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Executives

Mark M. Rothleitner – Vice President of Investor Relations and Treasurer

Stephen F. Reeves – Chief Financial Officer

Analysts

Nishu Sood - Deutsche Bank

Daniel Oppenheim - Credit Suisse

[Matt Lamden] for Megan McGrath - Barclays Capital

Michael Rehaut - J.P. Morgan

Kenneth Zener - Macquarie Research Equities

David MacGregor - Longbow Research

[Unidentified Analyst] for David Goldberg - UBS

[Unidentified Analyst] for Sam Darkatsh - Raymond James

Dennis McGill - Zelman & Associates

Peter Lisnic - Robert W. Baird & Co., Inc.

Eric Bosshard - Cleveland Research

The Black & Decker Corporation (BDK) Q3 2009 Earnings Call October 22, 2009 10:00 AM ET

Operator

Good morning and welcome to the third quarter earnings call. (Operator Instructions) Thank you.

It is my pleasure to introduce Mr. Mark Rothleitner, Vice President of Investor Relations and Treasurer. Please begin.

Mark M. Rothleitner

Thank you operator. Good morning and welcome to Black & Decker’s third quarter conference call. On today’s call are Chief Financial Officer Steve Reeves and I will discuss our third 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 SEC, including the 8-K filed today.

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 in included on the corporation’s website under the Investor Relations section.

Now I’ll turn it over to Steve.

Stephen F. Reeves

Thanks Mark. This morning Black & Decker announced diluted earnings per share of $0.91 for the third quarter. This was consistent with the update we gave last week and well above our initial guidance of $0.35 to $0.45. Of the roughly $0.50 of improvement, $0.14 related to favorable tax adjustments. A smaller portion of the outperformance came from early shipments of promotional items in the U.S. More than half was driven by other favorability in operating margin.

Return on sales was 7.5% for the quarter versus the 5% or so implied in our July guidance. This primarily reflected lower SG&A from ongoing cost control, volume leverage and better productivity, and [commode] cost of inflation than we projected.

Sales were down 23%, reflecting 21% lower organic volume, 1% positive price and a 3% unfavorable impact from currency translation. The decline was approximately four points better than our initial guidance, and primarily related to early shipments of promotional items and favorable currency. We are not yet seeing a recovering demand but continue to see stabilization.

Net cash generation was $256 million for the third quarter and $368 million year-to-date. Despite lower earnings, cash generation is nearly $100 million ahead of last year’s pace.

Inventory is consistent with the second quarter level and down $231 million since the end of 2008. Capital expenditures also remained below the prior year, but we continue to invest appropriately in our new product road.

Our outstanding cash generation positioned us well, with strong liquidity and better debt metrics. We have no long term debt payments due until 2011 and the full $1 billion short term facility available at quarter end.

Now let me discuss our businesses in more detail. Sales in the worldwide Power Tools and Accessories segment decreased 21% for the quarter. In the U.S. industrial products group, sales decreased more than 20%. Sharp year-on-year declines in both residential and commercial construction continue to affect all key product lines and channels.

The independent channel, with greater exposure to commercial construction, has been particularly hard hit. This ongoing trend was partly offset by sales of promotional items that we had expected to ship in the fourth quarter. Even without those orders, however, the business saw some sequential improvement from the second quarter.

And as we have discussed before, this fall we are launching a new line of DeWalt compact lithium ion tools, improving our position in a key segment in the cordless market.

The U.S. consumer products group saw a sales decline of approximately 20% for the quarter. This is well below the second quarter performance as we had expected, largely due to a much smaller outdoor season. Our Porter Cable line of tradesmen tools continued to do well, but not enough to offset the impact of continued weak demand in the core tools category.

In addition, we did not pursue some low margin business and discontinued several SKUs in another portfolio. While that put a little pressure on our top line, our focus on cost and improved mix has helped this business deliver much better profitability in 2009 than last year.

We have a strong holiday lineup of new products including the innovative Flex Canister Vac, user friendly Smart Select tools and the versatile Ready Wrench.

