史丹利百得 (SWK) 2004 Q3 法說會逐字稿

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

All lines have been placed on mute to prevent any background noise. After the speakers' 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 keypad. If you would like to withdraw your question, press "star" then the number "2" on your telephone keypad. Thank you.

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

Thank you. Gerry Gould. Good morning, everybody. Welcome to the conference call. On the call this morning here with me, we've got John Lundgren, our Chairman and CEO, and Jim Loree our EVP and CFO.

We've got a few press releases out there, our dividend release from last Thursday, our divestiture of Home Décor release last night, our earnings release this morning, they're all up on our website if you need to access them. Jim and John will review the contents of those releases and then we'll move on to a Q&A period.

Per regulation FD, we'll discuss earnings guidance today at the outset of the quarter and then we cannot comment on it thereafter. And we would obviously pre release if business conditions changed materially from this point in either direction.

We'll plan on a one-hour call so we should end at about noon. A replay will be available beginning two hours after the call ends, and it will run through Saturday, the 23rd, and you can hear the replay at 800-642-1687, and to do so, the access code is 138-0385. And after that point, it will be on our website and you can call me with any follow-up questions at 860-827-3833.

Before John begins, we have the usual two reminders. First in this discussion, as well as our press releases, prior year quarterly and year-to-date reported earnings are supplemented with related amounts and percentages that exclude restructuring costs, impairments, certain other costs, and we believe these supplemental measures provide useful information.

By removing the effect of variances in the prior year reported results that were not indicative of fundamental changes in earnings capacity of the Company. Full reconciliation's with reported amounts are included within the press release and have also been posted to our website.

For the current year, '04 we reported GAAP results only. And secondly, certain statements contained in this discussion by the various Stanley participants are forward-looking statements. As such, they involve risk. Actual results may differ materially from those expected or implied so we urge you to read the cautionary statements included in the Form 8-K, which we're filing with last night's releases. With that, I'd like to turn the conference over to John Lundgren.

Thanks, Gerry, and good morning, everybody. Last night we reported third quarter earnings of 76 cents a share. This exceeded our guidance of approximately 70 cents a share as sales volumes were robust across all three of our business segments. Results and momentum remain strong throughout the quarter.

The 76 cents compares with 46 cents last year from continuing operations, including pre-tax restructuring, asset impairment and other charges of $17 million or 14 cents a share in the third quarter of '03. The rest of our comments will exclude the 2003 charges and all 2004 numbers are GAAP. So EPS of 76 cents was up 27% over the 60 cents from continuing operations exclusive of last year's charges.

Starting from the top line, sales grew 19% in total and 10% organically. The 19% was comprised of 9% from acquisitions, 4% from volume, 3% from currency, and 3% from price. The pass through of material cost increases has been moderately successful thus far and cost inflation has stabilized during the last couple of months.

We also delivered very strong cash flows. In the third quarter, we generated $100 million in operating cash flow and $85 million in free cash flow. This brings us to a nine-month January to September total of $243 million of operating cash flow and $207 million of free cash flow. We're well on our way toward generating $300 million of free cash flow in 2004, which is our stated goal and a very solid performance in a year with nearly 18% sales growth.

The first use of our free cash flow is always our dividend. Last Thursday, our Board of Directors approved 28-cent per share quarterly cash dividend. This was the 128th consecutive year of cash dividend from Stanley and our yield is 2.7%.

Working capital turns improved over 15% in a sales growth environment and our team worked very hard to deliver that improvement. In fact, all three Stanley business segments had improved working capital turns versus prior year. Excluding the effect of acquisitions, working capital is down approximately $50 million year-over-year, a significant accomplishment given organic sales growth in excess of 10%.

Growth continues at Stanley, and this quarter we certainly sustained it. Stanley teams across all businesses executed at high levels, delivering strong marketing programs and innovative new products to our customers.

This is enabling us to capitalize upon recent customer wins, as well as the economic upturn.

Looking at our segments, in our consumer product segment, sales were up 6%. Excluding positive price and currency impact, sales volume was up 1%. For the fourth consecutive quarter, we achieved double digit percentage total sales growth in hand tools, our core consumer business.

Strength was again broad based across all US channels. Sales in Europe were down 5% at constant exchange rates, but increased 5%, including favorable currency translations. In addition to the effects of a product recall that we mentioned last quarter, our elimination of certain unprofitable SKUs at selected retailers, ZAG, our consumer storage business, had a particularly weak quarter in Europe. ZAG also encountered a port strike in Israel, along with its volume slowing, and its profitability was also strained by high, energy related resin costs.

We had the most year-over-year improvement in our industrial tools segment. Stronger markets contributed to higher volume levels, and we leveraged a lowered cost base while our two largest industrial businesses progressed with turnaround. Sales increased 22% in total, and 17% organically. Both double digit percentage increases for the third quarter in a row. Organic sales growth ex-price and currency was up a very encouraging 10% in the third quarter following 5% and 7% increases in the second and first quarters respectively.

