史丹利百得 (SWK) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to The Stanley Works fourth conference call. After the speakers' remarks there will be a question and answer session. [OPERATOR INSTRUCTIONS]. Thank you.

Mr. Gerry Gould, you may begin your conference.

Thank you. Good morning everybody. Thank you for joining us. On the call with me this morning are John Lundgren, our Chairman and CEO; and Jim Loree, our Executive VP and CFO. We have results in our fourth quarter results in the press release from last night and the guidance and it is posted on our Website, stanleyworks.com in the Investor Relations section. There is a presentation on our Website. The vendor we used had a little glitch this morning but we assure you that if you go there now it is the proper and correct Website, not the HSM presentation, it's all corrected. We will refer to these charts and there is a PDF version out there also. Jim and John will review the results and then we will have a Q&A period.

The call should last about an hour, perhaps a little longer. There will be a replay available through the end of next week, Saturday, February 3. The replay is (800)642-1687. And the code for this call is 5958473. It will remain on our Website for probably a month after that. You can call me with any questions at (860)827-3833. Two items that we always cover. In accordance with Reg G we issued earnings guidance in the press release last night. We will comment on it today and then we cannot comment on it further thereafter. If it changes materially, more than 10%, we will issue a press release and conduct the call at that time.

Finally, certain statements contained in this discussion by the Stanley participants are forward-looking statements. As such, they involve risk. Actual results may differ materially from those expected or implied. So we direct you to the cautionary statements in the Form 8(K) that we filed with today's press release. With that, I would like to turn the call over to John Lundgren.

Good morning and thanks, Gerry. We've got a fairly extensive presentation today because there's a lot going on. I'm going to take you through fourth quarter results and some of the business highlights. And then Jim is going to take us through guidance, as is our custom and tradition, and talk a little bit about the resegmentation that we introduced in our press release last night. So looking at the fourth quarter, revenues were up 21%. And that's driven primarily by Facom and our National acquisitions. We reported $1.019 billion in revenue.

Looking at sources of growth, volume was at all-in on a core or organic basis down 1%, a tremendous number of puts and calls in there. I will get into that in the segments, so I won't dwell on it now. We got 1% in pricing, that's a good trend but you know how much inflation is general and particularly non-ferrous metals inflation is out there. So, it wasn't really enough to recover all the inflation but we were pleased to have positive pricing, which led to flat organic sales. We did get 1 percentage point from currency. As our press release pointed out, Europe is becoming an increasingly larger part of our revenues and an even more important market for us than it has been in the past. The 20% from acquisitions getting us to 21%.

Looking briefly at the segments. Consumer up 17%. That's primarily the inclusion of National Hardware, again with some puts and calls. The tremendous performance in hand tools, plus 10% across North America and Europe. Hardware was down a bit and consumer storage was down a bit. Consumer so storage and hardware together account for about a third of the segment.

So, great performance in hand-tools, softness in hardware and storage but all-in 3% organic growth in a very flat to down market. As you're aware, we are very quite pleased with that. Our industrial segment all-in was down 4%. That's all about Bostitch and we will talk about that in a minute. The rest of the segment, excluding fastening systems, was up 3% but Bostitch was down 12% organically. We reported down 8% but that includes the impact of Besco and the U.S. was down even more and Europe actually had a good quarter in Bostitch. And we will come on to that in a minute. But what it's telling us is our diversified portfolio in fact did a lot to dampen the effect of the well publicized weak North American retail markets.

Looking at the numbers, very quickly, we will get into them in more granularity. We reported $1.04 from continuing operations, that's a 39% increase from fourth quarter last year. And compared to our guidance, and I'll do a bit of a walk on that for you, we issued guidance of $1. And in that guidance, Jim presented our assumption of 2% to 3% organic growth for the fourth quarter and a tax rate of 20%. As you see we will actually -- organic growth was flat, tax rate was 14%. We will come on to that in just a second.

Looking at some of the highlights for the business in total. I touched on the impact of acquisitions, it added $171 million to revenues. On our consumer side, I'd mentioned hand tools was strong. With strength on FatMax Xtreme and XL products. We introduced our second wave of Xtreme in the U.S. and we introduced XL, which is a similar product, sub-branded slightly differently in Europe, with great lift from both of those businesses.

On the industrial side, MAC up low double digits, for the good performance on MAC for the third consecutive quarter. Facom, strong performance in not a particularly strong market. Tremendous performance from our hydraulics business. It's a relatively strong business but they did a really good job upgrading their mix. And with relatively flat and in fact slightly down unit volume, dramatic increase as they've done some great value pricing on a LaBounty Saber-Lube Shear. It's been a terrific success for the business over the last 12 months. Our Vidmar business was strong. And as I said, Bostitch was off about 12%.

Security, the tale of three businesses. Access technologies and automatic doors in general had very strong business. Our systems integration was not as strong but all-in modest growth and I'll come on to that in a second for security. Operating income up 27%. Margin was 12.4% last year, so we increased it 60 basis points from continuing operations. EPS up 39%, as I said.

And relatively good cash flow for the quarter. Not quite as much as last year and Jim is going to give you a very good detailed walk on cash flow and how we'd see that playing forward. But all-in we ended up $359 million in free cash flow for the year. A good level and we will step that up again going forward.

Looking at our results versus guidance, it's worth spending a minute on this page. We guided to $1, which doing the walk from fourth quarter '05, we assumed or planned about $0.30 improvement in base earnings growth. And that would include both the core businesses at our Facom and National acquisitions. In fact, we got $0.28, basically a lot of great performances across the line, offsetting softness in Bostitch. So all-in about $1.03 from the base business.

We got $0.07 from tax as reported. 14% tax rated versus $0.20, which was in our guidance, and as is often the case you've read three or four or five of our peer group releases in the last few days, it's the settlement of issues under audit that we are required to settle at the end of the year as that period expires; released the reserves and that's what we did. Restructuring charges were $0.06. In some of the reports we read a little earlier this morning. there was a little bit of confusion. If you go right to the P&L and the restructuring line you see a number of $0.03.

In fact in restructuring we spent $0.01 more than was in our guidance. There's $0.03 reported in restructuring. There's another $0.03 included in cost of goods and SG&A that went right to the P&L. So in fact there's $0.06 of restructuring in our $1.04. So the earnings held up well despite flat organic sales, which was a little bit less than to where we guided but given the market conditions particularly in North American in retail, we were modestly pleased with that performance on the revenue line.

Looking at some differentiation among our peers, it's a busy chart but we've spent some time talking about the degree to which Stanley is in fact impacted by North American construction, DIY, home improvement and home starts. So what this says is construction and DIY in North America, our business was down 9%, , primarily driven by Bostitch. As you see underneath that, our hand tools business all-in was up 3% in North America, obviously Europe was very strong in hand tools to get to where we did on a global basis.

Fastening, organically, in the U.S. was down 16%. Now Europe was up 8% and that's reflected down below. And in total fastening was down 12% organically and only down 8% with the inclusion of Bostitch. But all-in about 30% of our revenue base was down 9%. But conversely, industrial tools, up 4%t, security up 2% and construction and DIY in Europe and Asia, and for our P&L that's overwhelmingly Europe, was up 14%. And that's 70% of our revenue base.

So as we diversify our portfolio, as more and more of our business is outside the U.S. and less and less is tied directly to home starts we are less impacted by the current softness at least in the North American construction and DIY markets.