In the European Power Tools and Accessories business, sales decreased by more than 20%. Sequentially sales were similar to the second quarter level but against [year’s] comparison. The consumer business had a slightly smaller rate of year-on-year decline than the industrial business. As we have discussed in recent quarters, this market suffered double-digit declines with another drop of nearly 50% in Eastern Europe.

In other regions, results were mixed. Sales in Canada fell approximately 30%, largely reflecting economic pressure. Latin American sales were down mid single digits, but sequentially improved versus the second quarter. Strong growth in the Southern Cone mitigated the decline in the northern part of the region as most [tied] to the U.S. economy. In the Asia-Pacific region, tool sales increased with gains in India and Australia.

Return on sales for the Power Tools and Accessories business was flat to the prior year, 7.6% this quarter. Gross margin improved due to positive price, restructuring savings and component cost deflation. This offset a higher SG&A percentage on lower sales volume. We continued to reduce SG&A spending both year-on-year and sequentially.

In our Hardware and Home Improvement segment, sales decreased 17% for the quarter. Locks and faucet businesses in the U.S. posted similar rates of decline. In the U.S. lockset business, Kwikset continues to expand its successful, SmartKey platform of re-keyable door hardware as winning in the marketplace.

Sales to channels serving new construction were down but much less than housing starts have fallen. Sales at retail also decreased at a larger rate of decline at higher price points. In the Price Pfister faucet business, sales for the new construction channel were down over 30%, in line with the housing starts trend. At retail this business experienced both lower remodeling demand and cautious reorders by customers.

Operating margin for the Hardware and Home Improvement segment increased 160 basis points to 12.9%. Gross margin continued to improve, primarily reflecting lower commodity prices and better productivity.

SG&A spending was down in most categories, partly offset by investment in the SmartKey media campaign. As a percentage of sales, SG&A increased due to volume de-leveraging.

In the Fastening and Assembly System segment sales decreased 24%, with similar declines in the global automotive and industrial divisions. Sales declined double-digits in all geographic regions and key product lines. While our sales of automotive fasteners were generally in line with auto production trends, the industry has cut back dramatically on capital for new assembly systems. The 2008 acquisition of [Spiral Lock] contributed 2 points of sales growth for the quarter. The segment’s results were modestly above our expectations, however, and a solid improvement from the second quarter. This was driven by a sequential gain of more than 25% in the North American automotive business as vehicle production rates rose from the depressed levels of the front half.

Operating margin for the Fastening segment fell to 9.3% for the quarter. Gross margin and SG&A percentage both deteriorated year-on-year, primarily due to lower volume. The improvement in operating margin from 5.8% in the second quarter reflects modest volume leverage and continued cost actions. As we have expressed in the past, this business is more vertically integrated than our other segments and margins should recover more quickly with volume.

Now we’ll review the financials in a little more detail. As I mentioned earlier, sales were down 23% to $1.2 billion for the quarter, including 3% of negative currency. Gross margin was 33.1% for the quarter, 70 basis points above the prior year. We continued to benefit from positive price, restructuring savings, component cost deflation and productivity initiatives. In addition the fixed cost absorption pressure we experienced in the first half has largely subsided.

SG&A decreased $64 million or 17% including 4 points of currency. Consistent with the first half trend, expenses decreased in each segment and across all major categories. Because volume fell more sharply, our SG&A percentage increased 180 basis points. In absolute terms, SG&A was up modestly from the second quarter, in part due to planned promotional spending and currency.

As noted earlier, we benefited from an 18% tax rate compared to 22% last year and the 30% rate that we had expected. This reflected the net effect of certain favorable tax adjustments based on resolved items or new facts. As we have indicated in the past, these adjustments can cause significant variability either favorable or unfavorable in our quarterly tax rate.

We continued to evaluate our cost base but did not record a restructuring charge this quarter. The restructuring initiatives we have undertaken in the past two years generated over $20 million of savings in the third quarter and we continue to expect over $75 million for the full year.

Now I’ll turn it over to Mark to discuss interest expense, cash flow and the balance sheet.

Mark M. Rothleitner

Thanks Steve. Interest expense of $22 million was a little below the second quarter and our expectations, partly due to strong cash flow. It remains above the prior year due to the bond issuance early in the second quarter.

Other expense was fairly typical this quarter but unfavorable compared to a gain on the sale of an asset in the prior year.

