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Executives

Mark M. Rothleitner – Vice President Investor Relations & Treasurer

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

Analysts

David Goldberg – UBS

Michael Rehaut – JP Morgan

Nishu Sood – Deutsche Bank

Ivy Zelman – Zelman & Associates

Kenneth Zener – Macquarie Research Equities

Eric Bosshard – Cleveland Research Company

David Leibowitz – Horizon Asset Management

Analyst for Daniel Oppenheim – Credit Suisse

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Gregory Melich – Morgan Stanley

Sam Darkatsh – Raymond James

David MacGregor – Longbow Research

John Kim – Discovery Capital

The Black & Decker Corporation (BDK) Q2 2009 Earnings Call July 24, 2009 10:00 AM ET

Operator

My name is Tina and I will be your conference operator today. At this time I would like to welcome everyone to the Black & Decker second quarter earnings conference call.

Mark M. Rothleitner

Welcome to Black & Decker’s second quarter conference call. On today’s call are Chief Financial Officer Steve Reeves and I will discuss our second quarter results and outlook for the remainder of 2009. Our comments should take about 15 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 risks and uncertainties. For a more detailed discussion of the risks and uncertainties that may affect the Black & Decker Corporation, please review the reports we have filed with the SEC including the 8K filed today. In addition, we will be referring to non-GAAP financial measures within the meaning of SEEC 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 Steve.

Stephen F. Reeves

This morning Black and Decker announced diluted earnings per share of $0.63 for the second quarter, well above our guidance of $0.35 to $0.45. Revenue for the quarter came in close to our expectations and similar to the first quarter as our end markets remained weak however, we continued to outperform on cost reduction driving better margins. This and a onetime benefit of $0.07 per share from an insurance settlement resulted in the earnings outperformance. We are also very pleased with our progress on net cash generation which is significantly ahead of the corresponding 2008 period.

For the quarter, sales decreased 27% including a 23% decline in organic volume, 1% positive price and a 5% unfavorable impact from currency translation. As in the first quarter, the decline is driven by the US industrial products group, the European tools business and the fastening segment. Our operating margin decreased to 5.9% primarily due to lower sales and production volumes. This is an improvement from the smaller first quarter and was above our expectations.

We reduced SG&A expense year-on-year by 25%. This is a larger reduction than in the first quarter and nearly in line with the drop in sales. Net cash generation was $234 million for the second quarter and $111 million year-to-date. As we described in the past, this includes the net effect of our currency hedging activity. On the April call we discussed our objective of reducing our inventory levels in the second quarter to correspond with the demand environment. Our successful execution of this initiative was a significant driver of cash flow.

Our second quarter results put us in a strong position for the rest of the year in terms of liquidity, debt metrics and cash conversion. Now, let me discuss our business segments. Sales in the worldwide power tools and accessories segment decreased 21% for the quarter. In the US industrial products group sales decreased nearly 30%. Our results in this business were actually a little less negative than the first quarter as inventory corrections at retail moderated.

The [inaudible] in construction activity has significant affected the professional business. So far this year US housing starts were down nearly 50% and commercial construction spending fell roughly 25%. Sales were down significantly in all our key channels but particularly those that serve the construction industry. DeWalt’s next generation XRP cordless tools are now on the shelves. That launch as well as promotional activity and the liquidation of old generation cordless helped mitigate the sales decline in the quarter.

The US consumers products group continued to stabilize this quarter posting a high single digit increase in sales. While this in part reflects an easy comparison, we are pleased with our progress in a difficult environment for discretionary goods. The outdoor business had a strong quarter with sales growth and double digit increase in sell through at key retailers. We have gained product listings and consumers are increasingly purchasing from our cordless offerings likely for convenience and environment reasons. [Inaudible] solid sales of the Porter Cable line that we launched last year. These gains were partially offset by weak sales in the auto, electric and home product categories.

In the European power tools and accessories business, sales fell approximately 30% similar to the first quarter. As in the US and most of the world, the industrial business performed significantly worse than consumer. All major markets suffered double digit declines. The biggest impact was in Eastern Europe which fell 50%. The UK, Scandinavia and Iberia also fell more than the average.

Activity in other parts of the world has also slowed significantly. The US downturn has affected Mexico and Central America driving a double digit sales decrease for the Latin American business. Sales in Canada fell more than 30% reflecting pressures similar to the US industrial business. Asia Pacific sales were down in the high single digits.

Return on sales for the power tools and accessories business decreased 140 basis points to 6.5% this quarter due to the impact of lower production on fixed overhead and lower sales on fixed elements of SG&A. We offset much of this pressure with over $50 million of SG&A cuts, positive price and a favorable comparison to inventory write downs in the prior year. Component cost inflation which had been a headwind for several years was not a significant factor this quarter. We should see a benefit from lower year-on-year commodity prices in the second half.

In our hardware and home improvement segment, sales decreased 21% for the quarter. Declines of roughly 25% to 30% in the new construction channel remained the key driver. Sales of locksets in the US decreased at a double digit rate. This represents an improvement from the first quarter decline. Despite the recession Kwikset sales increased slightly at retail reflecting continued success for smart key and other commercial initiatives.