Looking briefly at the segments, no matter how we measure it, we were delighted with the performance of our consumer product segment. A really successful quarter despite the fact that we were selling into a lot of marketplace head wind. Revenues up 17%. That's primarily acquisition driven but I'll come on to the pieces. Operating income up 29% and margin improving 160 basis points. And that's all about mix upgrade and getting paid for our brand and getting paid for our innovations in the fourth quarter. Hand tools plus 10% organically as I previously mentioned. With FatMax Xtreme, the second wave of the U.S., FatMax XL, two ways simultaneously in Europe.

Europe, our organic growth was 15% and that offset the weakness in the U.S. or relative weakness, which was still up about 6% in that business. Consumer storage, our ZAG business, our plastic storage business, I had two issues. The business is soft and we had a very good fourth quarter last year with about an $8 million load-in that didn't repeat. So tremendous growth in the hand tools side offsetting the softness in ZAG. And the chart that you're looking at says North America POS soft and combined inventory levels of the top seven customers reduced as expected. Don't read soft to mean down.

We were running at really strong rates. And you'll recall last year in the fourth quarter we were perplexed because we had double digit POS but flat shipments. And we were running high single digits to low double digits all year. POS was positive in the low single digits but softer certainly than it had been in the first three quarters. And then I think that simply impacts the market in which we are selling to. And in terms of the inventories down as expected. Last year inventories were reduced by about four weeks between the middle of December and the end of January. It caught us by surprise, caught our customers by surprise.

We've talked about it ad nauseum and a lot better joint planning went on because we lost business, customers lost business because of out of stocks and nobody won. When we gave our guidance we said we didn't know where it would come out but we thought that, overall, our customers would reduce produce inventories at half the level of what they did a year ago. We got it right. Our customers got it right. Large big box customers normally pare down inventories late December into January when they close their fiscal year. It varied from one to four weeks across the board but all-in inventories went down about two weeks.

That's what was in our guidance. That's what happened and that's how the numbers came out. Of course it varied by customer. We are not going to talk customer specific detail on this call. A, it's not relevant and B, our customers don't appreciate it. But all-in our inventories came in a couple of weeks. That was what was in our guidance. That's what happened and they are about two weeks higher than they were at this time last year and two weeks lower than normal as we enter the first quarter of '07.

Looking at industrial tools. Revenues up 35%, acquisition driven. Operating income up 41%. And operating margin up 40 basis points to 9.5%. 3% organic growth, excluding fastenings. So as I said, most markets holding up well. Mechanics tools, storage, I've already mentioned well above average, organic gains, Mac Tools up 10% to 12%. U.S. route averages continuing to grow, up 8%. So the rest obviously is adding distributors.

Fastening organic sales I've already mentioned down 12%. 16% in the U.S., up 8% in Europe. Some of that's -- roughly half of that's market and half of that's our decision to walk away from some very unprofitable business that we've been accepting and taking for basically six quarters through the middle of 2006. And we will talk about what's going on at Bostitch and fastening but the program is well underway.

And all we can do at this stage is say, one year into Facom, it was a great acquisition. It's growing. It's leveraging a strong brand. We have a great team at Facom in Europe. And they are doing a good job of balancing growth, while managing exceptional operating margins in a market that probably has a little more wind at its back than normally we're used to seeing in Europe. So, a lot of good things going on in Europe both legacy Stanley and the consumer side and in Facom and more of that to come in '07.

Looking quickly at the fastening recovery plan. We talked about this last quarter but a new leadership team has been installed in the business in the second quarter of '06. In place for about six months and already a good team in place. We've grown this business tremendously but we lost sight of, quite frankly, our cost structure and some processes truly needed to be improved. The team has been in place six months. Analytics are improving. And as I say, we've grown this business from $450 million to almost $600 million but lost sights of the margins, lost sight of the cost structure. We are focusing on that. This business might be a little smaller going forward. But margins will be better, we think it will be profitable.

The Besco acquisition that was two years in incubation was completed last year. That's going to give us a tremendous opportunity on the tools side. And we mentioned last quarter a program that we launched in the middle of the quarter transferring certain tool production to Asia. Besco has capability in both Taiwan and China. We've identified the opportunity to close several facilities, two of which have been announced, reducing basically the number of square footage under roof by at least 15 % and up to 25%.

I mentioned earlier to walk away from some unprofitable account activity, And that's both and pieces of our industrial business where we simply are not getting paid for the services we provide. Providing loan tools, providing tool reply, providing a lot of things in order to sell fasteners/ And when we are no longer being paid for it, we are no longer going to provide those services. And always the focus on SG&A. We're saying in '07 about $0.10 of the $0.25+ we've lost in '06 we're going to claw back. And when Jim walks you through the guidance that's an important piece of improvement we expect for operations for next year. But this is an important business. It's an iconic brand in fastening systems. It's primarily an industrial business. It's roughly half industrial and half construction and DIY as the revenue split. And we will get it back to acceptable profitability levels within 18 to 24 months.

Last but certainly not least, looking at security, modest growth -- great growth on the mechanical side and not as good a performance on the systems integration or electronics side. 5% organic Europe, primarily Blick SI declined. Our automatic doors business has had it's second or third terrific quarter organic growth with good margins, good progress on mechanical access plus 5%. We are fighting non-ferrous metals inflation. As you know, that continued in the fourth quarter. We got pricing but not enough to recover non-ferrous. That's sink, that's brass in our mechanical locking. That's aluminum in our door tracks. All working against us in '04.

The biggest news, of course, in fastening was the HSM acquisition. That acquisition closed on January 16. You read that concurrently, beginning January 1, we formed separate mechanical access and converts the securities solutions businesses. Under separate leaders the two of our most seasoned executives who know each other well will work together very closely on synergies where they are available, on cross-selling activities where they are available but with different focuses on the different businesses.

And of course, '07 going forward we need to focus on the HSM acquisition. We are pleased with the team. We are totally aligned on goals and objectives going forward and it's already underway. We also had a pretty good quarter in terms of cash flow. Jim is going to take us through cash flow and give you some guidance and talk about the segments.

Okay. Thank you, John. The last couple of years it's been a real pleasure to talk about cash flow at Stanley. Over the last four years, we've generated about $1.4 billion in free cash flow and we have redeployed that in the form of acquisitions, stock repurchase, dividends. And really done I think a good job growing the Company and returning some capital to the shareholders as well. We have funded the portfolio shift which allowed us to perform the way we did this quarter.

And as I said, we funded the growth. As we look at '06, we had $359 million in cash flow, $65 million more than '05. We were up 18% in cash flow. And our conversion ratio was greater than 100% of close to 130% if you include the receivable sales but about 104% if you exclude the receivable sales. So, very nice performance in cash flow.

And then turning to the balance sheet, we finished the year with an adjusted debt to capital, which is how we measure our debt to capital ratio adjusting for the ETPS offering of $450 million. That's half debt and half equity for ratings purposes. We finished that up at 29%, which is right in the zone we want to be in for this measurement Our debt was just under $1 billion and lower than the previous year, despite the fact that we financed the Facom acquisition, which was about a $500 million acquisition.

So we left -- exited the year in great shape from a balance sheet perspective. And all-in-all if you consider the way the growth held up, while there was no growth, the avoidance of negative organic growth in this environment and the earnings per share performance, the cash flow performance and the way we exited the year with the balance sheet we are very pleased with the outcome. The sales, as mentioned, were there north of $1 billion. The earnings per share, up 39%, the operating margin about 13%, which was positive for the quarter. Great success with the FatMax Xtreme, the FatMax XL launches, that one in Europe. And as mentioned, the portfolio diversification finally beginning to show the advantage that we are able to get from that.