It was another very good quarter for cash as we described earlier. Year-to-date net cash generation increased to $368 million, well above net income. The primary driver of the high conversion level is still outstanding working capital performance.

Inventory is down year-on-year more than sales and remains in line with our demand forecast. By taking aggressive inventory actions in the second quarter, we’ve subsequently been able to match production more closely with sales. As we resumed a more normal level of raw material intake, payables have increased, resulting in further cash flow benefit in the quarter.

Due to strong cash flow, net debt was down nearly $350 million year-to-date to just over $900 million. Our cash balance of $822 million and $1 billion short term line give us a very healthy liquidity position.

Now Steve will discuss the outlook for the rest of 2009.

Stephen F. Reeves

Thanks Mark. Looking forward to the fourth quarter we expect stabilization will continue in most of our markets. However, there remains significant economic risks including the weak employment picture entering the holiday season.

In a typical year our fourth quarter sales should be higher than in the third quarter. As I described earlier, we have a strong new product lineup for the quarter, including several consumer giftable items. However, taking into consideration the early promotional shipments we mentioned earlier, we expect our fourth quarter sales dollars to be similar to the third quarter. This will result in a year-on-year decline of approximately 12%, including approximately 3 points of favorable currency.

For the full year this would mean a sales decline of approximately 23%, including 3 points of unfavorable currency. Turning to operating margins, we believe that the 7.5% margin we achieved in the third quarter is sustainable in the fourth. While promotional expense is expected to be higher during the holiday season, we continue to make progress on other cost initiatives. This will represent a year-on-year improvement driven by component cost deflation and productivity.

We expect interest expense of roughly $23 million in the fourth quarter, up slightly from the third quarter due to the number of days. The diluted share count should still be around 60 million shares. While our quarterly tax rate can vary we are projecting a rate of roughly 30% for the fourth quarter. In total we are increasing our diluted EPS guidance to a range of $0.68 to $0.78 for the fourth quarter and $2.45 to $2.55 for the full year, excluding restructuring charges.

Based on performance year-to-date we are also raising our outlook for net cash generation to over $400 million. Our top priority for cash is still to reduce net debt, but our cash performance improves our ability to pursue small bolt-on acquisitions as well. An important goal of the corporation is to preserve our investment grade ratings so we plan to bolster our debt metrics further before resuming share repurchases.

In summary, Black & Decker delivered solid profitability this quarter and is well positioned to take advantage of the economic recovery. We delivered margins and EPS well above the July guidance. We continued to reduce SG&A in capital spending while funding key new products and marketing initiatives. We launched a number of strong new products with more to come in the fourth quarter. We managed working capital effectively, reducing the balance both sequentially and year-on-year. We generated $368 million of cash year-to-date, improving our liquidity position and financial flexibility.

Black & Decker’s team of associates has done a great job of focusing on what’s important and delivering results in a tough environment.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nishu Sood - Deutsche Bank.

Nishu Sood - Deutsche Bank

First question I wanted to ask was about the relative regional sales performances. Through this year, obviously a very difficult year, Latin America and Asia in particular have held up a little bit better than North America and Europe, so by our estimates those other regions as they’re typically listed in your filings might end up being you know 16% or even higher of your sales. So I just wanted to understand you know the kind of drivers of that. And looking ahead can we expect after the economy does begin to recover that those areas will continue to be a more important part of your business? Or do you think those changes are just temporary?

Stephen F. Reeves

Well I think in terms of what the drivers are I think they’re largely you know macroeconomic, although in certain cases you know we are increasing our presence and/or opening new channels of distribution. If you look at Latin America, it’s really two separate economies. If you look at the northern part of Latin America for us, the Caribbean and Mexico, both relatively strongly influenced by the U.S. economy and are down compared to last year. Whereas in the south in Brazil and the Andean countries they, you know sales growth is up. And that’s both a function of better macroeconomics as well as us penetrating you know new channels of distribution.

In Asia, I think as you look at that business we had I had mentioned Australia and India specifically in my prepared remarks, Australia was a listings gains that we got at a major retailer. But in India it was more of us capitalizing on the investments we’re making in that developing region and further you know penetrating that market. So it’s both a function of the better macroeconomics as well as I think some delivered investment on our part to grow in those particular regions.

