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Executives

Mark M. Rothleitner – Vice President Investor Relations & Treasurer

Nolan D. Archibald – Chairman of the Board, President & Chief Executive Officer

Stephen F. Reeves – Chief Financial Officer & Senior Vice President

Analysts

David Goldberg – UBS Securities

Michael Rehaut – J. P. Morgan Securities

Nishu Sood – Deutsche Bank

Daniel Oppenheim – Credit Suisse

David McGregor – Longbow Research

Sam Darkatsh – Raymond James

Kenneth Zener – Macquarie Research Equities

Eric Bosshard – Cleveland Research Company

Ivy Zelman – Zelman & Associates

The Black & Decker Corporation (BDK) Q4 2008 Earnings Call January 29, 2008 10:00 AM ET

Operator

My name is Randy and I will be your conference operator today. At this time I would like to welcome everyone to the Black & Decker fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Mr. Mark Rothleitner, Vice President of Investor Relations and Treasurer.

Mark M. Rothleitner

Welcome to Black & Decker’s fourth quarter conference call. On today’s call our Chief Executive Officer Nolan Archibald and our Chief Financial Officer Steve Reeves will discuss our fourth quarter and full year results and outlook for 2009. Their comments should take about 20 minutes and then we’ll answer your questions.

In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risk and uncertainties. For a more detailed discussion of the risks and uncertainties that may affect the Black & Decker Corporation, please review the reports that we have filed with the SEC. In addition, we will be referring to non-GAAP financial measures within the meaning of SEC Regulation G.

A reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included on the corporation’s website under the investor relations section. Now, I’ll turn it over to Nolan.

Nolan D. Archibald

This morning Black & Decker announced earnings per share of $0.73 for the quarter and $4.82 for the full year. Excluding restructuring charges EPS was $0.97 and $5.47 for the year. As you know, 2008 was a challenging year. While we exceeded our most recent adjusted EPS guidance due to lower interest and taxes, sales and margins were below our expectations.

Throughout the year, our management team remained focused on protecting our profitability, generating cash and positioning the company for the long term. We accomplished these objectives including full year adjusted EPS with our original guidance range despite dramatically weakening economic conditions.

In the fourth quarter the global economy deteriorated even more than we had anticipated in October. Sales decreased 17% including a 4% unfavorable impact from currency translation. This was well below our expectations particularly in our European power tool business and fastening segment. Our operating margin of 5.9% excluding restructuring was also a bit below our guidance due to lower volume.

For the full year sales decreased 7% including a 2% favorable impact from currency translation. Our operating margin excluding restructuring charges decreased to 7.8% for the year reflecting lower volume and the ongoing impact of component cost inflation. Pre-cash flow was $347 million for the year, slightly above expectations. Due to careful management of capital spending and inventory, we continued to cover over 100% of net earnings to free cash flow.

Now, let me discuss our business segments. Sales in our worldwide power tools and accessories segment decreased 13% for the quarter and 10% for the full year. The North American business has faced weakened housing and discretionary spending all year and the slowdown in Europe has accelerated in recent quarters. In the US industrial products group, sales decreased low double digits for the quarter, depressed housing and slowing commercial construction continued to hurt our sales this quarter in all major product categories.

Sales were down more than 20% in most channels primarily reflecting weak industry demand. However, our sales increased significantly at one major home center due to listing gains earlier in the year. Sell through at retail was weak and got worse as the quarter progressed. Accordingly, we anticipate retail in flow an inventory corrections in the first quarter.

For the year sales in the US industrial products group were down low double digits. Sales declined across all major product lines and most channels due to broad market weakness. In the US consumer products group, sales decreased more than 20% for the quarter. Demand for tools and accessories fell off sharply reflecting lower consumer discretionary spending and fewer new gift items this year.

The new quarter cable line was well received in the market place and shipments were around our expectations. However, they were below the combined level of Firestorm and BPX a year ago. Our sales also decreased significantly in cleaning products and the automotive and electronics business. The outdoor products line had very strong shipments ahead of the spring selling season, partially offsetting the weakness in other categories.

Full year sales of consumer products in the US were down more than 20%, similar to the fourth quarter results. Loss pressure washer listings and the transition out of Firestorm accounted for roughly half of the decline primarily in the first and second quarters. Most other product lines also saw decreases mitigated by growth in outdoor.

In the European power tools and accessories business sales decreased approximately 20% for the quarter. As in recent quarters markets in the UK, Iberia, Scandinavian were particularly depressed. The economic slowdown worsened in these and other parts of Western Europe. The Eastern European market which had been expanding has begun contracting as well. Weak economies were compounded by retailer inventory reductions, cancelled promotions and some loss market share in cordless.

From a product line perspective both industrial and consumer tools had significant sales declines with outdoor products the one positive note. For the full year, European sales decreased at a low double digit rate. This reflects a rapid deterioration in the second half following a mid single digit decline in the first half.

