Stanley Black & Decker, Inc.
Q1 2009 Earnings Call Transcript

Published: 24 Apr 2009

[Operator:]

Good morning. My name is Chen and I will be your conference operator today. At this time I’d like to welcome everyone to The Stanley Works Q1, 2009 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) At this time I’d like to hand the call over to Ms. White, Director of Investor Relations. Please go ahead.

[Kate White:]

Good morning everyone. My name is Kate White, the Director of Investor Relations for The Stanley Works. Thank you all very much for joining us on the call this morning. On the call in addition to myself is John Lundgren, Stanley’s Chairman and CEO; Jim Loree, Stanley’s Executive Vice President and COO; and Don Allan, Stanley’s Vice President and CFO. I would like to point out that our first quarter 2009 earnings release, which was issued this morning and a presentation supplementing today’s call, which we will refer to during the call, are available on the Investor Relations portion of our website, which is www.stanleyworks.com. This morning Jim, John and Don will review Stanley’s first quarter 2009 results and various other topic matters, followed by a Q-and-A session. The entire call is expected to last approximately an hour and a replay of the call will be available beginning at 2

[John Lundgren:]

Thanks Kate. Let me just spend a minute just on the highlights from the first quarter and the state of Stanley, I think it will help ground everyone. First quarter, as cited in our release diluted EPS from continuing ops $0.48 that did include about $0.08 of restructuring charges that we plan to take this year that we have been fairly transparent in terms of what we think they will be and when we think they will fall, and Don will talk more about that later. The highlight was security, I think validating the portfolio transition that we began five or six years ago, 12% revenue growth and 33% profit growth. Of course that was primarily driven by acquisitions, but that being said, we’re very pleased with the integration status of both Sonitrol and GdP. As they are on ahead of schedule in terms of where they need to be on cost savings Brett Bontrager in the integration teams continue to do a really good job in that area and it really helped four to five this quarter. Overall, sales unit volumes are down 19% versus prior year, but in that environment gross margins still improved to a record 39.6% for us in the first quarter. Where they are more about it later on, but we’ve taken additional $100 million cost reduction program that we initiated, that should generate up to $45 million in savings this year or $15 million of that, we will reinvest in some brand development programs and some organic growth initiatives, some of which has already been reinvested and Jim will talk a little about that in his portion of the presentation. Despite the volume decline, working capital turns improved to 4.8, and 2009 GAAP EPS guidance was introduced for the first time in the range of $2 to $2.50. That includes $0.42 of restructuring, so about 20% of the restructuring that we intend to take this year took place in the first quarter. Free cash flow, we still expect to be above $300 million. Looking briefly at the financial results. The chart itself explanatory, we were pleased to be able to hold operating margin at about 12% given the precipitous volume decline, but you see earnings excluding the $0.08 charge at $0.56 are down 30% from the first quarter a year ago. Revenue down 15% will be more explicit on that in the next chart, tax rate constant, number of shares outstanding constant. I think importantly to note, we did not maintain margin by producing for liquidations and building inventory. Inventory was down about 13% in absolute terms and there is only a modest four-day increase in day sales in inventory despite the 19% volume decline. So, the benefits of SFS are clearly showing up in terms of our ability to manage inventory, manage working capital and Don’s going to give you some more detail on that in light of the volume declines. Our ability to maintain OM reflects price acquisitions, productivity and favorable mix offsetting the adverse impacts of course the volume decline effects and still a little bit of our cost of goods inflation in the first quarter. Looking more specifically at revenues