All-in-all, solid quarter and we'll move on now to '07 guidance. Okay, for total year '07, our organic sales outlook is about 2% . x-currency and that compares to about 2% to 3%, which is what we said last time. So no large adjustment but just in view of the difficult U.S. housing and home improvement view of the difficult U.S. housing and home improvement markets, we've tempered just slightly our outlook there. The acquisitions, primarily in this case HSM, which we recently closed will add 6 points. And in total, we expect about 8% total sales growth for '07.

The earnings per share, we were able to reaffirm our outlook of $4 to $4.10 per share, with 15% to 18% earnings growth. And a free cash flow number, somewhere between $400 million and $450 million. That by the way is -- should read $400 to $450 million, not $450. And for the first quarter, the organic growth outlook is very similar to our total year outlook, 1% to 2% acquisition, 6%, so total 7% to 8%, no big difference there. A very solid $0.80 a share is our guidance for the quarter. And a very strong 78% growth on what admittedly was a very weak first quarter a year ago with some nonrecurring items related to acquisitions.

The HSM acquisition itself, although it's not addressed in the page, will probably be about a $0.01 dilutive in the quarter, something like that. And also just in terms of tax rate assumptions, our total year tax rate is expected to be in the range of 25% to 27%, with no audit settlements or anything really positive anticipated for the year. That will be about a 4% to 6% increase over this past year's rate. And in our first quarter, outlook is very similar, 26% to 28%.

And I'd like to take a moment now and just try to give you some perspective on how this guidance might be analyzed here from our perspective. If you look at the four to $4.00 to $4.10 versus the $3.47, that's about $0.53 to $0.63 of earnings growth and we will try to break that down for you into sort of its elements. From an operating perspective, we have Facom and National really coming in some significant earnings growth as planned, about $0.25 we expect. I think that could be on the low end of what they produce. It could be $0.10 to $0.20 higher than that but that's our very conservative view coming from those acquisitions. And then the 2% organic growth should yield somewhere in the neighborhood of $0.20 $0.30. Our fastening improvement, which John mentioned, another $0.10. And then product productivity, mix, pricing, et cetera, and impact of inflation, all of that should be somewhere around $0.06 or thereabouts.

And just to add some color to that. The last time we gave guidance we indicated that the inflation was going to be approximate $32 million for '07. I think our outlook is closer to $40 million now for inflation. However, our price recovery outlook has also increased and should pick up about 75% recovery on that $40. So that would leave about $10 unrecovered. We have an excellent productivity project pipeline coming into year, probably as strong as I can recall in the Company, my time here. And so we hope to offset that extra $0.10 and then some through productivity projects. And in total, the operating elements of this would add up to something like $0.61 to $0.71. And then there's some nonoperating items. For instance, the step up charges that were incurred last year of $0.17 will not recur and the income tax head wind will be about $0.25.

So a total of nonoperating type items of about -$0.08, that gets you to the $0.53 to $0.63. And I will just also mention as you see the footnotes there we had, of that, $0.20 restructuring related items in '06 and we expect to have another $0.20 in '07. The last time we gave guidance in October, that $0.20 for '07 was $0.12. So as you can see, we've been able to reaffirm our guidance with a somewhat $0.08 higher outlook in terms of restructuring related charges.

And then just as a note on HSM, HSM will deliver about $0.25 to $0.30 of income before its contract amortization, which is an accounting phenomenon associated with monitoring companies. It's a non-cash $0.25 to $0.30 charge offsetting that income. So in total, HSM will be income neutral but as you can see, it's going to be very cash accretive. And when you think back to the amortization that I showed you on the cash flow chart of $121 million for '06 we can add at least $40 million or so to that number for HSM And so you can see when you start to think about the cash flow statement and what it might look for '07, it will get a big boost from the higher D&A, which will be closer probably to $160 million.

And then lastly, in terms of content here I would like to cover a new way of looking at Stanley, which will commence in '07 effective with our first quarter 10(Q). And we have readjusted our segments based on the portfolio shift and the evolution of the Company. And I would just like to spend a minute on that. We still will have three segments. The first will be construction and DIY, which will include our hand tools and storage business, our CST laser measuring and leveling business and fastening systems. That will be about a $1.8 billion segment, about 40% of the Company.

And then we have an industrial segment which will be comprised of our industrial and automotive repair businesses like Mac, Facom, Proto, and then some smaller engineered solutions businesses such as Vidmar hydraulics and assembly technologies and that total segment will be about $1.15 billion, about 25% of the Company. And then finally security, which we covered at length in the HSM acquisition conference call, where we subdivided it into a mechanical access solutions business and a convergent access solutions business. The mechanical including the automatic doors business, the Besco mechanical business and the hardware business. And the convergent access solutions, which is really an electronics business with the -- comprised of the U.S. systems integration business, HSM, our recent acquisition and then our international activities such as Blick and Frisco Bay and the like.

Security would be a $1.4 billion segment. It would be about 35% of the Company. And in total, the nonconstruction and DIY portion of the Company would be in the neighborhood of 60% of the Company. So, a substantial change from where we were just a few years ago. We feel that this new segmentation will give the investment community a better window into the Company in terms of our segment growth strategies and the market drivers that affect the performance of these segments.

And also importantly, I think from a valuation perspective, the Street will be able to better accord valuations to the specific segments based on market comparables that are out there, which I won't get into right now but certainly you can envision fairly straightforward comparisons for construction, DIY, industrial and security. So we are looking forward to introducing that.

We are going to spend some time on that at our analyst meeting coming up on March 8 the Pierre Hotel in New York City and we look forward to reporting on that basis. And we will provide some historic details so that our analysts can adjust their models to the new segmentation. With that, I am going to turn it over to John. He's going to cover the year 2006 highlights and then we will open it up after that for Q&A.

With pleasure. I think we've made a lot of progress at Stanley in the last 12 months. On the operating front in terms of revenue, earnings operations, productivity. But of equal or greater performance in continuing to transition our portfolio to position us for less volatile earnings and with two stable platforms that will facilitate our ability to grow profitably going forward. Sales exceeded $4 billion. That's the first time in our history that we've achieved that level. Earnings of $3.47 which is up 9% from continuing operations, 14% excluding the non-cash step up charges.

Jim talked about cash flow. It's a record for us, up 22% and 124% of net income. We continue to work very hard on turning income to cash. We bought back 5% of our shares, most of those in the first six months of the year, about 200 million. Facom and National are delivering as expected. And as Jim suggested, we're counting on upside from both of those businesses in 2007. And arguably given their performance this year, that could be conservative but Jim was very clear on what was in our guidance as relating to those businesses.

I know there are some in the audience that are surprised with what we've achieved this year and think that may well be the limit. And obviously, a lot of things went right in terms of European competitive plan, integrating a large new management team into Stanley. But what we can say is so far so good. The momentum is on our side. And we have no intension of losing it. We are just pleased, to say the least, with the innovation that we got to the marketplace. More innovation that showed up in our top line, that showed up in our bottom line than in many years at Stanley.

