史丹利百得 (SWK) 2004 Q1 法說會逐字稿

Good morning. My name is Wesley, and I will be your conference facilitator. At this time I would like to welcome everyone to the The Stanley Works first quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer period. If you would like to is a question during this time simply press star then the number 1 on the your telephone key pad. If you would like withdraw your question, press star then the number 2 on your telephone key pad.

Thank you, I would now like to turn the conference over to Mr. Jerry Gould, VP of Investor Relations. Please go ahead sir.

Thank you Wesley. Good morning, everybody. On the call with me this morning. We have John Lundgren our Chairman and CEO, Jim Loree, our Executive VP and CFO, and Don McIlnay and President of our tools group.

We had our earnings release out this morning. Hopefully you have all got copies of it. First quarter and ongoing earnings guidance and the prerelease we issued on March 16th and we may refers to the dividend release that we had out on Friday. These are up on the website.

Don and Jim will review the releases, and then we will do a Q&A, and Don is also available during the Q&A. Per regulation FD we will give earnings guidance at the outset of the quarter, as we did today, and we will not comment on it thereafter but we will prerelease a business conditions change materially. We will do an hour on this call. It will end at noon.

There will be a replay available two hours after the call till the end of the day Friday, this coming Friday. The number is 800-642-1647 the code is 6556933. After that it will be available on the website and you can call me with any questions at 860-827-3833.

The usual two reminders before we start in this discussion as well as in our press release, prior year reported earnings were supplemented with related amounts and percentages excluding restructuring costs and impairment charges, and certain other costs. We believe the supplemental prior year measurements provide useful information by removing the effect of variances in the prior year results that were not indicative of fundamental changes in our earnings capacity.

Full reconciliations with reported amounts were provided within the release and have been posted to our website and for the current year we are reporting GAAP results only. And then secondly, certain statements contained in these discussions by the various Stanley participant are forward-looking statements. Actual results may different materially from those expected or implied. We direct you to the cautionary statements in both the earnings release and the 8K which we filed with the release today.

With that I would like to turn it over to John Lundgren who will begin the business part of the call.

Good morning everybody. It is a pleasure to be joining to the The Stanley Works at a time when results and momentum are both as strong as they currently are. I am pleased to be on board and I do look forward to meeting those of you I haven't met as soon as possible. Let me give you just a minute of background and we will move on to the results.

As most of you known, I came to Stanley March 1st, from London where I had a Georgia Pacific's $2 billion international consumer business and reported to Georgia Pacific's Chairman and CEO Pete Corel. I lived in London for six years and Brussels Belgium for eight and during that time was responsible for all the operations, strategy, planning, M&A activity and integration of businesses from Georgia Pacific as well as two predecessor companies, The James River Corporation and Fort James Corporation.

This position at Stanley is a great opportunity for me to deploy all the skills and call upon many of the experiences I have accumulated over the years. I am originally from New England, I was born and raised in Boston area, and I previously lived and worked in Connecticut for 12 years, so this is returning home for me.

Stanley is a great company with a strong brand and skilled management team that is executing well and producing strong cash flows. I look forward to overseeing profit growth and direct the team as we go forward as we face an exciting next chapter in Stanley's long history.

With that, I will proceed with the results that we reported. Growth has certainly arrived at Stanley. Our primary current focus is to sustain it. Stanley teams across all businesses are executing, delivering high fill rates, great marketing programs, and innovative new products to our customers. This execution is enabling us to capitalize upon recent customer wins as well as an economic up turn.

In our consumer product segment sales were up 21% in the first quarter. Excluding positive price and currency impact sales volume was still up 12%. For the second consecutive quarter there were double digit percentage total sales growth in hand tools. 20% in the first quarter of 2004 and over 20% in the fourth quarter of 2003.

Strength was broad based across all U.S. channels. Sales in Europe were up double digits percentage excluding currency benefits and in addition, we had a nice boost from very favorable currency translations. A second consecutive very strong quarter was detailed by Zag our consumer storage business with strong double digit sales growth in the first quarter. Following over 10% growth in the fourth quarter.

In our industrial tool segment sales increased 16% in total and 11% excluding acquisition. Sales volume ex-price and ex-currency was up a very solid 7%. The 16th% sales growth followed a fourth quarter in which sales had increased 10%. This was a very strong solid growth quarter for our largest industrial business. Fastening systems or primarily our [inaudible] business grow sales over 10% excluding currency.

Strength was in the construction supply and industrial channels in the U.S. and in Europe. We also had a very strong performance in MacTools. Traditional distributorship sales performance improved enough to give us flat sales for the year despite the fact that over 300 Mac direct distributor sales were included in last year's result.

