史丹利百得 (SWK) 2003 Q4 法說會逐字稿

Good morning.

My name is Rebecca and I will be your conference facilitator.

At this time I would like to welcome everyone to The Stanley Works fourth quarter results 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 1 on your telephone key pad. If you would like to withdraw your question, press star, then the number 2 on your key pad.

Thank you.

Mr. Gould, you may begin your conference.

Thank you very much.

Thank you all for joining us this morning for our fourth quarter results conference call.

On the call this morning, after a few brief intro comments that I will make, Jim Loree is here, our CFO, and Joe DeAngelo, President of our Tools Group. Those are our two Executive VPs and they will present most of the material.

We have had a lot of recent press releases. They are all on our website. Our earnings and guidance releases that we actually, we actually put out last night. We had a little snafu. A vendor of ours managed to distribute them by e-mail to a few of you so we put them out.

And then our (inaudible) and Frisco Bay acquisitions announcements are on our website as well and our entry to our (inaudible) from December 8th.. The dividend, you can find all that have on the website if you need it. Joe and Jim will go through the releases. Then well have a Q&A as the operator said.

In keeping in compliance with reg FD, we'll give earnings guidance today, just as in the beginning of each quarter. We won't comment on it there after. We'll prerelease and conduct the conference call if at any point after that that we feel the conditions change materially.

We'll do about an hour on the call. We expect it to end at noon. There will be a replay. It will begin two hours after the call ends and it will good through Friday, the 6th. The number is 800-642-1687 and you will need a code. The code is 4970276. After that, we'll put it on our website. And you can call me with any questions. 860-827-3833.

Before we start, I'll give you the two usual reminders that we give you.

In this discussion as well as in our press release, reported earnings are supplemented with related amounts and percentages that exclude restructuring costs, impairment charges, certain other costs, sometimes in this quarter we include our discontinued residential entry door business. We believe these supplemental measures provide useful information as they remove the effective variances in the reported results that are not indicative of fundamental changes in our earnings capacity. So we've provided full reconciliations with the reported amounts. They're both in the press release we issued today and on our website.

And finally, certain statements contained in this discussion by the various Stanley participants are forward-looking statements. Actual results may differ materially from those expected or implied, so we direct you to the cautionary statements in Form 8K which we filed with today's releases and at that point, I'd like to turn it over to Jim Loree who will start the discussion.

Okay.

Thank you, Jerry.

Let's start out with GAAP numbers. Fourth quarter EPS was .42 cents, versus .21 cents a year ago. That includes pretax restructuring asset impairment. Other charges of $38 million, .31 cents per share, versus $28 million, .21 cents in fourth quarter '02, and the rest of our comments will exclude these charges.

The press release shows entry doors as a discontinued operation. As most of you know, it's currently held for sale. We're still operating it and the anti-trust review process is underway.

Some top level, fourth quarter financial highlights. Our earnings per share after charges of .73 cents was above the range that we pre-released on December 8th. If you recall, it was .68 to .71 cents. That is up 74% over the .42 cents exclusive of charges last year. That would be our highest EPS performance ever. We did .72 cents in the second quarter of '02 and this is a penny higher than that.

Probably the, you know, the best news we have here is the double digit fourth quarter sales growth far exceeded our expectations. At plus 18% continuing operations, plus 18%, excluding (inaudible) best, plus 12%. If we break that down, the components of that growth were best was about six points. Volume was about seven points of which about four points relates to a calendar anomaly of 53rd week in the fiscal calendar which occurs once every five years on the average.

Currency accounted for about four points and price actually produced a positive point for us, which is the first time in a long time that we've seen that. So the total is up 12%, excluding the acquisitions.

The cash flow was also excellent news, a record breaking cash flow. $186 million in the quarter of free cash flow versus, 66 a year ago and $425 million for the year, versus $233 last year. Last year was a record year and we were very pleased with the 233 we had last year, so the 425 just kind of blows that away.

Operation 15, the charges are over as of the fourth quarter. That's two quarters earlier than we planned. We were able to do that based the on the strong cash flow and the strong execution. The total spending in that program will total about $108 million. That's approximately the original plan. It's at the high end of the range. You recall that the reason we gave a range was we weren't sure about the recoverability of the Mac receivables, and as it turned out, we ended up on the high end of the that range because of the recoverability.

We'll generate at least the $100 million of savings that we committed on that program. It looks like potentially more than that at this point and for some of you I know you're pleased that our intention here is to now move to a GAAP-only presentation in '04.