Proto industrial mechanics tools, which we described as the business and turnaround at our May analyst conference, had exceptional performance in both sales, which were up 18%, and operating margin, which was 18%, up 17 percentage points versus the third quarter of '03. This business, which was essentially breakeven in the third quarter last year has now posted mid teens operating margins the last two quarters.

This was also another solid growth quarter for our largest industrial business, Bostitch fastening systems. For the third consecutive quarter, that business grew sales over 10% excluding currency. Strength was in the construction supply and industrial channels, and in both the US and Europe.

We continue to be encouraged by the performance in our Mac Tools business. Especially given the tough third quarter conditions related to Florida hurricanes and the phasing end of the new financing program we announced last night and Jim will touch on a little bit later.

Total Mac sales increased 2%, and it's important to understand that our traditional distributor root average have increased year-over-year in six consecutive quarters. New start root averages continue to run 50% above prior year rates. And Mac Tools was profitable for the fifth consecutive quarter, achieving 310 basis points of operating margin improvement over the third quarter in '03. We recruited and added another 60 distributors bringing us to an increase of 25% in year-to-date distributor adds versus last year. Our program to add, train and retain capable and productive new distributors appears to be working.

Assembly technologies grew its sales at double-digit percentage over the same prior quarter for the fourth consecutive quarter. This business continues to gain share and improve profitability in a recovering auto assembly market. Its operating margin also improved considerably over the third quarter of '03.

Hydraulic tools, benefiting from a strong steel recovery market and a successful mobile share new product launch delivered very strong double-digit percentage sales growth and significant margin improvement as well.

Finally, CST/Berger, our newest commercial/industrial business delivered $15 million in sales at over 20% operating margin, and it was accretive to earnings per share again for the quarter. A $50 million business when we acquired it in the first quarter of '04, that business has grown to over $60 million in annual organic run rate.

Looking at Security Solutions, revenues increased 40% due primarily to the inclusion of acquisition. Organic sales increased 5% with particular strength in automatic doors and their service and especially within the national accounts. Best Access had flat year-over-year sales, while orders increased 10%. This business is currently 80% mechanical access control and 20% electronic access control, while 2004 orders trends continue to verify that it's a growth business with a building backlog in the longer cycle electronic access control portion of the business. We're confident and encouraged that this will translate into visible revenue growth in 2005.

Operating margin in Security, which had declined from 18% in the first quarter to 16% in the second quarter, rebounded back to 18% in the third quarter as we predicted it would. The inefficiencies discussed in our last conference call were swiftly and efficiently addressed by the Security Solutions management team.

Blick and Frisco Bay contributed 42 million of revenue at 16.7% operating margin in the quarter, also higher than in the second quarter. They were accretive to earnings per share in each of the first, second and third quarters. All recent acquisitions in Security, Best Access, Blick plc. and Frisco Bay industries continues to deliver the levels of cost synergy and returns on capital at or near those indicated when we made those acquisitions.

In summary, we achieved solid growth across the board again in the third quarter, accompanied by great execution and there's very good momentum right now in all three segments. In my third quarter on the job here at Stanley, I continue to be pleased with the capabilities, strategic focus and results orientation of the management team, as well as the performance of our 16,000 plus associates around the world. With that, I'd like to ask Jim Loree, our Executive Vice President and Chief Financial Officer to discuss both the Home Decor and Mac Advantage transactions we announced last night, as well as to review our earnings guidance for the remainder of the year and beyond.

OK. Thank you, John. Let me touch upon the sale of the Home Decor unit first. As you know last night, we announced the sale of this $150 million sales unit to the Wellspring Capital Management folks for $65 million in after-tax proceeds, and that was approximately $90 million or so of gross proceeds. There was a net after -- will be a net after-tax gain of approximately $30 million when that sale is consummated, which we hope will be in the fourth quarter. It could slip to the first quarter, but more likely in the fourth. We considered, as we've said before that business to be a good business, but really a little bit lower growth and operating margin than we would like for our portfolio. And also we had more than a third of their sales -- or they had more than a third of their sales concentrated with their largest customer. So we're pleased, we worked on that for quite a while, and we wish the management team well there with their new ownership.

And we also announced the sale of the Mac Advantage accounts receivable portfolio to HSBC for about $47 million in cash. Of that 47, about 35 or so of the cash will be used to reduce off balance sheet securitization liabilities, and the remaining 12 of benefit proceeds will be reflected in our -- has been reflected in our financial statements and operating cash flow and free cash flow with the proceeds being applied to debt reduction. We also implemented a new -- in connection with this transaction, a new long-term financing program for Mac Tools customers, and we're really pleased with the value proposition and the flexibility this affords our customers, which is an excellent feature of the program, and as importantly, our distributors out there will have more time to sell as their time collecting these receivables will now be freed up as that becomes HSBC's responsibility.