In Latin America sales increased double digits again this quarter but, at a slower rate than prior quarters. While the increase was driven largely by Brazil, sales for most product lines and regions grew. For the full year our Latin American business again delivered outstanding performance with sales growth in the high teens. Results in other parts of the world were mixed. Our Canadian business posted growth in the quarter and full year. Asia Pacific sales were down for the quarter primarily due to Australia and New Zealand but up for the full year.

Return on sales in the power tools and accessories business were 5.6% this quarter due to product recall costs in the fourth quarter of 2007, the segment’s margin increased year-on-year. Compared to the third quarter however, it was down significantly. Gross margin reflected increasing pressure from component cost inflation. This was also unfavorable as normal lines performed worse than promotional business. This segment’s SG&A percentage was down again this quarter despite lower volume as we aggressively reduced expenses.

For the year, return on sales for this segment decreased 270 basis points to 7.4%. The decline was primarily in gross margin driven by inflation, mix and fixed cost absorption. Price pressure was largely offset by productivity gains. SG&A percentage increased for the year as sales decreased faster than spending.

In our hardware and home improvement segment, sales decreased 11% for both the quarter and full year. This was driven largely by the Kwikset and Weiser US lock business which saw double digit decreases for the quarter and full year. Throughout the year this business faced declines of 25% or more in the new construction channels, similar to the trend in housing starts. At retail sales were nearly flat in the fourth quarter. Retail sales were down mid single digits for the year reflecting load in volumes for the SmartKey launch in 2007.

SmartKey has exceeded our expectations even in the slowing economy and took market share from the competition. Price Pfister faucet sales decreased mid single digits for the quarter and high single digits for the full year. At retail sales grew for the second straight quarter exceeding our expectations in a tough environment. Compared to Kwikset this business benefitted from a higher concentration in remodeling and the retail channels versus new construction.

Operating income for the hardware and home improvement business decreased to 5.8% for the quarter. Gross margin and SG&A percentage were affected significantly by lower sales and production volumes. We continue to face component cost inflation as well as product transition costs. For the full year this segment’s operating margin decreased to 8.6% primarily due to lower volume and inflation.

In the fastening and assembly systems segment, sales decreased 13% for the quarter. Historically this business is our most consistent both in terms of sales and profitability however, it could not overcome the dramatic slowing in the global automotive industry this quarter. Our automotive division sales declined sharply in all geographic regions but less than the 23% drop in global auto production. We continued to grow market share and content per vehicle outside North America offsetting some of the macro pressure.

Sales in the industrial division were down low single digits with continued growth in Asia. For the full year, sales for the fastening segment decreased 2% as strong sales in Asia partially offset the Us automotive decline. The September acquisition of Spiralock contributed two points of sales growth for the quarter and one point for the full year. Operating margin for the fastening segment fell to 11.5% for the quarter. While this business is quick to adjust to a changing environment, it was not possible to fully compensate for the sudden change in demand. For the full year, operating margin decreased 80 basis points to a respectable 14.7%.

Now, I’ll turn the time over to Steve who will discuss our financials in more detail.

Stephen F. Reeves

Starting with the income statement, sales were $1.4 billion, a 17% year-on-year decline. Organically volume decreased 13% for the quarter. Price was flat representing an improvement from the negative 1% impact in recent quarters. Currency translation had a -4% impact in line with our guidance.

For the full year sales decreased 7% with volume down 9% partially offset by 2% from the currency. Price was flat for the year and the acquisition of Spiralock did not have a material impact on the quarter or the full year.

Gross margin was 31.6% for the quarter. This was virtually flat to last year with a negative impact from lower volume, unfavorable mix and ongoing component cost inflation and a favorable comparison to the 2007 product recall costs. For the full year gross margin was 32.8%, a decrease of 110 basis points. Inflation had approximately a $40 million impact on the quarter and $160 million for the year.

Due to existing contracts in place, we expect the benefit from lower commodity costs will be phased in during 2009. Also bear in mind that the RMB appreciated against the dollar through the third quarter and a negative comparison will exist through the front half.

In the fourth quarter we continued our progress on SG&A reducing expenses by $88 million. While $32 million of this drop relates to an environmental charge in 2007, we reduced SG&A 14% excluding that charge. The power tools and accessories segment again decreased spending in every major category and even reduced SG&A as a percentage of sales. For the full year consolidated SG&A decreased by $104 million or $72 million excluding the 2007 environmental charge. It increased as a percentage of sales by 70 basis points on lower volume excluding the charge.

