史丹利百得 (SWK) 2005 Q4 法說會逐字稿

I would like to welcome everyone to the The Stanley Works fourth quarter results conference call. [OPERATOR INSTRUCTIONS]

I would like to turn the call over to Mr. Gould, Vice President, Investor Relations. Sir, you may begin.

Thank you and good morning, everybody. On the call with me are John Lundgren, our Chairman and CEO, and Jim Loree, our Executive VP and CFO. Our earnings release, including guidance, is out on our website, www.stanleyworks.com. It will be mentioned at various points during the call. And again, this quarter, John and Jim will go over a powerpoint presentation similar to what was in the last few quarters, and it's on our website, in the investor relations section, so can you follow along. And about twenty minutes ago, we put a PDF version out there, in case want to print it easily and take notes. Jim and John will review the matters in the release and we'll do a Q&A period after that.

According to Reg FG, as we usually do, we'll give earnings guidance today at the outside of the quarter, consistent with the release, then we won't deviate or comment on it, thereafter. If business conditions were to change materially, we would then issue a press release. The call some -- should last about an hour.There'll be a replay available for two hours after the call through the end of the day Sunday night. The replay is 800-642-1687 and, for that purpose, you need a code, which is 4293554. And after that, it'll remain on our website and can you call me with any questions.

Finally, we remind you that certain statements contained in this discussion by the various Stanley participants are forward-looking statements. As such, they involve risks. Actual results may differ materially from those expected or implied, so we direct you to the cautionary statements in Form 8-K which we filed with today's press release -- last night's press release.

With that, I'd like to turn the call over to John.

Thanks, Gerry. Jim and I are going to go through our powerpoint presentation, as Gerry said. I'm going to take us through most of the fourth quarter and our performance. Jim's going to take us through the outlook and spend a little time on the balance sheet. And then, of course, we'll open it up for questions. Regarding the fourth quarter, as can you see, total revenues, as we reported, were up 6%. It was all via acquisition. In terms of the sources of growth on the left-hand side, volume did contribute 1%. We got nothing from price, as there were various puts and calls across the various segments, and we lost 1% in currency. That roughly reflects the foreign exchange impact on $125 million of hand tools, fastening, and security business in Europe in the fourth quarter. So, plus 6 total. Flat on an organic basis.

Looking at it by segment, consumer products, the segment was down as a total of 4%. I'm going to come on to a little more detail of that later. Industrial tools up 2%. organically. and security up 23% in total, driven primarily by the effect of $140 million worth of acquisitions, on an annualized basis, that we made throughout the year, but 2% organically. And I'm going give more detail on that, as well.

Looking at EPS, as you'll see on the 6% revenue growth, we reported earnings of $0.75, which is basically flat versus same period year ago, and 3 to 6% below our $0.78 to $0.81 guidance that we gave on December 7. There is a press release out on December 7, but you'll recall the primary changes from our October guidance were nothing to do with operations, but specifically reflected, the early closing of National Hardware, the disposition of our decorated paint business in Europe, and the discontinuation of our appliance hinge business in North America. The resulting operating margin of 12.4% for the quarter was down about 130 basis points, slightly higher tax rate, shares outstanding up about a million, and we'll come on to that again.

In terms of some of the highlights, let's looking at revenue, first of all. This is where we focused a lot of our attention in the press release, and we can spend time on it today. But of the 839 million in revenue, our largest -- large consumer segment, hand tools as a subsegment was, in fact, down 8%. We reported 4% down in the segment, and that's obviously offset by U.S. hand tools, obviously offset by Europe and our storage business, but globally, the segment down 4. U.S. hand tools down 8. That compares to a very, very strong fourth quarter '04, where sales were up 7% in the 13-week period versus the 14-week period '03. So a really strong '04 and a relatively weak fourth quarter '05 and, as we'll come on to, all which of happened the last two to three weeks of the quarter.

In industrial or mechanics tool business that some of you know is Proto, our storage business that we refer to as Vidmar, and our CST laser business, had strong quarters, all up in excess of 10%. Fastening, or Bostitch, was flat. Hydraulics is $100 million business, about 25 million per quarter, in an assembly who's -- you know, who's primarily an OEM provider to the large automotive manufacturers. They were -- they were both relatively weak. Just one point on hydraulics, it's a small business and we won't dwell on it. It's been performing extremely well. About a third of that business is LaBounty or our shares business. We sold a lot of shares the last two years, as many in the last two years as in the previous five, so that business has been performing well. It's still performing well. But it's susceptible to the market conditions and we've reflected that in our guidance going forward. Our security business, good organic growth in the Americas, plus 4%, offset by Europe, which was flat, excluding the effective currency. And for reference, on an annualized basis, remind everybody it's an $800 million business. About 125 million of that is in Europe, primarily in the UK.

Operating income, as I previously mentioned, down 5 million in absolute terms, margin down 130 bases points. We did a good job controlling SG&A. It was down 7 million on flat sales, excluding acquisitions, but obviously less leverage than we'd anticipated, due to the late-quarter sales shortfall and the effective acquisitions. In fact, it went up in absolute terms. But the businesses did a con -- a good job controlling SG&A throughout the quarter.

Leads to the EPS that I've talked about, down 1%The driver's, per our release, the consumer hand tools weakness, if you will, the sales shortfall and resulting margin impact was about -- worth about $0.10 a share. The early closing of National Hardware -- we'll come on to that in a minute -- was worth about $0.02 a share. Interest on our financing instrument implemented to close -- to purchase National Hardware and Facom was a couple of cents. There was a penny negative, due to the tax rate difference not to the chart, just to get the math right. And offsetting some of that, we had lower restructuring costs in 4Q '05, versus 4Q '04, where we had -- we did have about $0.07 of restructuring charges a few years ago, combination of some minor severance and some asset impairment across the Company.