We made some excellent progress on the strategic front in recent weeks, months, since we last spoke. Earlier than that, we announced the contract to sell the entry door division and we've announced three acquisitions, CST Berger, Blick PLC and our proposed Frisco Bay acquisitions, so the portfolio positioning is well underway.

I'm going to turn it over to Joe now who is going to talk about operations and I'll be back with some more comments on the financials.

Thanks, Jim.

Clearly growth has arrived at Stanley.

The Stanley teams (inaudible) all businesses are executing at high fill rates, great marking programs, innovative new products and enables (inaudible) to capitalize on customer wins and an economic up turn.

Now I'll take you through the fourth quarter segment results, versus fourth quarter of 2002.

In hand tools we saw double digit sales growth with strengths in all U.S. channels and tremendous promotional activity, including excellent joint customer marketing support and corresponding strong sell through. Our on packed tool combination program successfully helped the retailers raise their average bill and we closed the CST Berger acquisition, which adds over $50 million of annual revenues and expand Stanley from a measuring tape company to be a full-line professional measuring business.

Our mechanic's tool business, sales were up 9%, led by industrial launch of Black (inaudible) and by our consumer mechanics tool sets. And our hardware business, we also saw double digit sales growth with record POS being strong, being driven by high fill rates and we began a very rapid expansion of builder's hardware into traditional hardware outlets.

Our Zag business also achieved double digit sales growth, delivering a strong quarter globally and our Mac Tools business had positive sales growth, despite the absence of the Mac Direct program. And delivered operating profit of $3 million in the second half of '03, versus $9 million negative in the first half of '03.

We've increased our tradition of distributors by 25% and had extremely successful Mac Tool Fair to launch the year and we've had an excellent launch of the Jesse James tool boxes and sets. Our (inaudible) fastening systems also saw strong sales growth in the fourth quarter driven by strength in both U.S. home centers and U.S. industrial channels.

And our assembly technologies business saw very strong sales growth, delivering over 30% increases for the second quarter in a row. And based upon this team's execution of performance of the growth plan, we've moved the assembly technology business to be (inaudible) or reclassified as part of our tools growth platform.

In general, we had great working capital performance, delivering almost $50 million each from inventories and receivables and, in summary, we saw solid growth across the board in fourth quarter. Delivering strong execution, we have good momentum. We expect the first quarter sales growth to be up about 4 to 6% and be up about 3 to 4% for the year. We have taken steps to ensure growth is delivered, including a significant addition to our Kanapolis, North Carolina, distribution warehouse.

Now I'm going to turn it back to Jim.

Thanks, Joe.

We also had some good news, very good news, in securities solutions. The fourth quarter revenue growth in the access doors business, we call it access technologies, was right around 20% and it's really gaining share on the strength of its national service business and it's national account activity. Fast Access, the other big part of the, of that business through Security Solutions Group was up 3%. While it built its backlog, it's second half orders trend verifies it is a growth business. It's third quarter orders were up 5% and fourth quarter orders up 9%.

Blick, PLC, the recently announced acquisition over in the U.K., adds an integration presence in Europe. About $120 million in sales, U.S. dollars. It has U.K. products that can be fed through our U.S. security pipeline. It has growth prospects with our U.S. products, it can be fed through their pipeline. So there is a nice synergy there. Over 93% of the shares were tendered and payment for that will be tomorrow. And that will be part of the Stanley Works at that point .

The addition, proposed addition of Frisco Bay Industries is completed. We'll add an integration presence in Canada, $40 million of annual sales and growth, again, via U.S. products can be fed through there. Canadian pipeline with some strength in the financial services segment, which they bring from an industry vertical point of view. With this deal, Stanley will triple its Canadian security solutions business from $20 to $65 million and in addition to that, $10 million of our existing business and 15 of Best access will add to that.

So we expect security to represent about $650 million of business really becoming a significant part of the company up from just over 150 two years ago. And most importantly, we will have taken two important steps to global capabilities. Our customers are increasingly seeking global capabilities and a global foot print. They're asking for it and now we are positioning ourself to be able to deliver that.

On our financial front, the three acquisitions should completely replace the entry door lost revenues and earnings, not all in calendar '04. A good part of it will be. But on an annualized basis we think that will happen. All three are in favored markets. Fragmented customer basis, growing markets, no large single customer dependency and higher inherent profitability.

And as far as the total company goes, it's likely we will have no single customer greater than 13% of our '04 revenues. And that's down from 21% in '02. So we're really making some good progress on diversifying the portfolio.