As we go forward, they continue to be an important focal part for us and I think as I’ve mentioned in the context of you know areas where we’re looking at doing bolt-on, small bolt-on acquisitions, you know a lot of those international markets remain very attractive to us.

Nishu Sood - Deutsche Bank

Next question I wanted to ask was about your debt structure and your cash balance that you’ve built up. Your gross debt load hasn’t decreased during the past year or so. Obviously you’ve paid down your line and your next maturity I think you mentioned is in 2011. On the other side of the balance sheet, obviously you’ve built up a pretty significant cash balance. So since debt repurchases are a priority obviously protecting your investment grade rating, what’s the mechanism going to be to bring the debt down? And you know how are you going to balance that against the need to maintain liquidity through what could be a continued difficult environment? And obviously they need to some bolt-ons as well.

Stephen F. Reeves

Sure. Yes. As you said we don’t have any near term maturities so we have that luxury to continue to evaluate this. Talking to your first question is a lot of our bolt-ons we’re looking at international regions, with some of that cash being offshore that will be useful in terms of pursuing those types of acquisitions. And we’ll evaluate whether there’s opportunities to effectively reduce our gross debt and maybe Mark could speak to the mechanics which we could consider on those lines.

Mark M. Rothleitner

Sure. Everything is under evaluation this year, but certainly an opportunity to think about paying debt early sometime before the [audio impairment] the 11th. You also are aware that we have some term loans. So not planning to do anything at this point except build cash, but those are options that we’ll think about during the coming 12 months or so.

Operator

Your next question comes from Daniel Oppenheim - Credit Suisse.

Daniel Oppenheim - Credit Suisse

I was wondering if you could talk about the margins in the Home and Home Improvement, Fasteners and the increase there. How much of that improvement was raw material driven versus other costs that you were able to take out? Just thinking about the sustainability of the improvements as you move forward.

Stephen F. Reeves

Yes, I won’t give you exact numbers but kind of orders of magnitude. I think its reasonably evenly split and we’re seeing some very good productivity initiatives being driven in that business that are taking cost out of our product portfolio. So some of it is good, structural changes in the manufacturing area.

Daniel Oppenheim - Credit Suisse

And then secondly, wondering about in terms of the power tool business on the consumer side, what sort of trends are you seeing in terms of the sales via the big boxes versus independents there?

Stephen F. Reeves

Well the consumer side of the business is more has less of a presence in the independent channel, so I’m not sure that’s really a fair comparison. I think the consumer business is focused largely in mass merchants and the big box channel, so the trends wouldn’t be material.

Operator

Your next question comes from [Matt Lamden] for Megan McGrath - Barclays Capital.

[Matt Lamden] for Megan McGrath - Barclays Capital

I was just hoping we could get a little more color on what drove the early promotions, what specific products they were. And where do you think that strength came from. If you think it was big box restocking and if that’s sustainable going forward?

Stephen F. Reeves

No, it’s not sustainable. It was purely a timing issue. You know we work with our retail partners you know to plan promotions out, you know for a period of time. As it happened this one shipped before we had it planned in our guidance to the outside world. So it really does not represent a restocking in any way or an improvement in the underlying end user demand.

[Matt Lamden] for Megan McGrath - Barclays Capital

And secondly I was hoping we’d get a little more color on your guidance for fourth quarter margins. I believe historically 4Q has lower margins as you have a bigger mix shift towards lower margin, consumer oriented products. So I was wondering what’s different this 4Q or if you just think it’s strength elsewhere.

Stephen F. Reeves

I think it’s kind of been a little bit of a mixed bag over the years, but you know I think that the margins in the fourth quarter typically are affected by more promotional activity. But we’re going to benefit from you know the commodity deflation or if you think back to last year we were kind of at the height of hitting the inflation into our P&L, as well as the productivity initiatives we’ve undertaken this year. So I don’t know that the mix shift is all that good. I think that generally you should think about promotions this year. Promotional activity will be a little bit more muted than in years past.