Let me touch now upon the third quarter results. We're very pleased with the quarter, the double-digit organic growth along with the expanding gross margins and expanding operating margin. We're all very positive, especially in the face of the big run-up in commodity prices that a lot of folks thought would probably depress our margins and we were able to come through with expanded margins during this timeframe. The execution in dealing with the inflationary pressure this year has been crisp from the moment it really began last February. Our analysis has been on top of it, and our sales and marketing people have taken that analysis and responded quickly and effectively in the marketplace.

The cash flow is another great story. Our solid third quarter now positions us to finish out the year at a minimum, we think, of 300 million before dividend, free cash flow, with some possible upside from there. And as a result, our leverage will soon be at requisite levels vis-à-vis our commitments to the rating agencies such that, we can resume acquisition activity in short order. And in that regard, our business development pipeline is very full right now, and we hope to close a few transactions in the not too distant future.

Now let's move to earnings guidance. Many of you know that the fourth quarter historically is not our strongest sales quarter, especially in recent years. But the fourth quarter of '03 was unusually strong. Our current guidance calls for 1 to 2% organic sales growth over the fourth quarter of '03. That with approximately flat volume, driven primarily by the fact that we have a 13-week calendar versus a 14-week calendar fiscal calendar in the fourth quarter of '03, and then on top of that, we expect to get one point of currency, as those comps get a little tougher and one point of price.

So the EPS result from that is approximately 70 cents per share, essentially flat with last year's 69 cents from continuing operations. But at the high end of the range that we implicitly guided to last call, which was 62 to 72 cents. And one of the reasons when you look at the fourth quarter, it looks a lot like the third quarter from a revenue perspective, but the gross margins typically do contract in the fourth quarter versus the third quarter here at Stanley, mainly due to holiday-related inefficiencies and lower production levels. We've built this into the forecast, and these will typically rebound in the first quarter

So that would give us for the year '04 total sales growth of about 18%, organic sales growth of about 10%, earnings of about $2.89 per share from continuing operations, and that's derived from the 2.19 through the three quarters plus the approximate 70 cents guidance for fourth quarter, and that is, as we said in the release, an increase from the $2.75 and $2.85 per share, which we had pretty much consistently been forecasting since last March. We're now expecting '05 earnings per share from continuing ops to be up in the double digits over '04, and where we end up in the range of double digits will depend in part on how successful we are in offsetting the home decor dilution with cost savings and from small acquisitions.

Our free cash flow generating capacity for the company, we now believe this year to be, as I said, right in the $300 million ballpark. We're already at 200 through nine months, and we historically have a very strong fourth quarter, and that is expected again in the fourth quarter of '04, as we liquidate the working capital that we built up in the third quarter.

As far as our cash balance goes, the $256 million reflects the higher foreign earnings as well as, the inflow from the HSBC transaction, and our plan remains to repatriate some of this cash as we go here in the quarter.

Obviously, we prefer to pay down debt with the cash, but much of it is abroad, and we are appreciative of the Congress's attempt to deal with some of the inequities the current tax code creates for US multi-nationals and recognizing last week's bill is only a partial fix. We still very much support it and are hopeful that it soon gets signed into law. That will obviously help us repatriate, even a bigger portion of that cash balance, and so we'll see what happens there.

In summary, we had a very solid -- have had a very solid first nine months of '04. Our growth is strong, and beyond expectations. Our portfolio is much stronger, and that's one of the factors at hand here. There's more strategic work ahead. This is an exciting time here at Stanley, as we strive to create a higher growth, higher return company focused on maximizing shareholder value. Now, I'll turn it back to John.

Thanks, Jim. I just want to mention a few third quarter business developments, prior to opening up the question and answer portion of our call.

First, as the CST/Berger team introduced Stanley branded professional laser tools in Europe, last spring within two months of Stanley's acquiring CST and simultaneously, won significant domestic share at the two largest US retail home center customers.

We've recently entered into a joint R&D and marketing agreement with Leica Geosystems, a Swiss Company, and recognized leader in laser measuring. We expect to leverage their product development expertise in laser measuring position, with our marketing capabilities and laser leveling leadership position to broaden the current offering of laser tools.

Our first joint efforts will bring a new product into the staff (ph) the chime. Our 2004 laser tool sales should exceed $60 million, as I previously mentioned, and we should exit 2004, at a significantly higher annualized run rate.

Our test of garage stores products at retail expanded from four to 30 stores, this summer. It has since been expanded into 50 Florida stores. Results remain encouraging and we do hope for an early 2005 rollout. As we indicated last quarter, we're also proceeding with a retail test of Stanley paint sundries. Brushes, rollers and selected tools, at 50 retail stores in the US. The test is going well, and demonstrating that the Stanley brand carries very well in that category.