Just one another point. Jim's going to spend more time on cash flow. We're pleased with our fourth quarter cash flow. We anticipated it. It was good. The point I'll make --Jim's going to spend more time on it -- is working capital for the core business was well-controlled. And given the sudden shortfall in sales at the end of the quarter, it was a good indication this family fulfillment system, controlling our inventory, controlling our turns, is working pretty well, that we didn't get a large -- a larger-than-anticipated inventory build, given the relale -- relatively abrupt sales shortfall at the end of the year.

The next chart, it really is a cause-and-affect, the highlights of the retail inventory reductions, but I think it's a very important one. This is our consumer tools and storage business, and what we're looking at is our retail sell-through that we call POS, relative to our shipments to large customers over three timeframes. And our source for this is seven large customers that account for more than 3/4 of our U.S. or our domestic -- our retail sales. If you look at January through September, the first nine months, everything was in balance. Our shipments to customers were up 6%, our retail sell-through was up 5% and, basically, a first quarter of '05 where our retail sell-through dramatically exceeded our shipments ultimately got into balance over the course of the year. Good second and third quarter.

Everything was in balance, and it actually remained that way through November. But looking at the fourth quarter in total, our retail sell-through, particularly on the strength of some of the new products that many of you saw in October, continued to be very strong and our shipments were good through November. But retail sell-through through the quarter was up 14% versus the same quarter a year ago, while the result of the very weak last two or three weeks of the quarter resulted in our shipments to customers being down 4%, and as mentioned in the release, resulting in inventory at retail below ten weeks, which is the lowest level in a lot of years.

That's continued through the first two weeks of January, where our retail sell-through, or our POS, remains up in 13%. And our shipments to customers through the 15 of January, as some of our large customers drive to reduce their inventories, as their fiscal year's end on the 31 of January, as you know. Our shipments are down 22%, and that is a big factor in flavoring our first quarter in the guidance that Jim's going to provide you later. If you look at the point-of-sale performance business again, this is within the retail channel. Most of our business in consumer tools and storage, and that's what's in the upper left-hand side, the same you've seen before. The 13-week numbers are up 13 to 14%. You see the four-week numbers up even better, and last week, we can argue it's declining slightly, but still, retail sell-through up double-digits. Top right, Stanley Fastening Systems, on a 13-week basis -- or Bostitch -- it's up in the mid single-digits, and lately it's been picking up quite nicely.

CST/Berger, a small part of our laser business is sold through the retail channel, it's going from strength-to-strength, as the numbers indicate. And a little bit of weakness, single-digit declines in hardware, as we and our customers prepared for our business to triple, as we bring on -- bring on National Hardware. Looking at the segments, the biggest news, obviously, is in the consumer segment. We've seen the revenues flat, which we have talked about. Operating income down 6% at 45 million. Margin down 100 basis points.

But a really important story to make here, we've talked about the early closing of National Hardware. We closed it November 30 and in previous guidance, we assumed it would close at the end of the year. With National, it's about a $180 million business on an annualized basis, or 13 to 15 million a quarter. We incurred more than $2 million of inventory step-up charges, not a lot of operating margins, so we've got 13 million of sales at break-even to slightly negative operating margin. Simply subtract is the impact of National arithmetically, consumer business in the fourth quarter at 17% operating margins, and I think that may well have gone, you know, unnoticed as we reported the GAAP numbers, but I think understanding it, it's important.

Looking at the highlights, we've talked about what's happened and we can address it more in consumer. We've continue to support the business with advertising, and that's stimulated end-user demand, thus the strong POS. Our summer programs and rollouts provided continuing strength in the second half of '05, sell-through is good. And we happen to report quarterly, but just sequentially. We're looking at first half, second half. We had a relatively weak first quarter, great second quarter. 16% operating margins in the first half, 17.5% operating margins in the second half; that's with the fourth quarter at 15.6. So, this is a very healthy business and every indication is that mid-teens operating margins are sustainable. We've got a lot in the pipeline and the fundamental sales growth prospects for the business, going forward, from our perspective have not changed.

Looking at industrial tool, a lot going on within the individual businesses. You see revenues up, 2% operating margin down 12% in absolute terms, or 150 basis points. The businesses I touched on earlier, specifically Proto, Vidmar and Berger, very strong. Assembly and hydraulics, smaller businesses but weak. As I said, laser tools just goes from strength-to-strength. Great execution in Europe of rolling out a CST/Berger product under the Stanley brand. We're experiencing a nice lift there. Fastening. or Bostitch. experienced some of the customary inventory pullback that we talked in consumers, as well as some cost and mix issues. Their operating margin was 5 million lower in 4Q '04 than 4Q '03. So, if you exclude Bostitch, the rest of the industrial segment, which, of course, is everything we mentioned, plus Mac Tools, was pretty much flat versus prior year. Mac sales were down a little bit, but OEM in at 7%, pretty good for a distribution business, and signs of our stabilization. We're improving our analytics a lot in Mac Tools. We're better understanding the drivers of both sales and margins. And the Mac Tool Fair, which is their biggest distributor event of the year, took place in National in January, and some of the things in the Mac Tools pipeline that we can talk about more, if there's interest, have been extremely well-received.

Moving on to security, again quarterly volatility that doesn't please us and probably puzzles many of you, and want to just talk through it, as it relates to the quarter and then, again, looking at the year in retrospect. Revenues up 23% overwhelmingly, as we said, from acquisitions, operating income up 11, and we lost 150 basis points of margins we talk a little bit about below. The Americas, good growth; Europe was flat, ex-currency. We expect that organic growth, 3 to 4% range, to continue and margin, 16-plus percent are achievable and we think maintainable, sustainable, over the course of the quarters. The margin was down 150 basis points versus same period a year ago, due primarily to mix.