Baldwin sales were down sharply due to the factors we described last quarter including showroom store closings and consumers trading down as well as product line transitions. Sales in the Price Pfister faucet business decreased more than 30% for the quarter. The new construction channel remained weak and orders from key retailers fell much faster than sell through this quarter. This is partly due to the comparison against Price Pfister’s best quarter in 2008 and we benefited from load ins following line reviews. Therefore, we expect the sales trend to moderate in the third quarter.

Despite the 21% sales decline, operating profit for the hardware and home improvement segment fell only 1% this quarter. Operating margin increased 230 basis points to 11.6% driven by higher gross margin. Across the segment we benefited from year-on-year margin decline and strong restructuring and productivity initiatives. These improvements were partially offset by impact of lower volumes. The segments SG&A percentage was virtually flat as we aggressively cut spending to keep pace with the sales decline. While margins in this segment tend to be more volatile than our other businesses we are encouraged by the progress this quarter.

In the fastening and assembly systems segment, sales decreased 32% with similar declines in the global automotive and industrial divisions. North American auto production was below our prior estimate and our sales to automakers declined roughly in line with global production rates. Our automotive sales decline in Asia narrowed this quarter but North America remained around 50% down and Europe roughly 25%.

With the emergence of GM and Chrysler from bankruptcy and ramp up of production, we expect a less severe sales decrease in the second half. In other industries we believe production rates have fell 10% to 30% in nearly all regions exacerbated by distributors inventory reductions. The 2008 acquisition of Spiralock contributed two points of sales growth for the quarter. Operating margin for the fastening segment fell to 5.8% for the quarter. Gross margin and SG&A percentage were both significantly worse year-on-year primarily due to lower volumes. The margins were significantly better than the weak first quarter level on similar sales reflecting continued expense control and productivity efforts. In addition, our receivable collections it the automotive business exceeded expectations and allowed us to reverse a portion of our bad debt reserves from the first quarter.

Now, we’ll review the financials in a little more detail. As I mentioned earlier, sales were down 27% to $1.2 billion for the quarter including 5% of negative currency. Gross margin was 31.2% for the quarter, this was down 150 basis points to last year and modestly below the first quarter. Reduction in our production levels outpaced the sales decline resulting in significant fixed cost absorption pressure. These headwinds were partially offset by positive price, restructuring savings, component cost deflation and productivity in HHI and the comparison of the power tool inventory write downs in the prior year.

SG&A decreased $98 million or 25% including six points of currency. Expenses were down again in each segment and every major category. Spending cuts did not quite match the sales decline so SG&A as a percentage of sales increased 100 basis points. As I noted earlier, we benefited from a favorable insurance settlement in the quarter. This related to an environmental matter and contributed approximately $6 million pre-tax to the other income line.

While we continue to pursue cost reduction initiatives, we did not record a restructuring charge this quarter. Our recent restructuring actions generated approximately $18 million in savings in the second quarter and we continue to expect over $75 million for the full year. Interest expense of $23 million was well above the prior year due to the bond issuance at the beginning of the quarter. This was slightly below our expectations. Our effective tax rate was 28% for the quarter, higher than last year but similar to the 30% rate we expect over time.

Now, I’ll turn it over to Mark who will discuss cash flow and liquidity.

Mark M. Rothleitner

As we mentioned earlier, cash flow was outstanding this quarter. We had net cash generation of $234 million bringing the year-to-date total to $111 million. This compares to $65 million in the first half of 2008. While earnings were down significantly, lower inventory drove roughly $80 million of working capital favorability versus last year. We also continued to reduce capital expenditures and benefited from net favorability relating to hedging activities.

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Due to strong net cash generation and a lower dividend, net debt decreased $242 million during the quarter and $93 million year-to-date. We also received $343 million of bond proceeds early in the quarter which were used to reduce short term borrowings. The short term balance was essentially zero at quarter end and cash increased by $239 million. This puts us in an excellent liquidity position with no long term debt payments due until 2011 and the full $1 billion short term facility available at quarter end.

We will have some short term borrowings during the year which we expect to continue funding primarily through commercial paper. Considering out second quarter outperformance, we now expect net cash generation of at least $200 million for the year. As we have discussed in the past few quarters, our first priority for cash is to reduce net debt followed by small bolt on acquisitions consistent with the conservative approach we have taken through the credit crisis, share repurchases remain on hold.

Now, I’ll turn it back to Steve to discuss the outlook for the rest of 2009.

Stephen F. Reeves

Looking forward to the second half, we are not anticipating a significant net improvement in our end markets. Some metrics appear to be bottoming such as US housing starts and global automotive production however, international markets are still weak and global commercial construction is expected to continue decelerating. In addition, the consumer outdoor business which helped our results in the second quarter is seasonally much smaller in the second half.

Therefore, based on lower expectations for the industrial tool and fastening businesses, we now expect full year sales to be down 24% compared to last year. Based on current exchange rates, this includes approximately three points of unfavorable currency. For the third quarter we anticipate sales to be down in a similar range to the first two quarters as we have elected not to pursue some low margin consumer businesses that we had in the comparable period last year.