Right now we're turning our focus to successful digestion and integration of these acquisitions. That will be the single major focus of our securities solutions and hand tools team as it relates to acquisitions in early '04. We have an excellent process. We proved it out on Best. We're out to good starts at CST Berger and also Blick and we're very, very pleased with the senior leadership in these businesses. They fit our culture well. They're very experienced and frankly they're happy to be a part of Stanley.

All of this was made possible by the exceptionally strong cash flow. I should talk about that for a minute.

The $425 million of free cash flow was a major positive. I'm going to talk about the numbers that follow will not include the -- will include the discontinued operations because that's really what we had for '04. So it will be a little different from what you see in the press release, but very close.

In total, the free cash flow was 2.2 times the net income before charges, so very strong. Clearly a lot of things went right. Working capital, full year, including entry doors, generated $77 million of benefit, despite an 18% fourth quarter sales growth. Therefore, the working capital turns broke through to 5.3 times, versus 4.1 at the end of last year.

Inventories and receivables were the major contributors. Payables a slight negative. CapEx spending was very disciplined. $39 million for the year, down $13 million from '02 and representing only 65% of the depreciation. The biggest contributor was other. $140 million of cash flow in '03 and $25 million in the fourth quarter. The 140 included about half of which is tax related refunds and deferrals and the sale of Mac's distributors receivables accounted for about $40 million and it's reasonable toll say we don't expect to 140 to repeat in '04 but on the other hand, we done expect other to become a big negative either.

And on balance, it's fair to say that the on-going free cash flow generating capacity of the company is probably closer to $250 to $300 million as opposed to 425, but that said, we had some one-time lever increasing events in '03, most notably the equity hedge forward purchase and the extra cash flow that we got this year was a welcome benefit that helped us deal with that.

Just a few other items.

We did repay $146 million of debt in the fourth quarter. Debt to cap ratio is down to 45%, versus 61% in September. Meanwhile, the cash increased by $35 million in the same quarter. The tax rate for the fourth quarter was 28.5%, versus 30.2% a year ago. The better rate was driven by our earnings mix improving overseas and lower tax jurisdictions and the year over year tax rate was essentially flat at 30%.

Our operating margin increased 320 basis points over the fourth quarter '02, exclusive of charges but remained at the 12.8% as it were in third quarter of 2003.

The reasons for that mix in seasonality, businesses would lower relative margins had sequential sales increases such as Mechanic's Tools and Zag while some businesses with higher margins, namely Best and Hardware, had lower fourth quarter sales than third quarter. And on top of that, on the fourth quarter, we have the holiday shut downs and inefficiencies which typically drive our margins down a half a point or so. This year was no exception. In fact, it might have been slightly worse with the 53rd week in the holiday. That week as well. So we covered at the OM level. The OM was sequentially flat. We kept the SG&A expenses in check and we leveraged the higher volume.

And now just turning to guidance for a moment, the first quarter is seasonally our lowest quarter and our first quarter guidance calls for 4 to 6% organic sales growth over first quarter 2003, as Joe mentioned. That's approximately two points volume, two points currency and one point price. On 3 to 5% more sales than last year, we expect to earn .49 to .51 cents per share. From continuing ops plus a penny from entry doors.

For the year 2004, in organic sales, increase of 3 to 4% and earnings of $2.50 to $2.60 per share from the continuing ops are expected and those earnings estimates would include CST Berger beginning about a half of a month of January and Blick beginning at the beginning of February. These don't include any benefit for Frisco Bay. That has not been completed. But the sales numbers that I mentioned, the sales growth does not include any effect from acquisitions.

Now, on a prospective basis, we expect to report earnings for continuing operations for '04 and we request that you build your financial models and your first call input accordingly. We know that some of you will do whatever you want, but we're asking to get the folks to do that so it will make it consistent for everybody.

And then o the topic of CEO search, the company's CEO search is in progress and the process continues. We hope to make an announcement in the near future regarding the selection of a permanent successor CEO, but we will not be able to comment further today on this call.

And now I'll turn it back over to Joe.

Thanks, Jim.

In conclusion, the company is strong. We're serving our customers well. We're executing our strategic moves and our momentum and winning culture continues to accelerate.

With that, we would be happy to take your questions.

At this time I would like to remind everyone if you would like to ask a question, please press star, then the number 1 on your telephone key pad. Please limit yourself to two questions. If you have a follow-up question, please press star then the number 1 again and you will be place back into queue. If you would like to withdraw your your question, press star and number 2 on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Eric Bosshard of Midwest Research.

Good morning.

A couple of questions. First of all, in terms of the sales outlook, the 4 to 6 in the first quarter and then the guidance for the balance of the year, can you just give us some color in terms of where you have optimism, what pieces of the business give you optimism on the sales growth expectation?