During the quarter we recorded a restructuring charge of $21 million which had a $0.24 impact on EPS. This charge is primarily of work force reduction of nearly 1,200 positions in response to the global slowdown. Roughly two thirds of those positions are in manufacturing. We anticipate that these actions will generate annual pre-tax savings of at least $30 million most of which should be realized in 2009. Since the fourth quarter of 2007, we have eliminated over 2,900 positions, including more than 1,000 salaried personnel. In total, our restructuring actions generated approximately $23 million of savings in 2008 and are on track to deliver incremental savings of $60 million in 2009.

Interest expense of just under $18 million for the quarter was lower than the prior year and our October guidance. Underlying rates and spreads both came down from peak levels as the quarter progressed. For the year, interest expense decreased $20 million to $62 million reflecting favorable average rates globally.

Our effective tax rate had a significant effect on earnings again this quarter. As we have indicated in the past, book taxes will have significant quarterly variability under the Fin 48 accounting standard. The resolution of certain income tax matters and other adjustments resulted in a 2% rate for the quarter or 11% excluding a restructuring charge. This contributed approximately 20% to EPS relative to the tax rate assumed and our previous guidance. For the full year our tax rate of 20% was significantly below our expected long term run rate of 30% primarily due to the resolution of issues with several tax jurisdictions during the year.

Now, I’ll discuss the balance sheet and cash flow which continue to be a primary focus area for the company. We generated $347 million of free cash flow for the year converting over 100% of net earnings for the seventh time in eight years. We have averaged more than 20% conversion of this period. Inventory decreased 11% for the year compared to 7% decline in sales. We also limited capital expenditures to $99 million, our lowest level since 2002.

Because we have put our share repurchase program on hold, our cash flow enabled our net debt $35 million during the quarter. Net debt was down slightly for the full year as free cash flow roughly matched outflows for share repurchases made in the first half and dividends. We have no long term debt maturities until 2011 and believe our balance sheet and liquidity are in solid shape to support our business.

In addition to our operating performance I’d like to discuss the accounting impact on recent events on cash flow and the balance sheet. First, the stronger dollar will have an effect on reported free cash flow in 2009 as we define that term. Cash inflows and out flows related to our currency hedging activities are classified in the cash flow statement under operating activities or investing activities based on the nature of the hedge. Hedges of our net investment in foreign subsidiaries are classified as investing activities and hedges of our foreign currency denominated assets, liabilities and forecast to transactions are classified as operating activities.

As you recall, our definition of free cash flow is cash flow from operating activities, less capital expenditures plus proceeds from the disposal of assets. As a result, cash flows related to net investment hedges are excluding from free cash flow. Due to the rapid strengthening of the dollar late in 2008 we experienced much larger gains and losses on these hedges than usual. Therefore, based on current exchange rates we expect cash out flow on operating hedges will significantly reduce free cash flow in 2009 largely offsetting cash inflows from net investment hedges will be excluded from our defined free cash flow.

Therefore, when evaluating our cash generation in 2009 hedge settlements should be considered in addition to free cash flow. The bottom line is that we expect to generate cash in excess of earnings in 2009 and that our net debt will be down modestly. Second, as you would expect a decline in equity markets has reduced the value and funding position of our pension plans. The negative P&L impact of this will be roughly offset by lower service costs on a smaller work force so we expect roughly flat pension expense in 2009. In terms of cash, our full year contributions to the plans are expected to increase by approximately $15 to $20 million based on current regulations.

Regarding cash deployment, in the near term we remain focused on free cash flow, liquidity and a solid balance sheet. We will continue to look at compelling bolt on acquisitions but these will likely be small. In addition, we do not expect to be active in the share repurchase program in the near term but will return to this tool as conditions warrant.

Now, I’ll turn it back to Nolan to discuss the outlook for 2009.

Nolan D. Archibald

As you know, we are facing a financial and economic crisis unlike anything in our professional careers. We have recently seen housing starts at a 50 year low, US auto sales down more than a third and customer confidence at a new low. All in all data points suggest that our end markets will deteriorate significantly in 2009.

Our company has taken many cost actions over the past two years to right size our business and protect earnings. We continue to evaluate additional actions however, we have been careful to target these cuts and have left our product development capabilities essentially intact. This should help us to protect or even expand market share with new products in the future. Notwithstanding this, we expect macro conditions will result in a double digit organic sales decrease for the year.

At current rates, foreign exchange would also have a negative impact of roughly 5% the next few quarters. For the first quarter we expect sales will decrease approximately 20% reflecting weak demand, likely inventory adjustments at retail and unfavorable currency. Under this demand scenario, our margins will come under more pressure especially in the first quarter. Component cost inflation and currency will also be unfavorable for the first half of the year.

While we have implemented some price increases we anticipate price will roughly be neutral again in 2009. We’ll benefit from restructuring savings but not nearly enough to offset other challenges. In total, we expect margins around 5% for the year and approximately 2% in the first quarter. We expect interest expense will stay around the $18 million quarterly run rate. We’re assuming a full year tax rate of 30% and diluted share count remaining around $60.5 million.