Secondarily, absorbs and inflation. And the mix is two things. More systems integration, less mechanical, than we'd like. Mechanical, we've got a lot of product sales and we've got better margins, as most of you know. The access business continued to perform well, and, remember, $150 million -- 140 to be exact -- worth of acquisitions annualized. They're still in the high single-digit operating margins. Historically, it's taken us as little as six, and as much as 18 to 24 months, to get those up to line average margins, but the arithmetic impact is also included, when you're comparing versus a year ago. We've made -- taken some cost actions, which we'll touch on in January, to further improve the probability of success in that business. But, again, a relatively small business. There's going to be more quarter volatility than we'd like and we're living with it. But looking at that business, bad first quarter or -- and disappointing first quarter and fourth quarter, great second and third quarters. First half operating margins for the business for 14.4%, second half operating margin, 15.8%, and none of the fundamental growth prospects are changed within that business.

So, just quickly, we focused on the fourth quarter, but we've just ended the year with 10% revenue growth, 13% earnings growth, which we feel good about. But the -- the fourth quarter results and the surprise at the end of the year, still we felt the need to respond and respond quickly. It's exactly what we have done. We've taken some internal cost actions that'll give us about $40 million worth of annualized benefit. Most of them are already taken. They are spread across all three segments, as well as corporate, but focused on indirect labor, SG&A, some of which has crept up since second, third quarter '03, as we've continued to grow and haven't looked hard, or hard enough at our cost structure. So it's just a -- in a sense, a small wake-up call, the need to trim some arguably unnecessary fat out of all the businesses. We think we've done it very prudently, that will result in a $16 million pretax or $0.13 per charge in the first quarter, most of that severance. There's arguably, or possibly, a bit of asset impairment, but we think we've done it prudently.

At the same time, we're going to commence the repurchase of $200 million worth of our stock. The authorization is already in place for that, but we will commence the execution, and it'll still give us $150 million of -- or more of acquisition capability, without doing anything to the balance sheet or ratios or anything that's in place. The rationale for what we've done is pretty straight-forward. We needed to respond rapidly, but we needed to respond, I'll say, on a targeted basis, or surgically, against the businesses and against the structures where it was most required. It does preserve our EPS growth momentum, as well as our long-term outlook.

I don't want to suggest. This is a -- I'll call it -- let's call it a minor restructuring. Under no circumstances does it affect our ability to respond increased customer demand. We have the capacity, we have the organizational capability. We'd like the demand to come out smoother than it's coming in. But we clearly have the ability to fulfill the demand when it picks up, and we're cautiously optimistic that it will. Most important, we're maintaining all our key growth initiatives. The new product pipeline is full, the brand support is there and planned, and we -- we see the opportunity for -- to recharge the engine, if you will, beginning mid-way through the first quarter. So, we think it's a timely, effective response; we think it was necessary.

I'm going to turn it over to Jim, to give you a little bit about -- on outlook, a little bit more on balance sheet and cash flow, and we'll open it up to questions.

Okay. Thank you, John. We're on the 2006 sales growth page, and this is a page similar to one we provided in the powerpoint presentation. Last time, we -- obviously, when you look at this, the organic outlook for the first quarter is quite a bit lower than it was in the previous time that we discussed this. We've gone from about a 5% organic growth outlook in the first quarter to 1%, approximately, in the first quarter of '06, based on our current guidance. And this is predominantly driven by the large customer issues. Really little else has changed and it's predominantly a first-quarter phenomenon, we think, based on the strong POS that John showed you. We have very nominally modified our outlook for second, third, and fourth quarters, but really nothing fundamentally has changed in terms of our outlook for that time period.

But, that first quarter impact has a pretty dramatic effect on our total year organic growth outlook, and we have gone now from one of 4 to 6% in the previous guidance, down to 2 to 4%, just based in the first quarter weakness. And as you can imagine, that would have a significant effect for our earnings per share for the total year and for the first quarter. And that's one of the driving reasons behind the -- the significant cost take-out, in order to preserve that earnings growth profile. When you look at the Facom tools and National Hardware sales outlooks, they stand pretty much as billed in the previous guidance. Nothing significant has changed there, in fact, nothing at all has changed. And then we have the 100 million of '06 acquisitions, which based on the share repurchase and our pipeline activity, we have now put in the third and fourth quarters versus spreading them across the total year, the previous time we discussed this.

Now if we turn the page and go on to the revised 2006 guidance, it is -- there are a lot of moving parts here and it is a little complex, so bear with me a minute. If we take a starting point the $3.18 of earnings in '05, and then on top of that, we are going to realize, we believe, a $0.45 to $0.53 impact from growth from operations. And essentially what that is is the 40 million of cost savings, plus the operating margin on the organic growth. And if you do the math, you'll find out that that comes out closely to $0.45 to $0.53. We now have the advent of stock option expensing, that's a $0.06 negative for us. We have a higher tax rate. We think that's about a four to five point higher tax rate in the core business this year. That should cost us about $0.18 to $0.22. And then the benefit of the share repurchase should be somewhere between $0.10 and $0.15, depending on the share price at the time we buy it and our rate of repurchase, which we think will be fairly robust. And we will expect to quickly come out of the box here, after the earnings release and conference call, and maybe starting in the next few days, begin the -- commence -- begin the share repurchase activity.