Operator

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

Michael Rehaut - J.P. Morgan

The first question I guess just to hit back on inventory at retail, you know in the last couple of quarters, I think in first quarter pointed to some de-stocking and then its beginning to level off in the second and third. So where are we right now with that trend? Do you think we’re kind of more even? And you know on the contrast we’ve heard different things about demand. Do you see any type of building at all at retail or I guess like you said before promotions you expect to be a little bit more muted.

Stephen F. Reeves

Yes, I think that generally our feeling as you look at the U.S. and Europe in the Power Tool business anyway is that inventories are actually pretty well balanced with the demand outlook in my view. Most of the de-stocking at you know retail occurred in the first half. We saw a little bit of carry into the third quarter and perhaps the independent channels here in the U.S., but as of right now that’s reasonably well balanced. And you know obviously taking aside the early promotional shipments, but taking that out I think inventory retails where it should be. In the Hardware and Home Improvement business inventories are up slightly but that has a lot more to do with the specific commercial initiatives by our customers than I think a fundamental change in the demand outlook.

Michael Rehaut - J.P. Morgan

The second question just goes back to margins and you’ve had you know great sequential improvement now for a couple of quarters. You know back to let’s say 2008 levels roughly, give or take at least on a combined basis. You know all things equal in terms of sales levels, you know what do we expect in 2010 in terms of incremental either savings from restructuring or incremental productivity gains that you expect just in the way you run your business on year-to-year basis? You know, assuming raw materials flat, you know how much more incremental do you think there is from the restructuring and productivity side as we look into next year?

Stephen F. Reeves

Yes, I mean we’re not prepared at this time to write specific guidance on 2010 but I think we’ve spoken in the past that you know as we carried into 2009 a fair amount of inflation, going into 2010 we’ll be in kind of the inverse place on that, carrying in a little bit of deflation into the year in any event. With respect to some of the other productivity initiatives, there’s still some more to be wrung out of those as we go into next year. I’m not prepared to give you a specific number on that.

Michael Rehaut - J.P. Morgan

And your outlook for price?

Stephen F. Reeves

Well as we’ve been positive through the first three quarters, my outlook for the fourth quarter would probably be neutral on price. But that would survive to 1% up for the full year.

Operator

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

Kenneth Zener - Macquarie Research Equities

Just given the magnitude of your guys raise, can you just talk about what changed since July when you guys had given kind of guidance for that 5% raise relative to commodities, which in 2Q you expected it to be in neutral, so can you kind of talk about how much a positive that is now?

Stephen F. Reeves

Yes. I’m not going to quantify it because its just a component, similar to absorption and productivity you know. And it was roughly neutral in the second quarter. Its favorable into the third quarter and will continue to be favorable in the fourth quarter. You know what’s changed? Not a lot to be fair with you. Perhaps we could improve our forecasting just slightly in this area but in fairness its tough to pull apart some of the productivity initiatives between commodity benefit and true productivity. You know those negotiations with the supply base especially on component costs are kind of tied together.

Kenneth Zener - Macquarie Research Equities

When you think about it, given you guys in the last cycle moved to a less vertical platform, and this is what surprised me is how quickly the deflation would have moved through your business given Power Tools. You obviously had some benefits. You were shielded from some of that inflation on the upswing given the outsourcing. So I’m just interested to see if there’s been some type of shift or if you can kind of just give us a little bit more color about why that deflation now is moving so quickly when on the converse you were shielded from inflation on the way up, A, and if that seems to be obviously impacting the plumbing and the fastening which are more raw material oriented.

Stephen F. Reeves

We did trap A, an amount of inflation in the supply base on the way up, but we were not shielded from it. I think we took a pretty good margin hit on the way up. What you’re seeing now is you know there’s a lag effect from when you know prices actually move in the market to when it hits our P&L both because of the nature of our contracts with our suppliers, as well as working on to the balance sheet and then off the balance sheet as it goes through our supply chain. So you’re seeing now the effects of the commodity moves, really the base commodity moves that occurred in the back half of 2008 are starting to work their way into our supply chain now.

Obviously in the marketplace commodities are headed back up, albeit they’re still below year ago levels. So you’re really seeing the effect of what happened in the back half of 2008 hitting our P&L at this point in time.

Operator

Your next question comes from David MacGregor - Longbow Research.

