史丹利百得 (SWK) 2006 Q1 法說會逐字稿

Good afternoon. My name is Tonya, and I will be your conference operator today. At this time, I would like to welcome everyone to The Stanley Works first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS]

At this time, I would like to turn the call over to Gerry Gould, Vice President of Investor Relations. Thank you. Mr. Gould, you may begin your conference.

Thank you, Tonya. Good afternoon, everybody. On the call with me this afternoon are John Lundgren, our Chairman and CEO, and Jim Loree, our Executive VP and CFO. We have three releases out there, last nights the first quarter results and guidance, and this morning we put our dividend release, and on the results of our Annual Shareholder's meeting votes. So those are on our Website, StanleyWorks.com.

Also there is a PowerPoint presentation on our Website, and refer you to these charts as we will be going through them on the call, and we put a PDF version out there about 10 minutes ago, for ease of printing, if that will help you.

A couple administrative things, John and Jim will review the results, and then we will have a Q&A period. We expect the call to last one hour. There will be a replay beginning available at 6:00 p.m. this afternoon through the end of the week Saturday. The replay number is 800-642-1687, and you will need the following code, 8061581. Thereafter it's on our Website, and the presentation will remain on our Website. Any questions, call me at 860-827-3833.

Two quick reminders, the first in accordance with Reg G, we issue earnings guidance in the press release at the beginning of the quarter as we did last night, and we don't change or comment on it thereafter, if there's a material change, we would issue a release and conduct a call.

The second reminder, certain statements contained in this discussion by the various Stanley participants are forward-looking statements. As such, they involve risks. Actual results may differ than those expected or implied. So we direct you to the cautionary statements in Form 8-K that we filed with today's press release.

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

Thanks, Gerry. Going through the presentation is the best way to walk everybody through the quarter and through our outlook. As press released last night, we reported a 22% increase in revenues in the first quarter, primarily attributable to our acquisitions.

On the left side of the page, you see that volume was up 1%, no help from price, so organic growth of 1%, offset by currency, with the majority of the revenue growth coming from acquisitions. Looking at the segments, Consumer Products was up 20%, of which 3% was organic. The majority of that growth was the inclusion of three full months of National Hardware, roughly a $200 million a year business, or $50 million a quarter.

Later in the presentation, you'll see about $179 million of the revenue increase was attributable to acquisitions. Approximately 50 from National, and 120 from Facom, our new French acquisition. Industrial Tool segment up 29% in revenue, but organically down 3. That's primarily the impact of Facom, offset by a weak quarter in Bostitch, which we will come onto a little later in the call.

Security solutions up 10%, 3% organic. The other 7%, the inclusion of acquisitions that closed ISR, S&G, of SafeMasters closing early last year, and the full annual impact of those acquisitions. So all-in 22% revenue growth, of which 1% was organic.

Looking at page 3 on the charts and on the presentation. A lot more detail to come. The earnings of $0.45 versus $0.77 a year ago, includes step-up charges, restructuring, a higher tax rate, and the impact of option expensing. You see 9.6 operating margin versus 12.9% a year ago. And roughly 400,000 fewer shares outstanding due to the first quarter impact of our stock repurchase program.

I will walk you through the charges, because as Jim said on the call leading up to this quarter, it would be a noisy quarter due to restructuring, due to stepup, due to a lot of things, so I think taking you through it is the best way to be clear on what it is. First and foremost, inventory stepup charges of 19 million, and restructuring charges of 13 million, had respectively, $0.14 and $0.11, or $0.25 total impact on earnings.

Looking at the next page, you can see the basically, that $0.25 that I talked about, our EPS would be roughly $070, versus $0.77 same quarter year ago. The rest of the numbers on this page are the same. What we're doing is building for you from $0.77 a year ago, up from the $0.45 as reported.

So moving on to page 6. The $0.14 and $0.11 EPS impact from inventory stepup and restructuring that I referenced earlier, add to that $0.04 from the tax rate increase, $0.02 from the inclusion of stock option expensing, offset by roughly a penny per share, because we did have fewer outstanding shares, and that kind of walks you from the $0.77 year-ago, to where we are now.

Which we've done even in more granularity on page 7. We know it's a complicated quarter with a lot of moving pieces, and this is as clear as we can be on one page. On an EPS basis, you see guidance of about $0.77. The base business was actually down $0.14 versus prior year, which was down $0.02 to $0.04 versus our guidance.

We expected in the guidance that Jim provided, we knew there was weakness in the home centers in January, and we would have a hard time recouping that. The majority of the difference, the $0.10 versus our guidance was centered in Fastening, and we'll come on to that in just a minute. We included and guided the stock option expensing, we included in our guidance the higher tax rate, we included the positive impact of the share repurchase.

The positive for us was we in our guidance, we assumed about $0.09 of accretion, excluding stepup from Facom and National, and in fact, we got about 12, so it will come on again. I know it's of interest to everybody how those acquisitions are going, and how the integration is going, and the headline there is so far, so good. That leads us to roughly $0.70 reported versus $0.77 to $0.80 in our guidance, offset by about $0.10 lower stepup charges than anticipated.

