Stanley Black & Decker, Inc.
Q1 2008 Earnings Call Transcript

Published: 25 Apr 2008

[Operator:]

Good morning. My name is Sierra, 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. (Operator Instructions). I would now like to turn the conference over to your host Mr. John Lundgren, Stanley Works Chairman and CEO. Sir you may begin your conference.

[John F. Lundgren:]

Thanks Sierra. Good Morning. Just before the cautionary statements and proceedings with this mornings call, we have a brief announcement regarding investor relations at Stanley, which you may have seen this morning. Gerry Gould, who is Stanley's Vice President Investor Relations and has been for the last 11 year's has expected a position as the Vice President of investor relations for RSC Equipment Rentals Scottsdale, Arizona. And, simply we want to thank Gerry for obviously his many years of diligent service, valuable contributions to the company. Of course, we wish him well. We know he will enjoy the sun and do a really good job for RSC. And with us today is Greg Waybright who is our Vice President of Internal Audit. Greg is also going to be serving as our Interim Vice President of Investor Relations as we completed search of Gerry's replacement. So Greg, I will turn it over to you for the cautionary statements.

[Greg Waybright:]

Great thanks John and good morning to everyone. On the call in addition to myself and John Lundgren, our Chairman and CEO is the Jim Loree, our Executive VP and CFO as well as Jerry Gould. And there are few recent press releases that I would like to mention. One relates to our first quarter results, which was issued earlier this morning, and the other is related to our second quarter dividend declaration and the results of our annual shareholders meeting, which were issued yesterday and these press releases are available on our website. Today's presentation is also available on our site. And as that's important as we refer to these charge during the call. John will review Stanley's first quarter results followed by a Q&A session. The call is expected as usual to last approximately one hour. And then a replay of the call will be available beginning at 00

[John F. Lundgren:]