David MacGregor - Longbow Research

Just to follow up on that last question from Ken, does that imply then that we’ll see the cost of inflation? I mean copper’s up 20% in the last three months. Should we be looking at this in the second half of 2010, given the lag effect you just detailed?

Stephen F. Reeves

Yes. Yes, I think that’s a fair assumption. Yes.

David MacGregor - Longbow Research

Can you talk a little bit about the businesses you closed or rationalized? You cited low performance businesses being sidelined to. What was the impact on the P&L?

Stephen F. Reeves

Yes. Perhaps a business would be a strong characterization. It was more some under performing SKUs or categories that we just decided not to pursue in the consumer business because we just didn’t see a path to profitability. So that’s been a little bit of pressure on the consumer top line. I think also wrapped into that as you think about consumer businesses, if you recollect in the third quarter of last year we liquidated the BPX business that had failed the prior year. So that also is kind of a mixed benefit as you think about consumer business in 2009.

David MacGregor - Longbow Research

Can you quantify the benefit?

Stephen F. Reeves

It was just a couple of points to the. Oh, the benefit to our mix within the consumer business?

David MacGregor - Longbow Research

I’m just wondering what the benefit to the P&L from exiting these poor performing businesses.

Stephen F. Reeves

No, I don’t think I could get to that kind of granularity.

David MacGregor - Longbow Research

And then the pull forward benefit from 4Q to third quarter I think you said at the beginning it was less than the tax which was $0.14. Can you bring any more granularity to that?

Stephen F. Reeves

No. It was less than the $0.14. You know it was just again the timing of certain promotional shipments.

David MacGregor - Longbow Research

Just one of your indirect competitors I guess has said that in the recovery phase of the cycle they’re likely to experience greater than normal contribution margins. I’m just wondering if there’s a similar expectation on your part that early in the recovery phase you might do a little bit better than those 25 to 30% contribution margins you detailed.

Stephen F. Reeves

I would say that it’ll depend on the slope of that recovery. I think if it is a rapid or steep incline then yes, the potential for us to drop through greater contribution margins exists. If its more gradual I think that you should think about the kind of the normalized drop through rates.

Operator

Your next question comes from [Unidentified Analyst] for David Goldberg – UBS.

[Unidentified Analyst] for David Goldberg – UBS

I just wanted to talk a little bit about the M&A opportunities. I know that you’re sort of focused internationally but given the fact that those markets haven’t underperformed quite as dramatically or haven’t seen the level of downturn that you’ve seen domestically or more North America, can you talk about the opportunities that you’re seeing there? Are valuations coming down internationally? And how you think about the opportunities that may come up domestically.

Stephen F. Reeves

Yes. And we are precluding domestic acquisitions but you know we do see the growth opportunities in some of the developing markets and other international markets. I think valuations generally as we’ve been seeing deals are coming more in line with our expectations than where they were say six months ago. So we remain committed to driving a hard bargain and not overpaying for businesses, however. But I think the expectation gap is certainly narrowing compared to where it was.

[Unidentified Analyst] for David Goldberg – UBS

And would you consider doing something larger than a bolt-on deal if it presented itself? Or how do you think about this sort of product mix that you have now relative to maybe where you’d want to be longer term?

Stephen F. Reeves

Yes, well I guess you should never say never but I think our focus at this point in time really is on smaller transactions that bolt-on to our existing platform.

Operator

Your next question comes from [Unidentified Analyst] for Sam Darkatsh - Raymond James.

[Unidentified Analyst] for Sam Darkatsh - Raymond James

First off on the restructuring that you’ve talked about you’re talking actions and savings for 2009 and I was wondering if we assume there’s no more restructuring coming and just roll forward all of the actions you’ve already taken, there’s obviously going to be some benefit in 2010. And I was wondering if you could help us get to a number on that.

Stephen F. Reeves

You know there is some benefit but its not a overly material number at this point in time. I think we’ll realize most of the benefit of the existing actions in 2009.

[Unidentified Analyst] for Sam Darkatsh - Raymond James

I thought I had remembered you talking about maybe $10 to $20 million in the past? Is that a reasonable range?

Stephen F. Reeves

Yes. I think that’s probably fair. Yes.