In total we expect diluted earnings per share in the range of $0.05 to $0.15 and $1.75 to $2.25 for the full year. Partly because of the currency hedges Steve described, our free cash flow will decline significantly in 2009 however, free cash flow plus certain currency hedge gains should exceed net income therefore out net debt is expected to be down modestly for the year.

In summary, Black & Decker is weathering the economic crisis and is in a good position for long term success. We continue to generate earnings and met our original guidance for 2008. We continue to deliver innovative new products. In tools we have new cordless and corded platforms from DeWalt. In outdoor products we have 36 volt Black & Decker string trimmer and in Porter-Cable a new line for job sites and home workshops. In addition, we are excited about the new environmentally friendly products from Price Pfister and Kwikset.

We are reducing SG&A and right sizing the business for anticipated demand. We generated $347 million of free cash flow for the year and again exceeded 100% conversion. We significantly reduced inventory and capital expenditures and we maintained a strong balance sheet with ample liquidity to help us through this challenging environment. I believe that our talented management, solid financial position and sound strategy will drive long term growth and create value for Black & Decker stockholders.

That concludes my prepared remarks. I’ll now turn the time back to the operator and we’ll answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Goldberg – UBS Securities.

David Goldberg – UBS Securities

The first question I had was about the free cash flow projections and the sensitivity around free cash flow in ’09 to changes in top line and sales. What kind of sales decline do you think you could experience about the kind of guidance you’ve given so far and remain free cash flow positive?

Stephen F. Reeves

It kind of depends a little bit on the timing of that decline but we expect to be free cash flow positive. We could withstand I think a pretty sizeable decrease from here and still be positive on a free cash flow basis.

David Goldberg – UBS Securities

Is there any way to put some quantification around that?

Nolan D. Archibald

Generally our goal has always been to covert at least 100% or we’ve been guiding 90% to 100% of our net income to free cash flow so if net income were to come in lower we still think on a falling sales we should be able to generate positive working capital, etc. so we should probably be able to hit a positive free cash flow as well with our conversion in and around 100%.

David Goldberg – UBS Securities

Then just a quick follow up question, can you give us some more details about the tax rate? I know there were some broad comments about it, maybe just some specifics about some of the resolutions you had in terms of taxes that drove it down and maybe kind of as we would look forward if we would expect to see any kind of similar behavior in future years?

Stephen F. Reeves

Sure. Actually there was no one large settlement that we had in various jurisdictions around the world, we had some settlements and we had some statute lapses, a number of which cumulated in this rate that we saw here in the fourth quarter. I think you should expect that those types of things will continue to happen and we’ll see a choppy tax rate going forward. I think the base rate as Nolan mentioned going forward will be about 30%. The choppiness can go both ways, this happened to be all favorable in 2008.

Operator

Your next question comes from Michael Rehaut – J. P. Morgan Securities.

Michael Rehaut – J. P. Morgan Securities

The first question just on the cost structure side obviously, there’s been a big pull back in raw materials and I just wanted your thoughts there in terms of what you expectations are for material cost inflation, if any, in ’09 or if maybe there’s still a lack where you’re still seeing higher costs in the channel? Also, if you could comment on the price side, you said that you expect pricing to be roughly neutral in ’09 and given the sharply weakened demand environment particularly on the power tool side as well as the other segments what gives you the confidence to say that it will be neutral rather than perhaps giving up some price.

Nolan D. Archibald

You’re first question, we are clearly seeing a moderation in our commodity costs. However, we’ve got some contracts that we’ll continue to be paying at a higher rate through the first couple of quarters of the year. We clearly benefited from those hedges the last couple of years but we’re going to pay the price the first couple of quarters. We should see the benefit of that in the second half of the year.

The reason we’ve assumed that our price will remain neutral is we have taken some price increases that we’re not reflecting in our numbers. We’ve tried to be very conservative as we have projected in this very difficult unprecedented market that we’re in right now and therefore we think it’s a rather conservative assumption even though we’ve had some price increases and they are sticking. We just believe with promotional activity and the difficult market that we’re not going to benefit from those already implemented price increases and therefore will be neutral for the year.

Michael Rehaut – J. P. Morgan Securities

The second question, just on bigger picture, back in the 2000, 2001 downturn and certainly that in many ways pales in comparison to today, you guys rolled out a pretty aggressive restructuring program in terms of shifting manufacturing capacity. You’re taking actions today but I think on a comparative basis to a lesser degree. Anything in the works over the next year, anything that you’re looking at in terms of on a larger level in addition to the actions taken today to repair the margins or is this more going to be a volume driven margin recovery over the next few years?

Nolan D. Archibald

Well, the difference between our restructuring in early 2001 was our manufacturing footprint. We were manufacturing at a lot of high cost areas in Western Europe and the US and we dramatically changed our manufacturing footprint to low cost areas. We are in low costs areas and I think have a very good manufacturing footprint now so that opportunity to the same extent is not available to us.