Thanks, Greg. I'm going to go through a brief and call it formal presentation of the results. Jim and I often share this. Jim is here with us today, it's relatively short. So I'll take us through the entire presentation to allow us plenty of time for questions and answers. In summarizing, the first quarter business highlights, 6% earnings growth which led to 85% earnings per share, despite the difficult market conditions particularly in the North American residential construction business. Our revenues were up 3%. Certainly they were aided by our foreign currency translation and acquisitions, which did more than offset the softness in organic volume. We grew our gross margin by 60 basis points as a percentage of revenues, as our productivity programs in the plants and good work in the market place on freights realization more than offset the inflation, excellent quarter in terms of cash flow of $83 million up 22% over the first quarter of '07. As you would expect, the CDIY revenue was flat as the currency offsets in foreign markets compensated for the weakness in demand in North America. But in the industrial segment both profits and revenues were up 8%. I will talk more about that in our segment detail. And an outstanding quarter in security with our profits up 17% on revenue growth of 3%, again more detail on that in the segments. So looking quickly at the first quarter results in total, we see net earnings flat at $68 million, which translated the EPS of $0.85. Interest expense, tax rate, share count, tax rate is 70 basis points lower than the same period year ago, all contributed to the increase in earnings. So 6% earnings growth despite relatively difficult North American market conditions. Now, looking a little more closely at revenues and the sources of growth, as previously stated revenues up 3%, unit volume across the globe was down 5%, offset by 2%price realization, which lead to the previously stated minus 3% organic growth. We got a 4% less from currency, as you know about 45% of Stanley's revenues are outside North America and another 2% from the annualized effective acquisitions that one part of our portfolio in the first quarter last year leading to the revenue growth of about 3%. By segment, and we'll get into more detail on this, CDIY as previously stated was flat. Organic growth on a global basis was minus 5%. And, as I stated earlier, currency and price offset the unit volume softness, which was overwhelmingly concentrated in North America. The industrial segment grew 8% in total and was down 1% organically. Lot of moving pieces there, but Europe was strong. Our Engineered Solutions business was strong and of course we were helped by foreign exchange, offset by weakness in North American automotive and repair segment, and lot of things driving that and we'll talk about that more in the segment detail. Two small acquisitions, both notable of which was InnerSpace contributed in addition to the FX to the total growth. Last, but certainly not least, security which was up 3% in total, down 2% organically, but that's a tremendous achievement, and I'll talk about it more in the segment when you think about the fact we offset a 4% to 5% headwind due to the loss of a major customer in North America, which was announced this time last year, but the volume didn't disappear from our P&L until the middle of the third quarter. So as you see, 3% organic growth in the total security segment excluding hardware. Let's look briefly at the three segments, starting with construction in DIY. As I say, flat revenues, in those, in both the consumer tools and storage and our Bostitch business were basically flat. Segment profit down 19% in absolute returns and 280 basis points. The U.S continues to be adversely impacted by the residential construction market. That of course affects consumer tools and storage as well as Bostitch. In North America those businesses were both down low single digits in terms of revenue. Sales in the rest of the world were up 6%. Of course a lot of that was foreign currency, Europe up about 7% in the consumer tools and storage business and Bostitch up even more than that in Europe. So, relatively good performance outside the U.S. The profit rate of course is negatively impacted as we failed to fully recover inflation, about $20 million of the annualized inflation came out us in February and we absorbed some of that in the cost line and didn't yet recover it with price and productivity. The soft volume resulted in lower absorption of fixed cost, and we did continued spending on market development. We made our commitment early in the year to continue to support our brand in consumer tools and storage, as well as fully implement and retain our discovery team activities, and if appropriate as suggested in our guidance, we'll reduce those slightly to preserve earnings later in the year, but that money is committed. We thought it was money well spent and we continue to believe it will strengthen us for the future going forward. Just a brief note, we talked earlier about anti-dumping tariffs, and the impact that had on our Bostitch business. In the short term, it's neutral, neither positive nor negative. In the long-term, we think it's an advantage for Bostitch. You may recall in January of 2008, tariffs has a range between 4% and 118%, were imposed on all imports from China as a result of a lot of study and the fact that the conclusion that certain fastening products were being dumped in the U.S at unfair prices. The total impact on Bostitch was 19%, which was well below a lot of the competition and it of course just reflected the product mix of Bostitch. And, going forward it will level the playing field against any relative to Chinese imports that were being dumped. Short-term, any one the increases have been passed along in terms of pricing because it's affecting everyone. Long-term, we think it's an advantage for Bostitch and the Bostitch has very capable production facilities in North America, as well as in Poland, as well as in China, near Beijing. So, good production on three continents gives us the flexibility to move production going forward as exchange rates and market conditions vary. Looking at the industrial segment, as I said revenues and segment profit both up 8%. Profit rate was flat. Industrial tools and automotive repair tool revenues were up 6%, down 2% organically. Facom continues to perform well, and our U.S industrial revenues were down slightly. That's driven primarily by weak automotive sector assembly and MAC, both down and we'll talk about those in the Q&A to the extent if there is interest. Our Engineered Solutions business was up 18%, 3% organically. Our Vidmar business remains very strong. Total storage grew 50%, 13% excluding acquisitions and in total segment profit was up 8% despite the lack of organic growth. The rate was flat we did well with pricing and productivity, and that offset any of the negatives associated with inflation and mix. Lot going on in the securities segment, profit up 17% on 3% revenue growth, and the rate up nearly 200 basis points. As previously stated, the 3% revenue growth for the total segment would have been in the neighborhood of 9% excluding hardware. Segment profit as I said remains strong up 17%. Looking at our sub-segments within security, convergent had a very, very good quarter. 12% sales growths, 2% of which was organic, the difference between those two are combination of a full quarter of HSM where we brought that business on in mid January a year ago, as well as foreign exchange of about 20% of that business is generated in the UK. So, that's the primary differences and of course some good pricing work between organic and total. Restoration of organic growth in the U.S. systems integration business was a very encouraging aspect of the quarter. As the HSM acquisition and the reverse integration that we have talked about on previous calls, that's taken an impact and it was good to see that we call the legacy convergent securities solutions business performing well, and showing some true organic growth. On the mechanical side revenue was down 3% as due overwhelmingly, or more than a 100% due to that hardware issue that I talked about before. Plus 7%, 4% of which was organic if we exclude hardware, and the profit increase, was driven by combination of organic growth price and the benefits of the HSM Integration and Convergent that we talked about previously. Good story, on working capital, which continues to contribute to, a good story on free cash flow. Specifically, looking at the elements, despite the softness in demand, we took five days out of inventory and reduced our inventory in absolute terms. Receivables were up five days are 11%. It's overwhelmingly due to European mix with a higher percentage of our revenue in Europe, foreign exchange, and as many of you are aware in general negotiated terms are a lot longer in Europe than they are in the U.S. So, the mix toward more European business in the first quarter this year versus last year is having an impact on receivables. Payables again, a nice improvement in payables, but I wanted just emphasize, I feel it, necessary to emphasize that it's simply, it is due to negotiation of terms with various suppliers, which is an advantage of our strong balance sheet and not withholding payments. We are upper grade investment level credit. We want to stay that way. And, it's simply due to better terms with some of our strategic suppliers and renegotiation of those terms. And, as a consequence, turns improved from 4.4 to 4.6, as inventory and payable performance, more than offset the increase in receivables. Cash flow was up $15 million in absolute terms, and as previously stated up 22%. Fairly straightforward, in terms of where it came from. The biggest contributor was just better management of working capital. We believe we're still on track to achieve our $500 million of free cash flow for the year. And, that of course is what's going to allow us to continue to pay the dividend, make acquisitions, and pursue our opportunistic buybacks as necessary and as required. Of course, it also results on our balance sheet staying pretty strong, and as I said the capacity to allocate our capital is consistent with previously strategies and priorities. Last but certainly not least is guidance. You look at 2007 EPS of $4 a share which was up 15% versus '06 and $457 million of cash flow, current guidance of $4.20 to $4.40 and $500 million in cash flow. This was outlined, we think as clearly as we can outline it with what we know today in the press release. But our first quarter EPS was consistent with the fiscal year of 2008 guidance of $4.20 to $4.40. Second quarter recessionary operating environment also was what we anticipated at the beginning of the year and the end of last year, when we issued our guidance. Our guidance assumed two quarters of organic revenue contraction, and that was consistent with our stated belief in a mild to short live U. S. recession. As a consequence, the second half economic conditions will need to stabilize in order to support the achievement of our full year guidance of $4.20 to $4.40. In the event that it doesn't, contingency plans are primarily in the form of cost and discretionary spending reductions. Secondarily in the form of pricing are being developed or in fact are in place to protect earnings above prior year levels, if in fact the weak demand continues. And based on what we have seen today and the good achievement, continued focus on working capital management, we believe that our $500 million estimate for free cash flow for the year is well within reach. At this point, I'd like to turn it back over to Sierra and Jim and I will try to respond to any questions you might have. Question and Answer

