史丹利百得 (SWK) 2003 Q1 法說會逐字稿

Good afternoon. My name is Toshiba, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Stanley Works first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key, the number 2 on your telephone keypad. Thank you. Mr. Gould you may begin your teleconference.

Good afternoon. Thank you very much Toshiba. Thank you all for joining us this afternoon. With me today are Jim Loree, our Executive Vice President and Chief Financial Officer and Don Allen, our VP and corporate controller. I'd like to call your attention to the first quarter earnings release we issued this morning, if you need to reference it, it’s been posted to our website, stanleyworks.com.

The conference is being recorded for replay, it is expected to be available to anybody who wants to listen at 4 p.m. today through the end of the day Tuesday, May third. If you would like to listen to the replay, jot down the following number, 800-642-1687 and the conference code is 78324. After Saturday replay will be available only through our website, stanleyworks.com, click on the investor relations and then on the icon established for the call and there is no password or code required. If you have any questions call me after the call at 860 827 3833.

A couple other quick things we remind you that certain statements contained in this discussion by the various Stanley participates are forward-looking statements. Actual results may differ materially from those expected or implied. We direct you to the cautionary statements in form 8 K which we're filing with the SEC with today's press release. We elected not to give second quarter earnings guidance in our release today, so compliance with regular FD and the New York Stock Exchange rules we will not do so on this call. We plan to issue earnings guidance on May eighth when we have our analysts conference.

Additionally since we issued a pre- release and had a conference call to discuss operation 15 in our equity hedge just a couple weeks ago much of the business results were covered then. We intended to have another call today but we were offering to have this call to provide you with additional details to help you work with the first quarter numbers that we reported. With that, I'll turn the call over to Jim and he will highlight several financial matters in the release and then the operator will take your questions about first quarter results. Jim.

Thank you, Gerry. Today we reported first quarter earnings of 19 million or 22 cents per share versus 56 cents last year. These results include pre-tax restructuring costs, asset impairment charges and exit costs totaling $17 million, or thirteen cents per share. Page 7 of the earnings release provides a full reconciliation of those reported results with earnings prior to these charges, which is compliant with regular G disclosure requirements. Aside from the charges, earnings of 35 cents were within the range of 33 to 36 cents per share we indicated two weeks ago.

We note that 3.1 million or 2 cents per share of severance costs were incurred during the quarter related to restructuring activities. Sales were up 8% on the strength of the best access acquisition. Best added 60 million of sales; aside from best, sales were down 2%. Acquisitions altogether added $71m dollars of sales; this includes best access, senior technologies, (inaudible) and several other small acquisitions towards the end of 2002 and in the first quarter of 2003.

Best access saw its sales grow 8% over its first quarter last year when it was not owned by Stanley. In total, the sales increase of 8% was comprised of 12% increase from acquisition, 3% from currency, a decrease of 2 percent from lower price and 5% lower sales volume. Geographically sales increased 6.5% in the Americas, in Europe sales increased 14% entirely from currency. SG&A expenses were discussed in the release relative to their levels a year ago. On a sequential basis, comparing first quarter 2003 to fourth quarter 02, SG&A expenses of $162 million before charges increased $20 million. Approximately 11 million of this increase represents the full quarter inclusion of best, and the remaining 9 is comprised primarily of increase in that direct cost, foreign exchange impact and in certain cases higher spending. We know what's pushing up SG&A and we're taking the action through operation 15 to quickly address this issue. Net interest increased to 8 million versus 6 million in the first quarter last year due to higher debt levels from funding the best acquisition. Other net increase to 8 million versus 2 million in 2002 due to amortizing the intangibles acquired in a couple of the acquisitions and also lower profitability of the Mac advantage financing program.

We reported $17 million of charges in the first quarter as follows. $4 million in cost of sales for impairment of Mac Direct inventories, $10 million in SG&A for impairment of Mac Direct accounts receivable and $3 million for severance cost. You can see these amounts individually on the reconciliation on the last page of the release and all but the severance are the direct results of the (inaudible) of Mac Direct. On the balance sheet we ended the quarter with a debt to cap ratio of 43.1%, up one percent from year end 2002, a cash increase 34 million and if we had applied the cash increase to debt, the debt to cap would have been approximately 40%. We had excellent collection of receivables reducing the balance by twenty 6 million during the quarter, and a $23 million increase in inventories offset this benefit. The inventory increase resulted from the adoption of plant loading routines for higher volume SKUS in the tools group based on point of sale data.

This is as opposed to using some planner's guess estimates. Fill rates are good and getting better and we are prepared to serve our customers well when they adjust their order patterns. On the cash flow side there are a few highlights to mention as well.