The stepup charges are a combination of both the magnitude and value of the inventory we have to write up, as well as the speed at which it turns, and obviously there was a little bit less inventory to write up, and the written up inventory turned a little slower than we anticipated, within the newly acquired companies. And the impact in that will be reflected in our guidance going forward. Jim will talk to you about it in a minute. Restructuring was as guided at about $0.11. So gets you to a GAAP reported earnings of $0.45 versus our previous guidance of $0.40 to $0.45.

Looking at some of the other highlights. As I've said, I've touched on revenues, I've touched that the fact that acquisitions added about $179 million. The overwhelming majority of that being Facom and National. In our Consumer business, the consumer segment, the U.S. Handtool and Storage businesses had very strong February and March. The world returned to normal, if you will. And we released that in our K in the filing on February 28th.

Industrial, the Mechanics and Storage were up about 5%, Fastening and Assembly, a combination of market and our performance were down. We'll come on to that in the Industrial segment.

And the Security performed well, particularly the U.K. integration, excluding the impact of foreign exchange, and our U.S. Access business, or our Doors business, were both strong. What's going on reflected in Jim's guidance going forward, is that at the end of the quarter, our open order situation, our inbound business is up 4%.

We are not going to get into the habit, for lack of better terminology, of reporting IB or open orders by segment, but I will say it's up in all segments, it's up in our Fastening business, within our Industrial segment. So we're cautiously optimistic as we approach the second quarter that the positive of topline trend is there to be achieved.

Operating income down 9% in absolute terms. 11.7% margin versus 12.9 before stepup and restructuring related charges. SG&A, excluding the acquisitions, was up 4 million in absolute terms. That's purely the effect of stock options, and the charges I discussed earlier.

Within the SG&A, we've got a better mix, specifically, we're spending more money in SG&A supporting our brand, building our business, awareness of the Stanley brand is at its highest level in the last 10 years, so we feel that while in absolute terms, SG&A is relatively flat in absolute terms, and as a percent of total, we've got a far richer mix in SG&A, and we'll begin to see the volume leverage.

EPS, again, down 42%, as I've said. There are fewer shares outstanding. the inventory stepup, restructuring, and other items, per the prior pages.

Real positive story for us in terms of cash flow. $71 million of free cash flow versus $50 a year ago, and as reported in the press release, the $50 million a year ago included the sale of $43 million of our U.K. receivables portfolio in the Security business. So plus 41% on strong working capital performance, all elements of working capital, DSO, DSI, DPO, and as a consequence, turns all improved in the quarter. The first quarter is normally cash neutral at best for Stanley, often a user of cash. And so we're quite pleased with the management of working capital resulting improvement in turns.

Looking briefly at the segment results, for consumer, we're saying certainly another successful quarter for tools. If we look at revenues, up 310, operating income down 9% in absolute terms. Operating margin, a little bit misleading, down 390 basis points. You see the bubble that says 14.8% without stepup charges, that's just the arithmetic of taking them out. But importantly, if we were to take National out altogether, what you'd get is basically flat performance year-on-year, 15.5%.

Remember, in addition to the stepup charges, National is about a $200 million on an annualized basis, or about 50 million a quarter, at 8 to 9% operating margin. We're mixing that into a 15 or 16% business. We will get National to consumer average, or line average over time, as included in our guidance. It normally takes us 6 to 18 months to get it there, and that's the plan for National.

So it's on-track, but it is the arithmetic impact of mixing in a meaningful lower margin acquisition to that business. Customer inventory reductions in January, that we talked about on the last call. Orders have since normalized and we've reported that.

I talked about the fact that we're getting great response to our brand support activities, the FatMax Xtreme product launch took place in the middle of March, is still shipping into April. It's in its early days, and it's five specific product lines. So far, so good. It's meeting or exceeding our expectations in terms of placement, as well as initial orders. It's too early to talk about POS or reorders on that particular product line. The outlook is encouraging for all the reasons we've discussed, and we've talked about the margin impact of the National business.

Looking at Industrial, it was a tough quarter for the Industrial segment, centered around issues primarily in Stanley Fastening systems. Bostitch there were some bright spots as well. Revenues were up 29%, but organically, we were down 3%. That's the inclusion of Facom, offset primarily by shortfalls in Stanley Fastening systems.

Operating income down 22% in absolute terms. Again, that includes Facom's stepup, but you'll see the 10.5% last year, 6.4% margin this year. About half of the difference was due to stepup charges. The other half I'll come on to.

Facom is complete, integration is on-track, it's very early days, we've only owned this company for about 110 days, but we're quite pleased with the management team and its performance. We're quite pleased with the collaboration between the Stanley European team, the Facom team, and their ability to focus on common goals.

So it's way too early to declare a victory, but some of the early bumps in the road that are experienced, particularly with European or French acquisition, we think the fact that due diligence was long, we knew what we were buying, and we continue to have confidence in the team, and the process we have in place. That's going as well as we could expect, and from an operating perspective, as I mentioned earlier, it was a meaningful contributor to our improved performance, and we're very proud of the team in Europe for accomplishing that.

Sales strength also continued in Mechanics Tools, our proto business, as well as our Industrial Storage business, Vidmar. And some of our smaller business, Laser measuring and Hydraulics. They're very strategic, relatively small in terms of moving the needle for the whole segment, but again good performance there.