MacTools delivered 6% operating margin versus 3% in the second half and minus 7% in the first half of 2003. Clearly this business is experiencing a positive turn around. The number of traditional distributors increased by 30. From 1,500 -- to 1,530 verses 1500 in the quarter. That is up at 1200 at the end of 2002. There is a 50% increase in new distributor starts versus the prior quarter and new distributors are averaging 40% more sales than the new starts just a year ago.

We had an extremely successful MacTools fair in Orlando in January with distributor attendance up 50% over resent years. Also we launched our line of Jesse James tool boxes and set, and already over 5% of MacTools sales are coming from that line and this is in just six months. Assembly technologies grew its sales over 20% for the third consecutive quarter. This business is gaining share in a strong auto assembly market.

And last but not least, CST Burger, our new commercial industrial business contributed over 20% operating margin and was accretive to earnings per share in just over two months that we owned the company. A little later on Burger later.

Our third and final segment. Stanley Securities Solution, total revenues increased 46% and aside from acquisitions increased 15%. Operating margin was 18%. That's why we like this business.

We had over 30% revenue growth following 25% in the fourth quarter. In the excess technology automatic door business in part due to our national service strength. Access system sales were flat with first quarter 2003 levels and they complete to rebuild a backlog rebuild. Second half 2003, and first quarter 2004 order trend verifies that this is a growth business. Up 5% in the third quarter, '03 and 9% in the fourth quarter '03 and again up 6% in the first quarter of '04. The building backlog is in the longer cycle electronic access control portion of that business.

Blick and Frisco Bay contributed $33 million of revenue at just under 20% operating margin during the quarter. We added Blick in mid January and Frisco Bay in March. They were accretive to earnings per share in the very first quarter.

So there is solid growth across the board in the first quarter and great execution. We are cautiously optimistic with respect to sales growth for the rest of the year. There is good momentum right now and steps are being taken to sustain the momentum and ensure that growth is delivered, including a key addition to our Canapolis, North Carolina distribution warehouse and a significant facility expansion in Asia.

With that I would like to ask Jim Loree to review the financial elements of today's announcement starting with a review of the new segment report. Jim Loree: Thanks John. It is great having you here as you have quickly grasped and supported the elements of our strategy that have resulted in the resurgence of growth here at the company. Recent changes in the portfolio gives us an opportunity to provide new transparency into this changing company and in today's release, new segments were roll out.

Their consumer products and industrial tools as John walked through them, but I will start with what comprises them in consumer you have the hands tools business, consumer mechanics tools, home decor, hardware and the consumer storage or Zag business. In industrial we have fastening systems or the Bostitch business. Mechanic's tools which includes proto and Mac. Industrial Storage, which is the [VIDMAR] business. Assembly tools, hydraulic tools, specialty tools which is Jensen and Contact East, those brand names and the new CST Berger. And then finally in security, we have best access systems, access technologies, the automatic door business, Blick, Frisco Bay, the new acquisition, and then some smaller units such as Senior Technology, a personal [inaudible] securities unit that we have.

The portfolio when you step back from it is divided roughly 40% consumer, 40% industrial and 20% securities, at least as defined by revenues. Each of these segments have marketly different characteristics. For example, at 16% operating margin. Consumer products is a terrific growth business, it is really the heritage Stanley brands of business and you can see the growth in the quarter was quite good there.

Industrial on the other hand at a lower than line average, 9% operating margin has been historically an underperformer. It now has turn arounds in process in well underway in MacTools and proto and fastening, quite different. And then finally security solutions at 18% OM for the quarter really is the rising star of the company. Each one of the segments has slightly different approach in terms of what we are doing with it. In consumer, we have done quite well growing through adjacencies, adding new products. Managing categories for customers, building the brand and providing at least in recent quarters, good fill rates.

What we are going to do there is basically more of the same. In industrial the idea is to ride the economic turn around and business turnaround at the same time. There really is no structural reason this particular segment cannot be something like a 12% or line average or maybe slightly better at some point in the coming quarters but I wouldn't, I don't expect an over night turn around either there.

Security, the growth strategy here involves both organic growth as these markets are growing that we are in, 5 to 10% on the average, plus future acquisitions. Keep building a global footprint in securities integration. That's what our customers want and go direct to the market place. So we hope this new segment reporting gives you a clear line of sight into the company and helps you understand all the positive changes as well as the dynamics that are taking place in the business.

Let's review the first quarter financials. The earnings per share from continuing operations was 70 cents versus 22 cents last year. That -- last year included pretax restructuring, asset impairment and other charges of $17 million or 13 cents a share in the first quarter. The rest of our comments today will exclude these charges and Jerry noted all 2004 numbers are GAAP.

The 70-cent EPS was above the range we prereleased on March 16th. Which as you recall was 63 to 67 cents. That is up 100% over the 35% number last year that was exclusive of charges and that is our highest first quarter level ever, a record.