[Operator:]

(Operator Instructions). Your first question comes from the line of Eric Bosshard with Cleveland Research Company.

[Eric Bosshard:]

Thank you. Good morning.

[John F. Lundgren:]

Good morning, Eric

[James M. Loree:]

Eric.

[Eric Bosshard:]

I guess a couple of things, one can you give us an update on where we are in the Bostitch improvement effort and even perhaps the portfolio evaluation, consideration with emphasis as well.

[John F. Lundgren:]

Sure. I will take that one. I want to be sure you get your follow up and Eric Bostitch is I'd say on a long-term basis continuing to progress as we hope it would. It's fourth and first quarter, I'll say a bump in the road relative to the nice sequential improvement, we've seen for four quarters running before it. But there is so much confusion in the marketplace over, as I say 19% price increases across the board. What's that doing to volume on a short-term basis? It is really difficult to be very granular on how much of any volume softness was due to the confusion in the marketplace on price increases? How much of it was due to headwind? So it's fairly difficult to get up for us or anyone else on a short-term basis to get a handle on the Bostitch top-line. Strategically the manufacturing restructuring and our footprint modification is behind us and it's, we're quite pleased with the results. As I alluded to earlier, we've got a world class manufacturing facility in Langfang, China. We have great facility in the Southern Poland, as well as a very capable facility in East Greenwich, Rhode Island, and we've closed the facility that by no fault of its own. It was not up cost competitive in terms of delivery in Chihuahua, Mexico. We've actually moved nail production from China back to the U.S. As a result, about 10% of our production, the combination of labor rates, tariffs and Renminbi strength, has made it prudent for us to move about 10% of our production, and a 100 jobs with it back to the U.S on the fastening side. On the tool side, we're producing tools in the Besco plants in both Taiwan and China. That is on or slightly ahead of schedule, so we feel good there. So, I guess, to sum it up from the internal perspective, we're pleased with where we are to the extent that it faces marketplace challenges both in terms of the confusion around tariffs and North America headwind in term of construction, time will tell. You mentioned portfolio evaluation, we've been very clear about this for a long time. Our Bostitch is making money. I think sometimes people assume it isn't, but its low mid-single digits operating margin. It spent 10% or 12%. It needs to get back there, needs to get back there within a six to twelve month period, which is, will be two years after we started the restructuring program, or its less likely to be a part of the portfolio, and that we simply don't' continue to support businesses that are not creating shareholder value. Right now, it's not destroying shareholder value and they are doing. I think the team is doing an outstanding job with what they can control and we've got some pretty serious marketplace headwinds and we are trying to see if we can offset those going forward.