Eric, this is Joe.

I think, you know, across the board which are seeing pretty good IB, through the first month. There's really no place that we're soft but we're being very cautious in terms of, you know, what we're going to see through the end.

But clearly Fastening Systems is strong out of the shoot and that's probably the biggest growing one we see and we also see, you know, strength in some of the hand tools and Zag performance is very strong. And Access as well. Yeah, access continues to be strong.

Secondly, can you talk about, Jim, perhaps the balance sheet plan for 2004?

I think there was talk once upon a time of issuing some type of security in order to fund some of these acquisitions. Considering the strong free cash flow you came out of 4Q with and out of '03 with, talk a little bit about what you think you need to be doing in terms of the balance sheet.

I mean, we're, it starts with a, the fact that we're committed to retaining the single A rating and so, you know, that has certain leverage requirements that go with it and other, you know, ratios and we're committed, we have committed to the rating agencies by a certain point of time to get to a certain place, which is more consistent with a single A rating, and this cash flow helps, obviously, but we have been exploring the potential issuance of some convertibles and we've given kind of a, well I think in the press release we said up to $175 million.

And we'll be looking at, you know, what's an appropriate amount to issue to kind of take the Blick, Frisco Bay, CST acquisitions, absorb them into the balance sheet, execute the door sale and then, you know, with all the sources and uses there, try to figure out where we need to be from the size of a convertible to put us in the single A zone.

Is it safe to say that 175 may be the high end of the what you may need, considering the free cash you generated?

I certainly would hope so. One of our challenges is, you know, we have a lot of cash overseas right now.

Right.

And we're trying to set up a structure with the Blick acquisition that we can use a fair amount of that cash as opposed to leveraging up further to either through a convertible or through straight debt to pay for that. So a lot will depend on, you know, how much of that cash we're able to deploy into that acquisition and we're kind of reviewing that structure now.

Okay.

And then just last question, in terms of Operation 15. You've accelerated the program and its great to see that it won't have any charges in 2004. 15% operating margin, is that something you can get done for all of '04? Where do you shake out on that?

I don't think we're ready to commit to that, but I do think we're going to see some operating expansion as we go here. I think I've learned my lesson on committing to specific operating margin levels but in any event, we're looking for sequential increases '04 over '03 in operating margin and we'll see.

I think it's going to be a combination of the benefits as they, you know, finally roll in from Operation 15. Volume leverage and maybe some portfolio shift and, obviously, we would like to get this to 15% or even more at some point.

But the timing, you know, for us will be, you know, kind of, we're not going to commit to anything today.

Great.

Thank you.

Your next question comes from Ivy Zellman from Credit Suisse First Boston.

Good morning, guys.

I didn't know anyone could talk faster than me. I was trying to scribble pretty quick.

One of the things I guess Jim, you said with respect to securities solutions is that I guess Best Access sales were up 3%, which for growth company that seems pretty modest and realizing the fourth quarter orders were up 9, it's still at a decelerated pace and third quarter up 5 I believe you said.

Can you talk to us a little bit more about what's going on there and why the deceleration in both sales and orders?

Well, the orders are not decelerating. What's happening in Security Solutions specifically is that there was a backlog draw down that occurred sometime right around the time, right before we bought them and then shortly after we bought them. A lot of it had to do with the initial, you know, cost take outs that we executed when we acquired the business that we needed to get north of a 20% operating margin.

But they create a little, you know, confusion and uncertainty in a business an it's like a wound. It takes a little time to heel. And it's healed nicely, so the orders are back. The backlog is building again. We expect the sales rates to perform in the 5 to 10% kind of a range on an a prospective basis.

I guess I don't remember you talking about this when you had the backlog draw down. You didn't mention it then or if you did, I apologize, but was this something you shared with us that there was a draw down in the backlog that resulted in stronger results that you're seeing today?

We did mention in the last two conference calls.

Okay.

And what about the operating margin as a result of, you know, the noise going away from the backlog draw down, is there any year over year change in the profitability of the business as a result of lower volume?

Best?

Yeah.

No, the operating margin since we've owned it has been in the 20 to 25% range and it continues to be in that range.

And year over year right now, is it flat or up or down?

Up.

Okay.

Your next question comes from Mark Zambrone of Barrel Hanley.

Morning, fellows. A great quarter.

Thank you.

I just want to ask a little additional color on the margin question.

Without being specific, when you initially outline your guidance for Operation 15 and had a target to reach that level of margin, you then came back a little later and said, well you know, the target is going to a little lower because we're not getting the revenue growth we had anticipated to sort of help us get to 15.