As the press release indicated, entry doors were sold to [MASONITE] Corporation in March in addition to the 70 cents from continuing operations we had a pretext gain of $143 million or $1.14 per share from selling the business. It was price achieved was 7.3 times the 2003 EBITDA and Goldman Sach advised us on that transaction.

As far as the growth John talked quite about it. It far exceeded expectations coming into the quarter. Sales were up 23% aside from acquisitions of 16%. As you break that down, 23%, as you break the 23 down, acquisitions was seven-point. Volume was ten-point. Currency another four and price was a point and a half. Yes, it was a positive number for the second consecutive quarter and all that equals 23%.

And just a a side note on price. We have been working with McKinsey now for about three quarters and they have been doing a lot of work to be more surgical with our pricing actions, and already even before the steel increases we were getting some price improvement from the direct result of the work.

Moving to cash flow, very very solid. Not spectacular but very solid 52 million in the first quarter consistent with the 52 we did in the first quarter of '03. Free cash flow coincidentally was also consistent with the first quarter of '03 at $44 million. Working capital performance was pretty good. $16 million of cash consumed versus 21 last year. Most of you who have followed the company for awhile know that our working capital trends tend to be some what negative in the first quarter as we build for the season and then as the year come to say a close we tend to get most of that back. So we think that is right in line with where we expected it to be. As far as the impact of acquisitions and divesture on us. Blick, Frisco Bay, and CST contributed $46 million in revenues in total at approximately 20% operating margin. As John indicated they were collectively meaningfully accretive in the first quarter. They should for the year more than offset the 13 to 15 cent full year dilution from the sale of the residential entry door business, and the objective of replacing that revenue was strategically more attractive and higher margin businesses was clearly met.

I think as importantly all three of the acquisitions the integrations are definitely on track. The financial results speak for themselves. We have an excellent and ever improving integration process to do that. I think the challenge ahead now for us in the security solutions area is to integrate the global securities strategy so we can start leveraging the and already strong customer value proposition.

Then just a few other items pertaining to the financial results. The purchase price for the acquisitions in the first quarter was $282 million plus $18 million of net debt assumed. So for round number $300 million for acquisitions we acquired $230 million of annualized revenue which should produce EBIT or OM of about 20% this year. And that's where the cost take out authority implemented.

So, relevant multiples, 1.3 times sales and 6.5 times EBIT after energies in the early days and just as an aside U B.S. advised us on the purchases of Blick and Frisco Bay and CST, Berger was a privately sourced and negotiated transaction.

On the disposition we received $162 million cash for doors. The taxes will be paid later. All of that a net of taxes, all the factors in financing cash flow none of that is operating cash flow. Our total debt to cap is now down to just under 44% it was 45% in December and 51% in September, so the trend moving in the right direction.

Operating margin increased 430 basis point over the quarter a year ago. 90 basis points sequentially over the fourth quarter. Lots of reasons, the restructuring we did last year, the volume leverage, favorable exchange some price, and mixing into higher margin resent acquisitions all of that was good.

On the other side steel inflation costs us about a point in the quarter. So the effect of that was felt and now as we move to guidance, the second quarter seasonally for us, a solid sales quarter. We are calling for 10 to 12% organic sales growths over the second quarter of last year and six to eight points of volume, two point of currency and two points of price. And we expect to earn 63 to 67 cents as mentioned in the release and that was versus 48 cents a year ago.

For the total year in organic sales increase about 10% and earning in the 275 to 285 per share range from continuing operations are expected. One major consideration in our guidance, especially for the second quarter is the resent inflation and raw material costs. Particularly steel. The impact to Stanley is about 60 to $70 million of annualized inflation which is very unusual. The steel prices are up an average of 40% over year-over-year and obviously for us the only appropriate action here given the magnitude of these increases is to pass them on through.

We are pursuing, have pursed, and will continue to pursue that actively. So far we passed approximately $50 million of that through to the customers and then we are working on actively as we speak here to pass along the remainder but the inflation has kind of happened so quickly there is a time lag. So we are not factoring the recovery of the last 15 million or so into the guidance at this time. However, we intend to pursue that.

And at first blush, some of you may think our second quarter guidance seems a little conservative. Given what we have just accomplished. The steel cost inflation and the price recovery are significant factors effecting that. Time something a big issue. Cost increase immediately and will be definitely felt in the second quarter. The pass through lags and that is largely due to the notification requirements of the customers and the negotiations that took place and so when you look at the unrecovered price the second quarter is the time when we will experience the greatest impact. The good news is the increases have stopped for the most part. Steel prices have stabilized but they are holding at higher levels therefore we have no choice but to pass them through. On cash flow, free cash flow generating capacity of the company is still believed to be close to 250 to $300 million for the year.