Consistent with historical trends, we anticipate that third quarter revenues will be less than the second quarter. In the fourth quarter we anniversary the global credit collapse. We are also excited about this year’s new products such as the expanded smart select line, the new readywrench and the launch of DeWalt compact lithium ion. This offering should be favorable to last year when our consumer business was focused on the Porter Cable launch instead of targeting gift items. The easier comparison and better new products should help us narrow the percentage sales decline to the low teens in the fourth quarter.

Turning to operating margins we continue to expect roughly 5% for the full year. This margin guidance reflects a slightly lower back half sales outlook offset by cost reductions and a little more benefit from component cost deflation. Due to the improvement in steel pricing and sourcing initiatives we now anticipate inflation will be roughly neutral for the full year. In addition, currency pressure has subsided a bit since April. We still expect that price will be positive for the full year.

Below operating income, our full year assumptions are not changing dramatically. We expect interest expense of roughly $86 million, a tax rate of 30% and a diluted share count of around 59.5 million shares. In total we are increasing our diluted EPS guidance modestly to a range of $1.65 to $2.00 for the full year excluding restructuring charges. This reflects our second quarter out performance and a lower second half sales outlook.

In the third quarter we expect diluted EPS in the range of $0.35 to $0.45. As Mark previously mentioned, we are raising our outlook for cash generation. In summary, Black & Decker is taking the necessary steps to deliver results and position the company in the virtually unprecedented downturn. We exceeded our EPS guidance despite weak end markets. We accelerated our SG&A and capital spending reductions but kept investing in innovation and long term growth areas.

We remain on track to launch a strong line up of new products globally this year. We aligned our inventories to the current demand environment, we generated over $100 million of cash in the first half positioning us for over $200 million for the year, strengthening our liquidity positions. People at Black & Decker are a dedicated and talented team. We remain confident that their efforts are building a great foundation for the company’s long term success.

That concludes my prepared remarks. Now, I’ll turn it back to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

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

David Goldberg – UBS

First question is actually on free cash flow generation as you look forward, I know you kind of gave some guidelines and I’m just wondering where the additional free cash flow is going to come from? Is it mostly from further inventory reduction? And, kind of where do you think that can go generally in terms of how well you can bring the inventory level given the sales pace right now?

Stephen F. Reeves

Well, the incremental free cash flow is really driven from working capital outperformance. Where we brought the inventory levels to in the second quarter was really in line with our historical targets on inventory turns and forward coverage so we are reasonably aligned right now for the demand environment that we see. So, I would expect as we go through the back half you’ll see production mirror the sell out as we go forward.

I think as we’ve taken inventory down here in the second quarter, we’ve obviously stopped the intake of products and our payables have decreased accordingly. As we accelerate the production to match the outflow of sales then you should see payables build back up again and provide incremental cash flow.

Mark M. Rothleitner

Dave, the fourth quarter is usually a strong free cash flow for us or a positive free cash flow because it’s one of our bigger selling seasons.

David Goldberg – UBS

Just a follow up question, you guys mentioned bolt on acquisitions as a possible use of cash and I’m wondering if you can just talk about the acquisition pipeline and kind of what you’re seeing, where pricing is there, if you’re finding attractive deals now given the macro environment and what specifically you might kind of be, I guess not specifically but generally, what we might be looking for right now?

Stephen F. Reeves

Sure, with respect to bolt ons we’re looking at small transactions. Typically that would be product line extensions where there would be some significant cost synergies. We continue to see some out there. Pricing has not fully come in line with what our expectations are in this environment so we continue to look for compelling valuations. We believe that if we’re patient the valuations will come back to us.

David Goldberg – UBS

Have you seen things start to come down a little bit though?

Stephen F. Reeves

It’s moderating but still now to where we would like it to be.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

The first question, just on 3Q guidance, I’m sorry I jumped on the call a little late so if you hit on this I apologize, but it kind of looks like if we kind of back in roughly from the full year guidance that you will have a little bit of a margin pull back in the third quarter. I was wondering if you can just kind of discuss the margins in the back half of the year as it relates to what you were able to do in 2Q and specifically as it relates to fastening given that’s had a nice sequential improvement but it’s still off of its highs from the year before?

Stephen F. Reeves

Generally, we expect operating margins for the total company to be 5% for the full year. I think historically you would see that the third quarter has tended to be lower margin than the second quarter on a historical basis, a function of a number of factors. One, it’s historically been a smaller quarter from a top line perspective and given the effect of that on fixed costs. Secondarily, there is a promotional element to the third quarter as you sell in versus the fourth quarter promotions so that tends to be lower in general on a historical basis than Q2.

Specifically, with respect to fastening, as we’ve talked in the past that’s one of our higher fixed cost businesses and as the volume returns there should be some good margin expansion opportunities there. It was a weaker than expected second quarter in the fastening business. We would expect based on how car inventories stand today versus where they stood in the second quarter that you should see some sequential improvement in production and therefore hopefully we’ll get a little bit of leverage as we go forward.

Michael Rehaut – JP Morgan

Also, just one more question on the margins, the hardware segment also had a pretty nice sequential improvement. The sales are obviously still depressed, what are you thinking in this environment we should expect for that segment in the back half and in to 2010 particularly as it relates to the most recent raw materials data points? I think base metals still strongly down year-over-year but they have had a little bit of sequential boost up in the last few months?