I guess my questions relates to based on the volume you are seeing now, is that volume within the expectations of your initial level of revenue needed to achieve Operation 15 initially?

Well, I, for the fourth quarter it absolutely would be true but, you know, the latest quarters work for us. The second and third quarters will be the real test of whether, you know, the, if the volume is there in the second and third quarters, those are when you really see the big volume leverage numbers.

And I don't know if you recall, Mark, but we were expecting about, we were roughly around 9% operating margin when we announced in the fourth quarter and first quarter and announced the program and we had to get about 500 to 600 basis points of improvement and the cost take outs associated with Operation 15 were only going to drive about 300 to 350 basis points. So that there were other things that were driving the last 200 of 250 basis points, of which volume was a piece.

And then some additional carry over costs and other things that represented the remainder of that. And I walked through on May 8th of last year literally the walk to go from 9% to 15% and what I can say about it that the Operation 15 cost out has slightly exceeded our expectation. So we will get the 300 plus basis points of improvement from the cost. I think that's what we're seeing in the margins today.

What we're not seeing is the volume quite yet even we had the big fourth quarter. It doesn't quite get us to the levels of volume that we were expecting in the second and third quarters. There will be some lift from that.

On top of that, there were some things that didn't go in the right direction outside of Operation 15, especially in the first half of last year. And that remains to be seen as to whether we can, you know, how soon we can get that back.

Okay.

I guess my next question relates to just your recent acquisition spree.

Do you view going forward now a pause and a sort of a time to take, you know, into account what you've got and work on that and so we should assume that there would be much less, potentially no activity this year or do you think there will be, that it could continue this year?

No, we're going to take a big pause because we have a lot to digest and we're very much focused on integrating them perfectly and that's where we're focused now.

That's not to say we're not always looking and if we find something that's just perfect, we will go forward, but we're going to take a pause and we're going to make sure we integrate with perfection.

Okay.

Thank you.

Your next question comes from Jim Lucas of Janie Montgomery Scott.

Thanks.

Morning.

First question on cash flow. You indicated the $250 to $300 million sustainability and if we look at the CapEx component, with the shifting of the portfolio, can you talk a little bit about the CapEx versus the R&D needs of how Stanley, going forward, is going to look, since some of your businesses that you are acquiring have a little bit more of a R&D-type emphasis?

Well, the R&D component, we always think of that as included in the current operations, so it's not like there's incremental R&D above and beyond the current operations. And all these businesses we're acquiring in the Security Solutions area will have, you know, operating margins well north of 15% and most cases between 20 and 25%. So that sort of funds the R&D within the existing operations of these businesses.

And then the CapEx, what we're finding is for the most part, you know, the model that we're operating under today, which is about a, you know, two-thirds of the depreciation. CapEx equal to two-thirds of depreciation. It's a very comfortable model for Stanley's overall mix of businesses. We can absorb a little extra CapEx (inaudible) security businesses. We can absorb a little extra if we want to put some in there and yet still achieve probably about a two-thirds ratio of depreciation for CapEx spending.

Okay.

And with regards to Mac, I would be remiss if I didn't ask one question on it, you've had a tremendous change here in profitability. Your traditional base is up 25%. The receivable issues seems to be resolved.

As you look at Mac going forward in '04, is there a way that you're looking at it either from growing the dealer base or focus on profitability combination of both, can you talk a little bit about the Mac strategy in '04?

Sure thing.

It's going to move over to be a growth business for us. You know, clearly we have now , now that we've simplified the model, it's proven with the addition of the distributors and the addition that we experienced in the third quarter and fourth quarter in terms of the rate averages that this can be a growth business for us.

So we think we have a very simplified model. We executing it well in the third and fourth quarter and just had a tremendous kick off to year. So it is going to be a growth business, from a cash-generating business.

And final question. In the press release you talked about the strength of Proto.

Could you talk about the specific end markets, if there were any, that showed any particular strengths? You indicated that the general strengths you're seeing across the board were broad based but for Proto, given their very strong industrial offering, what did you see with their end markets?

I think with the end markets, that's still a little flat from the industrial perspective. Clearly, some of the fringe pieces, the GSA, the government stuff was very, very strong. But we really, you know, a lot of our growth that we saw was taking share and primarily with this new launch of this Black (inaudible) by Proto (inaudible) and good execution with capturing almost all of the national accounts.

Okay.

Great, thanks.

Your next question comes from Sam Darcashe of Raymond James.

Good morning, gentlemen.