Importantly, we've noted on recent calls, as well as at our May 7th Analyst Conference, that we needed a commitment to furthering our brand support. That began in the second quarter with a $4 million incremental spend, over prior year level and continued with another $4 million in the third quarter.

Hopefully, you saw our SET MAX Television commercial, during the major league baseball playoffs, last week and on some of the NFL games, last Sunday. These are part of a pre-planned fall ad campaign, and we expect to continue to invest in our brand going forward.

In that regard, our marketing team issued a press release to the trade yesterday, and it's also on our website that announced our sponsorship agreement with Evernham Motorsports, for the 2005 NASCAR and Nextel Cup Series. Stanley will be the primary sponsor of the Dodge number 91 car of Bill Elliott for four races in 2005, and the Stanley logo will be carried on the numbers 9 and 91 cars throughout the racing season. This is an ideal marketing venue for Stanley.

NASCAR is the fastest growing spectator sport in America, and there's an extremely high participation in construction and home improvement among Motorsports loyal fans. The Company's performance is strong and well positioned for the near future. Serving customers well, while simultaneously executing strategic moves remain our priorities. Momentum continues to be strong, and establishing a winning culture continues to accelerate. The management team in all 16,200, associates are to be complimented for pulling together and continuing to deliver such strong results.

I'd now like to turn it back over to Shatina, our operator, and Jim and I will take your questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press "star" then the number "1" on your telephone keypad. Also, at management's request, please limit yourself to one question and one follow-up. Please hold for your first question.

The first question comes from Sam Darkatsh with Raymond James.

Good morning, John. Good morning, Jim.

Hello, Sam.

Hello, Sam.

Two quick questions. First off, you're mentioning that commodity inflation in 2004, is $70 million to $75 million impact offset by pricing, and if my notes hold, that's the same -- or approximately the same level that you noted back in Q2 as what would be the impact, yet I'd guess -- that would be in the phase of pretty severely rising scrap and resin costs over the last three months.

Does that mean that you folks are buying better to keep the prices down, or does that mean that your contracts don't roll over until either later this year or early next year?

Neither, Sam. The scrap did rise dramatically, but has mitigated moderately the last couple months. Our estimate for inflation for the year hasn't changed much, in the last three months. We'd like to think, we're buying better, but I think that would be a naive assumption on our part.

The fact that we have long-term contracts, guarantees us, supply at market price and no better than that. So simply said, our sourcing organization forecast the run-up. What's happened is it came faster and sooner but has flattened out lately in the annual impact is about the same.

Also importantly, we're all about steel. Resin is impacting our ZAG plastic storage business, toolbox business. That's a 100-plus million dollar business with a lot of our resin in it, but the overwhelming majority of the $75 million number that Jim talked about is steel, and as you know, the overwhelming majority of that is within fastening systems.

It is in Bostitch. Sure. Second question, you alluded to this briefly with ZAG, but can you talk about what you're seeing in Europe, what trends you're seeing broadly? And then, also talk about, I believe, you had a recent leadership change there, if you could address that, if you could, John?

Sure. Europe business is stable. As you know, we're primarily a hand tool business in Europe. And while both home center and professional -- but home centers, of course, are a less significant portion of the total in Europe just due to the fragmentation of the market.

We talked about our European unit volume being down slightly. A lot of things contributing to that; ZAG is one, as I said, and you'll recall we had a handsaw recall in the second quarter, and that had a marginally greater impact than we'd anticipated, but nothing material. So, we feel good about the European business, our position in it, as well as possible consolidation opportunities going forward.

In terms of the leadership change, I think it is important -- Arneau (ph) who'd run our business in Europe for about four years has left the company. Want to be -- couldn't be more clear to say that that's Arneau's choice and we're disappointed by his departure. Arneau was going to run $1 billion private enterprise that's an excellent company, an excellent opportunity for an excellent leader.

And while we're disappointed with his departure, I guess we're flattered they chose one of our leaders to run their business. We have an interim management team in place, and Jim and I are working hard to find a full time solution to replace Arneau.

Your next question comes from Margaret Whelan with UBS.

Good morning guys. Nice quarter.

Thank you Margaret.

The first question I had was just on the security solutions. It's not clear from the press release exactly what was your organic growth there in pricing versus units, if you have it?

Well, the total...

5%, 40% total, 5% organic.

5% organic...

Yes.

...and you're actually a little weak, we didn't hear the second part of your question.

Sorry John. What's the mix between pricing versus units?

Yes. I believe its 2% price, 3% units globally across the security platform.

OK. Is there FX in there as well?

No, there's an insignificant piece of our business is in Europe, and there's no FX in that number.

OK. Thanks. That was great. The second question I have is just as you look out over the next couple of years, what do you think is the organic growth rate of each of the business units now, and also margins, and then a CapEx number if you have it?