[Unidentified Analyst] for Sam Darkatsh - Raymond James

You mentioned that when sales do come back, the Fastening segment you’ll see the profit improved there faster than the rest of your business. Were you just referencing the fact that it naturally has a higher contribution margin? Or was there something else to that comment?

Stephen F. Reeves

Well I think it’s more a reference to the fact that it’s a greater fixed cost business so its way more sensitive to volume than say the Power Tool business we do.

Operator

Your next question comes from Dennis McGill - Zelman & Associates.

Dennis McGill - Zelman & Associates

Sort of on the same lines as the prior question, the Fastening segment, to get back to let’s say a 14%, 15% margin do we just need to see revenue and volume get back to where we were let’s say last year? Or have you taken actions in that segment as well where volume doesn’t necessarily need to get back to that level to see margins back to those?

Stephen F. Reeves

Yes, we’ve taken significant cost actions in that segment as well. So I think you can get back to that as kind of a return on sales levels at a number below the historical values.

Dennis McGill - Zelman & Associates

How much of a boost in volume would you need to see to get back to those kind of levels?

Stephen F. Reeves

Yes, we’re not giving that level of guidance by segment. Sorry.

Dennis McGill - Zelman & Associates

On the cost cutting actions when you think about all the different levels you’ve pulled and I think one of them being across the board sort of wage cuts, first question is is there any risk that you’re impeding the ability to see revenues come back just because some of the actions you’ve taken? And I’m sure you don’t believe that but maybe you could go through the rationale as to why some of these cuts aren’t necessarily going deeper than you’d like. And then secondly, would you consider reversing the wage cuts if volumes and the market were to improve next year? Or are those types of actions more permanent?

Stephen F. Reeves

The wage cuts are not permanent. They were meant to be a temporary measure and they will be reinstated you know when the economic performance merits it. The relative to why there hasn’t been a diminuation in our ability to generate revenues I think if you think through where we’ve cut, in all of our businesses its our view that that product is the key driver of success and ultimately in the markets. There are other factors that apply as well. And we have attempted as we’ve gone through these downsizings to protect the new product capability of the business both in terms of engineering product management as well as protecting the new product capital as we’ve made our various cuts. So as we’ve gone through this downturn, it really hasn’t materially disrupted our product road going forward.

And as we’ve taken out costs and while people that have left the company certainly were valuable and making contributions, you know we have attempted to de-layer the business and you know we are obviously a smaller company than we were you know a year ago from a revenue perspective. So I don’t know that we’ve destroyed any capabilities of the company in terms of generating revenues.

Operator

Your next question comes from Peter Lisnic - Robert W. Baird & Co., Inc.

Peter Lisnic - Robert W. Baird & Co., Inc.

Just a follow up question on pricing. You’ve been running at a 1% clip through the year. I would imagine that most of that is just carry forward from higher commodity costs in the previous year. Is that right?

Stephen F. Reeves

That’s right. Yes, we pursed price increases last year based on the commodities. We had taken over several years the commodity [risks] were taken over several years. We’re anniversaring those actions here as we get into the fourth quarter.

Peter Lisnic - Robert W. Baird & Co., Inc.

I was just wondering if any piece of that could be related to new products. And what I’m really wondering is what the competitive landscape might look like from a pricing perspective and whether that’s changed from you know typical, historical behavior? And so what you’re seeing anecdotally and particularly on the industrial side in terms of pricing would be helpful.

Stephen F. Reeves

When we quote price we’re talking like for like so as we introduce new products, even if there’s a price improvement from the product that’s replacing, we don’t consider that part of price. So that’s actually as you think about our formula one of the ways we try and support our margin is by bringing out innovative new product.

In terms of the price environment that exists out there today, ours is a tough business and I don’t know that its any worse or better than it has been historically relative to you know the pressure on pricing.

Operator

Your next question comes from Eric Bosshard - Cleveland Research.

Eric Bosshard - Cleveland Research

Can you give us a sense on the new product launches that are coming here in 4Q? I believe maybe some in 3Q and sort of beyond. Just give a little bit of a sense of how that compares to what you did year ago and some expectations or some perspective on that.