on chart five, down 15% as I said, but looking at a quick walk, volume down 19%, and just for everyone to recall, that fall had a 7% volume decline in third quarter and a 10% volume decline in the fourth quarter. So the 19% was in fact significantly higher than we anticipated as we ended the year. We’ve reacted to that. Jim is going to talk to that in just a minute or two. We got favorable price impacts resulting in organic revenue decline of 16%, hurt by currency, helped by acquisitions so revenue down 15% with the poor security being the bright spot. Looking at the segment results, you see Security up 12% with volume being down 8%, but the both Industrial and CDIY businesses, volume down 26% and 22% leading to the 19. As it relates to Security and we’ve talked about this a lot, it’s insulated from but it’s certainly not immune to the economic headwinds that we are facing as the installations were down, but that was certainly partially offset by some healthy resigns and obviously from a margin perspective, the recurring monthly revenue of our convergent security business. On slide six, no area escaped the headwinds, if you are looking just quickly top left, North America accounts for about 64% of Stanley’s revenue and Canada was down 16% in total, 12% organically and the US down 14% organically. In Europe fall came later, but more precipitously. Europe was doing pretty well up until about September 2008 and declined quickly from September onwards and certainly remained soft at this point in time. Australia, given its small size, is a relevantly important market for Stanley, but it was down 6% organically, 31% in total as currency was the big factor and Asia down as well after some significant consecutive quarters of growth. Looking at margins on slide seven, the high point of the quarter may well have been our gross margin achievement of 39.6% as I alluded to earlier, price acquisitions and mix as well as strong performance by our security business. Operating margin did decline 40 basis points versus the first quarter 2008 and 80 basis points sequentially, due primarily to volume. SG&A was down and I’ll give you some more detail on that in the next slide, but obviously it was down less than volume as we are not able to adjust it quickly to a volume decline 400 or 500 basis points above what we had anticipated as we entered the quarter, but to give you a closer look that add SG&A down 8% in total but there are a lot of moving pieces so we prepared this [work] that we thought would be helpful. I think on the whole we did a good job controlling SG&A, given the level of volume decline. As I said, down 8% in total but down 16% excluding the impact of the acquisitions. Most businesses, which is not on the chart, but most of our businesses, were down in excess of 20% with the exception of Security and the Security businesses were down mid-single digits, but again but not facing quite the marketplace headwinds as our industrial tools in CDIY business were down a little bit less. As you look at the work, it’s pretty straightforward acquisitions adding $23 million investments, adding $4 million to the spend and that’s some of our incremental brand support, most particularly supported expansion of our very successful to-date Major League Baseball program, I wanted [Jim Loree] is going to talk about that a little bit and we are very exited about the brand building and potential volume building aspects of this program. Inflation was another $2 million and then all the savings, 13% reduction versus our 1Q ’08 cost basis between headcount, foreign exchange, a lot of moving pieces in discretionary spending, the biggest of which is T&E or travel less, fewer promotions, virtually no temps on our payroll, everything write down to office supply, is $20 million in the quarter and so again a pretty a fairly formidable effort controlling expenses which helped maintain margins. Now as we detailed in our press release, we did take additional actions in the first quarter as we absorbed the volume declining more than we previously anticipated. Jim’s is going to give you a little more granularity on what those actions are the impact is it relates to restructuring cost and what to look at of the rest of the year. Then Jim’s also going to give you some more detail on each of the segments. I’ll turn it over to Jim Loree.