Two introductions of Xtreme in the U.S., one introduction of XL in Europe. Continuing strong support and minimal cannibalization on the FatMax line led to a very successful year in our consumer hand tools business. Fastening systems all-in sales were down 7.5%, operating income is low single digits. We talked about a comprehensive profit improvement plan at Bostitch and the nature, the significant importance of the Besco acquisition in improving our competitive cost position on the tool piece of that business. And as baked into next year's guidance is recovering about half of the earnings that we lost in Bostitch this year. Calling us back next year and restoring that business to where it's been. We believe we have the team and programs in place to do that. And it is obviously one of Jim's and my highest priorities, as it is for the management team.

And solid performance in security. HSM is a game changer for us. We paid a lot of money for it. We continue to think it's a great investment for the Company both strategically and economically. We've divided the business for better focus. So, we achieved some profitable growth. We are transitioning our portfolio and looking forward to 2007. Let's open it up to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Margaret Whelan, UBS.

It's actually Susan for Margaret. Can you talk a little bit about pricing? You mentioned in your comments that you didn't get quite as much of it as you had expected during the quarter but it sounds like you do expect to realize some positive pricing in '07. Can you just give us some sense of how that's trending?

Yes, Susan, you misunderstood what I said. We got pricing in the quarter. We were pleased with what we got all-in. what I said is we didn't get quite enough to cover the non-ferrous metals inflation, which was at unprecedented levels, as Jim talked about,. We are quiet pleased with pricing. We've established pricing centers of excellence in the majority of our large businesses. We are getting quite granular on all forms of pricing, how to achieve it.

And we are getting more scientific about it. We've had help from consultants, as well as Jim's team spending a lot more time on it on a business by business basis. As Jim stated, we are looking at a whole lot of inflation next year. And we are looking at recovering at least three quarters of it with pricing. Half of that's already in place. So, it's purely carry over. Half of it are price increases that we expect to announce and will stick. And we'll recover 3/4 of the inflation with pricing. And we expect to get the rest if not more from our productivity gains.

And then there are certain commodities like energy that have started to come down. Have you seen any benefits from that or do you expect any benefits?

Fair question. If you think about Stanley, you need to this first steel, second non-ferrous metals, third energy. A very fair question but it's, it's surprising what a $10 price change in the cost of a barrel of oil is less than $5 million impact on Stanley's P&L. So, as energy comes down, yes, our freight costs go down marginally. Costs to run our plants go down marginally. But energy is not a large input cost for Stanley. Of our raw materials, 2/3 of it's steel, 20% to 25% is non-ferrous metals and the rest is a variety of other things.

So simply said, those energy prices of course have a tremendous effect on the economy and markets into which we sell, both consumer and industrial. But a big drop in energy or a big rise in energy as the case may be would have less impact on The Stanley Works and our margins as you might suspect without getting granular on the P&L.

And then in terms of steel, is that really what's driving some of your inflation or is it really on the non-ferrous side?

No, it's on the non-ferrous side. Steel has been relatively stable for the last six plus months. So, obviously it is volatile there are two kinds of steel. There's bar and there's flat. And I think when our customers and others read in the press about the cost of steel, automotive industry, etc., we are mostly bar and rod particularly in our fastening business. And, no, our inflation this year, what we struggled to recover has been overwhelmingly non-ferrous. Zinc, brass, aluminum up double what they were this time last year. That's what we are running hard to recover with productivity and price pricing.

Your next question comes from Stephen Kim.

I had a question for you regarding your performance in hand tools. I have in my notes that in the fourth quarter of the preceding year you had a pretty easy comp, would be the way to describe it. And the comps are going to get significantly more difficult as you go forward. And I know that you've done a lot of very successful initiatives, as you've talked about on the call. And so I'm trying to figure out how to balance these two factors. You also threw in this $6 million storage dynamic. So, I'm trying to figure out as we go forward here over the next quarter or to, would you anticipate that the sales rates for consumer organic could sustain at the level that we saw in this fourth quarter? Thanks.

Well, Steve, the hand tools business was down 4% in the fourth quarter of '05. And you saw the performance in this quarter.

Did you say hand tools was down 4% because I have in my notes it was down 8%?

'05.

Consumer tools and storage was do you know 8%, hand tools was half of that.

Okay, got it.

So while it was an easy comp, we certainly way outperformed the easy comp in the fourth quarter. Clearly, the real strong performance is coming now from the launch of the FatMax XL, as well as just a very vibrant construction and DIY market in Europe right now. So, we are benefiting from having an excellent product introduction program at the same time the market is reasonably robust over there. At the same time, the U.S. market is really in pretty difficult shape; having a difficult period. So who knows what the future portends for any of those markets. But right now we are focused on what we can control. And what we can control is these waves of FatMax Xtreme and FatMax XL that we are introducing. And we are going to continue to do that and our outlook is for modest growth and we don't expect to shrink. And I think we are in the right place at the right time.

Steve, just remember, your numbers are all correct and sometimes it's even a source of internal confusion. One of the reasons Jim introduced the new segmentation, we report a consumer segment that is 2/3 hand tools. So, that's the driver. But 25% of that segment right now is hardware and 10% is consumer storage or Zag. So, all of those numbers are correct. And when we say hand tools, that's exactly what we mean, 2/3 of the consumer segment. There is another 1/3 of that segment; hardware and consumer storage that adds to the $1.2 billion or $1.3 billion.

Thanks for that. And in terms of the security business, my recollection was that, I think it was maybe last quarter's call you talked about how you would come to understand the seasonality of the business has an impact on the margins and that therefore they typically have lower margins. I think one of the factors you mentioned was the weather impact and sort of the difficulty with getting access to the sites and so forth in that business. And we did see the margin in security come down. But it seemed that this time it didn't -- it wasn't related to the access, it was related more towards the integration, which surprised me because I would have thought that the integration wouldn't necessarily have a seasonal component. And I was kind of curious as to how that may have played out in the quarter? I would think access would have been aided by the warm weather we saw in the fourth quarter.

Access had a terrific quarter. Mechanical had a terrific quarter from a sales growth perspective. From a margin perspective, they got hurt by the non-ferrous inflation particularly. The access business buys a lot of aluminum and the zinc and brass are big components of mechanical access. So, there was some margin pressure in mechanical, nothing dramatic but that's why you didn't see a big boost in margins.

And as far as the electronic or what we now call convergent goes, basically the very simple answer to that is the market is growing about 8% to 10%. We actually had slight contraction in that business from an organic growth perspective, which brought down the total growth story in security. And it's a self inflicted discipline that we are implementing and it's really the -- we have an answer to it. We don't like to relegate share like I just described but we are not -- we did not have a business in systems integration that had the appropriate profitability model until we acquired HSM. HSM brings us the recurring revenue stream that will supplement the install revenue that we make in the systems integration business.

We will also take some of the operating philosophies and disciplines that come with HSM in terms of making sure that the sales force is directed and rewarded on getting recurring revenue, as well as non-recurring revenue. And the margin will go up over time. And then as that occurs we will unleash our growth activities in electronic instead of throttling them back like we have done in the last few quarters.

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

Two questions. Jim could you give us an update on anything that you can provide at this point with regards to the financing of HSM and the CapEx outlook? And for John or Jim, with Bostitch, it's interesting that Stanley has this track record of two steps forward and one step back and it's usually, unfortunately, one of the bigger businesses. And can you talk about if there was any lesson that you learned from the turnaround at Mac that could give us, as outsiders, confidence in the turnaround at Bostitch and how we should think about monitoring the progress you are making there over the coming quarters?

Jim and I are just whatever, so in lock step on both of those. I am going to have him both of those because you addressed the first one with them and he's tougher on capital than I am. So, he'll take both of those.