Cash from operations was $52 million versus only $21 million in the same quarter last year, acquired companies, particularly Best Access, generated strong operating cash flow and cash outflows for restructuring activities and income tax payments among others were much lower than in the first quarter of 2002. Pre-cash flow before dividends was $44 million versus only $2 million a year ago and again, acquired companies mostly Best Access generated cash flow across Stanley CAPEX also was only 8 million dollars versus $19 million a year ago. We have acquired cash generating companies and certainly our de-capitalization plans are on track. We expect to file our full form 10-Q with the SEC later this week and we look forward to seeing many of you at our annual analyst conference the following Thursday, May eighth in Indianapolis. With that we'll be glad to take your questions.

Operator?

At this time I would like to remind everyone if you would like to ask a question, please press star then the number one on your telephone key pad. Your first question comes from . Shane McGrath of A.G. Edwards.

Thank you. The first question, I guess your other expense line was a lot higher then we were looking for, what's kind of a normal run rate on that as you move through the rest of the year, is it kind of 7 million a quarter?

Yes. I think it was a little high this quarter. Simply because of the Mac Advantage performance in the quarter was a little bit more unfavorable than usual so it probably would work down a million or 2. That would be a reasonable run rate.

Okay, So like a 5, $6 million a quarter?

That's fine.

How much of that number is the intangibles?

Probably, I’ll get the exact number for you, probably in the range of three, four.

Three to four million.

Okay. Did you guys do any accounts receivables securitization in the quarter?

I can't tell you exactly because I don't know the answer to exactly how much we might have securitized but all I can say is that we follow consistently the practice of keeping our Mac advantage and our distributor receivables at about 65% off book and 35 percent on book so if there was any adjustment it would only have been to keep that ratio in tact.

I guess one final question, you guys know that your consumer business was down for the first time in three years. How much of that was the door portion with losing the region last year?

Doors was extremely weak, down in double digits. The cold weather, the share loss from the loss of the Florida, Arizona regions a little less than a year ago were the big factors there and it was obviously a big piece of the overall consumer issue although it was not limited to the doors business because we also had some inventory corrections in the consumer business especially at the mass merchants.

Alright, Thank you.

Yep, Thank you.

Your next question comes from Jason Putman of Credit Suisse First Boston.

Hi, Good afternoon.

Hi, Jason.

First question relates to the door operating margins. I guess I was under the impression that best access was a better operating margin business than your current business so I guess now we've had a full quarter of best numbers it was a little bit lower than I expected. Am I under the wrong impression or has the rest of the business really struggled because of the loss of the region?

Yes. It's the latter. It's the best acquisition performed extremely well, high double digit operating margins and the entry door business was very weak, both in terms of dollars and percents and we expect that to rebound somewhat in the second quarter because one of the big issues we had in the doors business was the volume that we talked about, and that's a business that is relatively sensitive to volume. So effecting the rate. We had a rate issue and a volume issue.

Excluding best would it have been a low single digit

type operating margin?

Probably I would say mid, not low. But mid.

Okay. And the next question, just some of the cash flow items wanted to run threw since there were a couple of unusual items. Do you have other non-cash items, I think there's some pension swing in there given that you switched to a defined contribution plan. And also could you highlight your thoughts on CAPEX dropped rather dramatically for the quarter and what your thoughts are for that for the rest of the year?

Yes. The pension, there was some favorable cash flow when you compare quarter to quarter on the pension side. Call it, you know, $6 million or something like that. But it relates to the absence of pension income as opposed to, so we have non-cash income last year and did not have the same non-cash income this year. And as far as CAPEX, I would say we were somewhat lower than you might expect on the average. I would use a rule of thumb of 60% of depreciation or CAPEX equal to 60% of depreciation to give you a feel for where we might be headed in the total year basis. I believe, I don't have the number before me but I believe the quarter was a little bit lower than that on a percentage basis.

Okay then, lastly, there was another 15 million dollars item it says business acquisitions and asset disposals. Was this a couple of those small acquisitions that you were talking about?

Yes, there's two small acquisitions. One is a company called ABW, which is an Australian mechanics tools company and that was acquired in the quarter. That was the larger of the 2. And then there was a small, I believe it was in the first quarter we closed -- yeah, we closed a very small product acquisition I'll call it in the assembly technologies business which is a very neat product that adds a whole new dimension to their product line in the assembly technologies business but not a lot of sales.

And both of those are in the tool segment?

Yes.

Okay. Great. Thank you, guys.

Thank you.