Stephen F. Reeves

As you think about the hardware business, the second quarter was an exceptional quarter for us and that business has tended to be chopping from a margin perspective anyways given the way line resets go, etc. As you think about the back half you should probably think not quite at second quarter levels but high single digit to double digit kind of operating margin levels. That business has taken on some very good productivity initiatives in addition to the commodity benefit that we’re seeing so I think that you should see pretty stable performance out of that segment.

Michael Rehaut – JP Morgan

Once last question if I could, new product development, you kind of hit on it a little bit in your prepared remarks but I was wondering if you could just get a little more granular if possible in terms of on the power tools side to the extent possible more specificity on DeWalt and Porter Cable as it relates to cordless and which channels you’re targeting specifically as Home Depot has made some moves over the last year with regard to some arrangements with Makita and Milwaukee?

Stephen F. Reeves

Well, the new product offering I think obviously the biggest initiative is the compact lithium ion offering in DeWalt which fills a product app we have in our lithium offering which will be launching here in the fourth quarter. As you look at the power tools business on the DeWalt side, it will be an active back half but a lot of it is product that is designed for some of the developing markets we have been putting a push on to improve our product postings or product offerings as we look at Asia, Latin America, etc. and a fair amount of our launches will be directed there in the back half. But, that stuff may well find its way in to the DeWalt markets at some point in the future. To answer your question, we’ll continue to round out the Porter Cable line with some new products in the back half that adds to that listing both on the corded and cordless side.

Michael Rehaut – JP Morgan

If I understand that correctly, the compact lithium ion DeWalt will be in the US but also there will be a focus on the emerging markets?

Stephen F. Reeves

Yes. As it happens the product pipeline, the products coming out here in the back half are a lot of attention focus on the developing markets, the product is specified for those markets.

Operator

Your next question comes from Nishu Sood – Deutsche Bank.

Nishu Sood – Deutsche Bank

I wanted to follow up on Dave’s question earlier about cash flow. Maybe looking at it more from a longer term perspective, since in early 2000s you folks have had a pretty good record of converting your income to cash flow 90% to 100% plus year in year out. Now, more recently the declines in working capital have helped to offset your declining profitability. I was just wondering what’s it going to look like coming out of this as it takes margins some times to recover and you need to rebuild some of your working capital positions?

Mark, I know you mentioned the benefit from increasing payables but is the other side of the coin increasing inventories, is that going to mean that cash flows lag the recovery in profitability coming out of this downturn?

Mark M. Rothleitner

Yes, if we get in to a significant sales growth period we will need to build working capital which in concept in fact drag on cash flow. I would say though that we have over the years been increasing our investment and focus on process improvement so I think our capabilities have improved over the period of time so that hopefully we would be able to mitigate some of that working capital investment in a sales growth environment.

Nishu Sood – Deutsche Bank

Another part of the equation has been since your restructuring you’ve been able to pretty effectively hold your cap ex to below your D&A levels. How much longer do we have kind of tailwind from the restructuring earlier this decade? At what stage coming out of this downturn is cap ex going to need to step up?

Stephen F. Reeves

Well, we’ve taken it down, our guidance for this year is $80 to $85 million range which is stepped on a little bit that we have been running closer to the 90 to 100 level. In a stronger economic environment we may well go back up to that level but I still believe that for the foreseeable future we’ll be able to run a model that has cap ex below D&A.

Nishu Sood – Deutsche Bank

Just one more quick question if I could, your decision to stop sponsoring NASCAR, maybe it’s just a matter of how you interpret but obviously a very long standing strategic marketing investment. I know conditions are very depressed now and you’re obviously coming through all your expenses very carefully but things aren’t going to stay this bad forever, or hopefully they won’t so why decide to abandon that now especially considering its historic importance to DeWalt?

Stephen F. Reeves

Well, our contract expired the end of this year so it was a negotiation point to start with. But, as we evaluate either the NASCAR program or our promotions generally to run a NASCAR team at the highest levels which is what we’ve been doing, we had a very competitive team, it’s an expensive proposition and more importantly it’s a fixed cost. Where we sit with the uncertainties in the environment right now we felt that taking our promotional spend to a more variable model was the prudent thing to do. So, you should see us look at different promotional venues going forward that are a little more flexible and allow us to flex as the demand environment changes.

Operator

Your next question comes from Ivy Zelman – Zelman & Associates.

Ivy Zelman – Zelman & Associates

You guys mentioned earlier at the beginning of the call that there was a positive impact from price and what I was hoping you could elaborate with a little bit of an understanding on how you were able to achieve that positive price and what the overall promotional environment is today with always a very competitive environment and certainly historically more of a neutral to negative pricing deflationary environment in the power tool environment specifically.

Stephen F. Reeves

The price we’re seeing reflected in our P&L currently resulted from activities we undertook in the back half of 2008 in response to the commodity pressure that had been building over time where we negotiated prices increases to reflect our cost increase. Some of those prices increases took effect the beginning of this year, some took effect in the fourth quarter of last year. So, we have fundamentally at this point held on to that price increase. I think what you’ve seen or what we’ve experienced here in the first half is probably a less promotional environment than what we’ve seen in years past so that has been a favorable trend for us relative to pricing.