Great, thanks. Okay, let's start with the HSM acquisition. We have to be very careful when we discuss how we are going to finance that because of securities laws restrictions, so I can't go into any great detail. We've said publicly that we would entertain some sort of a hybrid capital financing. We are exploring various avenues. It's likely to take the form of some sort of mandatory issuance, which I think will mandatory which I believe will be more of a bullish statement more than anything else in terms of how we feel about our equity right now. And that's really all I can say. I can give you some sense as to when it might occur. And I think it probably would -- right now we have a bridge financing in place of about $500 million. And we probably will replace that bridge with permanent financing some time in the March time frame; possibly April but most likely March. And CapEx was $80 million this year. I think we continue to see CapEx at approximately the same rate as a percent of sales. So as the sales go up we expect that CapEx will go up in proportion to the sales. On the Bostitch --.

Let me just add to that, Jim, so you don't get cut off in the queue. We are at an $80 to $100 million range. Obviously, we've got plenty of good projects. We will spend the $80. And we will accelerate high return projects that relate to restructuring or obviously advance our strategic alternatives. To the extend we fund them from improvements in working capital, it has no impact on cash flow. So, our models are running in the $80 to $100 range for next year. So pick a point in the middle of that if you're -- and I think that's fair and everybody is dealing with the same information.

On the Bostitch turnaround, I have never felt better about the ability of our management to turn or at least to execute on a program to turn the business around. Because we are running this program like an acquisition integration and I think over the past few years we've demonstrated that when we commit to something in an acquisition integration, we typically deliver it. And the reason is because we have a corporate group of experts who do very detailed planning in conjunction with the management team. And we track and manage that as a major initiative, which means that every week, or every other week depending on the acquisition and the importance of it, we will get the management team in front of myself and John to go through the various elements of the program. And give us a status report and if there are issues that are developing we are -- we work together to solve the problems and move forward.

And there is a very granular program in place to address the Bostitch issues. Now, in contract to Mac, one of the important elements of these types of issues is management team buy-in. One of the significant elements of the Mac turnaround was just that. John Aden and his team were completely bought into the detailed plan that they put in place and they tracked and executed it on their own. Bostitch is, frankly, a bigger turnaround from the standpoint of business size. And perhaps to some extent more moving parts, some more complexity. And so, in this case, we are actually managing it like an acquisition integration, as I mentioned.

Your next question comes from Kenneth Zener, Merrill Lynch.

Congratulations. I'm wondering, the $0.10 improvement that you guys are expecting in fastening relative to the decline in '05, is that still given that you've walked away from business, roughly a $600 million base of revenue?

Yes, as I say, Ken, we've chosen what we think is a conservative point. Let's just use OM percentages regardless of whether this is a $550 or a $600 million business. This business has made 10% OM, in the three years I've been at -- since I've been at Stanley and that's only three years. It's at 3%. We're taking 15% to 25% of the manufacturing footprint and structure out, so we can support a much smaller business. We won't have to run to recover fixed costs. We can truly shed unprofitable businesses.

The team has done a really, really good job of -- when I say walking away from business, it's primarily end of quarter business at very low margin, that not only doesn't come with any margin, it really disrupts the factories in terms of level loading. It really disrupts our supply chain, it has an adverse on fill rates. And it's just a terrible domino, or ripple effect. And we are taking up at least $10 million a quarter volume hit to get away from that. But I think the margin and income improvement that will result from that alone is quite credible and quite realistic.

We've got a lot of moving pieces, as I say, between plant restructuring margin improvement. Looking very hard at businesses and quite frankly, we say SG&A, this is not a fat organization in terms of people or programs or spending. What it is is we over time provided a tremendous amount of service to our customers that we simply aren't getting paid for and one of two things will happen. We will start to get paid for those services. I referenced them, tool repair, loan tools, things of that nature.

We will start to get paid for those services or we will stop providing them. It may or may not have an impact on volume. It will certainly have an impact on margin. And as I say, on the manufacturing footprint piece, we are often running with the team totally bought in. So we are cautiously optimistic that that $0.10 is real and we would like to think with the team in place there's upside from there but we are just not in a position to bet on it at this stage.

If I can have a follow-up question then. Security, obviously building a very large platform there and the acquisition that was made was in the U.S. Are you still looking at pan-European companies? And kind of -- with Brett running the new division, is he going to have the time to look over there? And if you could describe the landscape of that?

Sure.

And I think the HSM acquisition was actually was at a relatively high margin relative to what's available in Europe, if you could comment on that as well?

Yes, let me say three things. First of all, you mentioned Brett, he's insatiable in terms of his ability to manage a business and look at others. He obviously knows the space extraordinarily well. And having spent the last two years of his life in Europe, did nothing of course but solidify the bonds and the relationships with, I will say for lack of a better term, targets in Europe. We've said this before. Most of the companies in Europe are quite large that we are looking at. The incubation period is 2x to 3x what it is in the U.S. especially if it's a $100, $200 million Company with financial sponsorship and an exit strategy and a target.

So, that's a long way of saying the pipeline is quite full and getting fuller. Our focus, short to intermediate term, is on digesting what we have and continuing to build these bonds, to build these relationships, to vent them. There's plenty out there. Obviously, they are going to have to be at a reasonable price, a price that despite what we paid for HSM, which was a lot, it met our financial criteria. And we are not going to do anything in Europe that doesn't. But because they are going to be bigger we need to get our financing in place for HSM. Absorb it, so certainly don't look for us to do anything in the next six months. But also don't expect us to wait two more years before we continue to build on this platform.

We believe in it. We love our North American access model. We'd love to duplicate that in Europe. We are understanding convergent better and better. Justin on the mechanical side has a tremendous business with tremendous margins. We can expand that in Europe. So, it will take a little time but there's plenty out there and we are becoming a very logical go to buyer for a willing seller especially if somebody wants to sell outside of process.

Your next question comes from Nigel Coe.

Thanks, good morning. Quick question on Bostitch, before I move onto my real questions. Jim, you sound really bullish on the turnaround, about $0.10 cents of Bostitch recovery in 2007. Do we get a little more drag in the first half of the year and then get the real benefit in the second half? How does that play out in your numbers?

Definitely. I think we are dealing with a double whammy in the first half because we have the difficult market. Thankfully, the comps are getting a little easier, by the way. As I recall the first quarter of '06, I think was down 8% or thereabouts organically for fastening. So the comps are getting a little easier. But the market is pretty rough right now. You can see with some of our competitors and the power tools arena some of the experiences they've been having. And Bostitch may be air powered but it's a power tool at the core. So, yes, I think the first half will be more difficult than the back half. And then you have the other dimension, which is the programs and the initiatives are really going to be kicking in full gear in the back half of the year. So, for all those reasons I think you are probably correct.

Okay. Great. And secondly, the Facom $0.25, you more or less told us that that's a conservative number. What's driving you to be so bullish there? Is it demand is tracking higher than you expected? Is it that you got more back up synergies? Where does the potential affect come from? And if I could just squeeze one more in. The free cash flow guidance step up, is that all from the HSM acquisition?

It's not all from the HSM acquisition but it's substantially from the HSM acquisition. And the reason I'm bullish on the $0.25 is because we have literally hundreds of people coming off the payroll as we sit here today in connection with the ECP We've already had a great performance in '06 from our Facom contingent and the costs are coming out. The margins are going up. And the market itself is holding up quite well and their organic growth performance is pretty good, slightly better than expected. So for, on that basis the $0.25 look likes a very doable number.