However, we continue to look at low cost regions. We’ve seen cost increase recently in China and therefore we continue to look at India and Vietnam and other places. As you recall when we put those plants in these low costs areas we put them in such a way where we wouldn’t have the dramatic costs of shifting our manufacturing from one facility to another or even to lower costs countries.

So, we continue to evaluate that and we’ll make manufacturing footprint changes as the market demands. We feel like we have been fairly aggressive, we’ve taken out about 13% of our work force dramatically increasing our SG&A. If you think how fast sales have gone down due to market conditions and that our percentage is lower than that, I think that’s fairly aggressive cost reduction and we’ll continue to look at additional costs reductions.

Michael Rehaut – J. P. Morgan Securities

One more question if I could, just on the new product front, you mentioned a few new products. If you go back to the mid to late 90s when there was that large expansion of the DeWalt product portfolio, it appears that in recent years you haven’t had those types of bigger entries in to adjacent categories. Anything over the next year or two on the new product front that you would consider kind of larger than kind of let’s say singles or maybe doubles or triples in terms of order of magnitude or impact?

Nolan D. Archibald

I just mentioned a couple of examples in my prepared remarks. We have a very, very good new product year ahead of us. We’ve got some significant additions to our cordless lithium ion line that we’ll be seeing this year both in 18 volt and all this is completely compatible with our battery and charging system out there. We have a DeWalt coil framing nailer, we have DeWalt one half inch corded drills, two of those coming out. We have the Delta unisaw, we have a [minilay] that’s five speed with variable speed. We have a significant number of accessories.

Porter-Cable the new tradesmen line that we introduced with about 20 SKUs, we’re going to be expanding that line. That clearly is a major product introduction that we had in the fourth quarter and just as likely rolled out DeWalt with 20 or so SKUs. We’ll be adding to that Porter-Cable line, that’s our tradesmen line that we think will go right at the heart of a lot of our competition.

We’ve loss some market share in the low end lithium ion cordless market and we think our new Porter-Cable tradesmen line will go directly at that as well as some additional DeWalt introductions that we’ll have later in the year. In outdoor I mentioned in consumer Black & Decker the 36 volt string trimmer, we’ve got new 12 and 14 volt hand vacs coming out, we’ve got a number of new products in our automotive and electronics business. In HHI we’ve got an aggressive plan in both locks and [inaudible] so new product share for 2009 throughout the year will be very, very good this year.

Operator

Your next question comes from Nishu Sood – Deutsche Bank.

Nishu Sood – Deutsche Bank

I just wanted to ask, your forecast for double digit sales declines through the first three quarters, I was just wondering about the phrasing of that and your kind of macro assumptions that you’re making. Are you by virtue of what you’re saying there assuming that the economy is going to start improving towards the end of the year or what does that mean in that respect?

Nolan D. Archibald

We are not assuming improvement in the year. We are going to have not as low of sales in the last three quarters. What we have done in the first quarter is adjusted for some inventory buildup in our customer’s inventory and we think there will be some adjustment of that. So, we think our lowest quarter will be the first quarter but that’s not economic related.

We believe that we’re going to have a tough year throughout the year. Housing starts, we saw the latest numbers there of around 500 to 550 single housing starts. We think that could even deteriorate more. We’ve tried to be conservative in our projections and our assumptions and adjust our cost and expenses accordingly. Steve do you want to add to that

Stephen F. Reeves

Our sales forecast is really projecting current run rates out and you start to get a comp in the fourth quarter which is why we phrased it that way. We still think it will be difficult in the fourth quarter next year but not in a double digit range.

Nishu Sood – Deutsche Bank

The next question I wanted to move on to was the pensions, the over $350 million charge you took to equity to kind of up the pension obligation gives us some sense of the change in your funding status. That would seem pretty obvious given the deterioration and the investment environment and obviously the lower discount rates you’d be applying to your obligations. But, on the other hand your cash obligation only increased I think you said by $10 or $15 million for the year.

I just wanted to get an understanding of that. Is that simply a matter of the accounting only requires that much extra contribution this year but there will be additional cash contributions in the future? How should we kind of reconcile that?

Stephen F. Reeves

I think it’s actually more like $15 to $20 in 2009. It’s hard to project out past that because it’s all so dependent on the facts and the assumptions in the market place at that time. But, all other things being equal, the funding pressure will increase from there as we go out past 2009.

Nishu Sood – Deutsche Bank

What’s the total amount of the funding that you’re expecting this year?

Stephen F. Reeves

We had about $10 million this year so the total funding should then be about $25 to $30.

Nishu Sood – Deutsche Bank

If I could sneak one final in there, any thoughts on your dividends here? Your yield is now above 5% based on where your stock price is now. I think your obligation is over $100 million a year so any thoughts or any pressure on that?