Ivy Zelman – Zelman & Associates

In terms of one housekeeping item, actually a few, but bad debt reserve you said was reversed, how much was that in a positive impact on margin?

Stephen F. Reeves

It was reasonably small, it effected the trend quarter-over-quarter which is why I mentioned it.

Ivy Zelman – Zelman & Associates

It was just in fastening you said?

Stephen F. Reeves

Yes.

Ivy Zelman – Zelman & Associates

Then just big picture one of the things that you guys have been so successful at is reducing your dependence in worldwide power tools on fixed manufacturing and going to an outsource more variable model. Can you refresh us in terms of the variable percent today and how much is outsourced versus still in house?

Mark M. Rothleitner

We don’t give percentages and when you talk about outsource what we really have done over the last several years is move to outsourcing more components. So, we still do, I’m sure you’re aware most of the assembly, we do buy some finished goods from contract manufacturers but for the most part as we moved our footprint overseas to low cost locations what we did was make a conscious decision do we want to keep a component in house or do we want to take it outsource.

That trend is not accelerating but that was accomplished sort of in the early to mid 2000s. From a percentage basis, if you look at our cost of goods sold, a high portion of that cost of goods sold is variable.

Ivy Zelman – Zelman & Associates

With respect to your percentages of what I guess would be European today versus US with so much volatility and the changes in the revenue mix, can you give us a breakdown of US versus I guess where you are today foreign sales manufactured outside of the US?

Mark M. Rothleitner

Well, we can give you that but generally the way we characterize this is high costs versus low costs and so low costs is obviously outside the US, we’re over 70% now in low cost locations which would include China, Mexico, Czech Republic, Brazil and places like that. We still have significant manufacturing in the US including fastening and tools and so that’s the primary area of high cost locations that we have manufacturing. We also have manufacturing in high cost locations in Europe and Japan for the fastening business. But, substantially all of the consumer business and a good portion of the tools professional business is being manufactured in low cost locations.

Ivy Zelman – Zelman & Associates

Lastly, just sort of getting at sort of a cost perspective longer term, you guys have done a great job in managing cost and continuing to streamline the business. If you were going to model Mark and Steve what would you think the analyst community should think about what would be eventually a normalized margin? Certainly, if revenues stabilized you’d start to see the benefits of all of the cost improvements even more so but where do you think that you can’t really take more out and where do margins stabilize longer term? It use to be Mike would talk about there’s no way margins would go below 10% and obviously the overall fell worse than everybody thought it would but where do you see you get to a point where you get back to normalized?

Stephen F. Reeves

We’re trying to position the cost structure so that when the sales do come back we have some visibility of getting back to double digits 10%. When we get to there we’ll try and evaluate where we can get further from that but at this point I would suggest that 10% is where we’re targeting at this point.

Operator

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

Kenneth Zener – Macquarie Research Equities

Given that volume declines kind of went from the first quarter down 20% of sales or sales feel from 20 to 24 now, that implied negative profitability assuming let’s say a 30% sales contribution or roughly $70 million. Relative to where you guys were in April when we talked about this, can you kind of discuss where the surprise came in the productivity or pricing to get to that extra profit to kind of hold guidance flat?

Stephen F. Reeves

Just to make sure I’m understanding your question, is your question to the second quarter or to the full year?

Kenneth Zener – Macquarie Research Equities

To the full year.

Stephen F. Reeves

Well obviously we have taken the revenue forecast down it the back half. Based on the outperformance on SG&A we’ve adjusted our run rate on SG&A going forward to offset some of the draw through on that.

Kenneth Zener – Macquarie Research Equities

[Inaudible] from G&A? I’m just trying to think about the G&A versus the productivity and price.

Stephen F. Reeves

It’s probably about half from SG&A and our price assumption really hasn’t changed this guidance versus last. I think the other piece is we feel a little bit more confident on deflation during the back half so that would be the other major offsetting factor.

Kenneth Zener – Macquarie Research Equities

Do you feel that you have an equivalent amount of if the world were to continue, it’s hard to exactly imagine but if it were to continue that you’d have an equivalent reserve built in to the system to offset that?

Stephen F. Reeves

You mean if sales declined more than 24%?

Kenneth Zener – Macquarie Research Equities

Correct.

Stephen F. Reeves

Well, we’ve tried to anticipate the declining environment. Never say you’ve got it all. Yes, if sales fell off more we are in the process now of identifying other actions we would take to mitigate the drop through and support our market structure where it is.

Kenneth Zener – Macquarie Research Equities

I guess with the weak sales that we saw in Europe there was a – how much of that decline was tied to let’s say inventory corrections? It seems to be that was more the case in Europe versus the US for some other companies. Was that half or was that a third of the decline?

Stephen F. Reeves

That’s hard to quantify. I’d say half was too big. You’re even seeing a destocking here in the US in the construction related channels. I mean at retail it’s pretty clean at this point. But, both in Europe and the US you are continuing to see distributors destock that serve the commercial construction industrial markets and quite honestly also take their forward coverage objectives down so you’re seeing a reasonably significant impact in the pro business here and in Europe on that. So, half feels too big to me, could it be at third? Sure.