Your next question comes from Ivy Zelman.

Good morning, this is Justin [Spear] in for Ivy. Just a couple of questions. One, how much benefit did you receive from the new hand tool launch? And when did you begin that launch?

I think we covered that in the -- if the question is, benefit tens of millions. We launched in the first quarter and again in the fourth quarter, FatMax Xtreme in the U.S. And we launched FatMax XL, Justin, which is the exact same product line but we are not allowed to call it for trademark reasons Xtreme in Europe. And all-in that was a big part of the lift. Now, that being said, the fact that it was 100% incremental, meaning there was virtually no cannibalization from the FatMax line, is what we took great solace in. So it was 100% incremental, accounted for most of the list. And obviously, it's a super premium product so it came at higher margins. So North America, the second wave was shipped in October. And in Europe it all shipped in October.

Okay. Are you expecting any more launches next year?

We've got a rhythm. Jeff Ansell runs a very, very I'll say disciplined SBU structure, which really works well in that business in terms of keeping the pipeline full, the commercialization efforts. There's not a lot of seasonality in that business but if you are going to choose it, it's spring and fall. And our history has been, and what we've going forward, is look for spring and fall introductions. We've gotten through two waves. We have at least three more planned, so look for one in the Spring of '07. Look for one in the fall of '07. And as Jeff's product development guys continue to work we think we have another one in the Spring of '08. Two a year.

Your next question comes from Eric Bosshard, Cleveland Research Company.

On that subject, two things I wanted to talk about. First of all, in regards to Facom, can you talk about -- the execution seems like it's great but the end market, what's going on? What's the organic rate of the businesses and what the outlook for the organic growth of that business is in '07?

Jim will take it Eric. We -- the market is good, we are gaining a little bit of share but Jim is going to get a little more granular for you.

On a pure volume basis it's about a flat market and then you get a little price every year there, so it's about a 1% to 2% kind of a market. An we are looking for 4% growth this year out of Facom.

And the reason for gaining share, is there something different going on that's driving the share gains?

I would say we have a revitalized commercial effort. The Facom folks I think are learning. We've learned a lot from them and I think from Stanley they are perhaps learning a lot about commercialization of products in the tool industry. They had a very robust kind of product development group but they didn't have a lot of money to work with and we've given them some funding. And so, for those reasons there is a little better growth than the market.

Maybe to just clarify a little bit, in Stanley speak, Facom's vitality index has already been extraordinarily high. The struggle at Facom, to Jim's point, it wasn't perhaps as well funded as it could have been and the commercial execution wasn't quite what it could have been. A tremendous amount of new products successfully introduced but virtually 100% cannibalization. They were doing that to stay flat. The new product vitality under the direction of a gentlemen named [Everey Goma] who is part of the Facom team, working closely with Stanley. That is at or above previous levels but we think the commercialization discipline is a little better. As a consequence, a little less cannibalization. So, 15% of the business is new products, to Jim's point, as opposed to none of that being incremental. 4% to 5% is incremental. And that's where we are getting the lift and we are cautiously optimistic that we can carry that through '07.

And we are leveraging the infrastructure, too. For instance, as we all know, Eastern Europe is the place that's growing at a much faster rate in Europe than other places. And Stanley has a number of resources out there in the commercial area and Facom did as well but when you put them together it's 1+1 is more than 2.

At this time, I have the no further questions, John do you have any closing comments?

No, other than we started a little late so thanks for bearing with us. Thanks for your attention. And just as Jim referenced during the prepared part of the presentation, we do have an analyst day on the afternoon of Thursday, March 8. Gerry has sent a save the date, invitations will be forthcoming. Our objective there is to talk a little bit more about the segmentation, give you some of the history. So you can work with that in your respective models. And also, I think something that you obviously asked for and we are more than pleased to do, give you exposure to some of the management team, the business executives that run these various businesses and various segments. And we will have four to five of them on hand on the 8 as well. Thanks for your attention.

This concludes the conference call. You may disconnect.

[OPERATOR INSTRUCTIONS] Your first question comes from Margaret Whelan, UBS.

It's actually Susan for Margaret. Can you talk a little bit about pricing? You mentioned in your comments that you didn't get quite as much of it as you had expected during the quarter but it sounds like you do expect to realize some positive pricing in '07. Can you just give us some sense of how that's trending?

Yes, Susan, you misunderstood what I said. We got pricing in the quarter. We were pleased with what we got all-in. what I said is we didn't get quite enough to cover the non-ferrous metals inflation, which was at unprecedented levels, as Jim talked about,. We are quiet pleased with pricing. We've established pricing centers of excellence in the majority of our large businesses. We are getting quite granular on all forms of pricing, how to achieve it.

And we are getting more scientific about it. We've had help from consultants, as well as Jim's team spending a lot more time on it on a business by business basis. As Jim stated, we are looking at a whole lot of inflation next year. And we are looking at recovering at least three quarters of it with pricing. Half of that's already in place. So, it's purely carry over. Half of it are price increases that we expect to announce and will stick. And we'll recover 3/4 of the inflation with pricing. And we expect to get the rest if not more from our productivity gains.

And then there are certain commodities like energy that have started to come down. Have you seen any benefits from that or do you expect any benefits?

Fair question. If you think about Stanley, you need to this first steel, second non-ferrous metals, third energy. A very fair question but it's, it's surprising what a $10 price change in the cost of a barrel of oil is less than $5 million impact on Stanley's P&L. So, as energy comes down, yes, our freight costs go down marginally. Costs to run our plants go down marginally. But energy is not a large input cost for Stanley. Of our raw materials, 2/3 of it's steel, 20% to 25% is non-ferrous metals and the rest is a variety of other things.

So simply said, those energy prices of course have a tremendous effect on the economy and markets into which we sell, both consumer and industrial. But a big drop in energy or a big rise in energy as the case may be would have less impact on The Stanley Works and our margins as you might suspect without getting granular on the P&L.

And then in terms of steel, is that really what's driving some of your inflation or is it really on the non-ferrous side?

No, it's on the non-ferrous side. Steel has been relatively stable for the last six plus months. So, obviously it is volatile there are two kinds of steel. There's bar and there's flat. And I think when our customers and others read in the press about the cost of steel, automotive industry, etc., we are mostly bar and rod particularly in our fastening business. And, no, our inflation this year, what we struggled to recover has been overwhelmingly non-ferrous. Zinc, brass, aluminum up double what they were this time last year. That's what we are running hard to recover with productivity and price pricing.

Your next question comes from Stephen Kim.

I had a question for you regarding your performance in hand tools. I have in my notes that in the fourth quarter of the preceding year you had a pretty easy comp, would be the way to describe it. And the comps are going to get significantly more difficult as you go forward. And I know that you've done a lot of very successful initiatives, as you've talked about on the call. And so I'm trying to figure out how to balance these two factors. You also threw in this $6 million storage dynamic. So, I'm trying to figure out as we go forward here over the next quarter or to, would you anticipate that the sales rates for consumer organic could sustain at the level that we saw in this fourth quarter? Thanks.

Well, Steve, the hand tools business was down 4% in the fourth quarter of '05. And you saw the performance in this quarter.

Did you say hand tools was down 4% because I have in my notes it was down 8%?

'05.

Consumer tools and storage was do you know 8%, hand tools was half of that.

Okay, got it.