[James Loree:]

Before we dive into the new actions which are the ones that we took in the first quarter, I would like to just refresh everybody by summarizing the actions that we took in 2008, primarily in the fourth quarter. We exited the year with about $220 million in cost actions, of which about $195 million of that or $1.75 per share impact 2009’s cost base, another $25 million will impact 2010. About half of the impact related to headcount for those actions with about 2,000 people coming out of about 10% of the workforce. Another quarter of the savings came from discretionary items such as the suspension of our 401(k) match and some deep cuts in to things like T&E and other discretionary items, some of which will come back in fact I think we can be fairly certain that about a quarter of these will actually come back in 2010 and then the remaining 25% are other expense reductions that are more permanent in nature, the type that typically will follow headcount actions. So about 75% of those 2008 actions we expect to be permanent. Then we move on to the first quarter ’09 actions and as you may recall, as we exited the year we committed to produce the contingency plan that would protect us in the event of the volume forecast for 2009 was less robust in the minus 10% and as the quarter went on and as you can see from the organic growth in physical volume declines, it became clear that it would be appropriate to implement these actions at the end of the quarter. So, as we look at the 1Q ‘09 actions, we have an additional headcount reduction of 550, bringing our total to 2550 from the beginning of last year or about 13% of the total workforce. As mentioned that’s about $100 million of annualized savings associated with these cuts, about $45 million in 2009 of which 75% of that are related to the headcount and then the other remainder are from costs that follow headcounts. So again these will be primarily all permanent in nature. The charges associated with are $45 million restructuring, most of which is related to the 4Q ‘08 actions, $0.42 a share and the charges are going to be primarily 90% cash, so as you can see mostly severance and items of that nature. So, we talked quiet a bit already about the savings, you have the $1.75 a share from the 2008 actions, and then an additional $0.51 in 2010 from that combined benefit of $0.75 in 2010 will largely be used to offset the cost pressures from those costs that I mentioned from the ‘08 savings that will be coming back. I think it’s fair to expect that about $0.40 to $0.50 of those 2008 actions could be coming back, especially the 401(k) match and some of the T&E reductions. Now, one of the nice elements of this was that we were able to take $15 million of these savings and reinvest them in organic growth in the Security business, particularly in the electronic business and it’s our intent this year to add about 150 sales people into the electronic security business. We have the ability to gain share, we have a market that is willing and able to accept additional sales resources, and these folks can be productive and we have some competitors that are retrenching to some extent so that we can hire folks that are already up to speed and have an account base. So, we are making that move. In addition to that, we will talk in a minute about the brand investments in Major League Baseball and the NASCAR sponsorship, but I think it’s also important to note that these actions, unlike those in the fourth quarter, I would characterize that actions in the fourth quarter has more traditional cost cutting. These actions were very thoughtful in terms of changing the structure of the company in ways that could actually improve the effectiveness and not just the efficiency or not just drive efficiency benefits. So for example, as we’ve announced in the press release, we combined the CT&S and Bostitch businesses under one management team, under Jeff Ansell. This will provide significant benefits we believe in the form of accelerated product innovation, channel efficiencies since many of these customers are end channels, in fact overlap and provide us I thin with significant share gain potential in the coming years. In addition, another change that we made as we took our Supply & Services business and combined it with Mac, and now we’re able to use the supply chain associated with Supply & Services which has a terrific operating performance of some thing like 10 working capital turns, very efficient supply chain and that will actually replace ultimately the Mac supply chain over time, so another example of ways we are extracting effectiveness and not just efficiency. Then the third example is, we took the company’s healthcare business units, several of which were in security, and several of which were in engineered solutions and for our internal purposes we’ve combined those under one leader and we expect to gain additional efficiencies from that included in the cost savings, but also, the begins of a new growth platform for the company and healthcare solution. I think the difference between these cost actions and the ones that we took in the later half of ’08 are that we had enough time to think through these very carefully and do some things that we thing will improve the effectiveness of the operation on a go forward basis. Now I’ll talk a little bit more about the brand reinvestment initiative and those of you who have either follow baseball or watch ESPN’s SportsCenter, you may have noticed the growing Stanley presence in Major League Baseball Parks from coast to coast and as it turns out, we are now in eight Major League Baseball parks, the interior generally in the outfield or scoreboard areas. We took advantage of a situation where the banks and the auto companies have backed off from as much advertising as they were doing for obvious reasons and the pricing came down dramatically, we’ve been circling this type of a sponsorship for several years now on contemplating on doing it, but we felt it was a little too expensive in the past but with the other prices coming down the way they did, it was a great opportunity for us to team up with Major League Baseball and the eight teams represented on the page. Of course we have the Boston Red Sox, pilot have been going on for about a year and half and so the additional seven teams that have represented here are all new and I would say that one of the thrush here was to concentrate on the Hispanic market. So you will see several of these are in areas where there are significant Hispanic concentration such as Florida and Texas and California. The purpose there as we try to continue to develop the brand with the Hispanic community, we find that baseballs are great way to reach that particular demographic. So that’s one area you can see the pictures there, you have got US Cellular Field in Chicago, you can see a large Stanley sign there and then Hubert Humphrey’s Metrodome in Minnesota are the right field walls are literally covered with five Stanley logos in the Twins