And in summary, we are off to a solid start here in '04. The growth has been strong and the stronger portfolio is one of several factors. We have more strategic work to do. But our short term focus now is on deleveraging, getting the balance sheet back to historical norms consistent with our credit rating, and that will enable us to continue the transformation of Stanley into a high profitable company.

Now I will turn it back over to John. Thanks Jim.

I would like to highlight or mention again a few first quarter business developments and then we will proceed to the questions.

First, we acquired CST Berger in January, as you know. Just 60 days later the team introduced Stanley branded professional laser tools at the international tool and hardware show in [COLLOGN] Germany. Customer reaction was encouraging, it is a great opportunity that our tool team sees very, very quickly.

Second, we recently introduced the new line of Stanley branded air tools for auto repair. This line is currently offered in the automotive section of the Wal-Mart stores in the United States. This is exciting for us because it represents a new product line extension.

We also started a test of Stanley's new closet organization systems in the first quarter. This is an evaluation that will take place through the second quarter, or through the end of June, and these systems are currently being tested in 30 Lowe's Stores. And finally, we are currently in a retail test of Stanley paint sundries. Brushes, roller and selected other tools at 50 Wal-Mart stores across the country.

These are but four of the many examples of working with our large retail customers to enhance their offering and ours. We have innovative offerings to bring to our major customers and we are bringing them all exciting value propositions. Our brand is important to us and needs some attention. There will be a commitment to further brand support with details to follow on May 7th.

The combination of new products, innovative concepts, category management, on time and complete delivery, and solid execution present the value proposition that benefits our retail customers and their end users in an increasing number of product categories. The company is strong serving customers while executing strategic moves. Momentum is building and establishing a winning culture continues to excelerate while the management team and all 15,000 Stanley associates are pulling together and continue to deliver strong results.

Finally, our analysts, our annual analysts investor conference is scheduled to be held in New York City on May 7th. Call Jerry Gould for details or questions. On that day we will provide more information about some of the topics we discussed this morning on some of my impression since joining the company. And many of our business and functional leaders will be participating as well. We look forward to seeing you there.

Let's start the Q&A. Wesley?

At this time I would like to remind everyone to ask a question, press star and number 1 on the telephone key pad. Again that is star and number 1 on the key pad. We will pause for a moment to compile the Q&A roster. Our first question comes from Margaret Whelan.

Good morning, guys. Nice quarter. Welcome, John.

Thank you.

The first question I have is for Jim I guess. Can you help us a little bit in terms of guidance for the three new groups in terms of the sales momentum for the year. And also the margin. I know you said the industrial target is 12%. What is the target for the other two please.

You are talking for the year?

Yes, kind of, for the year, I guess.

You, know, it is interesting, I haven't broken it into the segments to give the guidance. We find it easier to look at the aggregate to do it. I can tell what you I think is going to happen. Basically in consumer there is no reason to believe that the second and third quarters won't be terrific. The promotional calendar is great. They have done a nice job on that and the market seems to be fairly robust as well as the exchange rates. Although backing off a little bit in resent days are pretty strong. All that bodies well for the consumer segment.

Fourth quarter will be tough because they had a fabulous fourth quarter and maybe a little slower in the fourth quarter as a result.

Industrial what is going on there, we are getting some benefit from the economy, no question. The particular businesses tend to be very more cyclical than the consumer, so that's providing us a nice boost there, but on top of that Mac comes up on easier counts on the second quarter.

I think we have perhaps in the fastening business a little business of, there was a little, I would say, customer concern about availability of steel and there maybe buy ahead on the part of the customers, nothing we forced or pushed but something the customers may have done naturally. On the other hand if that backs off a little bit as we get into the back half of the year. The Mac will pick up and the fastener will be more where it is and comes up against the whole segment comes up against a tougher comp in the fourth quarter.

That 12% target would not be for '04. It's a longer term target.

Yes, that's right.

Okay.

Finally, security is booming right now, what happened is the access business has just done fabulously with the large customers and upgrades and service activity. There is a brig program at our large's customer for access that is going to wind down in the middle of the year, starting in the third quarter. Big upgrade program and at the same time we have had good performance in the segment based on that but best has been relatively weak. Weaker than we like or weaker than it should be vis-a-vis the market dynamics going on there.

But the backlog is building and we expect them to kick in in the second quarter at least 5% sales growth. Maybe slightly higher. Over the year they should build up as the access maybe slows down a little bit. I think on balance we could see security come down a little bit as we get through the year because of what we, organic perspective because of what is going on in the access business. But that is off set by stronger [inaudible] than what ever the access folks can do in terms of new business to offset that. I hope that gives you perspective.