Nolan D. Archibald

Well, we continue to evaluate that. I think a lot will depend on what happens to the market and how long this recession is going to last and how deep and long it’s going to be. Clearly, we’re above our normal rate of yield but we’ve made no decision to lower the dividend but we’ll monitor it and adjust it accordingly if economic circumstances continue longer and deeper than we anticipate.

Operator

Your next question comes from Daniel Oppenheim – Credit Suisse.

Daniel Oppenheim – Credit Suisse

I was wondering if you could talk a little bit more in terms of your thoughts on pricing. With your comments about the sales there’s implied in that that there is improvement as the year goes on and given this negative impact on operating leverage if you were to hold pricing at lower sales where you might to cut more on the SG&A side, would you think about to be more flexible on price given the focus from retailers these days on delivering lower prices to the consumer?

Nolan D. Archibald

Well, we think we’ve been fairly – I mean we haven’t taken the full price increases that we experienced during the inflationary period of time that we’ve had over the last five years. It has been unprecedented and we have not passed that along to our customers and therefore as prices of commodities have come down we have clearly communicated to our customers that we didn’t take the full price increases at that time and we absorb most of those ourselves.

So, we believe we can hold price from where we are right now and that’s why even though we’ve had some prices increases we’ll be doing some promotions that our pricing will be neutral this year.

Daniel Oppenheim – Credit Suisse

Can you give us a little more clarity, you’re talking about the [20%] decline in the first quarter, what is it you’re expecting second, third and fourth, if you can give us any more clarity on that?

Stephen F. Reeves

I think again, projecting out the run rates will kind of be in the low double digits in Q2 and Q3 organically and around 5% currency in both of those quarters. Again, as I mentioned earlier you start to comp on the decline in the fourth quarter this year so kind of mid single digits and neutral currency.

Operator

Your next question comes from David McGregor – Longbow Research.

David McGregor – Longbow Research

Can you just quantify for us the component cost inflation in 2008 and what you’re using for component cost inflation assumption in 2009?

Stephen F. Reeves

Well I think for the full year 2008 it was $160 million. As Nolan spoke to a little bit ago I think that as we look forward to 2009 it will be much lower than that. It still will be negative by the time everything flushes through the supply chain based on some of the contracts we have in place and some of the currency impact especially with respect to the RMB. It will be negative but not anywhere near that size.

David McGregor – Longbow Research

Is there any way you can give us a sense of what you’re using in your assumptions?

Stephen F. Reeves

I’d rather not split that out in all honesty. It’s not the factor that it use to be and it’s still a dynamic time in our negations with our supply base.

David McGregor – Longbow Research

Is it less than $100 million?

Stephen F. Reeves

I would say that’s a fair statement, yes.

David McGregor – Longbow Research

Can you also give us your volume assumptions by segment for 2009?

Stephen F. Reeves

Sure, I think we see the issues across the board so I think all segments will be down on an organic basis, double digits.

Operator

Your next question comes from Sam Darkatsh – Raymond James.

Sam Darkatsh – Raymond James

A couple of housekeeping, Steve restructuring I didn’t catch whether there are charges expected in ’09 and how that reconciled with guidance can you help with that? I know the savings you talked about $60 million but not any perspective charges?

Stephen F. Reeves

Those savings are relative to the charges we’ve already taken. You certainly here in the first quarter can be digesting what we’ve just done but we’ll continue to look at other opportunities to save costs so if there are future charges in 2009 there should be incremental savings associated with them.

Sam Darkatsh – Raymond James

My point is that your guidance right now does not include any restructuring charges or negative P&L impact of charges in ’09.

Stephen F. Reeves

That’s correct. I apologize.

Sam Darkatsh – Raymond James

Lastly, you were talking about your expectations for unit volumes, would your expectations for production be meaningfully different or will you be taking down inventory in 2009? How should we look at the differential there?

Stephen F. Reeves

I think we’ll obviously need to take down inventories in line with the sales or volume declines, yes. So, we will take production down.

Sam Darkatsh – Raymond James

So your production will be down roughly the same as your projected shipments.

Stephen F. Reeves

Yes, that’s a good assumption.

Nolan D. Archibald

Let me just add one point to the restructuring question you had to Steve and that is in our projections we have not taken any one-time off restructuring assumptions like we have. But, as you know, according to the current accounting rules we’ll have several restructuring related expenses associated with the restructuring that we’ve already announced and those are already included in the projections that we have made.

There will be restructuring related expenses we’ll be paying for this year but they’re already in the projections.

Operator

Your next question comes from Kenneth Zener – Macquarie Research Equities.

Kenneth Zener – Macquarie Research Equities

Can you talk about the declines you’ve experienced in Europe and how that business margins in power tools are relative to this segment?