Kenneth Zener – Macquarie Research Equities

Then the last question, you guys talked about in the press release specifically [inaudible] Kwikset, you talked about Kwikset and I assumed the higher end Baldwin. Can you kind of talk about the contractions we’re seeing? I know residential was down 25% to 30% in general, can you talk about the high end Baldwin or that category versus the more normalized category?

Stephen F. Reeves

Well Baldwin especially I think is being hurt due to some closures of showrooms and also I think you see a general trend throughout the hardware and home improvement category of people moving down price points. So, if you were going to buy a Baldwin now maybe you’ll move down to a Kwikset. So, I think the high end feels like it’s getting hurt worse than the OPPs portion of the market. I think we fared pretty well on the retail side in Kwikset through the smart key product offering is very well received and likely taking share on the retail side.

Kenneth Zener – Macquarie Research Equities

How long do you guys think that high end is going to take to kind of recover relative to the median price point?

Stephen F. Reeves

Well, I think that will have to do with how quickly the credit markets rebound for high end homes would be probably the main driver there.

Operator

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

Eric Bosshard – Cleveland Research Company

Two things, first of all the delta in revenue guidance for the back half, can you talk just a little bit more detail about where you’re seeing and what you believe is driving the deviation from the earlier expectation?

Stephen F. Reeves

I think as you think about the professional business both in the US and in Europe, I believe based on the channels where we’re seeing the pressure that you’re seeing the deceleration in commercial construction I think is driving a lot of the change in expectation from where we were previously. On the fastening business, while we think the trends will improve in the back half, the base from where we’re starting is much lower, the second quarter came in weaker than we had anticipated so it’s really about finding the level on which you’re going to start to see some improvements. So, on the pro side in terms of the revenue guidance, I think a lot of it revolves around the commercial construction spending declines you’re seeing around the world.

Eric Bosshard – Cleveland Research Company

In terms of market share on the professional side of the business, can you timeline a little bit how you think the performance has behaved? I think you acknowledged on some prior calls that you thought you maybe loss a little bit of share in the US power tool business last year. How do you think that behaved in 2Q or the first half and how do you feel about how that’s going to look in the second half?

Stephen F. Reeves

It’s hard to do market share quarter-over-quarter as you can imagine but I think the trends we’ve been describing for the last couple of quarters have held true here through the second quarter in that where markets, especially on the cordless side, where markets are shifting to lithium, we are losing some share based on not have as a robust of a product offering as some of the competitive set. We will address that partially with the launch of the compact product with the lithium ion batteries here in the fourth quarter and their developing sub market, I guess kind of sub compact or low voltage lithium where we also don’t have a presence in the market place which also will be addressed on the product road as we go forward here in the next 12 to 18 months.

On the corded side in pro I think we’re fairing pretty well and a lot of the products that we launched in the back half of last year, the stud and joist drill, the portaband, the corded drills are allowing us to get some conversion activity going and convert some distribution to be DeWalt houses. So, I feel good about the corded side, the trend on cordless continues and I think will continue through the end of this year.

Eric Bosshard – Cleveland Research Company

Then one last follow up, in terms of the US home center business, can you talk about how the momentum of that is behaving I guess both sell in and sell through?

Stephen F. Reeves

There was some inventory correction activities you saw in the first half, probably a little bit spilled over in to the second quarter from the first quarter. I think we’ve seen sell through be reasonably consistent honestly between the two quarters kind of down mid double digits so kind of seems to have plateau to some degree.

Operator

Your next question comes from David Leibowitz – Horizon Asset Management.

David Leibowitz – Horizon Asset Management

I got on a few moments late, did you discuss what the cycle or the changes are right now with retail take away versus your inventory position?

Stephen F. Reeves

Well, I just spoke about it a little bit with that last caller but I think here in the US you’re seeing some sell through and sell in starting to come in to line. There was some inventory correction that occurred on the retail side here in the first quarter and a little bit spilled in to the second quarter. That would also probably be true to a lesser degree though in Europe. I think in the channels where they’re serving the commercial construction activity I think you’re still seeing destocking going on.

David Leibowitz – Horizon Asset Management

In terms of the bolt on acquisitions that you would like to make, is there anything that you are in discussions about right now regardless of what aspect of the business it might be?

Stephen F. Reeves

Nothing that we would care to comment on, no.

David Leibowitz – Horizon Asset Management

The last question what do you see as the single biggest challenge facing the company rather than the industry?

Stephen F. Reeves

I appreciate the question but I mean the macro environment is so pervasive on our industry it’s hard to look past that. As I spoke to with the last caller, we are working on our product road relative to cordless lithium ion and that probably would be the most company specific issue.

Operator

Your next question comes from Analyst for Daniel Oppenheim – Credit Suisse.

Analyst for Daniel Oppenheim – Credit Suisse

I think a lot of our questions have been answered but I was just wondering, you commented on just choosing not to chase some of the lower margin business and mentioned seeing kind of the trade down in lock sets. I was just wondering how broad based was the trade down across your businesses? How much are you just choosing not to chase here and what are the implications of that on revenues going forward and your market share?

Stephen F. Reeves

There was some specific areas on the consumer business here in the third quarter that we just felt were unprofitable to pursue. I don’t believe it will have a material market share implication for us. But, in this environment, as you look at price movements and our industry is reasonably price elastic, you just have to believe that demand is there that we’ll pay you back for a price decrease in a slack demand environment, that case gets harder to make I think.