Fastening was an issue. We talked about first quarter customer inventory pullback. That was in the home centers, as discussed, and with our largest construction customer. That was a piece of our problem, but I don't to suggest for a second our problems were customer or market driven. What was uncharacteristic, and where we performed worse than expected was in the Industrial channel, where we believe the market was relatively strong, and we lost some share in the industrial channel, based on our performance in that channel.

We're confident that the volume will improve in the second quarter, but it is our highest fixed cost business. And when we fall short on volume in Stanley Bostitch, we've got the commodity headwinds that are expected with the high steel content in the Fastening product, and when we don't get the volume leverage, it takes a tremendous impact on the margin line. Plans and programs both short-term and intermediate term, some are in place and some are being developed and fortified, to restore that business to its historical profitability level and improve it beyond that. We'll touch on that a little bit going forward, and that is incorporated in the outlook that Jim is going to talk to you about.

Last but certainly not least, Mac Tools, sales were up 1%, OM at 7%. This business is stabilizing, we're certainly understanding the drivers of the business, and the business model better every day. And we're cautiously optimistic for the future of Mac.

Last but not least in the segments, Security Solutions, operating income was up 9% in absolute terms, but a lot of moving pieces within Security as well. Organic growth in the Americas was 2%. Europe plus 6%, excluding currency. So we're really pleased to see, primarily our U.K. acquisition and other related businesses in Europe, restoring the growth for the first time in a year or so. Pleased with that. Margin of 14%, or 14.2 before the impact of a Australian acquisition. We didn't point it out in the press release.

We bought a relatively small company, $10 million in revenue called Sielox, we closed it in the middle of last year. We had had some meaningful issues, in terms of cost estimating and time to completion for some major projects, that were on the books when we bought the company. And as we've gone to fulfill those contracts, we've underestimated the cost, overestimated the time, which had 110, or 120 basis point impact on the total segment for the quarter. The majority of that behind it, we think we fixed it.

We continue to regard acquisition integration as a core competency, but this is a relatively small acquisition in faraway land that we did not do our customary good job getting it on board, and getting it to where we wanted in a hurry. It is strategic, it's a good piece of business. We've put our own management in place to turn that situation around, but it's a relatively large problem, fortunately over a very small base. But it did impact the quarter by almost 120 basis points. Orders were good across all three of our businesses, doors, mechanical, and the systems integration business.

Jim talked to you about the restructuring activities that took place in the first quarter. Those were centered in Security and Stanley Fastening systems, although they touched all elements of the business. But particularly in Security, some sealed sales consolidations and field tech consolidations. They are complete, and so we'll expect to see the full impact of those in the second quarter.

And as we've said before, the second and third quarters historically, both in terms of volume and in terms of margins, tend to be better seasonal quarters for our Security business. So the fundamental growth prospects for Security remain positive.

We're going to look at 2006, and I'm going to turn it over to Jim. He's going to walk you through some of the underlying assumptions on growth and our outlook, and then we'll open it up to questions.

Okay, thank you, John. Let me focus on the second quarter growth outlook, which I think is very positive, especially in the wake of 1% organic growth in the first quarter, although having said that, the 1% organic growth was more or less in the range we expected, a little bit towards the low end of the range, just driven by the Bostitch issues.

When we look at the second quarter, we're very bullish on the Consumer business. And the point of sale that we discussed at length last quarter was up in low double digits for the entire quarter, inventories are in good shape at the customers right now, the FatMax Xtreme launch is going well.

We're confident that that business will generate 6 to 8% organic growth, and then on the heels of that, the Industrial business, the Fastening issues of the first quarter, I guess I'd like to talk a little bit about that. The volume issue in Fastening, it really was the perfect storm for them in the first quarter from a volume perspective. We expected the home center weakness. On top of that, we got weakness in the Construction channel, and the Industrial channel as John mentioned. The Construction channel really was primarily driven by an unexpected inventory correction by their largest customer in that channel. The Industrial one was probably more of a share story and market weakness story within some of the sub-segments within Industrial, and then they had currency issues in Europe on top of all that. So their total sales were down close to 10% in the quarter.

Well, that kind of a gut-wrenching volume issue does create negatives from the standpoint of gross margin loss due to volume, not only from the volume, but from the fixed cost absorption. And on top of that, they ended up giving away some of their price net of inflation in the quarter, that was a negative for them, too. So what, of that is kind of a non-recurring issue that will bounce back in the second quarter, and what is really more of a long-term fix, I think is a very important question. And the way we're kind of looking at it right now, it's about 50/50. The volume and the fixed cost absorption aspects of that, should not be a problem as we go forward here for the rest of the year.

However, the underlying issue, which in the Annual Report we described as more of a cost issue, I think that's with us for a couple of, maybe a year or two, but certainly a couple of quarters. What that says though, is that if we get back in the second quarter to more of a 2 to 3% organic growth for the Fastening business, they should be right back in-line with where they have been in the prior year, and there shouldn't be a real negative year-over-year variance coming from them. We don't expect to see one in the second quarter, so the sales outlook for them, would be more or less consistent with that 2 to 3%, which is more or less consistent with the 3 to 4 we see for the overall segment in Industrial.