Nolan D. Archibald

Our margins in Europe have decreased from their highs due to the lower volume but they’re still above the fleet average. We anticipate that they’ll be above the fleet average for 2009.

Kenneth Zener – Macquarie Research Equities

Can you talk about maybe competitor discounts or the competition over there? I think you mentioned some market share losses in cordless, was that in Europe or is that in the US?

Nolan D. Archibald

We’ve had some market share loss both in the US and in Europe because lithium ion has taken greater market share in Europe faster than it has in the US we’ve had slightly more market share loss. This is in the low end lithium ion compact cordless power tools. As I mentioned, this new line of Porter-Cable that we’ve got as well as the new offerings that we have coming in DeWalt will address that but we have had a little bit more market share loss in that segment in Europe than we have in the US.

Kenneth Zener – Macquarie Research Equities

I guess kind of related that, what are your field teams telling you in terms of your industrial channel about those professional buyers willing to trade down? That would seem that is what they’re doing in this lithium ion. With the Porter-Cable lithium ion that you hope to stem some of these losses is that really just a function of price?

Nolan D. Archibald

Well, it’s a function of price. We’ve continued to do extremely well in our cordless DeWalt premium market. Those sales have been pretty good and we’ve maintained or increased market share in the high end so it has to do with application also. Some of the application of the lower end professional power tools, the tradesmen line, people are a bit more cost conscious in this kind of a competitive environment so it is cost sensitive in that lower end of the market.

Operator

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

Eric Bosshard – Cleveland Research Company

Two things, first of all can you talk a little bit further about what you’re seeing with mix in the market in terms of what your power tool customer is doing? You mentioned I believe promotional sales did better than traditional in line sales but can you give us a little more color in terms of how that is behaving and what impact that is having on you and how you might be responding to that?

Nolan D. Archibald

Well, the fourth quarter and we’ve seen that continued in the first quarter, it is that people are inclined to buy things that are on sale or on promotion. I think you’ve seen that pretty well across the line not only in our industry but all industries. We’ve tried to be responsive to that with promotional deals and therefore even though we’ve put in price increases we’ve had some very aggressive promotions and that’s what our customers seem to be buying the most of and therefore we had the unfavorable mix. We’ve anticipated that same kind of activity in the projections that we have made.

Eric Bosshard – Cleveland Research Company

Secondly, I know in the fourth quarter that you commented that you were above your expectations in terms of results but the first quarter number is down so significantly. Can you talk about how things have trended as we moved through 4Q and in to 1Q? Then, within that how you think about 2Q and beyond, how that behaves sequentially?

Nolan D. Archibald

Well, we think the trends that we saw in the fourth quarter will continue in the first quarter. The reason that our sales are affected more in the first quarter is the inventory adjustment that we believe our retailers will make as they take down their inventories. But, we don’t believe they’ll match point of sale. We believe that inventory correction will take place in the first quarter and therefore our shipments will be closer to our point of sale results in the second and third quarters. Then, as Steve mentioned, we have lower comparables in the fourth quarter.

Stephen F. Reeves

Eric, it’s a little different around the world as well. I think I might say that in the US things appeared to decelerate as the quarter went on, things held in pretty well through Thanksgiving and stepped down in December whereas in Europe it was pretty consistently down throughout the quarter.

Eric Bosshard – Cleveland Research Company

Then I guess lastly, the inventory correction needed at retail based on the slowing in sales, is that something that you’re confident is a one quarter phenomenon or might we be spending all of 2009 talking about inventory draw down at retail?

Nolan D. Archibald

We have pockets of inventory. It isn’t across the board and we believe that the first quarter will correct those pockets of inventory.

Operator

Your next question comes from the line of Ivy Zelman – Zelman & Associates.

Ivy Zelman – Zelman & Associates

Just to follow up on Eric’s comment on inventory and then I have a question on balance sheet. The inventory at the home centers and major customers from many are saying are already at very low levels. Maybe you can comment historically six to eight weeks use to be sort of a good level of stock on the shelves and some SKUs we’re hearing stock outs and inventory is already as low as one to two weeks.

So, I’m just kind of curious from fourth quarter to first quarter with inventories so lean, the expectation for a more significant inventory correction seems high to digest so if you can help us a little on that and kind of compare it to where it is today and what you think that means especially since there’s been a lot of stock outs. All you have to do is walk through the stores and you see it.

Nolan D. Archibald

Well, as I mentioned in my response to Eric’s question is this is not across the board. We have some accounts that have very lean inventory and we do have stock outs. We believe retailers are going to continue to play it very close to the vest. We believe that they’re going to have very lean inventories but we do have pockets of inventory and that’s what we’ve reflected in our projection for the first quarter. So, we’ve got one particular customer that has a higher level of inventory and we think our projections have taken that in to account. But, you’re right, in other categories we’ve got lean inventories.