Ballpark. We also continue our investment in NASCAR. We upgraded the number of races this year. We upgraded the level of sponsorship, as you saw we are in the Daytona 500 with a number 19 car driven by Elliott Sadler placed number two in the Daytona 500, got tremendous press from that and then finally on the left hand side of the page, I want to call your attention to a new innovative advertising medium for us on the iPhone. In an iPhone application, we actually have a level application where the iPhone actually works as a level and you can actually go to the App Store on the iPhone search for Stanley, it’s a free download and quite a few folks have done that already and this functions as a level but it also have significant product information associated with it. So I urge anybody has access to an iPhone to check it out. I think it’s indicative of the fact of how we are trying to contemporize our advertising messages as well. So let’s move on now to the segments. Security was the bright story of the quarter for us, clearly with revenues up 12%, just modest decline in organic sales just down 4%. Segment profit up a third and margin expansion of segment profit to 18.9%, 290 basis points, which was also a sequential improvement of 50 basis points versus the fourth quarter performance. Convergent had a terrific quarter with their acquisitions of Sonitrol media last year, and Generale de Protection in September of last year providing revenue growth and offsetting the mid-single digit organic volume decline that was experienced primarily from lower installation sales as John earlier pointed out and the mechanical business also had a terrific quarter on a relative basis. I think if you look into some of their competitors and their performances, I think you will see that they clearly gained share in the quarter. They had about 4% revenue decrease, but they had excellent margin performance as the cost reductions that we’ve talked about earlier and some good price inflation arbitrage kicked in and helped them with their operating profits. So, good story there as well and Security continues to buttress the overall company’s performance in this very difficult environment. Then we move on to the other segments, Industrial being the topper, I guess of the two stories from the standpoint of sequential performance with revenues down 29%, organic growth of minus 24% versus minus 9% as an example in the fourth quarter and what we have going on here is a weak market for sure, but on top of that we have a very massive inventory correction going on. I think it’s exacerbated by the credit crunch so that the distributors in the supply chain really have some challenges in terms of gaining financing and maintaining the level of inventories they would like to maintain, and also just being cautious. So we think about eight points of the decline was associated within inventory correction, which we think well probably continue into the second quarter. Our segment profit was down about 50%, down to $25 million and the segment profit rate while it was down 420 basis points we were pleased to be able to deliver still a double digit operating profit under those circumstances. So moving on to Construction & DIY, another tough revenue story with total revenues down 25% exchange exasperating that issue with organic growth minus 18%, but the order rates were about 3 points better than the organic growth, do that’s encouraging. I think the other item of note is that the point of sale for our seven largest North American customers was only down 9% during the quarter and it was fairly stable. So I think that’s indicative that the end markets are really not in as bad a condition as the performance would indicate in the segment. Europe was very difficult as organic revenues declined 20% and the cost actions that we’ve taken are lagging clearly in Europe because of the normal time delays that are involved with reducing headcount in the European area. The other thing to note on the page I think that is also encouraging is that the operating profit rate in the segment was 9.5%, which was higher by about 3 points than the fourth quarter. So, we talked about our last quarter the 6.4% might potentially be a trough and it looks like that may well be the case as we go here. Moving onto a working capital on the next page. We continue to exhibit good control over our working capital with our inventories coming down 13% to $504 million with a four day improvement there. We like where the inventories are positioned right now, because the overall reduction in inventories is relatively consistent with our overall organic growth forecast for the quarter, which means that while we brought our inventories down responsibly, we are also positioned to serve if and when the market comes back and I think that’s very important. Receivables are a terrific story, down 24% to $659 million, down over $200 million. The big story here is not only as you might expect coming down in proportion to volume, but also delinquency is coming down. Greater than one-day delinquencies are down substantially about $90 million year-over-year. So in this tough economic environment we continue to focus on making sure that the receivables are collected and that we keep our delinquencies down. Payables was a user of cash on a year-over-year basis and also on a quarter basis, they dropped over $100 million year-over-year as the inventory reductions took their toll and in addition to that the SG&A reductions also affect payables, and so that’s what you see going on there. But all in all, 4.7 last year 4.8 turns this year, very much in check and I think we are positioned nicely for the type of environment that we are in. Free cash flow for the quarter, minus 18, nothing to be concerned about our outlook of 300 plus for the year stands. The working capital usage in the quarter was a negative 45, had a big payables impact hitting that and as you can see from the box there, the working capital typically is negative in the first quarter. So that’s nothing that has its overly concerned. Although it was a little lower than usual we had about $30 million outflows and cash associated with some derivatives related to exchange which was the anomaly there and we would expect to see the reminder of the year very strong from a cash flow perspective. Moving on to page 16. The next page is our balance sheet, and it’s very, very stable from fourth quarter to first quarter, as you can see the debt-to-capital hanging in there at 48%, and the adjusted debt-to-capital for the hybrid financing and the convertible in the 35% to 37% range. You will note that we were downgraded during the quarter by Moody’s and we were reaffirmed by Fitch and we are at this point have not seen anything from S&P at this point in time. However, at the moment we have a split rating, but it’s still a single A in both Fitch and S&P, and then A- from Moody’s. So that’s the state of affairs there. I will turn it over now to Don Allan who will take you through the guidance.