Mac was a reasonably positive story in the quarter. They had a positive organic growth, albeit small. But in the wake of several years of negative organic growth, we found that to be encouraging. They had strong comp sales, and we expect to see Mac get even slightly healthier in the second quarter.

And then Security, we're looking for about 5 to 6% growth. They have very strong order rates coming into the second quarter, and hopefully we'll see that translated into a nice solid sales performance. So for the total company, the organic growth outlook for the second quarter is in the neighborhood of 5 to 7%. Layer on top of that the acquisitions, and we're looking at about a 30% growth rate for the second quarter, in terms of top line.

That translates over to our earnings guidance. And let's start with the quarter of $0.86 to $0.90, operating earnings per share, and then we have another $0.02 to $0.03 for the stepup charges associated with Facom, and $0.03 carryover spending from the restructuring program we announced in the first quarter, for a total earnings per share of $0.80 to $0.85. And for '06, we're leaving our guidance unchanged. Certainly there have been some shifts in our thinking in terms of what might be beneath the surface.

Primarily the Fastening business will not perform as well as we had hoped in our original guidance. It certainly will bounce back from where we were in the first quarter, and we also think that the Facom acquisition and the consumer businesses will perform a bit better than our original guidance, and in total we're still quite confident in the total year guidance of 345 to 365. And the cash flow, with the encouraging first quarter performance now looks very, very, very solid at $350 million.

So let's talk about cash flow for a minute. Those of you that have been following Stanley for a while know that our first quarter is always tends to be a tough quarter for cash flow because of all the payments that go up out in the quarter for annual-type expenses, and the working capital build that typically occurs in the first quarter to prepare for the second and third quarter, higher volume quarters.

Well, in this particular case, we actually had a positive cash flow from working capital. We maintained our turns, excluding the acquisitions, right around the 5 turns level. Which we experienced in the fourth quarter. And to do that, in this first quarter, very, very unusual, and very positive in terms of a story.

And then as John mentioned, we had a receivable sale in the prior year that generated $43 million of cash, associated with our Blick business. That did no reoccur in '06. So when you compare the 71 to the 50, probably a fair comparison is 71, apples to apples, to something like that 7 million. 71 to 7. So huge increase in cash flow, and something that we're very pleased with.

Balance sheet, nothing really notable here, other than to say that the debt to capital is looking to be, after adjusting for the ETPS, around 39%. And that's right in in-line with where we expect it to be, with the repurchase activity and the acquisition of Facom.

With that, I'll turn it back over to John.

Thanks, Jim. So just a couple closing highlights on the first quarter. I guess, all of which we've touched on, Facom [tills] is completed, $485 million on the first of January this year. Integration, so far on-track. National Hardware is completed, again, $170 million purchase price for about $200 million in sales, completed last November. Again, integration being managed by a dedicated team. So far, the programs are on-track there as well.

The cost reduction program that we announced early in the first quarter, it's going to cost us about $16 million, with $40 million of annual benefits. The overwhelming majority of the cost is behind us, and the benefits are starting to accrue. That's also what's reflected in the guidance that Jim provided for the second quarter and going forward. We repurchased 3.5 million shares for $176 million in the open market.

And last, but certainly not least, the most significant launch in the history of Stanley hand tool, five product lines under the FatMax Xtreme brand, focused on the professional end user, began shipping to customers about three weeks ago.

With that, let's turn it over for questions and answers.

At this time, it I would like to remind everyone [OPERATOR INSTRUCTIONS]. Your first question comes from Margaret Whelan with UBS.

Hi, guys.

Good afternoon, Margaret.

Good afternoon. I wanted to ask a question just about rate of change in the business you're seeing that Consumers will go better, Facom's will go better than expected, and then the Bostitch in particular is lighter. With regards to Bostitch, what can you actually do to fix that problem, whereby you can control the cost better?

Yes. There's a lot of things going on at Bostitch, Margaret. It's a really fair question, some of which we can talk about on this call, and some of which we're not ready for. There's going to be a meaningful quarter to quarter, sequential improvement in both volume and margin in terms of basis points, for all the reasons Jim discussed. As I say, we had commodities headwinds, we had volume shortfalls that we expected, and some we brought on ourselves due to poor mix management, and poor product management.

We spent a lot of time, I guess, with both external resources and the Bostitch team, which is a very experienced management team, analyzing the root cause. We've got a cost problem at Bostitch. We weren't even subtle about it, we eluded to it in our Annual Report. And a lot of restructuring we took in the first quarter, the short-term, I don't want to call them quick fixes, but the things that would have immediate benefit, were centered at Bostitch and Security.

Longer-term, we've got two to even six quarters of restructuring activity to do, and systems and manufacturing capability upgrading to do. Obviously, that would entail a further presence in low-cost countries of all the Stanley businesses, Bostitch is probably least represented in Asia. I will say that we opened a state of the art faceting plant in [LongFong] China about two months ago, three months ago. That's going to help a lot. And focus on tool production and assembly needs to be a focus as well.