So while it was an easy comp, we certainly way outperformed the easy comp in the fourth quarter. Clearly, the real strong performance is coming now from the launch of the FatMax XL, as well as just a very vibrant construction and DIY market in Europe right now. So, we are benefiting from having an excellent product introduction program at the same time the market is reasonably robust over there. At the same time, the U.S. market is really in pretty difficult shape; having a difficult period. So who knows what the future portends for any of those markets. But right now we are focused on what we can control. And what we can control is these waves of FatMax Xtreme and FatMax XL that we are introducing. And we are going to continue to do that and our outlook is for modest growth and we don't expect to shrink. And I think we are in the right place at the right time.

Steve, just remember, your numbers are all correct and sometimes it's even a source of internal confusion. One of the reasons Jim introduced the new segmentation, we report a consumer segment that is 2/3 hand tools. So, that's the driver. But 25% of that segment right now is hardware and 10% is consumer storage or Zag. So, all of those numbers are correct. And when we say hand tools, that's exactly what we mean, 2/3 of the consumer segment. There is another 1/3 of that segment; hardware and consumer storage that adds to the $1.2 billion or $1.3 billion.

Thanks for that. And in terms of the security business, my recollection was that, I think it was maybe last quarter's call you talked about how you would come to understand the seasonality of the business has an impact on the margins and that therefore they typically have lower margins. I think one of the factors you mentioned was the weather impact and sort of the difficulty with getting access to the sites and so forth in that business. And we did see the margin in security come down. But it seemed that this time it didn't -- it wasn't related to the access, it was related more towards the integration, which surprised me because I would have thought that the integration wouldn't necessarily have a seasonal component. And I was kind of curious as to how that may have played out in the quarter? I would think access would have been aided by the warm weather we saw in the fourth quarter.

Access had a terrific quarter. Mechanical had a terrific quarter from a sales growth perspective. From a margin perspective, they got hurt by the non-ferrous inflation particularly. The access business buys a lot of aluminum and the zinc and brass are big components of mechanical access. So, there was some margin pressure in mechanical, nothing dramatic but that's why you didn't see a big boost in margins.

And as far as the electronic or what we now call convergent goes, basically the very simple answer to that is the market is growing about 8% to 10%. We actually had slight contraction in that business from an organic growth perspective, which brought down the total growth story in security. And it's a self inflicted discipline that we are implementing and it's really the -- we have an answer to it. We don't like to relegate share like I just described but we are not -- we did not have a business in systems integration that had the appropriate profitability model until we acquired HSM. HSM brings us the recurring revenue stream that will supplement the install revenue that we make in the systems integration business.

We will also take some of the operating philosophies and disciplines that come with HSM in terms of making sure that the sales force is directed and rewarded on getting recurring revenue, as well as non-recurring revenue. And the margin will go up over time. And then as that occurs we will unleash our growth activities in electronic instead of throttling them back like we have done in the last few quarters.

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

Two questions. Jim could you give us an update on anything that you can provide at this point with regards to the financing of HSM and the CapEx outlook? And for John or Jim, with Bostitch, it's interesting that Stanley has this track record of two steps forward and one step back and it's usually, unfortunately, one of the bigger businesses. And can you talk about if there was any lesson that you learned from the turnaround at Mac that could give us, as outsiders, confidence in the turnaround at Bostitch and how we should think about monitoring the progress you are making there over the coming quarters?

Jim and I are just whatever, so in lock step on both of those. I am going to have him both of those because you addressed the first one with them and he's tougher on capital than I am. So, he'll take both of those.

Great, thanks. Okay, let's start with the HSM acquisition. We have to be very careful when we discuss how we are going to finance that because of securities laws restrictions, so I can't go into any great detail. We've said publicly that we would entertain some sort of a hybrid capital financing. We are exploring various avenues. It's likely to take the form of some sort of mandatory issuance, which I think will mandatory which I believe will be more of a bullish statement more than anything else in terms of how we feel about our equity right now. And that's really all I can say. I can give you some sense as to when it might occur. And I think it probably would -- right now we have a bridge financing in place of about $500 million. And we probably will replace that bridge with permanent financing some time in the March time frame; possibly April but most likely March. And CapEx was $80 million this year. I think we continue to see CapEx at approximately the same rate as a percent of sales. So as the sales go up we expect that CapEx will go up in proportion to the sales. On the Bostitch --.

Let me just add to that, Jim, so you don't get cut off in the queue. We are at an $80 to $100 million range. Obviously, we've got plenty of good projects. We will spend the $80. And we will accelerate high return projects that relate to restructuring or obviously advance our strategic alternatives. To the extend we fund them from improvements in working capital, it has no impact on cash flow. So, our models are running in the $80 to $100 range for next year. So pick a point in the middle of that if you're -- and I think that's fair and everybody is dealing with the same information.

On the Bostitch turnaround, I have never felt better about the ability of our management to turn or at least to execute on a program to turn the business around. Because we are running this program like an acquisition integration and I think over the past few years we've demonstrated that when we commit to something in an acquisition integration, we typically deliver it. And the reason is because we have a corporate group of experts who do very detailed planning in conjunction with the management team. And we track and manage that as a major initiative, which means that every week, or every other week depending on the acquisition and the importance of it, we will get the management team in front of myself and John to go through the various elements of the program. And give us a status report and if there are issues that are developing we are -- we work together to solve the problems and move forward.

And there is a very granular program in place to address the Bostitch issues. Now, in contract to Mac, one of the important elements of these types of issues is management team buy-in. One of the significant elements of the Mac turnaround was just that. John Aden and his team were completely bought into the detailed plan that they put in place and they tracked and executed it on their own. Bostitch is, frankly, a bigger turnaround from the standpoint of business size. And perhaps to some extent more moving parts, some more complexity. And so, in this case, we are actually managing it like an acquisition integration, as I mentioned.

Your next question comes from Kenneth Zener, Merrill Lynch.

Congratulations. I'm wondering, the $0.10 improvement that you guys are expecting in fastening relative to the decline in '05, is that still given that you've walked away from business, roughly a $600 million base of revenue?

Yes, as I say, Ken, we've chosen what we think is a conservative point. Let's just use OM percentages regardless of whether this is a $550 or a $600 million business. This business has made 10% OM, in the three years I've been at -- since I've been at Stanley and that's only three years. It's at 3%. We're taking 15% to 25% of the manufacturing footprint and structure out, so we can support a much smaller business. We won't have to run to recover fixed costs. We can truly shed unprofitable businesses.

The team has done a really, really good job of -- when I say walking away from business, it's primarily end of quarter business at very low margin, that not only doesn't come with any margin, it really disrupts the factories in terms of level loading. It really disrupts our supply chain, it has an adverse on fill rates. And it's just a terrible domino, or ripple effect. And we are taking up at least $10 million a quarter volume hit to get away from that. But I think the margin and income improvement that will result from that alone is quite credible and quite realistic.

We've got a lot of moving pieces, as I say, between plant restructuring margin improvement. Looking very hard at businesses and quite frankly, we say SG&A, this is not a fat organization in terms of people or programs or spending. What it is is we over time provided a tremendous amount of service to our customers that we simply aren't getting paid for and one of two things will happen. We will start to get paid for those services. I referenced them, tool repair, loan tools, things of that nature.

We will start to get paid for those services or we will stop providing them. It may or may not have an impact on volume. It will certainly have an impact on margin. And as I say, on the manufacturing footprint piece, we are often running with the team totally bought in. So we are cautiously optimistic that that $0.10 is real and we would like to think with the team in place there's upside from there but we are just not in a position to bet on it at this stage.