[Donald Allan:]

Thanks Jim. On page 17, as we mentioned in our press release today, we feel that we have sufficient visibility into our end markets and wanted to provide some detailed guidance today for the reminder of the year. We do expect sales volume weakness to continue for the reminder of year and as you can see with the first assumption as we walk from our $2.82 of GAAP EPS in 2008 that our range of unit volume at the negative 13% to a negative 15%. The assumptions behind this is that, as you’ve heard from John and Jim earlier negative 19% in Q1 was the unit volume result. We expect that likely to continue in the second quarter and then in the back half the year as the comparisons get easier we expect our unit volume to approximate about 10% to get to that range of 13% to 15%. Just to keep in mind, the EPS estimate of $2.90 to $2.40 associated with this is not only the volume decline, but it’s also the plant under absorption impact as we see those negative volumes year-over-year. The next item is currency. Currency, it’s moved up and down a lot in the last three months, but as of last day or so it’s pretty consistent with where it was in January, provided this $0.50 assumption year-over-year. So, it s relatively consistent and also keep in mind that the main currency that affect us are the Euro, the UK Pound, the Australian dollar and the Canadian dollar. Last but not least on that matter, any 5% movement on either strengthening of the US dollar or the weakening of the US dollar by 5% would have an EPS impact of about $0.10 to $0.15 either way. Moving on to the cost initiatives. Jim touched on the $1.75 or $195 million of actions already. So I want repeat that. The next item is the first quarter cost reduction initiatives which are net of that reinvestment that Jim described. So the gross savings are $45 million as he mentioned on the $100 million annualized program and $15 million of our reinvestment which nets to the $0.28 EPS or $30 million. The acquisitions of GdP, Sonitrol, Xmark and Scan Modul carryover effect of that consistent with our January guidance or January factors we provided of $0.10 of positive, and then last but certain not least we do expect lower restructuring charges in 2009 versus 2008 of $0.45. As you remember, we had $92 million of charges in ‘08 and we expect to have $45 million in 2009, $35 million of that relates to the new production programs we are talking about today that we initiated in the first quarter. So the end result of that is a range of $2 to $2.50 EPS, and the main variable obviously is unit volumes that you can see. So to summarize this morning’s call, we feel that we’ve positioned ourselves very well by taking some important strategic restructuring actions to lower our costs further beyond what we did in the fourth quarter of ’08, but at the same time, we took some of those savings and reinvested in important areas like our brand and organic growth opportunities in our Security business. We will continue to be focused on paying down our debt as our free cash flow. Our estimate should be greater than $300 million this year. We will be able to deleverage ourselves during the year by about $200 million. As always, we are dedicated to go forward with our SFS success and drive working capital benefit throughout the year and see the types of returns we’ve seen over the last year or two and we’ll continue to be disciplined about our pricing approach with our customers in maintaining our SG&A in the right levels to maximize our margins as we go forward. That concludes the presentation portion of our call today.

[Kate White:]

Chen, we are now ready for the question-and-answers.

[Operator:]

(Operator Instruction) Your first question comes from Eric Bosshard - Cleveland Research Company.

[Eric Bosshard:]

Good morning. In the Security business, the performances there are obviously quite good relative to the other business. As we look through the rest of the year, is the organic revenue decline in 1Q, what you expect or what are you seeing go on in the business that would suggest kind of where the demand is going to go as we work through the year in that business?

[John Lundgren:]

I think, Eric, this is John. I think what you said is what we would continue to expect. There is no question that installations are down and depending on the business mechanical versus convergent, installations account for a larger percentage of the revenue. We would expect to see installation stay at the low rate they are. The long term issue with that of course is without robust installations we can continue to increase our recurring revenue base. Short to intermediate term, the advantage of that of course as installs were down, recurring revenue becomes the larger percentage of the base going forward that is very, very favorable in terms of mix, but a modest decrease of high single to low double digit decline in installs is our projection for the remainder of the year.

[Eric Bosshard:]

So when that rolls back up to the overall organic performance out of security and I know you are not giving guidance by segment, but should we assume that security is going to continue to run down on that kind of 5% range?