You mean the sales momentum might decline a little bit.

I think it will. It is built into the guidance. If it doesn't happen we will be stronger. Fourth quarter was a darn good quarter and it will be tough.

Sure. Next question, you are trying to simplify the business and deleverage the balance sheet a little bit, are you thinking about exiting any of the smaller businesses?

Well, we are always thinking about that Margaret, certainly as you review the portfolio, there has to be a few question marks in everybody's head. We are sensitive to the fact that we don't want to counter any major dilution without having something to replace it with, so we are trying to manage the balancing act.

M&A pipeline is still full.

Pretty good.

Okay. Thank you very much.

Our next question comes from Ivy Zellman.

Good morning everyone. Thanks for taking the questions. With your acquisitions you made in securities, both Frisco Bay and Blick are not 100% security businesses, just thinking about the portfolio of currency counter, A T M business, time management, paging business, are those businesses potentially going to be sold off or do you plan on keeping them at this point, Jim?

Ivy, this is John. I will say definitely not. We like all of those, all parts of both of the businesses. Based on the performance, the direct model and the ability to integrate it. I will let Jim elaborate a little bit.

It is not a coincidence they are in some of these businesses. When you look at the Canadian business, in security, it is very strong in financial institutions and very strong in financial institutions because it has a lot of business that is related in some fashion or another. They have a currency counting business in there that obviously one can say is that really a core business but it gets you into the customer.

The ATM's, we at first thought, when we dispose of them, we learned a little bit about the business, we kind of like it. It is not in the main stream if you will of security for sure. But if you look at the cash flow characteristics of the business, they are not, certainly very good. So we have to look at each one in and of itself on a stand alone business. In Blick we have time and attendance. Time and attendance should not be viewed as noncore. You have the doors, the locks and then next logical things are the cards that keep track of the people, where people are to give them point in time. We like the time and attendance business a lot. There are few things in Blick that will determine whether we want to be in them. We are not undertaking a major portfolio clean up of the businesses we acquired.

Realizing Justin Boswell heads this group is he reporting to you Jim, or to John.

That's a fire question, Ivy. What we have done and we haven't been totally public with it. Justin reports to me and this is John, and what we have, we have declared Blick totally integrated. Our process is for a weekly detailed integration calls for the first two to four even six months after integration to make sure it is on board. The Stanley systems are in place and cost taken out.

Jim and I declared Blick integrated what does that mean? Blick reports to [inaudible] who runs our European business. Vander Morery who overseas the business. Heads Blick and reports to [inaudible] dotted line to Justin in terms of strategy and working on European strategy for us. So a long answer to a simple question. But Justin reports to me. Vander reports to [inaudible] and that is our best way to vote strategically operationally to keep the best look at that business.

Great on the outlook, Jim, you mentioned in consumer products. Things are pretty robust, can you characterize the progression of the first four months of the year realizing March apparently was very very strong. Is April sequentially even stronger or flatish with respect to demand levels versus March?

Don McIlnay is on the line. We gave him talking privileges. Don, why don't you tackle that one.

Repeat the question.

You are allowed to speak, Don.

Yes.

With respect to March, is April stronger than March or are they roughly the same.

Typically, we fall off a little bit in April relative to March. And then build back up momentum through May and June. And it would appear that we are going to move in a straight line rather than slightly down.

So it hasn't fallen off like normally.

Correct.

And what is the strongest month of the quarter.

Generally June.

June, okay. Looking at the fourth quarter comments that Jim made about the tough [inaudible] in the fourth quarter, I know it is tough, Jim, if you can give us, Margaret tried to ask the question about respect sales growth by segment. I believe you said 10% organic growth. Can you give us a break down if your fourth quarter, would you expect sales to be up in the fourth quarter, slightly positive.

I think they will be positive. But we haven't built any significant sales increase in the fourth quarter in consumer or industrial.

We don't see anything at the present time that would suggest that there would be a fall off below last year.

Access winding down was your largest customer in the third quarter, how do you expect the fourth quarter to be for access, positive or tough comp there as well.

It is going to be tough but not negative. They have a lot of stuff going on in the area of growth. One of the could competitors just through in the towel. I am not going to name them but there is lots of business out there to be had. We have tremendous momentum, and we have a really good sales team. They are not going to, since the account is starting to wind down for us, they are not going to go to sleep in the back half either. We are basically kind of flattish kind of performance in the fourth quarter and then positive growth from best. And the new acquisitions obviously will not organic growth but overall growth.

Next question comes from Mike Rehaut from J P Morgan.

Good morning. Just a couple of questions. I had a big question, and then just specific on the income statement trends. In terms of the three different divisions, Jim you mentioned 40/40/20 split. I think the question before was asked about the M&A pipeline. You still see opportunities on the security side. Looking out one or two years, are you still looking to put most of your cash flow that your dedicating towards the on acquisition fronts. Would that be still in the security business what can you see in the percent of sales liking out like two years.