OK. Do you have your model out, Margaret, or is...

Yes. It's right in front of me.

Go ahead. I'm going to let Jim take it to be sure we're consistent because we modify these going forward recently.

Yes. I'm going to, I guess, first start by going back to the Analyst Meeting that we had in May. We were expecting essentially 2 to 4% growth, I believe, in both the consumer and the industrial segments to be enhanced, then, by 5 to 7% growth in the security segment.

Yes.

All right. And as this year -- and this year is shaping up to be quite an anomaly where the industrial and consumer are considerably stronger than that, and the security is probably going to be at the low end of five to seven. But the security, nonetheless, is within the five to seven, and I would expect it to stay within that range.

What probably is going to happen here as we go over the next year or two is the industrial is probably going to be a little stronger than the consumer because, primarily, not so much because of market conditions because it's tough for us to predict those, but if you look internally what's going on momentum-wise in the business, the fastening business and the Mac business both have very high -- in relation to kind of the norm for that segment, higher than average growth prospects, and, you know, the two of those businesses comprise about 70% of industrial.

So, on top of that, you have CST, which is probably going to grow in the double-digits for the foreseeable future. So all of that suggests that the industrial will be relatively stronger than what we thought last May. On the other side of the coin, the consumer business, we continue to enjoy and expect stronger than segment average growth out of the tools, hand tools business.

However, the hardware and the ZAG businesses, probably, will under perform at 2 to 4% over the next couple of years for different reasons. You know, the hardware -- there's only so much hardware you can sell at the point of sale. It just -- it's not a big growth market.

And then, as far as the ZAG business goes, we clearly are going to focus more on profitability than volume in that business, and that may have some downward pressure effect on that their revenues.

On the other hand, we expect to take more cost out of that business to get the profitability going in the right direction. That's a tough business right now. So, kind of, having said all that, I would say the consumer probably will be, you know, flat up two, and if I were predicting in the industrial, probably three to five and security, about five to seven.

Your next question comes from Ivy Zelman with Credit Suisse First Boston.

Good morning guys. Good quarter. Realizing I only have two question, I'll try to get the first one in simplistically. If you're looking at your guidance, Jim, for the fourth quarter, the 1 to 2% flat -- sorry, 1 to 2% with volume flat for revenues, can you give us a breakdown given the tough comparison you're up against for the fourth quarter with respect to each segment?

I can try. I think similar to the comments that I just made to respond to Margaret's question, I think consumer is going to be a bit weaker than industrial. So I would not be surprised to see industrial up maybe 3%, consumer maybe flat, maybe even down a point, and security, again, right around probably 3 to 5% kind of growth, maybe 2 to 4.

OK. And then, looking at, I guess, your expectations with free cash flow, 300 million by yearend and getting your debt down to a level that is acceptable with the rating agencies, you said you've got a big pipeline of acquisition opportunities, and the last time you guys were on a conference call, I think in the second quarter, you indicated that you were looking at both -- or more so outside of securities, and yet my sense was that securities -- it wasn't as if you're going to stop making acquisitions, in fact, I thought you'd be more accelerating it. Can you kind of give us a sense of where that pipeline is and what we'd likely see first, or is it going to be a combination in 2005 with respect to all businesses and making acquisitions?

Ivy, it's John. I'll take the beginning of that, and then Jim can enhance it. We certainly can't tell you what's going to come first, because, as you know better than we, we don't necessarily control the pace of that, we influence it. And I think we probably did create a little confusion on our last call. We are going to grow in tools and we are going to grow in security.

In tools, there are tremendous consolidation opportunities, particularly on the industrial side, particularly outside North America, where we feel we can make a creative value-creating acquisitions realizing significant synergies and maintain and grow what will always be a core business for Stanley.

That being said, we didn't want to begin to imply that we were moving away from our effort to shift our portfolio in the intermediate term future towards a third, a third, a third consumer, industrial and security, and longer term, the march toward 50/50, some of that will acquire, of course, larger than bolt-on security acquisition.

In the near future, anything in the 1 to $300 million range, we think we have the cash flow to just do it, and get on with it and do it quickly. Things bigger than that, and they do exist in both industrial tools as well as security, will require us to think about financing, but it would indicate absolutely no change whatsoever from the stated strategy. Do you want to add anything to that?

No, I think that pretty much covers it. Does that answer your question, Ivy? OK.

Your next question comes from Eric Bosshard with Midwest Research.

Good morning.

Good morning Eric.

Two areas I'd like to get some further insight on, one is momentum and the second is on price. In terms of sales momentum, you talked about the industrial business and illustrated how the organic growth has improved in each of the past three quarters, and running at extraordinary levels.

Can you talk about why that number slows in 4Q? I got a feeling comparisons is part of it, and I'd also love some insight into consumer, which has already seen a bit of slowing of its momentum?