If I can have a follow-up question then. Security, obviously building a very large platform there and the acquisition that was made was in the U.S. Are you still looking at pan-European companies? And kind of -- with Brett running the new division, is he going to have the time to look over there? And if you could describe the landscape of that?

Sure.

And I think the HSM acquisition was actually was at a relatively high margin relative to what's available in Europe, if you could comment on that as well?

Yes, let me say three things. First of all, you mentioned Brett, he's insatiable in terms of his ability to manage a business and look at others. He obviously knows the space extraordinarily well. And having spent the last two years of his life in Europe, did nothing of course but solidify the bonds and the relationships with, I will say for lack of a better term, targets in Europe. We've said this before. Most of the companies in Europe are quite large that we are looking at. The incubation period is 2x to 3x what it is in the U.S. especially if it's a $100, $200 million Company with financial sponsorship and an exit strategy and a target.

So, that's a long way of saying the pipeline is quite full and getting fuller. Our focus, short to intermediate term, is on digesting what we have and continuing to build these bonds, to build these relationships, to vent them. There's plenty out there. Obviously, they are going to have to be at a reasonable price, a price that despite what we paid for HSM, which was a lot, it met our financial criteria. And we are not going to do anything in Europe that doesn't. But because they are going to be bigger we need to get our financing in place for HSM. Absorb it, so certainly don't look for us to do anything in the next six months. But also don't expect us to wait two more years before we continue to build on this platform.

We believe in it. We love our North American access model. We'd love to duplicate that in Europe. We are understanding convergent better and better. Justin on the mechanical side has a tremendous business with tremendous margins. We can expand that in Europe. So, it will take a little time but there's plenty out there and we are becoming a very logical go to buyer for a willing seller especially if somebody wants to sell outside of process.

Your next question comes from Nigel Coe.

Thanks, good morning. Quick question on Bostitch, before I move onto my real questions. Jim, you sound really bullish on the turnaround, about $0.10 cents of Bostitch recovery in 2007. Do we get a little more drag in the first half of the year and then get the real benefit in the second half? How does that play out in your numbers?

Definitely. I think we are dealing with a double whammy in the first half because we have the difficult market. Thankfully, the comps are getting a little easier, by the way. As I recall the first quarter of '06, I think was down 8% or thereabouts organically for fastening. So the comps are getting a little easier. But the market is pretty rough right now. You can see with some of our competitors and the power tools arena some of the experiences they've been having. And Bostitch may be air powered but it's a power tool at the core. So, yes, I think the first half will be more difficult than the back half. And then you have the other dimension, which is the programs and the initiatives are really going to be kicking in full gear in the back half of the year. So, for all those reasons I think you are probably correct.

Okay. Great. And secondly, the Facom $0.25, you more or less told us that that's a conservative number. What's driving you to be so bullish there? Is it demand is tracking higher than you expected? Is it that you got more back up synergies? Where does the potential affect come from? And if I could just squeeze one more in. The free cash flow guidance step up, is that all from the HSM acquisition?

It's not all from the HSM acquisition but it's substantially from the HSM acquisition. And the reason I'm bullish on the $0.25 is because we have literally hundreds of people coming off the payroll as we sit here today in connection with the ECP We've already had a great performance in '06 from our Facom contingent and the costs are coming out. The margins are going up. And the market itself is holding up quite well and their organic growth performance is pretty good, slightly better than expected. So for, on that basis the $0.25 look likes a very doable number.

Your next question comes from Ivy Zelman.

Good morning, this is Justin [Spear] in for Ivy. Just a couple of questions. One, how much benefit did you receive from the new hand tool launch? And when did you begin that launch?

I think we covered that in the -- if the question is, benefit tens of millions. We launched in the first quarter and again in the fourth quarter, FatMax Xtreme in the U.S. And we launched FatMax XL, Justin, which is the exact same product line but we are not allowed to call it for trademark reasons Xtreme in Europe. And all-in that was a big part of the lift. Now, that being said, the fact that it was 100% incremental, meaning there was virtually no cannibalization from the FatMax line, is what we took great solace in. So it was 100% incremental, accounted for most of the list. And obviously, it's a super premium product so it came at higher margins. So North America, the second wave was shipped in October. And in Europe it all shipped in October.

Okay. Are you expecting any more launches next year?

We've got a rhythm. Jeff Ansell runs a very, very I'll say disciplined SBU structure, which really works well in that business in terms of keeping the pipeline full, the commercialization efforts. There's not a lot of seasonality in that business but if you are going to choose it, it's spring and fall. And our history has been, and what we've going forward, is look for spring and fall introductions. We've gotten through two waves. We have at least three more planned, so look for one in the Spring of '07. Look for one in the fall of '07. And as Jeff's product development guys continue to work we think we have another one in the Spring of '08. Two a year.

Your next question comes from Eric Bosshard, Cleveland Research Company.

On that subject, two things I wanted to talk about. First of all, in regards to Facom, can you talk about -- the execution seems like it's great but the end market, what's going on? What's the organic rate of the businesses and what the outlook for the organic growth of that business is in '07?

Jim will take it Eric. We -- the market is good, we are gaining a little bit of share but Jim is going to get a little more granular for you.

On a pure volume basis it's about a flat market and then you get a little price every year there, so it's about a 1% to 2% kind of a market. An we are looking for 4% growth this year out of Facom.

And the reason for gaining share, is there something different going on that's driving the share gains?

I would say we have a revitalized commercial effort. The Facom folks I think are learning. We've learned a lot from them and I think from Stanley they are perhaps learning a lot about commercialization of products in the tool industry. They had a very robust kind of product development group but they didn't have a lot of money to work with and we've given them some funding. And so, for those reasons there is a little better growth than the market.

Maybe to just clarify a little bit, in Stanley speak, Facom's vitality index has already been extraordinarily high. The struggle at Facom, to Jim's point, it wasn't perhaps as well funded as it could have been and the commercial execution wasn't quite what it could have been. A tremendous amount of new products successfully introduced but virtually 100% cannibalization. They were doing that to stay flat. The new product vitality under the direction of a gentlemen named [Everey Goma] who is part of the Facom team, working closely with Stanley. That is at or above previous levels but we think the commercialization discipline is a little better. As a consequence, a little less cannibalization. So, 15% of the business is new products, to Jim's point, as opposed to none of that being incremental. 4% to 5% is incremental. And that's where we are getting the lift and we are cautiously optimistic that we can carry that through '07.

And we are leveraging the infrastructure, too. For instance, as we all know, Eastern Europe is the place that's growing at a much faster rate in Europe than other places. And Stanley has a number of resources out there in the commercial area and Facom did as well but when you put them together it's 1+1 is more than 2.

At this time, I have the no further questions, John do you have any closing comments?

No, other than we started a little late so thanks for bearing with us. Thanks for your attention. And just as Jim referenced during the prepared part of the presentation, we do have an analyst day on the afternoon of Thursday, March 8. Gerry has sent a save the date, invitations will be forthcoming. Our objective there is to talk a little bit more about the segmentation, give you some of the history. So you can work with that in your respective models. And also, I think something that you obviously asked for and we are more than pleased to do, give you exposure to some of the management team, the business executives that run these various businesses and various segments. And we will have four to five of them on hand on the 8 as well. Thanks for your attention.

This concludes the conference call. You may disconnect.