And I'm sure I speak for everybody on the call when I say it will be wonderful to read a Stanley release without a whole bunch of charges and that leads to my first question.

The guidance that you have, how much of the restructuring savings, the $100 million plus are you assuming that falls to the bottom line for that. And also, if you do restructure, subsequently, will you fold that in and only report GAAP, or are you going to break it out like you had in the past? And then I have a follow-up question.

Well, right now, you know, we expect there to be only about $15 million more of savings to come in '04.

And secondly, since we don't really expect any further restructuring, you know we have combed this company for restructuring opportunities over the last five years and, you know, the only real remaining area that I can see that would make any sense at some point, you know, would be the fastening business. But with their volume of performance and, you know, we're more into leverage the fixed cost of that operation than take it down, so we don't have any plans whatsoever for any major restructurings at this point.

If somebody asked me to go in and try to formulate a plan for a big restructuring, I would have difficulty doing it. We have the number of facilities over the last five years. We have, including distribution centers and plants, we have reduced the skews as you know by over 100,000 and so on.

The business is a lot simpler. The economy is better. Sales are positive, so all signals indicate that there's no need for a restructuring. And so I can't really answer the question if we did one because I don't -- we don't intend to do one at this point.

Okay.

Second question, this might be more of a 30,000-foot kind of question because there seems to be a bunch of moving parts. I'm trying to get a sense of your contribution margins or your variable margins going forward.

You've obviously got a new, a little bit of a new foot print with all of the acquisitions. You've been decapitalizing for years and I'd imagine your current utilization rates are low because of your working capital rationalization.

Can you give us a sense of what you would expect, or be pleased with, with respect to incremental operating margin or incremental revenue dollars at this point?

You know, there's just -- there are so many variables in that question that it's very difficult question to answer, but I will say that, you know, there is definitely a component of our variable cost which are semi-variable and included in the, you know, the gross margins is a fixed component as well. And if you take those components, you could pick a ballpark number of something like, you know, 30% or so and, you know, then you could sort of do the math that you would expect from there.

However, my experience here has been, you know, when sometimes when volume goes up, if the plant needs to be, you know, rebalanced, you can end up having to incur some inefficiencies or overtime and so forth.

So it's very, depending on the business, some are better than others. Some are worse than others. So it's difficult to answer the question. But I -- you know, if you kind of go with using 30% as a rule of thumb, you know, for what might be fixed or semi-variable cost associated with the variable cost, you can probably get a good sense.

Okay.

We're being constrained by two questions, so I'll let others ask.

Your next question comes from Steven Kim of Smith Barney.

Good morning.

This is actually Misheu, for Steve.

My first question is on the doors division.

Now, stripping out the residential entry doors business, the Access Solutions business is, let's say, about almost two-thirds of the business now. And that has, you know, with best having margins of 20 to 25%, I was wondering if maybe you could shed some light on what was holding the over all doors margin being back this quarter at only 11.5% or so?

I'll have to look at that. We'll gate back to you while we're on the call here. A couple of my people will look at it and we'll get right back to you.

Okay. Great.

I was wondering if maybe you could quantity -- now the currency impact, with a lot of your manufacturing now in low-cost countries, with currencies that are moved largely in line with the dollar and a lot of your sales, you know, against currencies that have appreciated against the dollar, what kind of impact did currency fluctuations have on your margins and especially in the tool side of the business?

In total, for the, you know, for the quarter, we probably, you know, we probably benefitted a couple of pennies from it. So a penny is $1.2 million of pretax income. I think it was .9 cents for the year and most of that was in the back half.

One of the things that we do is we do a basket hedge and we calculate all our trade flows from various countries to various countries and we, in the aggregate, we hedge all of the various trade flows. So that has a dampening effect on the currency fluctuations and that's what it's designed to do in the current year.

So that should kind of put it in perspective for you.

Great.

And finally, I guess just a house keeping question.

What kind of accretion are you assuming in your guidance for '04 from the acquisitions, from CST Berger and from Blick?

What we said for the, you know, for the total year was that they would roughly replace I think .16 cents for the total year. I think if you put in 10 for the calendar year you would be about right. When I said 16 I meant annualized, and then 10 for the calendar year. Including all --

Great.

All the acquisitions.

Your next question comes from (inaudible) Zeroka of Merrill Lynch.

Good morning.

On the 1% positive price, are there actually categories where you're gaining pricing power, you didn't have them previously or is that sort of a mix issue?

It's definitely not mix.

You recall Operation 15 had about $15 million of price in it and we had $30 million we were going for and he hedged it back to 15 and it looks like we're going to get, you know, pretty much all of what we went for.