Then the second question is similar in terms of price. It sounds like price, which I believe you said was 3% in 3Q will drop to 1% in 4Q and a little bit on the momentum within pricing as well?

Sure. The momentum in the consumer business is slowing a bit, as you pointed out. And I mentioned kind of the drivers for that being the hardware business and the ZAG business. Some of that's self-inflicted and some of it a function of the marketplace. Industrial has been increasing in momentum.

However, we now face the most difficult comp comparison that we have in four quarters, which is the fourth quarter this year, when the order rates picked up for the first time in a while and we delivered an unusually strong fourth quarter, which if you look at the history over the last five years or so, you'll find that the fourth quarter typically would be a dip organically, anyway, sequentially vis-à-vis the third quarter, and in last year's fourth quarter, we had an increase.

Now, part of that was this extra week that we had last year, and that certainly had -- big factor -- that was a big factor. But on the industrial side, as I mentioned in an earlier response, I think we're still going to see a volume -- a significant volume in the fourth quarter and probably total sales growth in the mid single digits for the industrial segment, which will be driven by a really strong performance in the fastening business.

The fastening business has very strong momentum. If it weren't for the $ 40 million plus of inflation that we're dealing with our operating margins in fastening would be in the industrial segment would be exceedingly high. And so that's very positive in terms of momentum.

The Mac business, it's kind of gradual, it's not real strong but it had its first positive quarter in probably since the second quarter -- first quarter of '03 in the fourth quarter, basically what it -- continues to do is methodically add trucks and methodically improve its route averages, and so we can see momentum there, but not blistering in hot momentum, just kind of steady momentum.

So, I think, industrial continues -- and then when you look at all the other businesses, we don't see any slowdown of any significance outside of the fact that we have, the calendar anomaly in the smaller industrial businesses.

And then in terms of what's going on with pricing?

In terms of -- well, pricing continues to be strong. We could be a little conservative on the industrial prediction there for price in the fourth quarter. We certainly will get some excellent carryover from the actions that are already implemented.

You know, we -- if you look at our total price of up 1%, we're going to get several points of that in industrial and we don't really expect any negative price in the other segments so, my guess is we're probably a little conservative on that particular data point.

Your next question comes from Stephen Kim with Smith Barney.

Thanks. I also wanted to ask a couple of questions about the security business. You mentioned that Best Access had orders up 10%, and you indicated that you had about an 80% mix of mechanical and 20% electronic.

I guess, when you were talking about having a longer lead-time associated with the electronic, you didn't actually indicate what percent of your orders, which were up 10% was coming from electronic and how much longer the lead-time was, and I was wondering, if you could provide a bit more color around that.

We can provide some direction but we can't and won't provide that level of granularity for our competitors, who are listening to the call. The majority of the 10% increase in Best is electronic, so you can do that math and it's because it's only 20% of the business. The lead-times for electronic are significantly longer than mechanical.

Two to three times longer than mechanical, because they involve a tremendous amount of coordination with the customer, as well as some advanced planning, so about a three to one time frame in terms of how long it would take to realize the revenue from an electronic access installation and from a mechanical access installation, and directionally, say 30 days versus 90 mechanical to electronic.

Now, as a follow-up to that, the labor component and the personnel required to do an electronic installation, is that something that it has entails significantly more man hours, when you're saying that it requires a lot more coordination with the customer? Is that something that you will need some substantially greater tech support with, and do you have that sort of, ramp factored into your HR effort?

The answer, Steve, is no. These are the same people, and we believe that's one of our competitive advantages. But Jim has been the Champion of this, and I'm going to let him jump in.

Well, yes, I mean, it's exactly the opposite, Steve. We have in our electronic access business, we actually have an underutilized tech force, and we're looking forward to this revenue -- the revenue coming through here, so that we can actually put these people to work more productively and generate higher operating margins in that business.

So, yes, we factored it into our HR forecast. We don't really need to add anybody in the near future. We need to get some of these orders, through the cycle and get them into the field so we can install the systems.

OK. Thanks.

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

Thanks. One question on the Mac receivable program. Could you give just a little bit more color and help us get an understanding of how the program is going to work and also from a recourse standpoint, what happens, if the mechanic stops paying?

You know, there is two pieces to the program. One is the receivables that were already out there that we sold, and on those receivables, which were about $47 million or so, we had a $7 million recourse, which we fully reserved, had already fully reserved, if you will, and so we basically set up a reserve in case there's any recourse in those receivables.

And then, as far as the ongoing program, there is -- it's a non-recourse program to Stanley. So, it will all be -- all the origination will be handled by HSBC's subsidiary that's doing a program. They will maintain the ongoing collection responsibility for the receivables. And they will take the risk. It will make the origination decision and they will take the attended risk.