[Donald Allan:]

Yes, I think that’s a good assumption Eric. I think there is enough uncertainty but your logic is right on, it’s consistent with our thinking and without giving specific guidance that’s certainly how Brett adjusted in their teams are planning their quarters rolling forward.

[Operator:]

Your next question comes from Sam Darkatsh - Raymond James.

[Sam Darkatsh:]

Pricing was up 3% and you are not expecting any inflation, I suspect you are not looking for a net pricing on a year-on-year basis. So, are you already starting to see deflation or what are the chances that the pricing is favorable for this year and how should we look at price mix for ‘09?

[Donald Allan:]

Hi Sam, this is Don. I think the assumptions that we have provided all of you in the first quarter around pricing and inflation on a net basis still hold true and I think we have seen a slight positive benefit of price versus inflation in the first quarter, but we continue to monitor that going forward. So those estimates that we provided for the year in that timeframe on a net basis was quite positive, I think still holds true.

[Sam Darkatsh:]

Is this sort of the deflation that you would see, I’m guessing would be mostly CDIY and Industrial. So if we are trying to look at how pricing affects each of those segments, is that how to look at that and how much of a degradation might we see in CDIY and Industrial from a pricing standpoint?

[John Lundgren:]

I don’t think we want to get into specifics about pricing around CDIY and Industrial, but I think in general, you can take the assumptions that I provided prior to those two segments.

[Donald Allan:]

And any degradation in pricing, Sam is going to depend a lot on commodities pricing. Obviously the pricing pressure is going to be directionally consistent, but lag commodities deflation which we are starting to experience at this time in the second quarter.

[Sam Darkatsh:]

Do we hit this as model for essentially applies between materials and pricing that would be okay from a modeling standpoint?

[Donald Allan:]

It sounds logical to me.

[Operator:]

Your next question comes from Peter Lisnic - Robert W. Baird & Company

[Peter Lisnic:]

I was just wondering if we can explore this concept of structural savings and maybe to begin with talk about from these restructuring programs how that filters through down to the segment level, and then is there a volume dependency to where the 75% or so that’s permanent becomes lesser of a number?

[John Lundgren:]

Certainly there is always going to be some slight flex in SG&A and in gross margin costs associated with volume, but it is really not going to be substantial, it’s not a huge – if it was that large you would have seen it coming down and we wouldn’t have to take all these costs out. So I wouldn’t make that a very large part of my analysis. I’m not sure what exactly the question you wanted to ask on the structural side was, maybe you could try that one again.

[Peter Lisnic:]

Well, what I’m really trying to figure out is, we’re got the permanent down. I’m trying to figure out by segment what’s the incrementals or decrementals are look like going forward, because it sounds like the structural profitability of the businesses is changing in some of these actions?

[John Lundgren:]

Fair enough. Let me give me you some rough, rough numbers that will allow you to do what you want to do. Roughly half the cost take out thus far from the two initiatives is in the CDIY segment and then the other two are about 25

[Operator:]

Your next question comes from Seth Weber - Banc of America Securities

[Seth Weber:]

Can you update us on what you are seeing on the security side with churn and cancellations, and if you are seeing any kind of unusual pricing there?

[John F. Lundgren:]

Yes, I’d say it’s business as usual, which is changing rapidly. In terms of churn, you read what we read as retailers go out of business, obviously that’s short term those are lost opportunities, two issues there. From a credit perspective not much of an issue at all as you know monitoring contracts and most of the security recurring revenue of our business are paid well in advance. So, one of the reasons Don’s team was able to achieve the tremendous improvement it did in receivable just because there is little or no risk of default on the security side. The churn is there, the good news is our security business as you well know is overwhelmingly B2B, not consumer or residential and when our large customer such as the Circuit City goes out of business at least 200 locations are open. Those buildings don’t stay empty forever and as competitors or different businesses move in, we are very active and very successful on what I have alluded was calling it resigns. So, we’ll go back and keep that account. That’s a big mitigatior in terms of the business that’s loss, so the challenges to resign the overwhelming majority of any business that was lost due to customer business failures. In terms of churn fighting for share etc. that goes on every day, the market is slightly smaller, we have several viable competitors in this business and we are all are testing our business models. We happen to believe ours is superior based on results to date, but no tremendous pricing pressure or predatory activities or targeted activities, anything of that nature that doesn’t go on everyday under better circumstances.