Mark M. Rothleitner

From a product perspective, we have a very strong new product offering in consumer so when Steve’s talking about stepping away from some of the lesser profitable stuff, we have a pretty robust fourth quarter new product launch in consumer so we expect it to be a better fourth quarter than the product offering we had for example in the fourth quarter of 2008 and that should in any demand environment benefit the company.

Analyst for Daniel Oppenheim – Credit Suisse

Then I just wanted to follow up on the comments on destocking, in your conversations with kind of your key retail customers have you gotten to the point where you’re talking when is the restocking going to occur? Or, what’s kind of your best guess as to how long the retailers really want to keep these lean inventories?

Stephen F. Reeves

I would say that certainly on the short term horizon in thinking about the back half of 2009 I don’t anticipate, our guidance does not anticipate a restocking of inventories here in the near term. I think in the construction side, as I mentioned, the opposite is happening, that they’re taking their forward coverages down.

Operator

Your next question comes from Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

You guys have been doing a pretty good job of holding margins at the power tool segment, I was wondering if that 6.5%, 6% is kind of what we should be thinking for the second half? Are you going to get any commodity deflation there?

Stephen F. Reeves

I think in the back half we should see, especially relative to the first half, some commodity deflation. But again, there’s a little bit more promotional activity in the back half as well which may offset that.

Analyst for Peter Lisnic – Robert W. Baird & Co., Inc.

Then for your kind of longer term on the home and hardware side, historically your margin has been in the mid teens range, with all of the restructuring that you’ve done, what kind of volume do you think will be required for margins to get back up to those kinds of levels?

Stephen F. Reeves

Well, it will take some volume for that to happen. We have positioned the company to leverage on the way back up as the sales improve. I don’t have a specific sales number in mind for you relative to that.

Operator

Your next question comes from Gregory Melich – Morgan Stanley.

Gregory Melich – Morgan Stanley

I just had one follow up question on the sales to key retailers, you said roughly you think the sell in versus sell through is in balance. I got that right?

Stephen F. Reeves

On the retail side, yes.

Gregory Melich – Morgan Stanley

But you also I think you mentioned, or I got in the comments that the Price Pfister, the sell in was a lot less than the sell through [inaudible] from a comparison issue. Is it fair to say that the flip was true, that the lawn and garden and Porter Cable that in those businesses you had sell in that was much better than sell through because you’re building it? Is that a fair extrapolation?

Stephen F. Reeves

I’m not sure I would say that. I think lawn and garden is a very seasonal business and the retailers will cut off when they think the season is about to end. So, I don’t know that there’s as much of build aspect, especially this late in the season relative to – in the second quarter, let me backtrack on that a little bit, in the second quarter yes, they are working off what they bought in, in advance of the season so yes, the sell through would be much higher than the sell in as the season nears its end because they don’t want to carry that inventory through the summer and fall.

Mark M. Rothleitner

On PC we probably also benefited from a little bit of loan in, in Q2.

Gregory Melich – Morgan Stanley

I’m just thinking about it big picture, if the Price Pfister was on one side of it, something had to be on the other side and it sounds like Porter Cable was on the other side?

Stephen F. Reeves

Yes.

Gregory Melich – Morgan Stanley

Do you have a holistic number that you talk about for raw materials? It sounds like some things are going to get better, it’s going to help you in the back half. Is there a balance number that you use as to what raw materials could be down this year? Maybe just describe how the few of that has shifted over the last three to six months?

Stephen F. Reeves

I think we carried in a fair amount of inflation. In the first quarter we experienced that. I think we had been guiding to the view that it would be a net inflation for the full year. Our view now is probably about a breakeven plus or minus. Some of that is through some strong sourcing activities and negotiations and some of it quite honestly as we scrub the estimate is looking at the split between productivity and deflation and I think we’ll get a little bit more deflation, a little bit less productivity so it may not be a net positive for the full year but that’s just some clarification of how we would characterize it.

Gregory Melich – Morgan Stanley

And the magnitude would be maybe 100 basis points, 200 basis points, something like that?

Stephen F. Reeves

I think for the full year I think it will be about breakeven.

Gregory Melich – Morgan Stanley

But where you would have been before, slight inflation would be 1% or 2% and now it’s sort of breakeven?

Stephen F. Reeves

I think that was a little high. It wasn’t that high.

Operator

Your next question comes from Sam Darkatsh – Raymond James.

Sam Darkatsh – Raymond James

Most of my questions have been asked and answered, I’ve just got a couple here, I want to make sure I’m clear, sequentially Q2 versus Q1 in gross margin, I’m trying to figure out the puts and takes. So, raw materials was a benefit sequentially, you had incremental sales sequentially and then I’m guessing mix and pricing were negative, is that how we should look at it? Or, what were the puts and takes sequentially?

Stephen F. Reeves

Pricing was actually reasonably consistent between the two quarters. I think mix would be the other element in that that would probably offset those.

Sam Darkatsh – Raymond James

So the mix more than offset the benefits in raw materials and incremental sales?

Stephen F. Reeves

I should have mentioned we had some absorption pressure in the second quarter as we pulled the inventories down.