And could you give us a little idea of where the thought process came from? Because this, the dealer business has been is been around for 80-plus years, and part of the dealer has always been going and collecting that cash. And where is this going to essentially just be a revolving credit card program for the technicians?

The answer to your second part of that question is yes, that's exactly what it is, and we think they'll be, I'll be(ph) modest, there will be a transition period till everyone gets comfortable using this new card, which is like a credit card. But you're absolutely right that the system has been around for a longtime.

We had to fix a broken business model, which the Mac Tools team has just done a tremendous job accomplishing in the last 12 to 15 months, and the whole idea here is that HSBC does this for a living and we don't. In addition to turning over collections and calculating the various risk and return, and as you know, this is a high-risk customer base, HSBC does this for living and they're good at it. That's a win-win. But from our side, depending on the market, our distributors were spending as little as 15 and as much as 25% of their time collecting the receivables.

Our simple thought process is, and when we know from observation, they're already spending all of that time selling Mac Tools. And while the transition will take a few months or a few quarters even to be totally comfortable with the new system, we think there has to be upside top-line potential as a result of the shift. So, great in terms of risky elimination and great in terms of having distributors and salesmen do what we pay them for. So, we think it's win-win.

And also, Jim, there are two types of receivables that these distributors traditionally had. As you know, as one of them are the longer term receivables, which we're talking about here, when they buy a big-ticket item like a tool chest or something like that. And then they also have the smaller receivables, which are kind of the day-to-day receivables that they don't always get -- the distributors don't always get cash for the small purchases.

Sometimes they give the customers a couple weeks to pay. And those particular receivables are still the responsibility of the Mac distributors that we have, although even some of those could be funded on this revolving line of credit. But it's expected that our distributors will still have some working capital requirements just like the competitor distributors have. And they still will need to make sure that they show up at the customers to collect those, and that will continue to provide the glue in terms of the relationship that exists under the more traditional collection scenario.

That was the missing link I was looking for.

Once again, I would like to remind everyone, in order to ask a question, please press "star" then the number "1" on your telephone keypad.

Your next question comes from Michael Rehaut with JP Morgan.

Hi, good morning. First a question on Best and then I have a follow-up question on your manufacturing footprint. On Best, you're just saying that the split right now between mechanical and electronic is 80/20. I seem to remember about a year ago or three, four quarters ago the split being more two-thirds mechanical instead of 80, and I was wondering if there is any shift if that shift indeed did happen, if the electronic business retrenched or if this was just the mechanical growing a lot faster, and if there are any accompanying change in margins for that business.

The simple answer is no, there isn't a shift. The actual number is 70/30 or 71/29, to be precise, and I said 80/20 arguably for emphasis, and that's where it came from. It was 70/30 probably three quarters ago, and that's where it shifts today, so there's no inherent shift going on.

OK. And just shifting a little bit more broadly, in terms of your manufacturing footprint, you know, over the last couple of years, Stanley has selectively tried to combine or shut down one plant and warehouses, et cetera. Over the next two or three years, you know, do you have any additional plans to consolidate manufacturing or shift to lower cost countries, particularly as you look, as you mentioned, industrial tools in Europe, perhaps there's more exposure to be gained in lower cost eastern European plants?

The footprint basically -- it's actually interesting for us for the first time in my tenure, which is five-plus years here, we've actually had to evaluate capacity and ascertain whether we needed to make some modest investments in additional capacity.

And so instead of retrenching, you know, where we're now looking at adding a few plants, two in China and -- actually one in China and one in Thailand in the next two years. We have capacity, extra capacity in Eastern Europe, and it's possible that we will migrate some manufacturing to the Czech Republic and/or Poland over the next few years. But nothing radical in terms of change, and, you know, basically we would expect to see the occasional plant or distribution center shut down, but nothing like you saw over the last, you know, five, seven years.

The benefit of having the growth is that it negates the need to do that. You get productivity by leveraging your fixed costs in the plant as opposed to taking the fixed cost out of the plant system.

Now, just to be clear, we, and this goes to a question that Margaret Whelan asked and we didn't answer it, not intentionally but we just missed it. As far as the CapEx requirements for the company going forward, we've been running somewhere in that 60 to 80% of depreciation in the past three years, and we would expect to continue to run, you know, for the next few years at that rate, even with these capacity additions.

So when we talk about it, we're talking about a $3 million project or a $5 million or an $8 million project, and nothing that's going to, you know, break the bank. And those are just trade-offs that we -- instead of taking some of that capital and applying it to taking the plant system down, we're actually taking that -- some of that capital and applying it to growing our capacity in lower cost countries.

And let me just add to that, in terms of execution risk, first of all as Jim suggested, there's a lot less going on than there has been in the past, so we have the same capable global operations team to focus on it, but in terms of the Asian expansion, importantly, these are meaningful expansions of existing facilities.