[Eric Bosshard:]

And then just secondly, it seems like you've got a contingency that you've identified to ensure that you can have, I guess at least up earnings if demand continues to get worse, and I guess my question is, what is that consist of, and why not juts do it rather than wait to see what happens with the market?

[John F. Lundgren:]

We've done some Eric. I'm going to let Jim give you as much insight on that as we are comfortable doing on this call, but if I inferred we are waiting, I may miss spoke or didn't communicate clearly enough. Two (Inaudible) and Jim will take you through a little bit of that.

[James M. Loree:]

Well, I mean anytime you have a contingency plan that's going to generate enough earnings to be significant, it's going to involve reductions in force and obviously we take those very seriously, and we only do those when we feel it's appropriate to do. I mean, there is tradeoff's between the long-term and the short term that you invariably must make when you do those, and so our preference would be to not do anything in terms of the contingency plan, but the economic realities are out there. As John said we've done some, we've done the non people related part of it today. So, that's already in progress, and the way we are kind of looking at it is, it will cost us, if we do what we are doing, it will cost us about $0.20 a share and restructuring it will probably provide a benefit of about $0.40 a share. So, for plus $0.20 a share, to offset the lower volume in the second half that we might have if the economy doesn't come around. We are just making a decision, as to whether we want to do that or not based on the long term, short term tradeoffs.

[Eric Bosshard:]

And, the net saves Jim would $0.20 in the second half, is how the math looks like it would shakeout?

[James M. Loree:]

Yeah, I mean that the volume that we assumed in the original guidance, if we were to continue to experience the kinds of issues that we are having, the volume would be about a $0.50 issue for us, and we've get a net of about $0.20, which would be about $0.30. Now that's assuming, where we have minus 3%, I am talking organic growth at this point. We incurred about minus 3% or experience of about minus 3% organic growth in the first quarter. Our outlook for the second quarter is fairly consistent with that, so as we look into the second half and we don't see any improvements, then we are looking at about a $0.50 issue vis-à-vis the original guidance.

[Operator:]

And your next question comes from James Lucas with Janney Montgomery.

[James Lucas:]

Alright, thanks and good morning guys.

[James M. Loree:]

Hey Jim.

[James Lucas:]

Two housekeeping and one strategic question. With regards to the hardware comp when does that anniversary, that's the first one.

[James M. Loree:]

Okay let's tackle that and then we will go to your other question or questions. The hardware and total cost will cost us about $50 million, about 40 of which will be experienced this year. The first three quarters of the year are the time in which that will be recognized. So, we are talking about $12 million to $15 million a quarter depending on the quarter for the first three quarters.

[James Lucas:]

Okay. And, with regards to the buyback, I don't know if I missed this number, if you gave it out or not. How much did you buyback in the first quarter and how much of that left under the current authorization?

[James M. Loree:]

Well we bought back 2.2 million shares in January at $46 a share that came on the heels of a 3.6 million share buyback and I think it was about a 8 million share authorization and we have expanded 2.2 million of it.

[James Lucas:]

Okay, so there was nothing done after January.

[James M. Loree:]

No.

[James Lucas:]

Okay. And finally, with regards to Europe, could you give us a comment of what you are seeing there both from Facom, and your other industrial businesses and the consumer businesses, with regards to both of those?