Remind everybody that it's a $600 million business, but only $200 million of it is tools and the rest is Fasteners. We need to make Fasteners pretty much where we sell them, due to the high freight element, so we will always make Fasteners on three continents, Longfong, China, we make them in Poland in Europe, and we make them in two places in North America. Where we rethink where we make things, what gives us flexibility from a Fasteners perspective, and how we can drive down the cost of the tool element of that equation, while protecting our intellectual property, those are the things we're tackling with a lot of help from some objective third-party consultants. Jim, myself, and the collective expertise of the Bostitch management team.

And Margaret, just to differentiate, when we say a cost problem, it's not a problem where the management team spends too much money on day-to-day kinds of things. It's more of an issue of there's a structural cost problem in the business which involves too much overhead, too much structure, not enough LCC, and that's why it takes a little bit more time to fix. But having said that, we've been working on fixing it now for about four months, and I expect you'll start to see some sequential improvements in the not too distant future.

Okay. Thanks for that. The second question is just about the tax rate, I expect it to be a little higher, and it definitely helps this quarter. I know you had a tax loss carry forward, how long is that going to last, and where are you forecasting the tax rate to be on quarterly basis this year, please?

The tax rate was right in-line with what we said we expected it to be. And just to allay the confusion, because it's easy to understand how there could be a little confusion. The core tax rate, which excludes the acquisitions, was actually 29% in the quarter.

Okay.

And when you back off, and that's how you get the $0.04 increase we show in the exhibits and the tax rate going from 23 to 24. There were some, the benefits that did arise from the acquisition of Facom tools that we thought were actually going to be one-time in nature in the second quarter, and turned out that they may actually be more systemic on an ongoing basis, so I think we'll be looking at a lower tax rate, than the 27% or so we were thinking for the year, but not too much lower, probably in the neighborhood of 26 to 27.

What's the tax rate you're forecasting within the second quarter guidance you provided?

It's probably in the 27ish to 28 range.

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

Hey, Mike.

Sir, your line is open.

Yes, hi.

Hey, Mike.

Sorry about that. Just a question on Security Solutions, I think. As it relates to, in some of the prepared remarks, I heard several times in describing the quarter and even in the Industrial part, a lot of moving pieces throughout your business. And it just seems like, particularly with the last couple of acquisitions, that the pace of acquisitions continues to be pretty solid, and the business is getting more complex.

And I was wondering if you could walk through, you mentioned Sielox and the problems that that little acquisition caused. Just how the different businesses that you've acquired over the last couple of years in that segment fit together, how many are kind of runoffs, and what are you doing over the next year to integrate what is integratable?

Yes. There really are no one-offs, it's all part of a coherent strategy that we've tried to articulate for a couple of years with varying degrees of success, I guess. But in any event, what we are trying to do, we are not accelerating the pace, or even maintaining the pace of acquisitions in the Security business.

You'll note that of the acquisitions we did last year, roughly 70% or so had to do with the tools and hardware platform. And only a small portion of the acquisitions really were Security-related, and for the most part, they were bolt-ons, either strategic or regular bolt-ons.

And in effect what we are allowing the Security people to do right now, and we've been in this mode since the fourth quarter last year, when the results were not where we expected them to be, we're allowing them to spend their time working on taking what they already have acquired, and extracting the most value out of it and stabilizing the platform, and so forth. They are in the process, as I've said before many times, of unifying their business processes, their customer-facing processes, their information systems, and in effect their value proposition to the customer.

When they succeed in doing, that which will be some time in the next year, they will have a very, very credible and effective go to market proposition, which will hopefully allow them to do in the non-access Door part of the security business, what they've done in the automatic door business, which is double the size of the business organically in about three or four years. I'm not setting that as a target for them, but the point is they've had tremendous success in the automatic door business once they ironed out their customer value propositions, and we have a deep conviction that what they're trying to do makes a lot of sense.

And so don't expect to see a lot of Security acquisitions until we are, we declare that they have executed what I just described, their operating margins are more consistent in the mid-teens kind of range, mid- to upper teens range and when they get to that state, then we'll start to seriously consider additional acquisitions that they could then integrate into the platform that we've created.

Let me just add to what Jim said. We still, despite a hiccup or something, a performance we weren't happy with Sielox, we do regard acquisition valuation and integration as a core competency in the company.

Our record of buying companies and within 12 to 18 months doubling their operating margins remains intact, even with the issues included within Sielox. We calculate that about the end of every quarter, and as you know from previous discussions with us, we get about 200 or 300 basis points out of an acquisition within the first 30 to 90 days of owning the company through SG&A reductions, elimination of various redundancies, and things of that nature.

And we get another depending on the company, 200 to 400 basis points over the next 6 to 18 months, through the application of the Stanley fulfillment system to these acquisitions. It's worked well in Security as we've applied SFS to businesses that historically have survived on growth and technology, but with less focus on operating rigor.

Justin Boswell and his team has embraced that and applied it to the acquisitions, and that's why we're confident on our ability to achieve the kind of synergies we're talking about with Facom and National. These are businesses we know well. We've been in the hardware business for about 160 years, and we've been in the Mechanics Tools business for about 100, and these are our core competencies and I'll say we're cautiously optimistic, and as far as to say that we're confident that we'll apply the same rigor and rhythm methodology to these new acquisitions and improve their margins without stifling their growth.