The beauty of it is geographically the same location, the same work force, the same very capable management team. Any time you're in an expansion mode, it requires to do it on time and on budget. You know, that being said, whatever the executional risk has been in the past, there's a lot less of it now. Tested and proven team, expanding plants with existing work force and existing management, we feel pretty good about that. We like our chances of executing flawlessly.

Your next question comes from Frank Dunau with Adage Capital.

And maybe you could just help me on LIFO accounting. I notice your inventories are down year-over-year, and I'm assuming the actual unit inventories are down more than the numbers on the balance sheet, but your raw materials are rising in price. Are you booking LIFO credits or charges or what are you doing in there?

That's a very complex question, but the simple answer to the question is because of the volatility of the input prices, we actually calculate a LIFO -- our LIFO provision as well as all our FIFO provisions every quarter, and so what you see is what you get. In terms of we're not expecting any big adjustments at the end of the year, when we do our -- when typically one would do a LIFO calculation annually, but like I said, we do it quarterly. So the question on the provisions, are they throwbacks, the answer is, we've been providing inventory reserves all year and continue to do so as we go here.

OK. Thanks.

Your next question comes from Margaret Whelan with UBS.

Thanks. You missed another part of my question, which was the margin of you business unit please?

What was the question again, Margaret?

The margins by business unit. We went through kind of the growth longer term.

In terms of where the margins might be.

Profits might be, yes.

Effectively? I think consumer and security are probably about, you know, where they might level out, but I think there's still some runway left in the industrial, couple points in industrial.

So maybe 200, 300 basis points?

Right.

Was about 13%. OK. The second thing is, the 8 cents of dilution next year, because of the acquisition, I mean it looks -- the divestiture looks like, back of an envelope is about 10 cents. Does that mean that the Mac business you're divesting right now or monetizing, that that was actually losing money?

Margaret, you know us better than we know ourselves. There's no -- just for simplicity sake. It's roughly 10 cents from décor offset by -- it was roughly a 2-cent loss that we were absorbing so the net of that is 8 cents.

OK, lovely. Thanks.

Your next question comes from Ivy Zelman with Credit Suisse First Boston.

Hey, guys, just a follow-up on Mac. I understand that of the 70 cents that you'll -- in absolute dollars in EPS due in '04 over -- on your '03, that about half of that was due to Mac's rebound. And if that's accurate, is that, you know, upside in '05 going to be sustainable or should we see therefore relatively a tough comparison to show continued profit improvement?

Your math is absolutely correct, Ivy. We can probably get the precise number, but it's maybe 30 or 32 of the 70 cents, a business in deep loss to modest profitability.

That being said, Mac profitability is still well below our portfolio average, and well below our industrial group average, and the Mac team that I'm sure is listening in on this call knows that they're not finished, both in leveraging the top line, which is important, as well as continuing to improve margin.

So we think we've got a lot of opportunity to improve Mac in the six to 18 month prospective to get it, I'll say to Stanley's standard.

OK. Great. Thank you.

Your final question comes from Stephen Kim with Smith Barney.

Thanks. I just wanted to follow up regarding the Frisco and Blick businesses. First of all, when you were in the security show in Dallas, you were starting to, you know, try to get some cross-selling opportunities.

The sales that you would book domestically from the -- basically the Frisco and Blick product, would that go under the Frisco and Blick revenues or would that show up under domestically -- let's say and Best Access?

Basically, Steve, it would show up in two places because the Frisco people would make a small margin on what they sell to the Best people, and the best people, and it would show up in the margin in best and then the sales would get eliminated at the segment level.

And roughly what kind of progress have you made with respect to cross selling? Is that a big part of the opportunity as you envision it next year? You said Best Access runs about 10%. What would you say the Frisco-Blick cross selling is running and what is it likely to do next year?

The real opportunity is probably more in the Blick than it is in the Frisco. And it tends to be focused in the software area, where we have our own kind of low end and mid range software for electronic access control. We've been working diligently since we acquired Blick to get that software to meet the kind of specifications it would have to meet in order to be sold into the US market. The expectation is that by mid-year next year, we would have that work completed, and that we would begin to realize some of those benefits.

OK. That's a next-year event then, basically?

We think so. And a lot of the focus of our business development work is to expand that platform, or said differently, to allow us to leverage the strong install base with more cross-selling opportunities. But there's a 6 to 18 month build between when we acquire one of these companies and when, A, when we have it stabilized, and B, the technology modified to the extent where we're comfortable utilizing it in a different geography with different standards.

OK, great. Thanks a lot.

Thank you.

There are no further questions at this time. Would there be any closing remarks?

No, we just would like to thank you all for listening and participating as always, Gerry is our partner in maintaining the ongoing dialog, and please feel free to contact him with any follow-up as he so suggested at the beginning of the call.

Thank you.

Thank you.

This now concludes today's Stanley works third quarter results conference call with Gerry Gould.

You may now disconnect.