[James M. Loree:]

Yeah I mean, we were listening to Black & Deckers call, and I think that they mentioned that they were having a little bit of slowdown in Europe in the construction in DIY markets. And, I would say that our experience is reasonably consistent with that. It's a bit of slowdown, but it's not any kind of a deep dive like we are seeing in the U.S CDIY markets. Industrial, we are still growing in Facom organically, not the same kind of torrid rate that we were growing in the last half of last year. But still growing, so I think that what we have in Europe is the situation where the overall U.S. economy impact and the currency strength and everything else is providing a little bit of throttle on their growth, but it's not [tanking] in any respect.

[James Lucas:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Michael Rehaut with JPMorgan.

[Michael Rehaut:]

Thanks. Good morning.

[James M. Loree:]

Morning.

[John F. Lundgren:]

Hey Mike.

[Michael Rehaut:]

First question, I guess this goes to the raw material impact. You had mentioned last quarter, that you were expecting about a $75 million from inflation and recovering about 80% of that. Can you give us an update on how those numbers worked now? And also, what that recovery or incremental positive might be with some of those incremental cost reduction efforts in place? I guess its more headcount related but nonetheless?

[James M. Loree:]

I already talked about the cost reduction efforts in terms of the impact, which I will just repeat for ease of the administration here. It looks like it would be about a $0.40 improvement in the second half, which would be annualized around $0.80. And, the restructuring associated with that would be about $0.20, of which it's likely that $0.10 or so would be incurred in the second quarter, if we decide to do this. So, the net benefit of the restructuring would be, or the cost actions would be about $0.20, and it would be in the second half.

[Michael Rehaut:]

I mean, and then $0.40 incremental in '09?

[James M. Loree:]

If that has to forward to carryover absolutely, yeah.

[Michael Rehaut:]

Because of the annualization?

[James M. Loree:]

Correct.

[John F. Lundgren:]

Correct.

[Michael Rehaut:]

Okay.

[James M. Loree:]

And, then your other question Mike was relative to the price inflation?

[Michael Rehaut:]

Yeah.

[James M. Loree:]

Yeah, I'm very pleased actually with our situation here, not the fact that we're getting more inflation, but the fact that we've responded I think very well. And, as soon as the next wave of inflation came in the first quarter, our operating heads jumped on it and implemented price increases. And, so we actually have good news to report here. Now the inflation estimate for the year is up to $100 million, so it's up $25 million, but the recovery percent is up to 90%.

[Michael Rehaut:]

That's great. I mean that's really great reaction and proactivity. The second question is just on the commercial, your expectations for commercial end markets, obviously, on the consumer and macro side things are slowing but up until now commercial end markets have been relatively stable. It's not growing year-over-year, but the back half there are a lot of people out there looking for a significant slowdown. So, I was just wondering, if you could provide any idea of how your guidance either the $4.20 to $4.40 range or the more paired back type of expectations you are trying to set if things soften on a macro level, but within that what is your outlook for commercial and maybe just kind of remind us on a segment basis where that impacts your business?

[James M. Loree:]

Well, it's about 10% of the company, and actually it's less than 10%, about 8% of the company, about $400 million in revenue. And it is largely in the Security segment. So, I mean, obliviously there are some in the Construction & DIY, but very little and most of it is in the Security segment. The guidance that we issued and we discussed this in a little bit of depth at the analyst meeting, is that we didn't really have anything specific on commercial, but we said that it would be slowing. We expected it to slow in the second half of the year, because of the credit issues that are being experienced at the moment. And, that we didn't expect it to go severely negative. So, I would suggest in this kind of contingency view if you will that we're thinking about here for the back half of the year, I would expect that we would anticipate issues in the commercial construction market beyond what we had in the original guidance.

[Michael Rehaut:]

Thanks, Jim. One last question if I could. The free cash flow obviously comes in. It's still coming in nicely and you still have good confidence there. Relative to--

[John F. Lundgren:]

Sorry Mike, go ahead.

[James M. Loree:]

Have we loose him?

[John F. Lundgren:]

Yeah, we lost him.

[James M. Loree:]

Let's have the operator put him back on if we can.

[John F. Lundgren:]

Why don't we take another call and answer.

[James M. Loree:]

Yeah let's take another call, and while we're doing that, may be we can get him lined up to be, to finish his questions, thank you.

[Operator:]

Mike, your line is open.

[Michael Rehaut:]

Thanks, I appreciate that guy's. Just relating to the cash flow, projections and your use of that cash, if you could give us an idea, particularly on the acquisition front, how you see that market right now? If there are any more pressing or compelling opportunities relative to six or twelve months ago either in terms of price or in segment or geography?