[Seth Weber:]

Okay. Thanks, if I could ask a follow-up. Jim, as you talk about structurally changing the company a little bit, would that include sharing some assets or maybe if you could give us some idea of where you might be thinking on the acquisition side, whether it’s more healthcare that kind of stuff?

[James Loree:]

Yes, I’m glad to answer that question, because I did want to make the point at some point during the call that the capital allocation for this year is really focused on deleveraging. So, don’t expect to see much if anything in the way of acquisitions in the current year. Once we get our debt to the levels that we’re comfortable with, which would be at a minimum to get all of our short-term debt paid down this year, then as we into next year and we are building a pipeline for that eventuality. But as we go into next year, I think you will start to see some acquisitions in the healthcare area and also electronic security and mechanical security, and then possibly some tool consolidation acquisitions. It’s quite possible in this distressed environment when you start looking at the massive over capacity and the volume declines that some of our competitors are experiencing, which in some cases are steeper than ours. I think that there is a good chance that there maybe some consolidation in the tool industry at some point in time.

[Operator:]

Your next question comes from [Nicole DiBlaze – Unidentified Company].

[Nicole DiBlaze:]

A question on inventory, you guys obviously did a really good performance year-on-year, if I look quarter-over-quarter however it looks like inventories are broadly flat. So my question then is what’s your plan for inventory reductions in 2009, is this trough inventory level that we’re currently at, and then in what businesses are you guys seeing the highest inventory levels?

[John Lundgren:]

Don will take that, I think he can give you some specifics that we were very comfortable with.

[Donald Allan:]

Now to answer one of your questions, we don’t expect the inventory level we saw in the first quarter to be where we are to where it’s going to stay for the rest of the year. With the programs that we have in place under SFS, specifically around lien to transformation or transformation to lien in our plans as well as the S&OP processes we put in place, we do believe we will continue to see inventory reduction this year of a significant nature. What you are seeing in the fourth quarter and the first quarter just continue reaction to our volume decline sequentially, the accounts payable portion went down, you see inventory declined in the second quarter most likely and continue to decline after that. So I would expect the trend that we saw last year to continue in inventory.

[John Lundgren:]

Yes, and I’ll just add, Nicole, because I don’t really get cut-off if you try to ask a follow-up. Often we’re asking where do customer inventory stand, Jim alluded to the fact in the industrial segment the data isn’t as good and we don’t get it as quickly, but our estimate is about a third of our volume decline was due to de-stocking, credit issues in the two step channels and within our industrial account. On the retail side, roughly I’m comfortable saying, inventories are not out of line. As you know, the large home centers run at 10 to 12 weeks and our sense is that’s where they are, comfortable saying that obviously that 10 to 12 weeks of a lower base, but there are certainly nothing from the marketplace perspective that suggests we are going to be significantly impacted by that as we move to execute our own programs to continue to reduce our inventories.

[Nicole DiBlaze:]

That’s helpful and then one follow-up if. If may, if you guys could quantify how much benefit from the headcount reductions you’ve taken thus far you’ve seen in the first quarter that will be helpful?

[James Loree:]

Yes, if you look on the walk that we did for SG&A, you can certainly see a 13% reduction in the first quarter and then you have a portion in cost of sales as well, which is probably about $10 million to $15 million.

[Operator:]

Your next question comes from the line of Kenneth Zener - Macquarie Research Equities.

[Kenneth Zener:]

Looking at securities relative to the installation trends, how would you guys say you were you kind of outlook, do you guys use things like the architectural billings index and then could you also comment on perhaps the return prospects or payback payer, hoping to get out of the new convergent sales force?

[James Loree:]

Well, there is a lot of different factors that go into forecasting installations, for instance how many feed on the street, what’s the sales, where is productivity, what does the market look like, and there is no magic to it. So, we feel that the installations as we go in to the next several quarters are going to down consistent with the first quarter. The sales force adds, we are talking about roughly 8% increase in the feed on the street in the convergent business that is put in perspective.

[Kenneth Zener:]

Then given obviously that you guys have been very successful or aggressive on your restructuring actions, and consistently taking out what’s harder and harder for you to get. If there were another step down, I mean how much of that costs because I think you guys have been fairly aggressive or actually left in your guys opinion, I mean, have you gone seven-tenths of the weight to what you really think is reasonable?