So, with all of that, we would get to a base operating level of 345 to 362, which will be an 8 to 14% increase. And then, with the Facom and National operations contributing $0.41 and a minor $0.02 from planned '06 acquisitions. which we said here would likely be security, but it might be some other aspect of the portfolio, too, we would get to 388 to 405. That would be 22 to 27% growth, much more consistent with the revenue growth that we have planned for the year. And then we have got the non-cash inventory step-up charge of $0.27 to $0.30. We put a little range around that, as we have gotten into Facom. We've determined that there may be a few -- on the positive side, there is a lower inventory as a starting point, and then, on the other side, there is a -- some differences between U.S. GAAP and French GAAP accounting as we've gotten into the cost systems. So we put a little range around there just to be sure we capture the right number for that. And then we have the $0.13 restructuring charge. All of that adds up to $3.45 to $3.65 versus our previous guidance of $3.57 to $3.67.

And then moving to the first quarter, starting again with the prior-year earnings of $0.77, we think the consumer volume decline will cost us somewhere between 20 to 23 million in revenue, much of that in January. We do expect a pretty robust February and March, based on order patterns, and in just the point of sale mathematics on days inventory hand for the retailers. So, that'll be about a $0.07 to $0.08 negative impact. We have growing from our other operating activities of $0.04 to $0.05. The stock-option expense, perhaps around $0.02 negative. The higher tax rate, $0.03 to $0.04 negative. And then the share repurchase, may contribute a penny or so. That would get us to base operating earnings of $0.68 to $0.71. We would layer on top of that the Facom and National operations to get us to $0.77 to $0.80, and then the inventory step-up charge, most of which will be recognized in the first quarter of $0.24 to $0.26. And the restructuring charge of the $0.13, we expect about $0.11 or so to be recognized in the first quarter. So that gets us to a 40 to 45 kind of number, after the charges, and $0.77 to $0.80 before the charges.

So that's pretty much the guidance. I wanted to come back, just for a moment, to cash flow, and we finished out the year at 294 million, very close to the 300 million target that we've been talking about for quite some time. We had a really good performance in the working capital area, and we managed to generate $90 million of cash from working capital within the quarter, which was 50 million higher than last year. And that despite the $30 million sales miss that we -- that we had in the consumer business. So, good performance there, good performance for the year with our 294 million cash flow equaling about 109% of income -- of net income, from our continuing operations.

And just a word on working capital. I wanted to dissect a little bit for you the performance in the core versus the total, because the -- with all that cash generation in the fourth quarter, clearly there was a very good working capital performance in the core business. But when you look at the balance sheet, the acquisitions mask, for instance, that core performance. So, as an example -- and there's really no numbers on your page for this -- but I'll just give you some numbers.

The accounts receivable, excluding acquisitions, at the end of the third quarter were 611 million, and they went all the way down to 539 million within the quarter, so a huge reduction there. And inventories went from 432, again excluding acquisitions, to 404, so a nice reduction there, particularly notable in light of the fact that we had that big miss in the consumer business. So we were really prepared for a significant decline in inventories, even well beyond what I just described. And so you can see that production levels and purchasing levels have been adjusted to create a pretty significant inventory reduction. Then payable were roughly flat at 306 at the end of the third quarter, 308 at the end of the fourth quarter, again excluding acquisitions. And total working capital went from 737 in the third quarter down to 636, and $101 million decrease within the quarter. So, very tight management there.

As you would expect, the turns performance was pretty good in the core. For the total working capital, it went from -- they went from 4.3 turns at the end of third quarter to 5.0, again excluding acquisitions, at the end of the fourth quarter. And when comparing to the prior year on a same basis, the turns went from 4.7 to 5.0. So, either way you look at it, a pretty good story. And then moving on the long-term cash performance, with that $294 closing out the year for free cash flow, and we expect to generate about 350 million in '06. We continue to expect strong free cash flow from the Company. Then a look at the balance sheet. Focus here would be on the debt-to-capital ratio closing out the year at 43%. pretty much where we were at the end of '03. But included in that 43% is 450 million of these TRUFs securities, the enhanced preferred securities, that we did in the month of November. And when look at on a 50/50 equity debt blend, it gives us an adjusted debt-to-capital rate of 34%, so pretty much where we were as we -- or very close to where we were as we ended '04. Then you see the big increase in cash, because we did not use much of that financing at all for the National acquisition, because the cash flow generated in the quarter was sufficient to pay for that.

So, all that financing just went in to cash on the other side, and then, it was mentioned in the press release, but we did repat -- repatriate $245 million of cash in the quarter, and that was -- on the balance sheet did not effect any of the accounts, because it just went from foreign cash to U.S. cash, but it is now cash that can be redeployed for the purposes under the American Jobs Creation Act.

So with that, I'll turn it over to John for a wrap, and then we'll open it up after that for questions.

Yes, just in terms of highlights, just to remind everybody, we've press released all of these previously. We did complete Facom Tools as scheduled, on January 1, 485 million at exchange rates that were in place on the ti -- at the time. Integration is on-track. Dedicated integration team working well in Europe and, obviously, we've been able to meet more gran -- and discuss issues more granularly since the deal closed, and I'll say, so far, so good. We've only owned this Company for three weeks. National Hardware, again, completed early for 170 million, again the integration's on track. Excellent opportunities for cost reduction there and the National team is responding well to the challenges. Jim mentioned the $450 enhanced trust preferred. We're pleased we did it; The securities were sold before Thanksgiving, and in our December 7 release, we did announce our discontinuation of our appliance hinge business and the sale of our UK, -- very small UK paint decorator building.

Let's open it up to questions and answers, Whitney.

[OPERATOR INSTRUCTIONS] And your first question comes from Eric Bosshard.

Good morning.

Hi, Eric.

Morning.