[John F. Lundgren:]

Yeah, I'll take Mike. The good news is the cash flow gives us the opportunity to continue to pursue our strategy and after we pay our dividend, I think, we've been very clear. Our strategic accretive acquisitions to clear our financial hurdles are our top priority, and that being said, Stanley is on sale right now, and we obviously look at it very carefully relative to acquisitions, even though they will advance our strategy. Our pipeline has never been more full to be specific in terms of your question. There's a lot there, particularly in Europe, both in the security space as well as in the industrial tools space, which are the growth platform where we focused. It won't surprise you or anyone to know that the fewer financial sponsors show up in auction or processes, or even an attempted unilateral negotiations. That being said, there has been little or no price capitulation thus far. So, long way of saying both in the tools space and in the security space, good properties are selling for multiples of recurring monthly revenues, multiples of EBITDA etcetera, that haven't come down at all relative to the last six to nine months. The difference being, the suitors tend to be overwhelmingly strategic, which of course wouldn't surprise you, and fewer and fewer financial sponsors just given the current credit environment. But the pipeline is full, as we go forward to make an acquisition our intend is to continue to built our capital base and bring in acquisitions at above our cost to capital, which we believe in the long-term create shareholder value. That being said, we had a Board meeting yesterday. We discussed each and every acquisition with our Board and before we make it, to the extent it's our cash, and it's our desire to maintain upper tier investment grade. We look at each and every acquisition strategically and financially relative to buying Stanley stock, and in this environment the share repurchase probably gets a closer look than it would have historically, but we have not changed our priorities and we've not changed our strategy.

[Operator:]

Your next question comes from the line of Peter Lisnic with Robert W. Baird.

[Peter Lisnic:]

Good morning, gentlemen.

[James M. Loree:]

Hi, Pete.

[Peter Lisnic:]

Jim, if I could, just to clarify on the back half of the year guidance, down 3% organically in the first quarter, it sounds like second quarter accounts the same number. Is the second half of the year just kind of run along at that, minus 3% or are you expecting improvement? I just want to make sure I understand it.

[James M. Loree:]

Well, our guidance is 420 to 440 a share, and that as John mentioned when he went through his presentation is predicated on, was predicated on a short or a short lived, in mild recession in the U.S, and without a major global recession. So, the issue that we are facing right now is that, it's not even an issue, we are exactly where we though we would be when we issued the guidance, which is the first quarter would be really tough and the second quarter would be tough. And then, in theory if our assumptions hold true the third and the fourth quarters should get better. There is also its stimulus going on as you know with respect to interest rate reductions, with respect to fiscal stimulus as well, putting cheques in people hands in the U.S. and there are a number of reasons to think that it's possible that it could be better in the second half. But, I don't think anyone is going to bet on that certainly not us. But we are consistent with where we thought we would be. The wild card in the whole economic outlook for us has been the shakiness of the overall financial system over the past few months has really created more concerns on the part of the most folks here than we had before. And so, now we have seen some abatement in the last few weeks of that in particular with the Bear Sterns rescue and so forth. So, if the financial system stabilizes the stimulus works, I think there is a good possibility that we could have an okay second half, which would put us right smack in the range of our consensus. But, we want to give you a sense and I think, I saw a report from one of the analyst on the call who sort of pegged it as - we are sort of trying to quantify what we believe the downside to be for you if that doesn't occur. And, the downside is that we can still generate earnings growth while a number of our building products competitors are earnings are tanking 20% to 30% versus the prior year. And, that's a direct result of the portfolio shift, and also what we consider it to be a fairly direct response to the economic environment in terms of cost reductions and price inflation recovery.

[Peter Lisnic:]

Okay that's very helpful thank you for that one and then my follow up question I guess. If I look at the CDIY segment and if I understood John correctly, it sounds like there is a, was there a $20 million raw material hit in the first quarter or was there a price offset?

