventory getting cleaner just because they are not producing anything?
Is the inventory going down or they’re not selling anything even though they are not producing, the inventories are not really getting adjusted?
David Speer
Well, if you look at North America, I believe the last time as we saw on sales showed that despite the dramatic decline in production, that there was any more dramatic decline in sales. So I don’t think we’ve seen any significant inventory reduction at least through the end of the year.
Based on what we are seeing so far, in terms of build rates, for the first quarter, I expect that we would do some graph and inventories with the auto manufacturers as a result of the way this billed data that we are seeing but I can’t tell you that precisely because obviously it has to have but one fold but certainly the sale of the echoes is the big variable there and there’s still pressure here in North America, particularly obviously in the U.S. for people who would like to get car loans and that’s been a big issue.
Joel Tiss – Buckingham Research
How about another end mark as to construction of some of the areas? Are you seeing any pull through?
David Speer
I think in the case of construction we are seeing many bare shells. We’ve pitching people’s handwriting and about.
So I think it is probably any optic inactivity will be seen much quicker there as a result. I think the de-stocking in most of our construction businesses has been underweight for some time.
The one variable, I would say, is the renovation category where the big boxes are the predominant supply chain and they have made some dramatic reductions in inventory that are not reflective of net sales or end sales levels.
Joel Tiss – Buckingham Research
Okay. That’s helpful.
Thank you.
Operator
Our next question comes from the line of Shannon O’Callaghan of Barclays Capital.
Shannon O’Callaghan – Barclays Capital
Good afternoon, guys. So you mentioned things got tougher since the meeting, can you give a little more color or base revenue numbers on November-December as what you’ve seen in January?
Ronald Kropp
Well, the month of December base went to minus 14%, which was a little more negative than we have in phase credits and we had a meeting after all that number. For January, we don’t have a fixed amount of number or do we certainly expect you to be somewhere in that vicinity.
David Speer
The early returns we had for January, again as John said, we don’t have all the data in but we’d certainly indicate the same kind of relative, the same kind of sales levels that we saw in December. And certainly would be quite conscious as we’ve talked about and reduce our hours and number of customers and end markets we would expect to see probably similar mid-team kind of reduction to embrace more numbers in January,
Shannon O’Callaghan – Barclays Capital
Okay, so 4Q was down 34%, we’ve got a 1Q guide down 40% to 63%, right? Is this one source and one queue as you already saw in four pages of three bad months of down mid team.
Ronald Kropp
In Q4 we’ve had the benefit of a relatively strong October and then things started to really roll over in November-December. So we are looking at three pretty negative months in terms of January, February, March with some pretty steep comps on a year over year basis.
David Speer
Trend ratio is also going to get much worse on the first quarter.
Shannon O’Callaghan – Barclays Capital
Just a last quick one from me, I’m restructuring, you gave the comps number. What kind of savings are you expecting from what you do in 2009 and what you already did in 2008?
What do you expect to hit in 2009?
David Speer
The general savings that we see, the payback if you only restructuring somewhere in the 9 to 12 months range all in so the restructure that we will expect to see will be relatively be the same range as the dollars that we’re spending within a 12-month period. We spent $63 million in 2008 and obviously the range we are given here is $60 million to a $100 million so you can kind of do the math on that.
Operator
Thank you, our final question comes from John Inch of Merrill Lynch.
John Inch of Merrill Lynch
It’s all right. I’m back in the queue.
So the shareholder equity, I mean, that was a fairly massive differential decline, I guess the bulk of that was foreign currency, is there any sort of gap rating implication with any of this and if any of this dog tail back and again, it’s your decision, not to buy back as much stocks in the earlier part of this year or dramatically curtail the shareholder purchase?
David Speer
In January, the equity reduction of $1.1 billion, about $700 million of that was currently, and the other 400 million or so was related to pension adjustments, not just adjusting the pension plans for investment reductions and liability changes. So the way look at our leverage is just a camp, does not really affect our equity and so without those adjustments will be 29% instead of 32%.
We’ve always been in discussion with the rating agencies on ratings. Right now, we’re at AA minus, but both and we’re on watch with both.
So could it have an impact? Maybe and probably.
The bigger things that they’re probably looking at are just what its impact of the reduced results in 2009 and the effect of how much cash we could generate, et cetera. So there could be an impact, but right now, we’re at AA minus.
We’re not managing it to a credit rating, John, but I think if you look at the way that Ron described it, 29% without these impacts is really the way I would look at it, which would have been the high end of our range, anyway. So I think the cautiousness in how we are presenting acquisitions is based on the market environment.
Nothing, other than that. If the market environment were better, I would be very comfortable providing a higher range; and, therefore, implying a higher debt to cap as a result, but I think we’re really telegraphing here that the acquisition world is a bit cautious at the moment.
A little bit hard to predict. And I think, secondly, we’re at the high end of the range that we had set the – we wanted to be at and we want use any of the leverage above that.
John Inch – Merrill Lynch
Okay. So nothing to do with, for instance, liquidity issues or the fact that a lot of your cash is sitting overseas and you can’t use it for share repurchase or anything like that?
David Speer
No, not at all.
John Inch – Merrill Lynch
And then just lastly, I mean, food equipment and Asian welding are the stars of the portfolio. How are you thinking about those businesses and their resiliencies when going through this?
And perhaps, I’m a little more concerned about Asian welding, right? Just given the shift building trans-globally and stuff like that, but maybe, you could still talk to both of them and why they’re doing so much and if you think they can prevail.
Ronald Kropp
Certainly, Asian welding, those are bigger projects, longer term; they don’t stop quickly. And their infrastructure projects, certainly, the energy projects that we’re talking about are infrastructure projects that are well under way and are not going to stop, I mean, pipelines and processing plants.
So I think they have a fairly good runway still in front of them. I think the food equipment, I think it’s been a question of timing.
I think we will see some slowing in the food equipment, there’s no question. We have done much, much better than the market in that regard and some of it’s due to the way we positioned ourselves in some of the markets; some new product introductions and some good work we’ve done in recent acquisitions, particularly in the international side.
But I do expect we’ll see some negative trends in the food equipment businesses as we approach the first half of the year. Certainly, their end markets are under pressure and I expect we’ll see that reflected in the service numbers – excuse me, in the equipment numbers.
As John pointed out in his segment commentary, our service numbers actually went up, which is what we would expect to see as equipment sales are going to pressure. People will be in a position where the equipment they have will need more service.
So it’s not a full offset, but at least it’s a partial offset.
John Inch – Merrill Lynch
And what’s the net to service to equipment again, David?
David Speer
It’s about two-thirds, one-third equipment to service.
John Inch – Merrill Lynch
Okay, perfect. Thanks very much.
John Brooklier
Okay. Well, thanks for bearing with us during the call for this expanded ITW call.
And we apologize for the seven-minute gap. And we will be talking to you next quarter.
Thanks.
Operator
That conclude today’s conference, you may disconnect at this time.