Can we talk a little bit about security and, I guess, specifically. I understand the nature of the business is to have some volatility in the revenues, based on when orders go through. But the volatility in the margin, I guess, is what's a little disconcerting. Can you talk a little bit about what you can do and what you are doing to better manage the volatility within revenues, and especially the volatility within margins?

Sure, the volatility in revenues is going to be difficult to ever really manage on smooth basis, because the electronic business, in particular, is a lumpy business, you know. For instance, in the fourth quarter, we did not really have any major accounts that we installed, which in some cases can be $5, $10 million kinds of projects, and often have pretty good margins. So when you have a quarter without that, you get revenue and margin volatility. But we have a good pipeline for those, and certainly are very optimistic about the closure of some of those in the second and third quarter.

We're also finding that the business is more seasonal than we -- than we, perhaps, initially understood, and part of this is because this is a moving target. This business has gone from 100 to 800 million in four years, and it keeps changing it's complexion as we go. But as it stands today, it looks like a more seasonal business, perhaps, than -- than we previously knew, so we do expect to have better second and third quarters from a revenue and, therefore, margin perspective, as well. And the first and fourth quarters are probably going to be tougher, as time goes by.

I think where we can do a better job, and no ones guaranteeing no volatility or low volatility for the margin rates, but I think where we can do a better job is flexing our cost structure and being more variable-cost based, when we do have revenue variations, and becoming more granular in managing that cost structure. I think that's one of the things that happened in the fourth quarter was the revenue was not significantly down from where we thought it would be, but certainly the mix of the revenue was a little different. And the types of people in the field that are relatively fixed in terms of cost. We do not have a variable cost model, so management in the security business is focused on trying to figure out how to be more on top of the cost and revenue balance, as well as how to flex those costs when there is expected -- or anticipated variation in the revenue due to the changing pipeline.

Is the expectation that you will be able to modify how it's managed and the costs in the business to reduce the volatility in 2006 in margins? And I'm not talking seasonal volatility, I'm talking about year-over-year, one quarter margins are up, one quarter margins are down. Will that be able to be accomplished, and we see that in results in '06?

Well, I think just based on the cost take-outs that we've done, we're going to see more consistent improvement, year-over-year, as time goes on, particularly after the first quarter. But, again, I don't think John, myself, or anybody in the security business would say at this point in time, based on the size of the business -- I think it's good to think of it in this term. If you're talking about a bi -- which we are -- a business that 200 million in revenue a quarter, a point of variation in the operating margin rate is $2 million, and $2 million can be a discretionary decision that's made to hire a consultant or -- or invest in some growth or something like that. And that's going to create some volatility. So I think our expectation should be realistic, both externally and internally, in terms of there will be some variation, and every time that there is a blip in the margin rate, it's not cause -- it shouldn't be cause for panic. If it becomes a recurring theme, you know, that's a different story. But there will be continued volatility in the margin rates, but, hopefully, it'll get better. And we're doing everything we know how to do to make sure that happens.

Just -- and just to reinforce the last point Jim made, I'll want to remind everybody, we are doing a lot of systems work to get all of our -- well, our three business within security and all the field locations on a common platform. Remember, as Jim said, the business has grown from 100 to 800 million, and it's among our more difficult businesses to forecast, due to both internal systems capabilities and the market-driven volatility that Jim talked about. Market-driven volatility will remain. We're going to get better, both at cost estimating and have a more variable cost model going forward. But it's going to take us a combination of some time, as well as getting the base a little bit better. So, to Jim's point, $2 or $3 million worth of variation becomes 50 basis points, not 150 basis points.

And then a follow-up, if I could. In terms of what you've seen in the last few weeks, Jim, you commented that you thought order trends in consumer hand tools would improve in February and March. Have you seen anything in the last couple of weeks to say that, yes, we have hit bottom in terms of inventories at the home centers, and now the order rates are more matching the sell-through. Is that happening, yet?

Yes, I guess without -- because we're on the call, I guess without saying more than we're comfortable with, Eric, we've got -- we have very strong orders for delivery on or after the first of February in lot of our -- with a lot of our customers., which we expected, which happened last year. You know, we just need to understand January's going to be weak in terms of shipments, no matter what. It was the December that caught us early. But let me just simply say, order rates are becoming much more in line with our13 to 14% sell-through that we're seeing, because it -- and simply said, if they don't improve, you're not going to be able to buy a tape roll or a hammer in the U.S. before the end of the first quarter.

And anecdotally, for what it's worth, we're starting to get a lot of chatter about you. You folks better be ready for a strong February and this type of thing. So, all indications are that February will be strong, March will be strong. And as mentioned in the press release, we have very robust prod -- new product introduction program that will begin in March and extend into the second quarter and beyond. And orders -- verbal commitments have been made for across many, many different customers for those products, and those will manifest themselves in terms of orders in the near future, as well.

Your next question comes from Stephen Kim.

Thanks. Steve Kim, Citigroup. It was gratifying to see the data on the sell-through, particularly in the consumer business. But I guess I wanted to focus my questions on like our -- on the security business. Just to frame the conversation a bit, it looks like on your '06 guidance, if we think that the buy-backs sort of roughly offset the restructuring charge, you've got the tax effect of maybe $0.04. And it seems like, basically, what you're talking about is a fundamental drop of about $035 worth. $0.07 to $0.08 of that, maybe, comes from the -- you know, from the inventory disruption. So you're left with $0.28 there that I'm trying to figure out what that is, and it seems to be security. And I wanted to find out from you as to, how much of the $0.35 or so that the restructuring is aiming to offset or counter balance is going to be in the security business, as opposed to the consumer and industrial?

Steve, a couple questions there, but let me try to do two things. First, and foremost, is the overwhelming majority of the reduction is due to lowering our organic growth estimates for the entire corporation, nothing to do with security.