Sam Darkatsh – Raymond James

Sequential pressure? Because, sales were higher – so production was lower sequentially than Q1?

Mark M. Rothleitner

Yes, we pulled a lot of inventory out in the second quarter.

Sam Darkatsh – Raymond James

The second question and I apologize if this is an elementary question, the DeWalt compact lithium ion, is that the 12 volt or is that a separate category all together?

Stephen F. Reeves

It tends to be the 14.4 and 18 volt but it’s the despeced version of the DeWalt offering, different from the XRP offering. So that would be at a different price point typically but still in the professional catalog.

Sam Darkatsh – Raymond James

What would the status be then of the 12 volt at this point?

Stephen F. Reeves

In lithium we do not have an offering in the low voltage lithium and that, as you might imagine, we are working on our product as part of our product growth.

Sam Darkatsh – Raymond James

The last question, this I understand you’ve got to be very sensitive to customers, speaking about particular customers on public calls like this but, there has been some chatter that Lowes is thinking about perhaps going more private label in their power tool category. If you could give any commentary to that, that would be terrific.

Stephen F. Reeves

As of right now there’s nothing concrete. We have a good relationship with Lowes and have worked well with them as a true partner. I’m sure that they, like any company, would be evaluating their different options but as of this point in time there’s nothing concrete to my knowledge.

Operator

Your next question comes from David MacGregor – Longbow Research.

David MacGregor – Longbow Research

I wanted to just take it back to the European business for a moment. We talked a little bit about the pro category, I wondered if you could talk a little bit about consumer and maybe elaborate a little bit more about what you’re seeing on the consumer business in Europe?

Stephen F. Reeves

Consumer is faring a little better than the pro side in Europe largely on the tools position. We’ve had some good wins with retailers there and generally have gotten some nice listing gains so while the macroeconomics are poor and the business is still down substantially, it’s still better than the overall performance.

David MacGregor – Longbow Research

You don’t have the same kind of home garden element to your mix in Europe as you do in North America do you?

Stephen F. Reeves

It’s a smaller part of our European business than it is in the US.

David MacGregor – Longbow Research

Then just last question, on the [inaudible] to dealers, you refer to them a few times as being particularly weak and still destocking, how much of this is attributable to CIT and just kind of inventory financing issues as opposed to just a view that the market is going to get a lot worse?

Stephen F. Reeves

That’s hard to parse but whether there’s liquidity issues or it’s just good business judgment to take your inventories down in a weak demand environment, that’s a little difficult to say. We’ve actually come through this down turn with reasonably few of our partners failing. I’m sure their financing issues are an element of it but I think it’s largely the macroeconomics.

David MacGregor – Longbow Research

The finally, do you have any visibility at all this point on 2010 raw materials?

Stephen F. Reeves

No, only that based on what we carried in this year if things were to freeze today there would be a benefit. Where commodities are going would be a speculation.

David MacGregor – Longbow Research

But you don’t have any forward hedging programs or anything that would give you at least some limited perspective?

Stephen F. Reeves

Not at this point in the year, no.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

Just a couple of follow ups and again, I believe you didn’t hit on this before but I apologize if you did, you had mentioned or in the text of the press release as small insurance settlement, I believe it’s in the other income segment. Could you break out the dollar amount of that?

Stephen F. Reeves

It was around $6 million. It is in other income, below operating income.

Michael Rehaut – JP Morgan

So then the effect on EPS we would tax it on a regular basis?

Stephen F. Reeves

Yes, it’s about $0.07 of the EPS.

Michael Rehaut – JP Morgan

Taking a step back and looking at some of the adjustments to the full year guidance, just to summarize correctly if I’m thinking about it right, less raw material expense on the positive side, perhaps some better than expected cost savings or cost actions partially offset by slightly lower sales outlook. Am I missing any other major changes versus the guidance from last call?

Stephen F. Reeves

Well, the currency is a little favorable as well so that would be probably the other element that you didn’t hit on.

Operator

Your next question comes from John Kim – Discovery Capital.

John Kim – Discovery Capital

Just a question in terms of quantifying how much of the improvement in margin on the home and hardware side you got on a quarter-on-quarter basis from raw materials? You went from 4% to I think 11.5% quarter-on-quarter. Is there any way for us to know how much of that game from obviously commodity prices and then maybe the productivity gains and maybe the price realization. Can you break that out for us?

Stephen F. Reeves

I would really prefer not to.

John Kim – Discovery Capital

The other thing then, in terms of the commodity prices where if you came in to the year with expectations of net inflation and now you’re looking for sort of a more neutral breakeven type of commodity price environment, are you planning any roll back in the price increases that you implemented?

Stephen F. Reeves

No. We’ve taken over the years a lot of inflation in to our costs, way more than we’re getting in price so I would not anticipate that we will do that just because of the slight abatement at this point.

Operator

We have no further questions at this time. Do you have any closing remarks?

Mark M. Rothleitner

No closing remarks. Thanks for your interest in Black & Decker and we’re available to answer questions throughout the day.

Operator

Ladies and gentlemen this does conclude today’s teleconference you may all disconnect.

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Source: The Black & Decker Corporation Q2 2009 Earnings Call Transcript
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