This is John. Obviously we are going to grow, both our consumer and industrial tool businesses hopefully add or ahead of the rate of the market because they are good margin businesses and our customers are growing. But I think your presumption is a fair one. One of the reasons we broke it that way with the time perspective, a third, third, and third is not unreasonable.

If you think about our two consumer industrial tool businesses growing slightly at or ahead of the market as we gain share and the majority, not all but the majority of our incremental cash flow being directed towards security, it is quite conceivable to get to a third, a third, a third split for the three businesses.

Also, in terms of margins, certainly you have had nice rebound from the low point of the first quarter of '03. In terms of looking out the next couple of quarters and you know, beyond that, there are so many variables perhaps although I would appreciate your perspective, you are approaching on a 14% margin in the first quarter. Is that something that for the next couple of quarters, given the rise in steel costs whatnot look to be stable or are there specific opportunities in the different segments that you know, could drive that higher?

Well, first thing is built into the guidance, you know, on an implied basis, if you do the math is a slight retraction from where we are in the first quarter in terms of rate. So maybe, something like 50 basis points or something. Something in that neighborhood. That would be even a little bit more.

That's in the second quarter because of the steel costs?

Yes.

Sorry.

Now the third and fourth quarter should be fine because the you know, the steel in price passed kind of offset each other. We are able to get higher volume, you know, we should have more operating leverage, the costs are -- the SG&A costs are firmly under control, at this point, and so, you know, I am not predicting any big margin expansion. I think we will have a little entrenchment in the second quarter and be back to kind of normallicy given the run rates and we will have to see where it goes from there.

Lastly. Income statement detail, the other net line was 14.1. What is the sustainable rate over the next you know, run rate for the next couple of quarters for the full year?

Boy, I wish I knew that. It is one of those things where you settle a legal case in the quarter and get hit for 2 million bucks or you get, sell a piece of real estate and get the benefit of million dollars. Over time, I think it evens out. In any given quarter it is difficult to predict. If you sort of took where we were in this quarter, we had a couple of things that were more negative than usual by a couple million bucks this quarter. You might look at it this way and normalize the few million, but it is pretty close.

On the other hand we are going to have some acquisitions that have amortization kicking in, we will have a full quarter in the second quarter and go the other way. It is really difficult to say. But if you look at the last two or three quarters, you can ballpark where we can expect to be going forward.

Your next question comes from Stephen Kim with Smith Barney.

Yes, thanks, I had a couple of questions I could on the security business. You talked about some of the broader themes you see going on in there about integration. I was wondering if you could update us on how your customers are perceiving your acquisition in the integration of it, Frisco Bay and Blick, they are service customers, are they still having the same personnel contact them? Is there any change that is discertainible from the customer side with respect to the business.

This is John. The answer is absolutely not.

The context are the same and one of the things that we, you know, we are just really enthusiastic about the business and we feel keeps us unique is the direct model. Whether they are perceived by the customers as part of Stanley that's an evolutionary process. It could be a good thing if they are. We aren't facing the channel conflicts of many of the other product suppliers or integrators within the business. The simple answer to the question is yes, individual contacts are identical to where they have been and we see them identical good forward.

I guess what I am getting at is obviously one would expect that your belief is is that those businesses are more powerful and could add more value to the customers by being part of the Stanley brand, the network and I was curious as to how you sort of anticipated that being effected on the ground so to speak and what kinds of things we should expect and look for in the coming years.

I do think when you take a Frisco Bay or Blick and associate the Stanley name with it, it does provide a more confident, you know, customer provide for a more confidence in the customer because of the capital structure of the company and the companies commitment to security, et cetera.

I think the other thing is what really remains to be seen is how we can leverage these assets to create more customer value from the standpoint of the existing best customers or access customers, now that we have a global footprint not totally global but certainly getting there. That's the real request from my perspective, to what extent can we really create customer value by having this more global footprint, even as we continue to globalize it will it enhance the value proposition.

We are getting initial feedback from large multi nationals in the U.S. We haven't explored it fully with the international and multi national. I think we will find it is a net positive from a customer perspective, as we are able to execute more globally it will only hopefully get stronger.

Okay. Great. I agree, I think that is going to be pretty important to watch. John, I was wondering whether or not you could weigh in on having studied the security business pretty intently over the last couple of months, are there any changes that you see or I guess, where do you anticipate that we might be able to see your attention most keenly focused with respect to the security business and where Stanley will ultimately take that. What kind of things are you scrutinizing that you think might be ripe for some sort of change or guidance.