And we're also, we're doing some things in the pricing area that are, that go beyond just racing prices. We have done a lot of work with McKenzie on several of our product lines and trying to understand, you know, where our pricing strategy can be modified to generate more price. In other words, with low profitability customers or with customers that have low volumes, this type of thing.

And so we, over the last six months or, four to six months, we've done a lot of that work and we have started to realize some benefits from that as well. So it's a combination of those things.

It's been particularly good performance on price in the Fastening business and Mechanic's Tools and we expect to see both Access and Hand Tools kind of continue to gain some price here as well. But I wouldn't call it a mix effect at all.

Okay.

I saw you included 1% price in sort of your first quarter expectations, so you're more in an atmosphere you think price stability to price improvement rather than the some of the price deflation categories that you've been in previously?

Right.

Okay, and then lastly, when you get done with a portfolio realignment here, with the Door business an the new acquisitions you're making, does it make sense to realign your segment reporting so that we can understand a little bit more what's going on in the various businesses?

Yeah, we're taking a very close look at that right now given the Doors disposition an the growth of the Securities Solutions business, so if you have any, if anybody has inputs that they would like to share with us, please call them into Jerry and we're going to take your input and then for the 10K this year we may make a change. We're not sure yet, but we may do that.

Okay.

Thank you.

Your next question comes from Michael Rehalt of Michael Rehalt.

I wish I was working for myself. I'm working for J.P. Morgan now.

I just had a couple of quick questions.

First, I know you mentioned the CEO search.

Is there anything you could give us in terms of shedding light on what's kind of pushed it out a little bit and, you know, are you still kind of locked into a few, you know, a couple of final candidates or are you sort of going back and looking for additional candidates or what's going on there?

Mike, I'm, we are under strict instructions from the Board to make the statement that we made, and we made the statement, and that's really all we can say.

Okay.

In terms of '04 guidance, you talked about, you know, 3 to 4% growth for the year excluding acquisitions. You know, I was kind of wondering if you could kind of break that down? You know, you had talked about Best and Security growing at, well at best that you expect to grow 5 to 10%, you know, and you're currently seeing some strength in Fastening and Hand Tools and Zag.

You know, a lot of, it would seem that a lot of those segments right now are certainly, you know, growing in double digit for the fourth quarter. What are your expectations in those type of segments for '04 and where would the, you know, lag would be that would get you closer to that 3 to 4%?

To be honest with you, it's going to be a long year and we've got a conservative number in there.

When you look across this thing, we're going to, (inaudible) that we hit in the fourth quarter, but we're going to prove our growth and then we'll, you know, take it up. If that's appropriate.

If you think about it, we were at minus 3% organic in the first quarter, minus 3 in the second quarter, minus 3 third quarter and then we had a very strong positive, if you exclude the 53rd week plus 3 in the fourth quarter. So one data point does not make a trend and we're not going to commit to that kind of a volume.

We have 2% in there, so, you know, there could be another 2 points or so, just if current trends keep up and then you could lop on some currency and so forth if the dollar stayed weak and so on. So we could do a lot better. There's no question.

Frankly, you know, our coming out of the box we have no, we're not disappointed in the order rates in the first three weeks, put it that way. So I think we've got a nice, as Joe said, a conservative number on the table. It should hopefully set the floor and we'll see if the execution keeps up the way it's, in the market keeps up the way it's going. We would feel great if, you know, a couple of months from now we could raise that and have a higher estimate for the year. But it is early and we're not going to over commit and get into that box my time soon.

Okay.

And you said plus 3 organic in the fourth quarter. I thought with the math that, you know, volume excluding the extra week, was 4% and price was 1.

I was talking about, I confused, but I was talking about volume, not organic, organic volume.

Okay.

And that was plus three in the fourth quarter.

Okay.

And I'm sorry, just one number question, house keeping, you mentioned $650 million in sales from, that's, that would be the total annualized securities solution sales for 2004 that you're looking at?

Yeah, that's right.

Okay.

Thank you.

Your next question is a follow-up question from Eric BossHard of Midwest Research.

I'm here. A couple of things.

Jim, the, just to be crystal clear, the 3 to 4% organic, that's a volume number with no price and no currency, is that correct?

Could you say that one again? I'm sorry

The 3 to 4% organic growth you indicate is the expectation for '04, does that include any currency, does that include any price?

Yes, it includes currency and it includes price. It's two points of currency, one point of price and two points of volume.

Okay.

Secondly, CapEx at 65% of depreciation. You commented on this but I guess I would ask again, you know, do you Joe, do you feel that that an acceptable level of reinvestment in the business , especially now with the improving demand that you're putting through the factories and through production?