Stephen F. Reeves

Sure. You know I think year-on-year I don’t know that it’s a huge difference in terms of numbers. I think because we had the Porter Cable launch last year, I think maybe its different in the respect that you know we’ll have a good holiday gifting offering this year for the Black & Decker business where last year it was reliant on some older offerings. And as we go into the fourth quarter here we’re launching the compact ion lithium in DeWalt which will fill a opening we have really in the marketplace as lithium becomes a bigger portion of the cordless market. So it has the potential for being reasonably impactful.

Eric Bosshard - Cleveland Research

And then secondly on the inventory it sounded like and I guess I’d rather just ask you the question, in terms of retailers are they reducing inventories, holding inventories, starting to rebuild inventories? What do you see now and how does that compare perhaps to what you saw back in the first half of the year?

Stephen F. Reeves

I think through the first half we clearly saw de-stocking going on. I think that both in North America and in Europe that retail inventories are kind of where they ought to be relative to what we believe the demand environment to be. I think my view or sense is that the retailers are still reasonably conservative on the outlook at this point in time until they see the POS trends start to appear in the marketplace.

Eric Bosshard - Cleveland Research

Does that mean that they’re still cutting inventories or that they’re now holding inventories?

Stephen F. Reeves

I think they’re holding. I think inventories are at a level that’s supported by the current POS trends. I do not see restocking at this point in time.

Operator

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

Michael Rehaut - J.P. Morgan

When you’re talking about the Porter Cable tradesmen and the upcoming launch of the compact lithium ion, I was wondering if you could kind of take a step back and look at the share trends over the past couple of years and if its possible at all to try and give us a view of on the professional side, you know, how much share you’ve lost and perhaps what you expect to hopefully make up with these launches you know over the next 12 months.

Stephen F. Reeves

Sure. Yes, I think we’ve talked over the last couple of conference calls about the fact that we have in the professional cordless business been losing some share as those markets have moved to lithium ion. I think you know we’ve kind of characterized it as a couple points of share. We have starting with this year in the first quarter with the new XR Premium Line. Now here in the fourth quarter with the compact started to address some of the product totals we had relative to our lithium offering.

I would say that performance year-to-date on the Premium side has been very strong and we’re very happy with where that product has been received into the marketplace. Obviously its too soon to know how the compact that we’re offering now is actually performing but we have high expectations. And I guess as we look at the cordless marketplace, there’s a reasonably best growing, low voltage category developing, kind of 12 volts or less, where we do not have a presence at this point in time. So as that business grows we don’t participate in it, obviously you would expect we have our product road focused on that.

So I think our product portfolio you know should be reasonably robust here as we go through 2010 and we’re hopeful about recovering some of our lost position.

Michael Rehaut - J.P. Morgan

And that 12 volt or less, I mean is that something that you expect to address over the next 12 or 18 months?

Stephen F. Reeves

Sure. You should expect that we have something on our product road that will address our gaps in our offerings. Yes.

Michael Rehaut - J.P. Morgan

In terms of the changing mix of product that you’re selling and that we’ve heard and I think you’ve referred to before that you know there is a little bit of a trading down going on, I believe on both the consumer and the professional side of the market. Is there any accompanying margins with that? You know in the past I think it was viewed that you know some of your higher end, cordless DeWalt product really did carry a much higher margin than some of the other product and I was wondering if you could comment on any incremental change in product mix and what that might have relative to margins.

Stephen F. Reeves

Yes and in our product portfolios it varies a fair amount as to whether you know where in the price point range is the most profitable of the categories so it’s not an absolute statement. I think what we are seeing you know a trade down in ticket price I think that’s pretty clear across both Power Tools and HHI but we’ve made some pretty good strides on improving the profitability in our consumer business, especially relative to where we were last year. So you know I don’t know that the mix impact of that is particularly significant.

Operator

And that was our final question.

Mark M. Rothleitner

All right. Thank you operator. Thanks everyone for their interest in Black & Decker. We’re available to answer questions throughout the day.

Stephen F. Reeves

Thanks.

Operator

Thank you, ladies and gentlemen, for participating in today’s third quarter earnings conference call. You may now disconnect.

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Source: The Black & Decker Corporation Q3 2009 Earnings Call Transcript
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