I am not talk going to talk company specific targets. But Jim has already said we have a very active and full potential acquisition pipeline but the kinds of things to look for I guess are two things. It will always be consistent with, we think of ourselves as an integrator as a product provider. And it would be consistent with the direct model. You can see companies that offer products and/or technology to fill a gap and allow us to participate in a broader spectrum of the business. It is 100 billion or 25 billion and we will provide some better I will say science and precision to the segments that we, that we intent to participate in because we have a competitive advantage on may seventh. But, depending on how you define it, it is a billion, 100 billion or 25 billion and we will provide some better I will say science and precision to the segments that we, that we intent to participate in because we have a competitive advantage on May 7th. But specifically, companies that offer products or services that allow us to broaden our offering and integrate what we already have on a larger geographical basis.

Your next question comes from Jim Lucas from Janney Montgomery Scott.

Thanks good morning. Can we go back and look closely at the suck us you are success you are having in Mac right now. There is time and at tension put in the business, can you give us more anecdotal type in the business, your two competitors chimed in with very strong numbers this quarter. Can you give us a little more color please.

This is John. Let me start, Jim and I will ask Jim to supplement. My observation is a pretty simple one. It is from 36,000 feet and our significant improvement is based on a little bit of economy and a lot of correcting of flawed business model and comparing it to pretty easy comps. The Mac model just wasn't working and it was a tough bullet to bite almost a year ago now, to undo it. What I have been just, you know, fascinated by is the fact that despite eliminating so many distributors, we can keep fills flat. I think the hit rate of you know, I gave you the numbers in a year, we have taken new distributors from 1200 up to 1500. We are adding about, we are still adding about 30 a quarter and because we are getting new, let me call them enthusiastic hungry distributors, committed to this to this concept with a chance to make some money, I think we are seeing some more energy on the top line side.

I don't want to underestimate where we are the licensee Jessie James has given us good traction as well. It is a brand that is incredibly popular with a growing segment of the business. John Aiden who runs the business for us is worked really hard to leverage that and that is 100 percent incremental. Those two things, executing well with the new model versus a flawed model and the 100% incremental Jessie James is adding a lot. Jim might add more to that.

I think the other thing, John aiden will be there on May 7th and he could give you a full rendition of what is going on there. But he has this initiative he calls customers for life and he reorganized Mac around the customer if you will, around the processes. And I think it is really powerful and it is what is driving, a lot of what is driving the performance. These folks lost 20% of their distributor base a year ago, versus a year ago and they are essentially flat. So when you think about it, it is an incredible accomplishment. Their comp sales are up. Same-store sales are up in the mid single digits year-over-year for the traditional channel. The number of trucks we talked about is way up. This is not just you know, a function of good luck or anything, they have done a lot of work at a very detailed level to try to make that a business operationally successful and John will walk you through all of that in a few weeks.

When you look at the new dealers that are being added in, are you seeing a return of any of the top dealers that have left when direct first rolled out. Are you seeing addition of competitor dealers, have you been able to analyze anything from that.

Jim, it is John. My sense is yes. Six weeks here. I am going to have you ask John Aiden that same question, and he will be happy to share it with you. That has to be going on or we couldn't be sharing the top line with some of the distributors. We have to have premier guides that left us two or three years ago. Let's have John follow up with you on that.

Your next question comes from Eric Bosshard from Midwest Research.

Couple of things first of all in the consumer business which has this tremendous growth in the quarter, can you talk about what of that is strong demand and what of that is share gains side of that are we going to see this those maintained. Sort of what and why through the balance of the year.

Eric, just to show you this is the new Stanley, we are going to ask Don McIlnay to answer the question because he will do a better job than me. He deserves a lot of credit.

Rising tide raises all boats, what has occurred here is a results of a more robust economy, but I think if you remember back over the last two or three years, the additional SKU placement, that we have gotten at most of the major retailers are now really becoming productive. You are seeing the boats rising but we had more sails on our boat and therefore we caught more of the wind and, so I think that going forward, you are going to see that sustain itself and we will continue growth through the end of the year.

Secondly, the best business which was disappointed on the revenue line and the background was good. We have seen good backlog and no revenues, we care more about revenues, can you talk about what is happening to either turning the backlog into revenues or revenue total growth in total. Why it is softer than otherwise.

Very good question. Because, we get as impatient as you do. Obviously it as little frustrating, when you look underneath the layer or two what you find is the mechanical business plods along year in year out. Anywhere between two and 5%. That's expected for the mechanical business. The real growth is in electronic, that's where the market is growing. That's where we should be growing and what we have done there is in the last year, we pretty much have reinvented the sales force, restaffed, reorganized, refocused it under new leadership and it is a six month cycle. Much longer cycle business and as we get those orders in, it is still takes several months to ship them and so, there is no problem manufacturing, there is no problem getting parts. It is really a time lag in the electronic business that we are up against and you know, we are going to have mid single digits growth in best in the second quarter where we are confident because we can see the backlog now.