[John Lundgren:]

I would argue that academically or theoretically we can continue to reduce costs consistent with volume declines not quite as fast almost in perpetuity, do know recognized that 45% of our revenues are outside the US and as Jim and I both touched on in our pieces of the presentation. Right now our volume in Europe of the last five or six months is down even more than the US, and while we have the exact same objectives and strategy, I think everybody on the call also aware it takes a lot longer to right-size a European manufacturing operation than it does the US or an Asian operation. So, the plans are in place and plans are proceeding, but it’s going to take us allow to get those results. Our hope is by the time we see those, this will be over and volume will start to improve, but right now the cost benefits have been primarily in the US, secondarily in Asia with Europe still to come, or say differently the European cost based needs to ketch up with the volume decline in Europe and our team is well aware of that and we are working with the appropriate works counsels, unions and government and government officials to reach the right solution.

[Operator:]

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

[Michael Rehaut:]

First question, just on the security margins, very impressive continued stable performance on the margins and I was just wondering going forward, what is your expectation if volume drops from here. It appears that a lot of the actions that you have taken have been in the restructuring actions have been more on the industrial and CDIY side, which is obviously borne very positive fruit in terms of the margins holding up there as well. On the security side, if you see a similar drop off in sales, what are your thoughts in terms of down side to margins for let’s say every 5% and do you have similar kind of plans in place that would allow you to take quick action?

[James Loree:]

Well, Mick as we said in the past, we really don’t make a practice out of forecasting segment margins or trying to be that question about what might happen within certain segments. However, I guess what I can say is that there is a lot of cost in the security business, there is a lot of fixed cost and it’s actually there is more fixed cost in the security sales and service structure than probably any other such structure in the company, because you have thousands of sales people, thousands of vends, technicians, etc. In a manufacturing type of a segment, those would be up in all and not the sales people, but certainly the service and the installation and so forth, if there was such a think would be in variable cost, but in our case it’s in the field structure. So, if the revenues were to come down precipitously and we don’t think they are and the reason we don’t think they are is because there are so much recurring revenue and I think you’ve seen us fairly stressed out distressed quarter in the security business and this kind of what it looks like. So we don’t expect it to get worse, but if they work the next step would be to accelerate some of the cost reduction actions that are out there, opportunities that are out there in the field structure, and thus far, we’ve avoided doing much of that. What we have done has been centralizing some functions and things like that that we have before provided in the field, but there is definitely the ability if we steam it necessary to go in and do some surgery with respect to the cost structure in the field. Hopefully, we wanted to do that and as you can see we are adding back resources, not taking the amount at this point in time.

[John Lundgren:]

Yes, Mike, this is John. Remember when I gave you a little granularity on SG&A, there was no business or segment split, but I alluded to most businesses, CDIY and Industrial, SG&A was down in excess of 20% and in security by design it was high single or low double digits because security has not experienced the types of volume declines and margin pressure as our two tools businesses, and as Jim just pointed out in fact we’re in the process of trying to build for the future and maintain volume by adding 8% to our sales force, which last half full it should add 8% to our revenue last half empty would preclude an 8% further decline depending on how you look at the business.

[James Loree:]

That’s an important point, because we haven’t really factored in any volume associated with those reinvestments and surely at some point in the year they are liable to through out some positive volume which will be a nice cushion against further market decrease.

[Michael Rehaut:]

Right. I appreciate that. Just as a follow-up, I guess this is what you’re referring to before about the fact that organic only down 4% in such a difficult environment. If you could just remind us, give us your split for recurring revenue. What is that as a percent of the sales and if possible that percent mix by CSS and MAS?

[James Loree:]

Yes, Mike, we’ve been public with that before and it hasn’t changed. Roughly, to the nearest 10% off because we are not going to split decimals within, on the convergent side it’s slightly in excess of 40% and we’re trying to grow it, and if nothing else as installs go down and we don’t lose any customers it will grow as a percent of total, but it’s basically constant recurring on a lower base. On the mechanical side, it’s about 20%. Those segments are almost identical in terms of size so the math gets you to 30% in total.

[Operator:]

At this time there are no further questions. Ms. White, I’ll turn the call back to you.

[Kate White:]

Thank you everybody very much for their participation in the call. Our contact information is on the website and in the press release and I wish everybody to you have a wonderful day and weekend.

[Operator:]

This does conclude today’s conference call. You may now disconnect.