I appreciate that. And just a follow up on what you were saying, Jim, in terms of integrating the sales teams and getting the cross marketing effort, you said that it would be fully done by about middle of next year, so I was wondering if you could give us an idea what are you, 30% done at this point in that process, or how should we think about that?

And also, the two recent acquisitions that were just announced in the press release, there was another, albeit small security systems company, and so it seems like you still are kind of adding on little pieces. And also with the Sielox problem that was based out in Australia, I guess it doesn't really impact your willingness to, I guess, buy with the other South African Fastening company. I guess you're still confident that buying these different geographically diverse companies, are not going to trip you up too much?

Jim will follow on, this is John, Jim will follow on, but let me just say two things. The simple answer is no. For what it's worth, our General Manager in South Africa is who we've sent to Australia to fix the Sielox problem. He's one of our best managers, he's got a tremendous track record, he'll fix it and he will integrate the small South African acquisition, provide that process, it's a different business, but he's there on the ground to provide the same process, he's a senior, seasoned executive, and we're quite confident there.

These are very, very small, and they're in markets where we have a management team in place. I think our issue with Sielox was that it was small, it was Security, we didn't have a lot of Stanley management on the ground, and we didn't pay enough attention to it early enough, and we've learned from that.

Well, two things. One is, the truth is for a roughly $10 million acquisition, we did not bring our normal corporate team to scrutinize the due diligence, and everything else that the team in Australia did. And had we done that, we would not have made the mistake that we made in terms of mis-estimating some of the liabilities of the company, which is what we really did. We have a very, very comprehensive due diligence process on our larger acquisitions. And in this case, we have made that mistake and we won't make that again.

The other thing, Michael, to your question about the small security acquisitions, I'm not going to say here today that we're not going to do any security acquisitions until a year from now. What I am saying is that there are, let's take the one we just announced. The automatic entrance doors in Colorado. That's in the access technologies business. The access technologies business is on a major roll right now, executionally, operationally, and from a market share perspective, and operating margin and everything else.

These people have very little to do on a day-to-day basis with the team in Indianapolis that's integrating these acquisitions that we made over the last two years. They're buying up the distributors in the industry, distributors that carry multi-line packages, multi-supplier packages, and they're converting the distributors over to Stanley-only.

And that's something they do about three or four of these a year, and they'll continue to do three or four a year until there's none left to buy. That's a no-brainer, and it has nothing to do with the execution of the Security integration activities that I mentioned earlier.

Your next question comes from Chitra Sundaram, Cardinal Capital.

Thanks. Two questions, firstly when we look at the Q2 guidance sales growth, Security Solutions 5 to 6%, can you highlight specific items that give you, you know, that have enabled you to get to that 5 to 6 number, which is obviously much better, almost double than what you did in the first quarter.

The very specific item, there's only one item that really needs to be discussed, and that's their order rates. And their order rates are very strong right now. And it takes a few months to convert from order to sale in this business, so we have some visibility as to what's ahead of us on a quarter-to-quarter basis. And therefore, we're confident in that forecast.

Got you. The second question is, this kind of discussion you just had about the Security Solutions business, look at the Industrial Tools business, is it possible to briefly take us through your thinking on why you are in the businesses you are in. What are the metrics you're using to determine if it's still worth the remaining, say in something like the Bostitch business, which has been a bit of an underperformer for quite a while. How are you doing that analysis?

I think if you read, I don't know if you'd had a chance yet to read the letter that John and I included in the Annual Report, but it very clearly spells out the rational for why we are in certain businesses and exiting other businesses. It sort of starts with the fact that we want to be in businesses where we have a compelling value proposition for the customer, and on top of that, we want to be in businesses where brands are important, and we have great brands.

And thirdly, we want to be in businesses where we can have, either have, or can have global cost competitiveness. And if we kind of bounce everything we do up against those three criteria, and we elect to stay in the businesses where all of those are true, we will be able to we think we'll be able to generate above average returns in the form of cash flow, earnings per share, and return on invested capital.

Your next question comes from Steven Kim with Citigroup.

Thanks, guys. First off, I wanted to ask you about restructuring charges. It looks like in the fourth quarter when you were going through your slides, you included an estimate for '06 about $0.13 of restructuring charges. And this quarter, it looks like we've now upped that by about $0.04 or $0.05, and I guess I was curious to what that represents, first?

Okay. Well, in our European business, there's a, some of the consolidation activity that will occur in the future, some of that will affect certain Stanley employees. And that does not go against purchase accounting. I'd say we're honing our estimates in that area, refining our estimates.

Your next question comes from Kenneth [Fenner] with Merrill Lynch.

Good afternoon. I knew you guys were going to be conservative on the Facom earnings, glad to see I'm coming through early. Question about the insight you have into the business. I know you closed in this in early January. The fourth quarter conference call was about towards the end of January. Is there anything different about that business, or the form business that affects the controls and timing of information? It seems to me as though you might have had that information over a three-week period. If you could discuss, kind of the control and information process?