Last question, you mentioned four, five months ago the potential for having to do some type of an equity linked offering to fund past and future acquisitions. You talked about the strong free cash flow. Can you give us an update on the current thinking on the balance sheet and what you might need or want to do about it?

Yes, I would do anything not to have to do the equity link security, however the discussions with the rating agencies have been clear, in order to keep the single A rating we need to get our leverage down by a certain date. Our intent is to do that. If it takes an equity linked security in the 100, to $175 million range we will issue one. You will see something in the second quarter if we need to do that. We have other options that we are pursuing, this is a last on the list but it is definitely something we are ready to pull the trigger on if we need to.

We are thinking end of June drop dead date where one way or another, we will have resolved the agency's concern.

Next question comes from Sam Darkatsh with Raymond James.

Good morning and John, welcome aboard.

Most of my questions have been answered but a couple of quick ones, if I could. You talked about pricing, Jim, could you talk about industrial pricing versus consumer pricing. I think if I recall, some of the McKenzie were more on the box as prototype general rah, can you help me with what trend are in both segments.

This is John. Let me take it and Jim can supplement.

We separate the McKenzie work from what is going on in the market place. I am very familiar with the process and I am a big supporter of it. It is really about identifying slippage between gross price and net price realization as well as cost to serve the customers, it is a customer by customer basis and it as process that relates equally to consumer and industrial and we used the sampling of our business where we covered about two-thirds included security solutions.

So think of McKenzie as a process to help us get better price realization. Identify where the leakage is if you will, or the water fall and the cost and net to serve we will do it across the businesses with or without inflation that we need to cover. If you come back to the steel inflation that Jim talked about, the overwhelming majority, it is in Bostitch, thus the need to cover it quickly in Bostitch.

Because the base is a little more fragmented, I guess economics are fundamental business principle would say, maybe a little faster, maybe a little more easily communicated because you are communicating to a broader diverse customer base as opposed to on the consumer side where the line I don't know share of your business is selling to the Bostitch retailers and precludes getting anything through much quicker than 30/60 or 90 days. Same for the large distributors. You have the notification time, negotiation time and so forth. I think that's two totally different ways to think about it.

McKenzie nothing to do with the inflation. We need to recover the inflation in Bostitch quicker and faster than anywhere else. So far a little more rapid recovery on the industrial side. Particularly in the distributor channel. Than on the consumer side.

So if you were to take a broad look at things, on like for like SKUs year over year, what is the positive pricing impact on the consumer side versus the positive impact on the industrial side. Speaking broadly.

We did do the as John mentioned. We did do the study and it covered all three segments. So, you know, frankly the benefits are not dramatically different from segment to segment. I think you can. If the jury is still out on how much we will get from that. So far in two quarters, it looks like we are get getting around a point, point and a half a quarter, that should hopefully keep going for a couple of quarters until anniversaries. And I think you will see it across all segments.

John, I will throw you a softball question since the time is already up. Have you been an able to travel to each of the divisions and any surprises that are notable at this point?

I think each of the divisions I need concord back in rotation. I have been to a lot of the operations and have quite frankly been pretty impressioned with what I have found. I found no really weak links or anything that has been a ridiculous surprise. All of my due diligence prior to joining Stanley was desk research. That being said, I have a week in Europe and week in Asia at the end of May. Both of those I put off until the May 7th analyst conference. As you know we have two board meetings since I arrived. Annual meeting, all my travel has been domestic and I hope to get a little better handle around our European operations around the middle of May.

Great. Thanks. Look forward to seeing you in a couple of weeks.

We have time for one he question.

You final question comes form Ivy Zellman.

Are you saying Jim with respect to consumers just to correct or clarify you are raising prices at the big box.

I am not saying that. What we are basically saying is that we did a lot of analytical work that studied actual customer profitability by SKU. Profitability sliced and diced six ways till Sunday. If our pricing was not properly calibrated by channels, strategy or segmentation or what ever.

We made some surgical adjustments, either in our cost to serve or in the price or in some cases we were finding that policies we had in place needed to be changed to increase order size. There are all sorts of things like that. So it is not just walking into a customer and saying we are going to raise prices 2 percent or something like that. That has not happened to a great degree of the MacKenzie study in the consumer segment. What has happened with the larger customers especially with respect to fastening and also to a smaller ex extent as we shared some issues in the steele inflation areas and we have had some success there.

There are no further questions at this time.

Thank you.

Thank you very much.

Thanks for joining today Stanley works conference call. This concludes the conference. You may now disconnect.