I see.

So, of the $0.27 or $0.28, if you think about it, due to the fact that January's going to be almost an nonevent in consumer, and we can't -- we'd be less than prudent if we didn't anticipate that maybe some of this will happen again in December. We've taken organic growth down almost 200 basis points in the consumer segment. Hopefully there's upside to that, but that's the driver of the big number you're looking at. In terms of where the restructurings coming. You know this is a $4 billion company next year, so each and every business is going to participate that to some extend. A pro rata or even larger than pro rata portion of that is coming in indirect labor in security, as we've looked at that business and we've improved our systems. But I'll reiterate, Jim talked about what the issues are. We're spending some capital, as well, in security to improve our systems, and what we don't think we're doing is cutting enough out of security, or cutting into any muscle or bone, if you will, that will stifle the growth, in security or in any of our businesses. The $40 of improvement and the $16 charge is spread somewhat evenly across all three businesses, as well as corporate.

And also, Steve, I'm not so sure I can understand your -- the logic behind your math, and perhaps we shouldn't take it offline afterwards, but the way I look at it, our previous guidance was 357 to 367. It's now 345 to 365, so maybe we're $0.10 lower on the low-end, but we're consistent on the high-end.

Yes, the mid-point's down about $0.04.

Yes, so the mid-point's down about $0.04, and if you think -- I mean the restructuring and the share repurchase offset each other, so every thing else pretty washes down to maybe $0.04 --

Right, which was the tax --

-- at the mid point.

Right, which is the tax issue, which meant that basically, if you're restructuring was going to add back -- you know, was going to give you a benefit of 40 million or roughly $0.35 a share, then I'm saying that that was obviously the fundamental drop you're seeking to offset.

Exactly.

Okay.

And then as John said, he was absolutely right. It's the organic growth going from 4 to 6 to 2 to 4%.

Okay, I was --

-- and that makes the difference.

Okay, I was -- my second question was going to be a follow-up on the security business, but now I'm more intrigued by the comment about the broadness of the reduction in the organic sales growth. I guess, where I'm just -- what I heard you say, I think, John, just now was that you might be baking-in some -- an additional dose of conservatism just in case get revisitation of this inventory adjustment at the end of the year, which would assume -- which I assume means that you are not assuming that you're going to get a makeup for what happened in, you know, in January. But, you're also going farther and basically baking-in an assumption that this could hurt you later, even though it may not. I guess my que -- my follow-up question would be, is this something that you think -- I guess I'm just trying to understand you why think it might happen again as quickly as the December, and whether or not you have, in fact, implicitly baked that into your guidance?

I guess, implicitly, we've baked it into the -- our overall view on consumer. And if you -- you know, can you refer to the slide that Jim presented, slide number 11 on 2006 growth, if you look at consumer products split by quarter, we're showing it's going to be -- it's slide 11. You know, we're saying we're going to be down 1 to 2%, then 4 to 6 organic, 2 to 4 organic. In the fourth quarter, saying 3 to 4 organic. Remember that's awful lousy comp.

Right.

If you think about my slide number 4, without jumping around on you too much, U.S. hand tools was down 8% this December.

Right.

In November -- or last fourth quarter, it was up 7% over comp. When the numbers are that big and the volatility's that high, I think it would be -- I want to say irrational. It wouldn't be wise for us to assume it's all coming back in the second and third quarter. And it would be less than, I think, responsible for us to assume that it absolutely can't or won't happen again. So, there's, I think, just prudent judgment, and you can't have more granularity than Jim's provided you on slide 11 in terms of how we baked that into the forecast.

I agreed, and it sounds like you guys are setting yourself up to a surprise, maybe, to the upside, hopefully in two to three --

You are entitled to your judgement, and you have a track record of being an awfully good judge.

Your next question comes from Jim Lucas.

Thanks, good morning.

Hi, Jim.

Can we focus a minute on two areas? Europe, could you speak a little about what you're seeing over there, especially now that you have Facom in the portfolio, kind of what the industrial environment is looking look over there? And then, sticking within industrial, Bostitch, in particular, can you talk about commodity and pricing, the -- if we've got equilibrium there and expand on what you seeing at Mac?

Yes, I'll just -- Jim's going to take that. Obviously as it relates to the industrial environment in Europe, we've been able to have more, obviously, granular conversations with Facom and there's not a big change in the landscape. We're cautiously optimistic that, as we've said on several occasions, there's possibly some revenue enhancement in Europe, due to the combination of Facom and Stanley. But they were struggling to maintain their top line flat; so were we, with a lot of puts and calls in Europe. So we don't have a new view, let me say, or a different view on the industrial environment in Europe. But let Jim take the second half of that, because we spend a lot of time on the commodity inflation, where it's hurting us, and the impact.

Okay, thanks.

Bostitch itself is -- it has suffered over the last year and a half from substantial inflationary trends. At the moment, those have subsided to a large extent, with the exception of energy-related inflation. The total Company, we expect inflation to be around $20 million this year, and it's largely driven by energy and some of the bi-products of energy-related, such as resin and non-ferrous metals, so steel is not today's issue, but copper and aluminum and items of that nature are. hose -- energy tends to affect, you know, the fastening business, resin tends to affect ZAG, and non-ferrous metals affect a number of businesses, but not dramatically, so the -- particularly the security business, by the way. The total of all that is 20 million. We think we have about 20 million of price in the -- well, we have 20 million of price in the forecast, and we think that's pretty solid. So, price and inflation are really not the issue of 2006, at this point. We think we have that well -- well-contained and understood.

Okay, with regards to Mac, you had made reference to the fact you've got a little better only what is going on there. What's the outlook for potential top line acceleration in '06?