Yes. Without getting, without cutting off Ken, I'm not sure which information you're asking about, Ken.

I'm sorry. I'm referring to the inventory issue and the lack of finished inventory, or stepup charges that you guys had initially expected. I would assume over, since you acquired it in early January, you would have had the information in hand over the subsequent three weeks, by the time you had the conference call.

That's a fair assumption, but I'm going to turn it over to our Chief Financial Officer, rank has its privileges. I asked Jim the same question.

I guess I could answer that question with a question, but I won't do that. But it is interesting for when you acquire a company that has a very cumbersome and decentralized closing process, how long it can take to get information. We did not have any fourth quarter closing for Facom, we did not close until the beginning of this year, so they were very busy with their fourth quarter closing, and didn't finish it until mid-February.

So we did not have any information on inventory balances or anything of the like until mid-February. And the estimates that we were using for the stepup charges dated all the way back to the June audited financial statements that we were provided in the due diligence process.

And , I'll add, that's not an extremely slow closing process for a division of a French company, that off and on has not been publicly traded, and they're filing their statutory accounts. We think the numbers are good, but as Jim said, a conservative estimate based on audited balance sheets in the second quarter of '05, is what was the basis for our original estimate.

Right. And I guess, do you -- given the timing of these things to the downside, what comfort do you have that that information would be conveyed to you guys in a timely manner in the event that there are shortfalls.

Well we'll got, I guess we have tremendous comfort. Let's start with our Corporate Controller, [Don Alan], spends a tremendous amount of time with the Stanley CFO in Europe, with the Facom CFO, ensuring that the processes are robust. And we have little or no concern with the quality of the data.

Our objective, as with any new acquisition, this happens to be large, it happens to be decentralized, it happens to be in France. Our issue is improving our improving the time it takes us to close. We do this with Stanley, we do this with every new acquisition. If they're used to closing in 20 days, and Stanley is used to closing in 5, we'll move them from 20 to 5 over time, but never compromising the integrity of the data. That's not the way Stanley works, and it's not the way our controls and our processes work.

And with any acquisition, especially this one, but with any one, we have a large team of people that descend on the ground in the early days of the after closing, and start the process of hooking up the financials to Stanley's processes and controls. And you just can't, when you buy a company, you're not going to get the same standard that we have. It just doesn't happen. So it's a very quick process to make this happen, and it's one that we do in every case.

And in this case, we're very comfortable and confident in the first quarter financials, as you'll note. We closed our financials on time, and we did that with the same people that took six weeks in the beginning of the year to close the fourth quarter. So everything is fine. We understand what we bought, the financials are accurate, and we go from here.

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

Thanks. If we can concentrate on Security for a moment. Could you give us a breakdown on the Lock side, Access seems to be doing fine, but the breakdown of Mechanical versus Electronic, kind of what the order pattern is looking like to get a feel for the margin mix effect that could happen later in the year?

And then it's nice to here that Mac, we finally have some positive news on things, not taking a step back. Can you talk a little bit about growth opportunities within Mac?

Yes. I'll try to take them both, Jim, and I'll let Jim Loree, supplement. First in security, we're not going to talk about Security IB, so we're certainly not going to talk about IB by the three separate businesses within Security. What I will tell you, or what I'm comfortable saying, is it's not too much different than what you'd expect. The Electronic market is growing faster than the Mechanical market, and as a consequence, our sales are not out of line with that, and as you know that's a challenge for Stanley, because Mechanical is much more profitable. We're trying to strike the right balance between continuing to grow our Mechanical business, which is higher margin, without losing the growth opportunity that comes with Electronic.

So the ultimate challenge for Stanley on the Security side is to improve the margins of our system integration business. And we've got management focused on it, and we think we've got some pretty good upside as a result of that. But I won't on the call, or even one on one get granular on open orders, by business within Security. That's just more information than, not that we think you need, but that we're willing to provide publicly.

On Mac, we learned a lot about this business. I compliment the financial staff that's helped with the analysis. I won't advertise the consultant's brand names, because they get paid too much money as it is, but we've had a lot of good analytical work done on Mac, and what makes this engine run. And we've learned a tremendous amount with quite frankly, even going back to business school, I've never seen higher correlations between cause and effect. We've learned a lot, and it's not so much about product.

That being said, we've got a couple of really exciting products with Mac, two new ones. A custom Toolbox and a ratchet that are really, really being well received. But it's more about understanding, spanning control of the District Managers, the need to recruit and retain distributors faster than we're losing them. These are independent businessmen, as you know.

And for the first time in Mac's history, this has been done done quantitatively. We just needed a lot of outside help to collect process and analyze this data. How many distributors per district manager, how many starts do we need to ensure continuity within a region, and things of that nature. Very, very quantitative. No silver bullets, basic locking and tackling. And I think for the first time in a while, we've seen some of the positive impact of that activity, and we're cautiously optimistic we'll see a little more going forward.

Your next question comes from Nigel Coe with Deutsche Bank.

On Facom and National Hardware, $0.12 to in the waterfall you provided. That's up from $0.03 originally. Can you give us on color on where the extra $0.03 came from, and does that imply there's some upside to the full year number?

Nigel, your question got cut off at the beginning. If we could have the operator allow you to repeat the beginning of your question.