[John F. Lundgren:]

Yeah let me, Pete I mentioned that $20 million, when I was talking about CDIY. And, the majority of it is in the CDIY, because it's steel and that's Bostitch and that's hand tools. So, the majority of it is there. That 19, 20 million was on top of the 75 to 80 to get to the 100 that Jim reference previously. So, we entered the year saying 75 to 80. We observed another 20 in February. Get us to 100, or 20 to 25, get us to a 100 for the year. And those are the price offsets we worked hard to get in the place. In other words, we would look at 80% recovery when the number was 75%. We are now looking at 90% recovery, of a 100. We are still looking at $10 million of negative price inflation, which of course we are going to get some productivity, that's all on the annualized basis.

[James M. Loree:]

Yeah. But in any way, we expect to have gross margin accretion, because though, as I mentioned in last call, we expect about $70 million of variable cost productivity, which should fall through and except for the un-recovered piece of the inflation, which is at this point about $10 million

[John F. Lundgren:]

And, that was indicative. First quarter you saw 60 basis points of margin accretion despite all the activity that was going on out there, and despite soft volume relative to our plan.

[Operator:]

Your next question comes from the line Robert Wertheimer with Morgan Stanley.

[Robert Wertheimer:]

Good morning, everybody. You said something in the actual opening commentary that keeps my interest. You talked about renegotiating supplier terms, and I wonder whether that's because your suppliers are really starting to feel the credit crunch, and whether there is any risk there?

[James M. Loree:]

No it's more a function of in particular the Asian suppliers. So for two or three years, we have been able to stave off the price increases, while they have experienced significant raw material price increases. We sort of expected that. Sooner or later, it would come to this, and a lot of them have basically decided that they can no longer ship under the previous prices. And, so they come to us and say, well we don't want to do business with you anymore because, you won't accept the price increase, you haven't accepted the price increase for two or three years and our prices have gone up X percent on steel and other input costs. So, when we, we would be grudgingly grant those, and we have a process to fully analyzed their cost structure and everything else and then work with them to do value engineering, to reduce the impact of the price increases to us and so on. But ultimately, we've ended up taking some price increases from some of these Asian suppliers. And, in almost every instance when that's happened, we've said to them, we're not taking any price increase unless you extend the terms 30 to 60 days from what they are. And, that's basically most of what the payable increases resulting from, as well as some currency, John didn't mention the currency when he was talking, but the currency had an impact as well.

[Robert Wertheimer:]

Okay, fair enough. And then I would, just mechanically on your price increases, the one you just took, is that typically timing for the year, and if you talk about how often you typically do pricing in the year?

[John F. Lundgren:]

I have to talk to you by segment.

[Robert Wertheimer:]

Yeah.

[John F. Lundgren:]

Let's take the easy ones first, easy to explain, not easy to get price increases. But insecurity and in our industrial business because, most of it is be-to-be most of our customers are in the very similar situation as we are. It tends to be far more transparent and their willingness to accept and pass on a price increase is understood because, they are in the same situation as we are. So, it tends to be relatively quick, 30 to 45 days notice and it passes through and they have the same capability to pass it on through. That 90% price recovery that Jim talked about, that's on a corporate wide basis. The numbers higher than 90 in security and industrial, and below that in CDIY and the reason there, I think it's pretty obvious and straightforward. A very large percentage of the CDIY business is sold through the North American and European home centers. Large retailer with lot of leverage and just as we have formal processes to fully {vat] and then, and in an essence resist pricing increases until we are sure there are merited. They have the same leverage and they have it from a $40 billion to $80 billion revenue base, and it takes a lot of work, a lot of working with the supplier, and a lot of negotiation on what else can change. So, they can keep their cost and ultimately their retail prices as low as possible. So, it takes three to six months in some case to truly realize the benefits of a price increase. And part of CDIY channel its more 30 to 60 days in some of the other channels. That's not unique to Stanley. It's just reflects the difference in the channel and how the pricing models work.

[Robert Wertheimer:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Sam Darkatsh with Raymond James.

[Jeff:]

Yeah, this is Jeff calling in for Sam.

[John F. Lundgren:]

Okay.

[Jeff:]

First question is, we were pretty encouraged by the U.S. System Integration business. I was hoping you could talk about that a little bit, and whether or not you were surprised at all, or how did that came in, kind of just when you are planning forward?

[John F. Lundgren:]

We too were encouraged. We were surprised. Jim is right in the middle of it, so I am going to ask him to take that.