Well, I'll tell you, Jim, we've disappointed ourselves, and maybe the external environment, on our Mac tools top line. So while in our plans, we don't have tremendous top line acceleration, we certainly do have top line improvement. It's based on two things. We've done a lot of work with a -- I will say, rather than advertise their brand with a prestigious U.S. consulting firm, on analytics, because we really didn't have the internal capability and the data to do it at Mac. We've learned a heck of a lot. Some of the things we're focusing on, span of control in the field and things of that nature, and we've confirmed a lot of opinions, I'll say that, and quantified them. We're excited about that. And I will say, because now we've presented them at Tool Fair. On the product side, two big potential game changers. One in the tool box area, the ability to customize the tool boxes. We call it a configurator. Previously, you could get one drawer configuration and, you know, three different colors. And without frightening you, there's in excess of 5,000 options now available on Mac Tools for a tool box, and we can deliver that in 48 hours. We've had the capability of Facom in France. It's a wonderful system. We think that is going to be a mover.

We have a new product line called Mac Edge that we introduced at Tool Fair, which, is being extremely well-received by the distributors. We had 950 of our 1,600 distributors at Tool Fair. It's been really well-received Tool Fair, and I spoken with John [Aiden], who runs Mac Tools, as recently as this morning, and as we get out and present through the district managers and the distributor network, being well-received. So, we've got some good movement on the product side. We have some good understanding that simply adding distributors doesn't help if we're losing them on the other end or they're not making it for two years. And we can spend more time on it, if you'd like. But we're encouraged by Mac Tools, and we're encouraged by the fact that, despite flat sales, they generated 7% operating margin, which for a distribution business isn't bad, well-above its cost to capital, because as you know, we've decapitalized this business. And it is arguably adding value at 7% OM, and we think we've hit bottom on top line, and any rebound will be to their advantage and we're cautiously optimistic they're going to achieve it.

Nice to hear a positive comment on Mac. Thanks.

[LAUGHTER]

your next question comes from Ivy Zelman.

Good morning, guys.

Morning.

'd like to understand two things with respect to your guidance. First, with respect to the fourth quarter actual. When I went back and looked at your slide presentation, you had forecasted a pretty high tax rate, which we used for our fourth quarter of '05 for the full estimated year, and I'm wondering if, therefore, your earnings were actually $0.08, actually lower than the 75 you reported, if we had used your guided tax rate? And then on -- with respect to the full-year '06, we look back at the slides from your 3Q presentation and we had challenged you a little bit on the expectations for margins in both securities, the sustainability of margins, and consumer, as well, with margins at 19%. I asked if you thought that that was achievable and, Jim, you said, yes, you did. Now you're kind of saying 17.5 for the bake half of '05 was a good margin. I'm trying to sense, when you give guidance, and if I missed it, I apologize, but die you give margin guidance, guidance by business, for '06?

o, we didn't margin guidance, Ivy, but perhaps you missed John's presentation, when he talked about the various segments for the fourth quarter. And when he discussed the consumer products segment, he showed that the operating margin and the slide show, if can you put it up there for me, an --

No, I actually heard the whole thing, Jim.

Okay, so you know then it was 17%, without the National Hardware dilution.

Right.

And any comments I would make relative to the margin would, of course, relate to not including the National Hardware dilution. I'm actually very impressed with the job they did in consumer, taking a $30 million hit, you know, in the last three weeks and delivering an operating margin rate accretion to 17%. I mean, when you add -- if you add back the $12 million of operating margin, they lost on the 45, you know, 57, you know, divided by 290, you would be close to 19, you know, 20% after you backed out the national hardware dilution. I admit I could not predict the $30 million of operating margin they lost on the 45, you know 57 divided by 290, you'd be very close to 19, you know, 20% after you backed out the National Hardware dilution. So, I admit I could not predict the $30 million in sales, but I have no loss of faith or confidence in their ability to generate high operating margins. And I guess the other question you had, Ivy?

The tax rate.

Oh, the tax rate. We didn't give guidance, specifically, in the fourth quarter for tax rate, because of the volatility of the tax rate In the fourth quarter. i

Okay. I guess the -- you didn't answer the security margin question, Jim.

She similarly expected the security margin to stay up.

Oh, yes. Well, we said we on the call that we expected 15 to 16% security margins and they came in at 13.5.

Actually you guys provided a 15 to 20% range on future margin expectations. Can you narrow that range in for us now?

That's a long-term expectation and, you know, not for any one quarter. And we definitely support and subscribe to that range. We're going have occasional hiccups, and 13.5 is disappointing to us, but it's not the end of the world. It's 150 to 200 basis points lower than we expected for the quarter. We knew that it would be a quarter where the margins would be closer to 15 than 20. And as I said earlier, that's $2, $3 million and that -- unfortunately, we'd like it to be $2 to $3 million higher, but it wasn't, because for various reasons. Largely, the difference between what we were thinking and where it came in had to do with cost management more than anything. And, hence, the response that the team made, the cost got a little ahead of the growth and they've addressed it. So, margins will be back 15, 16%. My guess is for the quarter ahead, But I'm going to get out of the business of providing quarterly indications of margin for the security business, because it's a no-win proposition. When I guess 15, 16, sometimes 18 and sometimes it's 13. It's just volatile and as I said earlier, that's the way it's going to be for awhile, until this business gains some size and scale and some more experience in the data base.

your next question comes from Sam Darkatsh

Good morning, John. Good morning, Jim.

Sam, good morning.

Morning, Sam.