I think it's right on.

We just went through all the CapEx yesterday and, you know, we're just very focused on making sure we put the right CapEx in and really we've made a big shift to make sure we're getting the process capabilities where they need to be.

And that really gives you a free capacity and that's where we're going to focus this year. We'll spend judiciously where we have to but so we're really deliver excess capacity via process improvements.

Lastly, tax rate for '04, any projection or guidance on that?

The tax rate, I think, you know, we're seeing some definite improvement in the tax rate versus the 32, you know, 31. We saw that in '04. The question is will it remain and it's too early to really say.

I will say that we have 32% in the guidance. But there's no reason to believe that it couldn't be a little better if the exchange kind of -- rates stay where they are. And that drives the profit into the low tax jurisdiction countries.

Okay. Great.

Thank you.

Your next question comes from Steve Hawkins of Lehman Brothers.

Good morning, guys.

Just one thing on the pricing.

Jim, just to clarify, so if it's not really mixed, when you say it's not mixed, does that also mean it's not even the effect of new product line or new products that might be moving up the price curve, but it's literally an ability to go to your customers and say, you know, for the same item that was $10 last year we're charging you $10.50 this year?

That's what we've been realizing over the last quarter.

And I'm (inaudible) in the case the retailer they're willing to take that because they've accepted your brand at the expense of not wanting to pick up others, is that kind of the logic behind that?

There's a number of approaches in terms of discussion but, you know, there's cost to serve discussions that we've had, there's inflation in certain areas that, you know, we're passing along and it's not necessarily the retail environment that we're getting all the price from.

Okay. Fair enough.

One last thing, more broadly, given that you guys have been I think realisticly a little more cautious on an eventual realization of an operating margin goal, why not change that operating margin goal to a return on capital goal? I would argue over time that shareholders will be just as happy with you if you could generate a better return from a slightly lower margin than a higher margin but that you have to pay out to get that margin.

We do have return on capital goals. We just haven't, you know, gone -- said too much publicly about them. We're also trying to drive return on capital up into the mid-teens. Our goal is to get the return on capital into the mid-teens and then grow the capital (inaudible). (Inaudible) model of shareholder creation. If we can do that, then we will create a lot of share price depreciation, we think.

So I guess in that logic then you're basically assuming that in buying higher margin businesses you're going to be able to continue to do by keeping a tight lid on the price you pay for those businesses?

We've been very disciplined in that regard.

We have hurdle rates for these acquisitions. We will not buy anything that has return on capital less than 9 to 10% in year one and we're looking for that to gravitate into the mid-teens over the course of a couple of years. If the numbers don't indicate that that can happen with a reasonable level of certainty, we will not do the acquisition.

Okay. Thanks very much.

Your next question comes from Jim Lucas of Janie Montgomery Scott.

Thanks.

Could you talk a little bit to what you're seeing from a raw materials standpoint? One of your other Mechanic's Hand Tool competitors mentioned this morning about rising steel costs having an impact on them. Can you talk about your major raw component materials and what you're seeing?

The primary one is steel, particularly pricing and particularly within China. I mean China has become a huge net importer and that's driven raw materials, you know, very high and it's also created stock shortages of supply.

So that's a very significant issue for everyone that's operating out of China and then resin prices have continued to remain very high as, you know, we continue to have wars in the Middle East and that sort of thing. That's something that interoperating plans we've been making sure that we cover either with productivity or we have some plan to be able to achieve a price increase in the marketplace to be able to cover.

And are your customers generally taking the price increases?

You know, I think Jim commented on our success in terms of the price across the board but, you know, we get about half of what we ask for is I guess the best way to say it, if you look at an analytically.

Okay.

Thanks.

Once again, I would like to remind everyone if you would like to ask a question, press star and then the number 1 on your telephone key pad.

Your next question comes from Michael Rehalt of J.P. Morgan.

Just a quick follow up on what you said about the break down for '04 sales. Is currency 2%, price 1 and volume 2 that gives you five or --

Yep.

So the 3 to four 4% in the release was, again, being a little conservative?

It was about a point hedge in there.

Okay.

Thanks.

Okay.

At this time have you no further questions.

Okay. Thank you, everybody.

We had one question did not answer because it requires a little more leg work and if the individual had asked that question would call into Jerry Gould about an hour after the call ends or any time there after, that would be great and we just want to thank everybody for your time and look forward to getting back with you soon. Hopefully with some good news.

Thanks a lot, guys.

This concludes today's conference call. You may now disconnect.