[James M. Loree:]

Yeah, I mean, the encouraging thing about it is that it's happening a little faster than we expected. If you look at what we've said in the past, we were expecting to go through about the first half of this year with continued negative organic growth in that particular part of the business. And, as it turned out, we were able to emerge two quarters earlier with organic growth. And, the reason that is, is that we had a fair amount of sales turnover last year that was anticipated, but the folks that have stayed and the new folks clearly have brought into the business model, which involves recurring revenue as well as installation revenue as part of the sales process they brought into the compensation plans that we have and we're finding that gaining share is feasible. In particular, at the national accounts, it's been, we've been a welcome alternative to the other supplier out there or suppliers. And, in general, convergence security is really picking up momentum, and we feel very good about it.

[Jeff:]

Okay. My follow up is in regards to, in your script you mentioned something about the automotive business weakness, and it sounded basically, that like, may be there is little more three than market weakness, I was, can you talk about that?

[James M. Loree:]

Yeah, let's start by hopefully, it didn't sound like we're reading a script, because we don't do that. But I do understand, you met in the formal comments. Let me distinguish, between our small OEM business assembly, which is facing the same marketplace headwinds obviously that anybody supplying the North American or European automotive business would do. That business is soft from a top line perspective. That team has done a great job adjusting its cost base to stay inline with it, and in fact saw some margin accretion as a result of it. The issue there is volume. The rest of the business though what we do call, industrial and automotive repair, you think some of Proto, some of Facom, and certainly MAC, it's been difficult. If you think of the MAC model, the drivers are paying for their own gasoline, that's extraordinarily expensive, and a large part of the MAC top line comes from very high ticket items sold on consumer credit, which their end users are having difficulty, quite frankly coming up with the credit to buy it. So, a lot of that softness is driven by the combination of energy prices, and tight credit in the end user market for that particular segment, because the industrial part of that business is performing extraordinarily well. That the Proto, the part of Facom that goes to industrial in Europe. We are quite pleased with how they are performing. So, if it involves consumer credit, if it involves gasoline, it's going to be tough in the end market place. And, lastly, we don't talk too much about individual businesses, but we are making progress with, I'll say distributor recruiting model with Mac where historically we looked very, very hard and very closely on. How many distributors did we add, how many distributors did we lose in a particular quarter, with not enough focus on retention. The way that business model works is we need to keep these people for 12 to 18 months before they turn profitable. So, I won't bore you with the details but the MAC team has really stepped up the sophistication and the scrutiny under which they look at distributors before they add them. The end result is, we are going to add fewer distributors without question, because the border for them to clear clearing and become a distributor is much higher. The theory is that while we will be adding fewer distributors, our retention rate will be dramatically higher and in the long run that will be great for Stanley. We are only 1.5 quarters into this in new process, so I can't tell you, yet that it's working, but I know both at the MAC level, Donald McIlnaydone who is responsible for our industrials tools group is well of those of that that headquarters in the HR function as well as Senior Executive Management, looked at the program, take it to the right way to go, and we are consciously optimistic that that's going to help him. But right now, it's a difficult environment.

[Jeff:]

Thank you.

[Operator:]

Your next question comes from the line of (Inaudible) with Cardinal Capital [ph].

[Unidentified Analyst:]

Thank you. My main question was, when we talk about organic growth in the various segments for the rest of the world, is it possible to discuss them on a constant currency or a local currency basis, so we have a better idea for example, for Facom, rest of the world 6%, CDIY, what we are talking about on a local currency basis?

[James M. Loree:]

We do that, specifically our organic growth numbers exclude any foreign currency translations. So, if the number is organic it has no currency in it, and it is what it is.

[Operator:]

And your final question comes from the line of Jim Lucas with Janney Montgomery.

[James Lucas:]

My question was answered, thank you.

[Operator:]

And, at this time there are no further questions.

[John F. Lundgren:]

Okay, well let's than thank everybody for their attention. Busy day, a lot of earning releases up out, and we very much appreciate those of you who are able to join us live today. As always, Jerry and Greg actually are both available. If you have a specific follow up question that's either you didn't get answered or our comments have raised a question that you didn't get to ask we would be happy to hear from you. Thanks very much for your interest and participation this morning.

[Operator:]

Thank you for participating in today's Stanley Works first quarter results conference call. This does conclude today's conference call. You may now disconnect