Your next question comes from Eric Bosshard of Midwest Research.

Good afternoon.

Hi Eric, It always seem like they get your name wrong.

Yeah, First of all, best access you indicated the sort of core business was up 8% on a year over year basis. Is that similar to what it’s been growing, is that what you expect it to continue growing?

It's been growing in that range. I would say over the course of time 6 to 8% is probably a good benchmark for their growth. Occasionally they have some acquisitions which have spiked it higher but organically probably 6 to 8%.

Secondly in terms of the composition of sales momentum in the quarter, getting better, getting worse, how would you characterize that?

Pretty stable. It wasn't one of those quarters that started one way and ended another way or vice versa, it was very stable. The markets from our perspective are a little soft. Industrial has got a little bit more life than it has over the last year or 2 in some areas but really still pretty depressed. And then the consumer was the one that really, you know, was even more -- well, even somewhat surprisingly negative. But I think a lot of that was weather related and also had to do with the inventory corrections that I referenced earlier.

And the announcement that you made two weeks ago you gave full year '03 earnings guidance. You gave no guidance today and indicated you would do that at the meeting in May. Any reason or anything we should read into you not sort of again giving the same full year guidance that you gave two weeks ago? I don't understand the logic.

Nothing’s really changed, the, from the technical point of view we do not believe we gave guidance at the last conference call or in the press release because we didn't really give a GAAP -- we were not able to give GAAP guidance because we were not able to quantify the extent of the Mac charges so this new rate you can't give the non-GAAP guidance if you don't give the GAAP guidance. So what we're trying to do between now and May eighth is to get a range for the potential impairment related to the Mac business. It is a little bit more complicated than it sounds because we have different approaches to this -- potential approaches to disposing of the assets so we have to try to get a range there. Once we get a range we'll be able to give GAAP guidance and once we are able to give GAAP guidance then we’ll give non-GAAP guidance, but really nothing has changed from what we said last time.

The last question, you commented within the other income that the Mac advantage financing income was less. Is that related to the structural changing in Mac or is there a particular reason why that number behaved differently than it had been?

I think there's a little bulk potentially in that that clearly the Mac business in total did not perform well in the quarter. It was a largely driven by the Mac Direct. I think there was some operating issues and so forth that may have driven the write-offs a little higher in the Mac advantage program. But it could have been some of the organizational confusion and angst that goes along with the announcement of such a program as well.

Okay. Great. Thanks.

Thank you Eric.

Your next question comes from Joseph Sroka of Merrill Lynch.

Good afternoon.

Hey Joe.

Jim, when you ran down the 12 percent acquisition, three percent currency positive, what was the price delta?

Minus two percent.

And then minus 5 on volume it was?

Yes.

Okay. With respect to the operation 15 and I know you're going to go granular for us next week or whenever it was, but is the concept of the 15, the company having a 15% run rate operating margin, is that higher or lower in the doors versus the tools or is your concept of that balances out over time, if you can provide any –

I'll answer it a couple different ways. First of all, the operation 15, half the benefits from operation 15 are associated with Mac. And so you know, just by definition there's probably a heavier weight towards the tools segment than there is the door segment. On the other hand, the door segment as one of your colleagues pointed out earlier was unusually depressed in the quarter, in the first quarter, and I mentioned that was largely as a function of volume, lack of volume leverage as the sales were extremely low in both percentage and absolute terms in the entry door business.

So as that bounces back, and it will in the second quarter with seasonal effects and so on, there will be some natural operating margin improvement on a rate basis in the doors segment. And then with the very profitable excess solutions businesses in addition to entry door that will tend to mix up as those businesses grow and so on, and just as the entry do business comes back into where it normally is, it will push that operating margin right up towards 15% even though operation 15 is more focused on the tool segment. So I think a long winded way of saying if you were modeling it, if I were modeling it, I would probably go something like 14, 15 on the door segment and maybe 15 16 on the tool segment or, 13 to 15 on the doors and 15 to 16 on tools.

(Inaudible) One’s making it more there on its own and one is getting restructure?

Yeah.

Fair enough. Thanks.

Your next question comes from Steve McNeil (ph) of State Street Research.

My question has actually been answered. Thanks.

Okay, Thank you.

There are no further questions at this time.

Okay. Well, thank you very much everybody, I appreciate your taking the time out here. (Inaudible) and in summary we reported earnings in line with indications. As we mentioned the cash flows were encouraging, we hope this call was helpful and very much look forward to giving you more details of operation 15 in the company's outlook for 2003 on May eighth. That you again for joining us.

Thank you for participating in today’s Stanley Works conference call, you may all now disconnect.