Two subjects, if I could. The first -- and I apologize if this question comes out in an acrimonious fashion, I don't mean it that way. I'm just confused as to why you were blind-sided by the retailer drawdown? I mean, you only had -- December 7 was when you came out with the restatement or, at least, reclarification of guidance, and a week later, 75 to 80% of your retail customers are acting in concert to draw down their inventories dramatically, and either -- if it's a visibility issue or communication issue or both, but I'm just confused as to why you were blind-sided by that only a week later.

I'll take that, Sam. Doesn't come across as acrimonious, at all. I guess it explains why -- you know, one of the reasons is these are terrific customers, retail partners. They're profitable and profitable to us. But one of the reasons we're working hard to have those customers be 10 to 20% of the portfolio, as opposed to 30 to 40, because they are so unpredictable. Specifically, we showed you the data for all seven customers. The impact was with the three largest customers, and we're always cautioned not to say who they are on the telephone, but there's nobody on the other end of the line who doesn't know who they are.

Two points. As of, not only the 7th of December, I would argue as of the 15th of December, when we actually had a board meeting and updated our board, we didn't see that coming. When our customers decide to draw down inventory and/or stop ordering, believe it or not, they don't call us and tell us. They just stop ordering. And if we see one or two weeks of soft orders, where we're concerned that stocks might be an issue, obviously, we'll proactively call them. We're on a VMI, or vendor-managed inventory, situation with one of those customers, not the other two. But on the 7th, quite frankly, it didn't exist. POS was up in the teens, and our shipments were at or ahead of expected levels. In all, the orders started to slow down the second week of December, and they went from slowdown to virtually zero, no replenishment orders, no anything else.

The only other thing I can say, I don't think our customers act in concert. They're very different kinds of customers. You know, you can -- I think you probably know about our customers than I do, because you're close to them and you analyze their data. We do know that Wal-Mart's the largest retailer in the world, and a lot of folks observe what Wal-Mart does. They have reported that December was their softest December in the last five years, less than 2% same-store growth. And given that they saw that coming mid-december, my suspicion is some of the other larger customers were experienced. They have the same-end user base, were experiencing the same kinds of things, and, quite frankly, the inventory drawdown that we always see in January, my take is it started two weeks -- two to three weeks early, certainly earlier than we expected it, and perhaps earlier than they anticipated a little bit earlier in the year.

And then, the other thing is there is that these customers, from time to time, do have inventory reductions. We all know that, and what generally one finds as a supplier to the customers, at least in the past, it's been when your POS is strong, even if they have a wholesale inventory reduction, they make exceptions for companies that have -- or product lines that have strong point of sale. So, this is a dramatic change in the behavior pattern, because this time it wasn't -- there were few, if any, of these exceptions, and they required very high levels of approval in the customer organizations. And that, obviously, took us by surprise, being a significant behavioral change.

I have one other subject, but before I get to that, I mean was this category-wide, John, or was it specific to Stanley, because [Newel] came out this morning and didn't suggest that any of their tool businesses were affected by inventory drawdowns, at all, so I'm curious as to how widespread this effect was? And again, I have one more subject.

My sense is that it is pretty widespread. We tend -- to be honest, Sam, we get hand tool data and hand tool data only, but we also read what other customers say. You know, Cooper's been out with very sim -- or other competitor's. Cooper's been out with a similar issue to us. Our sense is is two-fold. Where there was a lot of inventory at retail or it had already been shipped, the quarter was fine. Those are the numbers, and those competitors or suppliers may be under more pressure in the first quarter than we will be. But simply -- you know, simply said, we interpreted it as a very broad scale inventory reduction or inventory depletion, certainly not specific to Stanley. On the contrary, with our shipments and our POS, you'll recall our inventory is at record low levels. So, our read, for what it's worth, and that's looking purely at data and then, obviously, conversations with the customers at the builders show in January, our inventories are at record low levels, so it absolutely was not a Stanley-specific effort to draw down inventory.

Okay, final question. Are there any near-term changes to the way your premium hand tool brand FatMax is distributed, and if there are, what are the potential positive and negative ramifications of the change on the long-term value of the FatMax brand?

It's -- yes, that's a fair question. I guess you've observed over the last three years the; a, expansion, and b, support of the FatMax brand. It's been a phenomenal success for Stanley in terms of -- both in terms of volume and margin, and as a consequence, we will continue to aggressively expand to the extent prudent the distribution of the FatMax brand. FatMax will always remain a premium brand for Stanley, no ifs, ands or buts. We've got a lot riding on FatMax, and would do nothing to jeopardize its image amongst the professional end-user, as well as with the customer base. You will understand and appreciate, I know you do, that regarding products introductions, et cetera, it's just served us well overtime to not talk about new products, where they distributed, or to whom they're distributed or who has accepted it, until it's available at retail.

And even though we'd love to do that, we just find that sometimes we get ahead of ourselves, we alienate many of our customers, and it's -- and as much as we'd like to talk about it, we're just careful. The policy has stood us well over time, and it's one we're going to need to stick with. But as Jim said, we're very -- we're cautiously optimistic about the future. We've got a terrific new product pipeline within the consumer business. You saw a wave of new products in October. You were able to see them in October, because they were at retail already. We could have the same conversation again, probably with our first quarter earnings call, when some of the other things that we have in the pipeline will be available for retail at that time. But as much as we would like to, we're not in the position to talk about it on today's call, and I hope you can understand that.

We have reached the end of the allotted time for questions and answers. Mr. Lundgren, are there any closing remarks?

No, we're a little over the time. Thank you. I will say that, compared to recent Stanley calls, we've spent a little more time on the slide show or the presentation, a little less time to Q&A. That's because we thought there was a lot of moving pieces that it would be helpful to understand. For those who didn't get into the queue, Gerry, of course, is available and he has immediate access to Jim and me. So, apologies to anybody who didn't get to answer their question, and we'll talk to you in April, if not before.

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