Ivy Zelman – Zelman & Associates

Separately, just talking about the challenge with so many of the industry participants especially a lot of your fragmented customers challenged today with the lack of working capital advancements now being afforded to them by their lenders and just pressure from builders going bankrupt and seeing just so many business failures unfortunately, can you tell us what you’re expecting for your’09 receivables? And, how much you have reserved for bad debt expense and what the fourth quarter looked like with respect to bad debt collection?

Stephen F. Reeves

There is clearly pressure out there and we have historically actually managed that reasonably well. We did put up some incremental reserves in the fourth quarter for some specific accounts where we felt there was a challenge. It will be something we’ll watch closely. Obviously, we try and be proactive in moving credit limits down when we start to see troubles so we don’t get caught with a balance sheet risk.

Ivy Zelman – Zelman & Associates

In terms of the reserve amount in the fourth quarter can you share that with us?

Stephen F. Reeves

It wasn’t material to the overall results.

Ivy Zelman – Zelman & Associates

Lastly, I think Nishu was asking you guys about the dividend and I think Nolan it was a very good fair answer, that you’re obviously going to continue to access things. I’d love to hear your thoughts about the overall down turn. Are you guys assuming that 2009 is the trough and therefore it would only be like – assuming 2010 is worse than 2009 that maybe then you’d have to step up the consideration on dividends? So, kind of what’s your trigger point Nolan?

Nolan D. Archibald

We’ll continue the to monitor it each quarter. This is a board decision and we’re clearly at a high payout rate right now. We’ll monitor it and I didn’t mean to infer in my remarks that we promise that we wouldn’t do anything with the dividend for a whole year, what I tried to convey is that we’ll monitor it and look at it on a quarterly basis and depending on what is happening in the market place we’ll just make that decision of what we feel like is the most prudent things for the best long term benefit of our shareholders.

Ivy Zelman – Zelman & Associates

I understand but do you have a view right now? Are you making a view known to us, what you’re view is, if you expect 2010 to be an up year in your planning? I think as Michael Rehaut was asking about your footprint and you’ve taken a lot of low hanging fruit out and yet you’re saying in China [inaudible] low cost increase in the cost structure and you’re looking at India and other places, I guess we’d like to hear your business plan and strategic outlook if you’re assuming 2010 is going to be an improvement from 2009.

Nolan D. Archibald

What we’re assuming in our planning right now is that 2009 will not be an improvement. As I mentioned, we think there could be some slight improvement in 2010 and then more in 2011.

Operator

Your next question comes from Michael Rehaut – J. P. Morgan Securities.

Michael Rehaut – J. P. Morgan Securities

I just have a few kind of cleanup questions. I didn’t hear, I’m sorry if you said this at the beginning of the call what the breakdown of 4Q consolidated sales between volume and price?

Stephen F. Reeves

Price was flat.

Michael Rehaut – J. P. Morgan Securities

Also, Nolan I was wondering if you clarify the comments you made before about losing share in the low end of the lithium ion market? More particular are you referring to the 18 volt because I don’t think you really have, and I apologize if I’m getting this wrong, material product offerings with the 12 volt or 14 volt in lithium ion.

Nolan D. Archibald

We do have offerings in 12 volt and 14 volt but they are in [inaudible]. When I’m talking about the low end lithium ion market I was speaking of 18 volt in that lower costs 18 volt market that’s more of a tradesmen, high do it yourself offering than a DeWalt offering. That is the area we have loss some market share in and that’s what Porter-Cable specifically addressed as well as some SKUs that we’ll be introducing later in the year in DeWalt.

Michael Rehaut – J. P. Morgan Securities

Just a couple of last minute small items on the income statement, for ’09 in taking that 5% consolidated operating margin in to account, I’m just trying to get a sense of the negative impact of currency and I assume corporate expense would stay roughly in line with ’08 maybe a little bit lower. So, that gets me to a negative currency translation hit of roughly $20 to $25 million.

Stephen F. Reeves

I think in your modeling you should assume actually that the corporate will be up slightly given the way we account for pensions internal to the company. The pension will be a little more negative in corporate and more favorable in the ops so it will be up slightly.

Michael Rehaut – J. P. Morgan Securities

Again, does that kind of leave me with a currency translation negative impact of about $20 to $25 million or would it be a little bit less than that?

Stephen F. Reeves

[Inaudible] four or five points, right?

Nolan D. Archibald

We said 5%.

Michael Rehaut – J. P. Morgan Securities

That’s on the top line. I’m talking about the operating profit.

Stephen F. Reeves

You might think about a number a little higher than that.

Operator

There are no further questions.

Stephen F. Reeves

Thanks everyone.

Nolan D. Archibald

Thank you very much for joining us. Mark, Roger and Steve will be available the rest of the day.

Operator

Ladies and gentlemen this concludes today’s conference call. You may now disconnect.

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