The Facom and the EPS waterfall you provide on the 1Q number, originally Facom was meant to give $0.09 of earnings for the first quarter, and came in at $0.12, where did the extra $0.03 come from? Is it revenues, margin, is it tax and is there some upside to the full year number?

Well, it's all margin. And I would say embedded in the thought process at this point in time, is any upside that might come from that, offsets any downside that might come from the Fastening business. Yes.

Nothing to add to that.

Okay. Also, in your revenue guidance you have got $100 million of acquisitions for the full year, just interested to know what sort of of margin and contribution are you putting on that?

And second quick question, is on the balance sheet, is it short-term borrowings about $400 million. Just want to know where that's coming from.

Short-term what is down --borrowings is up, up, right? Up 400.

Short-term debt is about $420 million, or thereabouts, just want to --?

That's what happens when you buy a $500 million acquisition of Facom.

Yes.

We had to pay for it with something, so --

Your next question comes from Sam Darkatsh

What other question did he ask? -- Before we take Sam's question, we'd like to finish answering the last question.

Okay. I'm sorry.

The other part of his question had to do with the $100 million of acquisitions that were include in the revenue guidance, and the EPS effect for the remainder of the year is $0.02.

Sam?

Okay, sir, your next question comes from Sam Darkatsh, Raymond James & Assoc.

Here I am. How are you doing? First off, I just wanted to make a quick statement, if I could. You mentioned that you don't think there's a due diligence issue with the larger deals, that it just seemed to be with the smaller deals. But last quarter, you seemed to be surprised with the seasonality in the Security business, which may point to a due diligence issue, and then you have the Facom inventory trueup error, and then Sielox as well.

It just seems as though acquisitions are going to have to be a continuing story with Stanley. And I guess that's why a number of us are asking these questions. It's just a statement, I don't know if there's a question there per se, it's just a statement.

My real question has to do with Bostitch, again. John, you mentioned that there were also some project management issues, which may point to something beyond a structural cost issue. Could you address that, and does that have anything to do with the restructurings that were announced, or is that a separate issue altogether?

I said nothing about project management, Sam. Either I confused you unintentionally, or you misunderstood what I said. We've got the opportunity to move to dramatically rethink our manufacturing footprint, both where we make tools, where we make Fasteners, but to maintain our flexibility. To maintain our flexibility, to make fasteners on three continents, to make tools in lower-cost countries, while protecting our intellectual property. What that results in is a lot of moving pieces.

And we absolutely need top notch management skills, to ensure that we execute those cost effectively, and on time. We have those skills internally within Stanley. In order to identify those opportunities and help us chart a path forward, we got some outside help. That being said, the ball is in our court, the plan is on the table, and it's for us to execute with our resources, and I think we've staffed accordingly to do so.

Your next question comes from Eric Bosshard with Midwest Research.

Good afternoon. Two questions for you. First of all, in the second quarter, you're talking about internal growth, internal sales growth of 5 to 7%. In the earnings guidance before charges, it looks like it's just a 13% increase, and I guess I'd like to understand why that seems to be a little bit meager earnings growth considering that level of organic revenue growth.

And secondly, in case I get cut off, if you could talk a little bit about the restructuring benefit in the quarter, I think John referenced that SG&A grew 4 million in the quarter in the core businesses. I guess I would have expected to see that different. Or maybe I'm not looking in the right place to see benefit from restructuring?

Yes, I think the restructuring benefit in the quarter was about 4 million in the first quarter. And it doesn't occur just in SG&A, it occurs in other places. You have to also keep in mind that SG&A is going to increase over time as salaries go up and that type of thing. Inflation effects SG&A like it effects everything else. So the benefit of the restructuring was obviously before any inflation, or any programmatic spending increases.

The reason the earnings growth in the second quarter is $0.80 to $0.85. If you back off the restructuring and the stepup charges, you're at $0.86 to $0.90, which I think is a pretty healthy increase from the prior year. Maybe not exactly in proportion to the type of operating leverage that you'd be looking for, but we're coming off a quarter where there's going to be some cautiousness and some conservatism in the outlook, we're not going to go crazy here, so let's get $0.80 to $0.85 behind us, if we do better great, and then we'll work on the rest of the year at that point.

Is the full year restructuring savings still targeted at $40 million?

That's the annualized, that's the annualized rate, and the overwhelming majority of that, we're going to get this year, because we had the overwhelming majority behind us at the end of the first quarter.

The actual benefit in the '06 year is in the total year, is $30 million.

Okay, so we should have a more material savings number in Q2, relative to the 4 million in 1Q.

Yes.

Okay. Great, thank you.

Thank you. Would Mr. Lundgren like to make a final comment?

No. I think we've run a little over. I thank everybody for their interest, input, participation on the call. As always, Gerry is available 24/7 for a follow up question. And he'll get to Jim and me if need be.

I appreciate everybody's participation and in an afternoon call, we had a Board meeting this morning, and that's the reason for the afternoon call, so I thank everyone for their patience, waiting for five hours longer than normal to get to ask their questions.

Okay. Thanks.

Thank you for participating in today's teleconference, you may now disconnect.